Fluence Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by and welcome to Fluence Energy Inc. Q2 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President, Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Fluence Energy's Q2 2024 Earnings Conference Call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non GAAP financial measures are posted on the Investor Relations section of our website atfluenceenergy.com. Joining me on this morning's call are Julian Nobreda, our President and Chief Executive Officer Ahmed Pasha, our Chief Financial Officer and Rebecca Bole, our Chief Products Officer. During the course of this call, Fluent's management may make certain forward looking statements regarding various matters relating to our business and company that are not historical facts.

Speaker 1

Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward looking statements for new information.

Speaker 1

This call will also reference non GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much.

Speaker 1

I'll now turn the call over to Julian.

Speaker 2

Thank you, Lex. I would like to send a warm welcome to our investors, analysts and employees who are participating on today's call. I will provide a brief update on our business and then review progress on our strategic objectives. Amit will then give more details on our financial results and outlook. Beginning on Slide 4 with the key highlights.

Speaker 2

I'm pleased to report that in the Q2, we had a strong financial performance as we recognized $623,000,000 of revenue and increased our gross margin and cash flow generation. We delivered our 3rd consecutive quarter of double digit gross margin. Our adjusted EBITDA for the 2nd quarter was approximately negative $6,000,000 significantly improved from the same period last year. We ended the quarter with $541,000,000 of cash, an increase of $65,000,000 from December 31. Additionally, we recognized more than $700,000,000 of new orders.

Speaker 2

Our solution business contracted 2.2 gigawatt hours, our services business added 900 megawatt hours and our digital business added 3.1 gigawatt of new orders. Our signed contract backlog as of March 31 was $3,700,000,000 which was in line with our December 31 level. As revenue recognized this quarter and a couple of small adjustments offset the additional order intake. The increasing number of opportunities was reflected in the growth of our pipeline, which increased by $2,900,000,000 to $16,300,000 thus giving us additional confidence in our revenue growth outlook for fiscal year 2025 and beyond. We had a strong quarter in our digital business, adding 3.1 contracted gigawatts to our backlog.

Speaker 2

Our digital assets under management increased by 200 megawatts to 17.2 gigawatts as of March 31. In summary, our combined services and digital annual recurring revenue or ARR improved to approximately $68,000,000 as of March 31. Turning to slide 5, I'd like to discuss our progress on the 5 strategic objectives that guide our decision and actions. There are also important markers that investors can monitor and measure our performance against. 1st, on delivering profitable growth.

Speaker 2

I'm pleased to report that we have generated a record amount of free cash flow of approximately $88,000,000 for the first half of our fiscal year. This is a proof point of the success of our business model and working capital management capabilities that result in a significant amount of cash generation. 2nd, we will continue to develop products and solutions that our customers As such, I am pleased to report that during the quarter, we expanded our GripStax Pro line to include the 5000 series, which is our larger and more energy dense 5 megawatt 20 foot enclosure, which I will discuss in more detail. Additionally, we signed our 1st domestic content contract that will allow our customers to benefit from incremental incentives under the Inflation Reduction Act or IRA. We are seeing tremendous interest from customers for U.

Speaker 2

S. Domestic content products. We believe we are well positioned to capitalize on this momentum as we are one of the first companies capable of providing customers with product that we expect to qualify for domestic content under the IRA. 3rd, we are on track for our U. S.

Speaker 2

Battery module manufacturing to begin initial production at our facility later this year. This battery model is a key piece that will enable us to provide a product that meets the U. S. Domestic content requirements for battery energy storage. 4th, we will use Fluence Digital as a competitive differentiator and a margin driver.

Speaker 2

I am pleased to report that our digital contract backlog increased by about 75% on a dollar basis from this year's from this time last year. And our 5th objective is to work better. I'm proud to state that in April Fluence released its 2nd annual sustainability report, which builds upon the sustainability disclosure from my inaugural report published in April 23 and provides updates on Fluent's sustainability strategy, which I will touch on more in a moment. Turning to Slide 6. We continue to see strong growth in demand for utility scale and e store systems.

Speaker 2

This is a 10th consecutive quarter of order intake outpacing revenue recognized, showcasing the robust growth in utility scale energy storage. Our backlog of $3,700,000,000 provides strong visibility to future revenue. As Amir will discuss in more detail, we're reaffirming our guidance ranges for both revenue and adjusted EBITDA. To that end, we have approximately 90% of the midpoint of our revenue guidance covered by our backlog plus revenue recognized year to date. Based on the conversations we're having with our customers and potential customers, we're expecting to see continuous strong revenue growth in fiscal 2025 of approximately 35% to 40% from fiscal 2024 guidance midpoint.

Speaker 2

Our 2025 outlook is underpinned by our pipeline, which sits at approximately $16,300,000,000 and grew $2,900,000,000 from last quarter. Our expectations for pipeline conversion is at a 50% probability over the next 24 months. I am increasingly encouraged by the growing number of opportunities we see around the world. As you can see from the chart on this slide, BNEF has forecasted between now 2030 global new capacity additions for utility scale storage of nearly 6 70 gigawatt hours, true in China. This is a major opportunity for us to continue our growth.

Speaker 2

We have a significant presence in some of the markets outside the United States where we expect to see the strongest growth. For example, Germany, our 3rd largest market and biggest European market. Battery and in significance in Germany as a country accelerates its transition towards renewable energy sources and aims to phase out nuclear power and reduce reliance on fossil fuels. As a result, BNEF sees this market adding nearly 23 gigawatt hours of new capacity between now and 2000 and 3. Additionally, Germany is a growing market for UltraStac, our transmission solution, and we have been very, very successful capturing opportunities as they come to market.

Speaker 2

Australia has quickly become our 2nd largest market. BNAF sees this market adding nearly 25 gigawatt hours of new capacity between now and 2030. As Australia continues to transition towards a more sustainable energy future, The battery storage market is experiencing significant growth. We have been successful capturing a good portion of these opportunities, and we are committed to expand our presence in this market as we move forward. The United States is our largest market.

Speaker 2

Battery Energy Storage is playing an increasingly vital role in the U. S. As the nation seeks to modernize its energy infrastructure, enhance grid resilience and transition towards cleaner and more sustainable sources of power. Furthermore, the IRA has spurred a significant amount of demand. BNEF sees nearly 3 50 gigawatt hours of new capacity added between now 2,003.

Speaker 2

This is a tremendous amount and represents a huge opportunity for us to capitalize on with our standard product offering, such as risk stack pro line, which includes our U. S. Domestic content offer. More importantly, the utility scale battery storage sector in the United States has demonstrated remarkable resilience to political chiefs and changes in administrations, largely due to its strong economic foundations and bipartisan support for grid modernization and clean energy infrastructure. The success of utility scale battery storage projects in the United States is driven by economic factors, such as the declining cost of battery technology, its technological advantage against all the capacity firming solutions and the increasing and urgent need for grid flexibility and resilience.

Speaker 2

The need continues to increase as renewable energy continues to improve its costs and becomes the most economical energy source even for states that traditionally had relied on fossil fuels. Overall, the U. S. Energy storage outlooks remained very robust and the intertwining of economic opportunity and technological advancement has positioned the utility scale battery storage sector as a resilient and thriving component of American energy landscape we support all around the political spectrum. Turning to Slide 7.

Speaker 2

Ploy has significantly expanded its Rig Stack Pro line to serve a wide range of project needs and enhance the versatility of any storage solution. The line comprises 3 enclosure sizes, namely the 1,000, the 2,000 and the 5,000 series, each sharing core components, certifications and operating systems to ensure Fluent's consistent domain expertise across the board. This modular approach enables different configurations, allowing for mixing and matching of enclosures to precisely meet the requirements of specific projects while maintaining competitive usable energy prices. By offering a variety of social capacity, the Gravestack Pro Line effectively addresses the issue of system overbuilding and contributes to reducing the cost per kilowatt hour. The highlight of the GraceTech Pro line expansion is our ability to utilize one platform to seamlessly and faster integrate new cell technology without modifications to the platform.

Speaker 2

Additionally, the 5000 Series has remarkable energy density, offering an impressive 5 to 6 megawatt hours in a single 20 foot enclosure. This high energy density not only optimizes land usage or project size, but also enhances overall efficiency, making it an attractive solution for space constrained installations. Moreover, the Greek Sarpro line prioritizes safety, surpassing the industry standard by successfully passing Fluent's internally developed the joint board test. This commitment to safety ensures peace of mind for customers and stakeholders alike, reinforcing Fluent's reputation as a reliable provider of any storage solutions. Furthermore, the GridStack Pro line is built with Fluence modules, battery management systems, electronics and software, all developed or fully controlled by Fluence to mitigate any concerns related to cybersecurity or policy issues.

Speaker 2

To better serve its U. S. Customers, Fluence offers the Fluence battery pack with domestically manufactured cells and modules, making the GridStack Pro line one of the first storage solutions eligible for the 10% investment tax credit bonus under the IRA. This initiative not only supports the domestic manufacturing sector, but also incentivizes the adoption of energy storage technologies in the United States, contributing to the nation's energy security and sustainability goals. Turning to Slide 8.

Speaker 2

As I mentioned earlier, we recently signed our first contract for a product that qualifies for domestic content, allowing our customers to capture an incremental 10% investment tax rate. We're seeing tremendous interest from customers for our domestic content offering and we expect to sign additional contracts in the coming quarters as it is competitively priced against non U. S. Alternatives that do not include the additional 10% ITC. Our proprietary battery model is at the heart of our domestic content offering and it is key to meeting the criteria established by the U.

Speaker 2

S. Treasury Department. By manufacturing our own battery modules, we will also qualify for IRS Section 45X benefits, which includes an incentive payment of $10 per kilowatt for battery modules produced in the U. S. We're currently on schedule to begin our initial production later this year, gradually ramping up over the subsequent quarters.

Speaker 2

Turning to Slide 9, I'm proud to report that in April, Fluent's release its 2nd annual sustainability report, which builds upon the sustainability disclosure from my inaugural report published in April of 23 and provides updates on Fluent's sustainability strategy. Some of the highlights from the report include, we expanded our green gas footprint analysis into scope 3 and clarified reporting boundaries. We offset 60% of our global business travel emissions from flights and we kick off Scope 2 emissions reduction effort for Fluent's facility, including switching our Erlangen facility in Germany to 100% renewal electricity. In conclusion, I'm pleased with the achievements of the 2nd quarter. Although we are mindful there's still work to be done, we will look to continue this momentum as we progress through 2024.

Speaker 2

I will now turn the call over to Amit.

Speaker 3

Thank you, Julian, and good morning, everyone. Today, I will review our Q2 financial results and then discuss our 2024 guidance. Beginning with our Q2 2024 results on Slide 11. We generated $623,000,000 in revenue, which puts us at $1,000,000,000 or 33% of the midpoint of our full year guidance of $3,000,000,000 I would like to note that year to date revenue is approximately $100,000,000 ahead of prior expectations of 30 percent or $900,000,000 of annual revenue in the first half as we were able to complete certain projects in Americas earlier than the Q3. In terms of profitability, we generated approximately 66,000,000 dollars adjusted gross margin or 10.6 percent representing the 3rd consecutive quarter of generating double digit gross margin.

Speaker 3

These results also include a modest expense from settling our pending litigation with Siemens Energy. Our continued execution further demonstrates that our legacy backlog issues are behind us and we are benefiting from our higher margin backlog. Our operating expenses were $74,000,000 representing 11.9% of quarterly revenue, which is down from 17% in the Q1. This continued momentum also reflects in our improving EBITDA. More specifically, this quarter EBITDA materially improved to negative $6,000,000 versus negative $28,000,000 in Q2, 2023 and negative $18,000,000 in Q1, 20 24.

Speaker 3

Overall, we believe these results reflect our disciplined approach to grow our top line and improve our bottom line to deliver on our financial commitments. Turning to Slide 12, before I talk our liquidity, I would like to share that our continued focus on profitability and proactive working capital management has yielded positive results. This reflects in our positive year to date free cash flow performance of $88,000,000 In terms of cash, I am pleased to report that we ended the 2nd quarter with $541,000,000 of total cash, an increase of approximately $65,000,000 since last quarter and the 4th consecutive quarter that we increased our total cash position. In summary, we have total liquidity of nearly $590,000,000 which we believe puts us in an excellent position to capitalize on the growing energy storage market. Moving to Slide 13.

Speaker 3

As Julian noted, based on our year to date performance and outlook for the second half, we are reaffirming our guidance ranges for both revenue and adjusted EBITDA for 2024 at a midpoint of $3,000,000,000 and 60 $5,000,000 respectively. At this point in the year, we have approximately 90% of the midpoint of our revenue guidance covered by awarded projects plus actual revenue recognized in the first half. Furthermore, we are on track to achieve ARR of approximately $80,000,000 by the end of fiscal 2024. I would also like to spend a moment on our year to go Specifically, we expect approximately 20% of our second half revenue to be realized in the Q3 and 80% in the Q4. This split reflects 2 factors.

Speaker 3

1st, the timing of projects in our backlog, which are largely scheduled to be delivered in Q4 this year. As a reminder, our revenue is recognized as we hit certain milestones. For example, the majority of our Q4 project milestones are for production and delivery of cubes, which is within our control. To that end, we have secured the necessary batteries, manufacturing slots and logistics. These factors provide us confidence in our ability to deliver on our revenue targets.

Speaker 3

And second, as I previously mentioned, we had approximately $100,000,000 of revenue pulled into Q2 from Q3. Finally, looking ahead to fiscal year 2025, we continue to believe that we will achieve approximately 35% to 40 percent year over year revenue growth from the midpoint of our fiscal 2024 guidance range. With that, let me turn the call back to Julian for his closing remarks.

Speaker 2

Thank you, Amit. Turning to Slide 14 and in conclusions, I want to emphasize the key takeaways from this quarter's results. First, we had a record setting free cash flow generation of approximately $88,000,000 for the first half of this year. This is a proof point for the success of our business model and the free cash flow it can generate. This cash generation also contributed to our strong liquidity position of nearly 590,000,000 dollars 2nd, the outlook for utility scale storage is very robust and there is a great opportunity for our new products to deliver value to our customers.

Speaker 2

More importantly, our space is well insulated from the upcoming U. S. Elections, and we do not anticipate any significant impacts to demand as a result. So we are on track to begin our U. S.

Speaker 2

Module manufacturing later this year. Together with our customers, we believe we are in a prime position to capture demand for products that qualify for the U. S. Domestic content bonus. And finally, this is our 3rd consecutive quarter of double digit gross margins, which reflects our continuous commitment to deliver attractive returns to our

Operator

to one question and one follow-up. Again, that's one question and one follow-up. One moment for our first question. And our first question comes from George Generakis from Canaccord Genuity. Your line is now open.

Speaker 4

Hi, everyone. Thank you for taking my questions.

Speaker 2

Good morning, George. How are you? Doing great. How are you? Doing great.

Speaker 4

I was wondering if you can maybe discuss the data center opportunity and how much traction you've seen there and how your conversations have changed if at all recently? Thank you.

Speaker 2

Great. Thank you very much, George. So what's happening with data centers? As we've seen Geni become more of a commonplace technology and all the technology providers coming up with a JNI solution. The JNI or general artificial intelligence technology requires this GPU graphic processing units, which are the chips that allow for parallel computing.

Speaker 2

And what happens with the chips that they require a lot more energy, energy, 5 times what you the old technology needed. So what we see is that data centers are scrambling for energy. And they have been looking at as you know, most of the solutions they have seen today is that they've been looking for renewal firm, renewal energy, 20 fourseven renewal energy that they can source from the grid. And we have been very, very successful through our customers, the IPPs of the world that serve these players, Clearway AES, Orsted, helping them firm their offering. And that's our normal business and that has gone very, very well and we see tremendous demand and you'll see some of the announcements that these companies put out.

Speaker 2

We are behind some of these announcements with our technology. But as data centers and this is where I think it's becoming more interesting for us and it's opening it up. As data centers are looking for other solutions, not because they are realizing that probably especially the time they need to meet their needs. Through the grid with renewal and it is becoming a little bit more difficult or a little bit strained or they have had some challenges. They are looking for solutions they can outside of the grid, either connecting and just all the big deal constellation and there are more things around that.

Speaker 2

They're looking for solutions outside the grid, But they still need this firm capacity. So they are looking for to see what can they do outside the grid with firm capacity. What we have done is that we started looking at what can we do to support that effort. How can we do we've been very, very successful supporting the on grid solution. What can we do supporting the off grid solutions either with renewables or thermal.

Speaker 2

And we have identified several needs that we believe our technology is very well positioned to resolve. Especially, I think that will tell you what we face, what helps us here is that we are our technology is the fastest way of firming capacity in the power sector. If you need a 24 of any capacity, either any capacity, the fastest way to firming that capacity and ensuring 20 fourseven, 100 percent availability, if you are off the grid or on the grid, battery technology is the best way to do. There's nothing that is anywhere near. And that's what we've been now working on.

Speaker 2

We've been talking to the developers of data centers to some of the companies that help them resolve some of these problem to identify those needs and productize those solutions. And we have we don't have the products today to announce, but we have identified a very big territory where we can where our capacity and I said the same speed is what I think at the end of the day, resolve this. The speed and our cost clearly, our speed and cost will allow us to help them on some of

Speaker 5

the stuff.

Speaker 2

And yes, I'll say more to come. We are this is in the initial starting. We have not been able to productize it to announce it today at this stage, but we hope to continue working on this and coming up with a solution in the coming days. So right, this is clearly a great opportunity in front of us. We're excited with it.

Speaker 2

And we see, as I said, this is something that a year ago wasn't in our radar. We were working with all these companies and doing this 20 fourseven renewals. Now it opens a new set of solutions that is bringing us into a new territory that's exciting and industry changing. And so thanks, George.

Speaker 4

Thank you. Maybe as a follow-up to that, are you seeing increased interest for long duration energy storage solutions? Is that something that's on your radar? Thanks.

Speaker 2

I think that when we looked at the soft of this off grid solutions, clearly longer duration is part of it. So what the way we think of it, our technology can do more than the 4 hours we usually do. We tend to offer the customer. The reason why 4 Hour has been kind of the sweet spot is because the market, there is an economic value for a 4 Hour system that kind of disappears once you go to 6, 8, 9. So longer duration will play a role and we are that's one of the things we're looking at how much can we spend, what we can do to ensure that we can support these solutions.

Speaker 2

With our technology, doing more than 12 is more difficult because of the economic, how does it work. But we believe that there is a switch spot that we can meet very, very easily or not very easily, but we can meet to support this technology. Longer duration than the 4 hours will be part of what we need to work on.

Speaker 5

Thank you.

Operator

And thank you. And one moment for our next question. And our next question comes from Brian Lee from Goldman Sachs and Company. Your line is now open.

Speaker 2

Good morning, Brian.

Speaker 5

Hey, good morning, Hooman. Thanks for taking the questions and kudos on the solid execution continuing here. I guess the question I had, had 2 of them, but one was just on the cadence of revenue. You're talking about the revenue pull forward and then the quite significant weighting into 4Q versus 3Q. So it sounds like you have a high degree of confidence around the timing of these projects.

Speaker 5

But can you speak to sort of visibility? I know just sometimes the market gets antsy about really back end weighted cadences and that's happening here with 3Q, 4Q that you're outlining. So what's kind of your confidence level visibility into those projects turning over in that timeframe and not having any potential risk to slipping out? Just any kind of color you can provide there would be helpful.

Speaker 2

So first, I think let's talk revenue recognition because I think it's important to get to know. So what are we what do we have? We have the way we work, the way our revenue recognition formula works. There's some recognition at the beginning when we signed the contract to the engineer and order the equipment. Then there is a significant and this is the bulk of our revenue recognition is when we transfer title of the equipment to the customer and then additional revenue recognition at substantial completion and final completion.

Speaker 2

The great bulk of it is transferring title of the equipment once it's manufactured to the customer. When you looked at the Q4, which is your question, okay, now you have all this significant Q4 revenue, what can you deliver on this? And when you looked at it, a big portion of it, and not to give you exact numbers, but a significant or a big more than the majority of it, close to the it is transferring title of equipment. So equipment we need to be a manufacturer and we need to transfer title to our customers. So we have the supply, we have the slots in the manufacturing.

Speaker 2

We've been manufacturing the stuff very, very well. We see very, very little risk that we will not be able to do that on the time frame. We can we have our logistics working very well. That there isn't very, very little reset that will happen. And that will cover a significant portion of the revenue that we had for the Q4.

Speaker 2

Then the number of calls, so well, okay, great, wonderful, it is manufactured and moving things around, you can do that. You've shown that you are now doing that very, very well. That should not be a problem. The other issue is that there is a limited number of customers, even though it sounds like a huge amount of money, it is 20 to 25 projects that we need to do with. And with our prototype solutions, this is something that we can do very, very easily.

Speaker 2

So we feel very confident that this can. What drives this, which is the other point, which you'll say, well, why are you so back ended? At the end of the day, the back end that is set by the fact that our customers wanted those projects delivered on those sites. Sites. We try to work with our customers to accelerate it and ensure that when we do the EPC, where we do the site preparation for the receiving this equipment that we are trying to accelerate as much as we can to try to move it closer and we have had some success.

Speaker 2

But at the end of the day, it is driven by that point. When do our customers want to have their products in their facility and transfer thyroid. And that's what sets very much what this is. So some people are asking me, well, it is the seasonality is going to repeat itself. It's difficult to see it because when you look when we go back and looked at our history, it moves around.

Speaker 2

So this year is all a lot back end. The last year was very, very divided equally around each quarter. The year before U. S. It was in the center where most of the center of our fiscal year where most of the revenue was.

Speaker 2

So it moves around. And it moves around because it is driven by our customer projects time, which in a way also is driven by what they signed with their own PPA. So going back, this is mostly driven by delivery or transferring title of manufactured cubes to our customers, limited number of projects 20 to 25, not that we're not talking here huge amounts. We've been very, very good at doing this. So we had very, very good KPIs in the close to 100% in terms of delivery capability.

Speaker 2

So we believe so unless there is a global disruption that stops the world trade, which will be able to do this. So we have very, very high confidence on our Q4 and we are very that's why we reaffirm guidance. We see very, very slow we have been we're very, very confident on it. I will let Amit add a little bit here more color.

Speaker 3

Over. Yes. That's simply a question. And I think the only thing I would add to what Julian had just mentioned is if you look at our last 12 months performance, we have been executing on every project on time and on budget. I think that gives us additional confidence or in our ability to deliver, particularly when we have all those cubes and equipment and logistics lined up for delivery in Q4.

Speaker 5

Okay. I appreciate all that additional color guys. Maybe one more if I could squeeze in a gross margin You also have the high end of the range you're talking about of the 10% to 12% gross margins in 4Q. I know you're not big fans of speaking to all the gross margin targets. It's more about EBITDA.

Speaker 5

But if you've got that sort of momentum exiting the year, you still have this 30 5% to 40% revenue growth outlook for fiscal 2025. Kind of give us a sense of should we be starting off kind of in that range, call it high end of the 10% to 12% as we look into fiscal 2025 just I know the longer term margin targets are into the mid teens. Just wondering if you start to approach those even into fiscal 2025 given the year end momentum plus the revenue growth additional that you're expecting for next year? Thanks guys.

Speaker 2

So let me first on this year, 10% to 12% is a gross margin even though as you said, I wanted all of you to come with me to adjusted EBITDA. I know you still all like gross margin very much. So we are we've been clear on this. So for this year, 10% to 12 percent, so 11% should be the midpoint. We should we will get we will be there.

Speaker 2

But when you look this year at the end of the year and you look back, So very confident. On 25, what we had said, even though we have not provided guidance on 25%, what I said is the following: 4 top line growth, 35% to 40% over our this year's midpoint guidance. So out of the $3,000,000,000 that we have at the midpoint, dollars 35,000,000 to 40%, that kind of puts it at $4,000,000,000 or if you put the middle of that range, it's $4,000,000,000 for top line growth in 20 4. Then from gross margin, we said we believe €10,000,000,000 to 15,000,000,000. So the middle of the range, 12.5%.

Speaker 2

And that's where we are today. I don't think we I can tell you today that we will get a tailwind that will put us anywhere else for next year. That what I'm telling you to ask. This is said very much by the order intake. But we will clearly if we can offer you something better, we will.

Speaker 2

But today, our view for 25% is at 10% to 15%, which we'll put it at 12.5%. And then for adjusted EBITDA, when I said our OpEx, our operating leverage, we believe that we our OpEx will not grow at more than 50% of our top line growth. So you can that will give you kind of a walk of where should we be for 2020 for 2025. And that's kind of where we are today. I feel clearly, as the year progresses and we see and we have more and more of the revenue for $25,000,000 in our backlog, we will confirm these numbers and walk you through.

Speaker 2

And if there's an opportunity to be more to do better, we'll let you know. But today, our view confirms our 10% to 15% gross margin in 25 percent. All

Speaker 5

right. Thanks guys. I'll pass it on. Appreciate it.

Speaker 2

Thanks Ryan.

Operator

And thank you. And one moment for our next question. And our next question comes from Dylan Massano from Wolfe Research. Your line is now open.

Speaker 6

Hey, good morning, everyone.

Speaker 2

Hey, Dylan. How are you?

Speaker 6

Good. Thank you for taking my question. So just wanted to check, there's been a lot of talk recently about solar projects getting delayed, interconnection issues, equipment shortages, etcetera. Is this something you guys are exposed to at all? Is there any read through to your answer to Brian's question about the back end waiting of the year?

Speaker 2

Not really. I mean, what we as I said, a lot of our back end that is delivery of manufactured products to our to site or transferring title to be very clear on what drives the transfer title. Usually, very much it happens at the site in most cases and when the sites are ready. As you know, we had had a rule in our contracts where customers are required to take title in cases where they have some delays, in cases where in our backlog, it's usually more connected to EPC stuff, things that are not built on time, usually weeks rather than month. But so when we have seen delays, what we have in our contracts, the customers are required to take title at a specific point in time.

Speaker 2

So that's generally how it works. What we see for 2025 for this sorry for 2024 what we see in the Q1, these are projects that are already we are still in the civil works. Can you imagine we have to get them ready. So we know exactly where they are. We know we have been working with the customers and we do not foresee any delays in related projects or related elements that could disrupt our delivery projects.

Speaker 2

And at the end of the day, we have the safeguard that if things get delayed beyond a certain point, customers are required to take title after that. I'll leave Ahmed to what we No, I

Speaker 3

think the only thing I would add is we signed these contracts 12, 18 months ago. And when we sign a contract or start construction, I think generally the customers have already all those permits in place and that's when they issue notice to proceed. So we feel pretty good about our execution, because they have there's nothing pending as such that could derail, particularly with reference to your question, which is the interconnection issues.

Speaker 6

Got it. Thank you. Then just quick follow-up. Any recent developments with any of the outstanding litigation that we expect to be kind of or the other anytime soon? Anything you could say there would be helpful.

Speaker 6

Thank you.

Speaker 2

Yes. Great. Thanks, Dylan. So we I think Ahmed mentioned it during the call. We settled the Siemens Energy litigation.

Speaker 2

And just to remind everybody who might be listening, Siemens Energy is not Siemens AG, our shareholder. Siemens Energy is a customer related to our shareholder, but not our shareholder. We settled that litigation. As we have told you in the past, that was an immaterial litigation, normal course of business litigation, immaterial. We settled it in terms that is even more immaterial than the litigation and it's a fraction of the claims that the customer had.

Speaker 2

And as I have said in the past, Siemens Energy is not a customer a significant customer. We have done very, very little with them. So when we start this litigation, you lose litigation with normal course of business. It's part of how you resolve a problem. I think at the end of the day, we resolved it in a way that is satisfactory for both Siemens Energy and ourselves.

Speaker 2

The other 2, nothing really material to inform you at this stage. The other 2, the other one, which is the Diablo litigation, nothing really that nothing has moved significantly there. And the Moss Landing incident, which is something that was also referred to, we have talked in the past, there's no litigation, there's no pending litigation on that. And at this stage, there's nothing really material to communicate. Siemens Energy, as I mentioned, we Siemens Energy and we'll repeat it again, it's not what settled in conditions that are beneficial to both parties.

Speaker 2

And as I said, the litigation was immaterial, the settlement agreement is also immaterial.

Speaker 6

Got it. Thank you. And congrats on putting that Siemens issue behind you.

Speaker 2

Yes. Thank you.

Operator

And thank you. And one moment for our next question. And our next question comes from Mark Strouse from JPMorgan. Your line is now open.

Speaker 4

Hey, Mark. Yes. Good morning.

Speaker 7

Hey, Julian, good morning. Thank you very much for taking our questions. So following up on Dylan there, so appreciate you're not seeing delays in your backlog projects. But I guess my question would be just when you're looking at your pipeline, is there anything that you're seeing there as far as kind of the maybe an elongation of the timing between when you're issuing a quote to when you're getting a final order, any kind of qualitative conversations you're having with folks about the next several years projects potentially getting delayed?

Speaker 2

What comes into our pipeline are usually are not usually, projects that are very mature in the interconnection queue because these are projects that we see you can deliver at that we can be converting to backlog within the next 24 months. So generally, you don't see that delay type of problem there because they are already when they come to us, they've been already 3 years in the queue. So they know exactly how they connect. They know what they need to do. It is very, very that one and it becomes more an execution more than anything.

Speaker 2

We have something that we don't disclose that much to all of you, which are leads, which is all the projects we looked at with our customers that are not necessarily ready for pipeline, but that are projects that we believe are we will work as we looked at the long term planning of some of our customers. Those are more less mature. And those probably, I'll tell you that we have a conservative view of them already. So I don't know whether it has been a have seen any deterioration in terms of timing from what we were seeing a year ago. It is the same.

Speaker 2

But we see a lot more coming into that group and a lot more players. And if you looked at the pipeline at the queue in the U. S, it's almost a tera of battery storage that is getting into a queue, seeing huge, not all over the world convert. So I would say the color I can give you on that is that, that those leads, the things that are early in the queue and are going what we have seen is an explosion. A lot and a lot more projects of those.

Speaker 2

We are that's not where we spend most of our time, but we that makes us very, very confident that we that this business has a huge tailwind very, very strong tailwinds going forward. In terms of our pipeline, as I said, we it's usually very much material projects that have been there almost 2, 3 years already in the queue. They know when they're going to happen. And we have a view I haven't seen any deterioration of any sort in the last year. And these queue issues, mostly a U.

Speaker 2

S. Issue. Issue. The other countries, even though they have transmission queues and delays, they manage it very, very differently. So systems in other markets are a lot more certain.

Speaker 2

What I mean a lot more certain is once you get into a line, you know that something is going to happen by a certain date. And so they work differently. So you don't see the situation that you see in the U. S. Where you have this 6 years, 5 years Qs on the line.

Speaker 2

But I think the great news this quarter, if you ask me to highlight and we're going to repeat a point, but if this one tera of when you looked at the Q nationally, the U. It's almost 1 tera of 1,000 gigawatts of capacity we're looking to connect to the grid, which is a mind blowing number and a great opportunity.

Speaker 7

Yes. Yes, that's great to hear. Thank you, Julian. Just a quick follow-up. Congrats on signing your first domestic content contract.

Speaker 7

Not necessarily looking for specifics on that contract, but I imagine you're having quite a few conversations with other folks there. You've said in the past that the 45x manufacturing tax credits would still kind of put you in your target gross margin range. Just curious now that we're getting closer to more and more of these contracts hitting, if you can provide an update on that commentary about gross margin impact?

Speaker 2

As I said, the 45x10 dollars per module manufacturing in the U. S, we have said that's going to be within our $10 to $15 It should not move us up. What we have said in the past is that we believe our domestic content because of the 1st mover advantage, because we have been able to sign the first one and we are let me put this we are the most secure way of any customer who wants to domestic content to capture of all the offerings around. Not only we are a 1st mover advantage, but their ability to deliver significantly the risk from what some other players are trying to offer. Because of that, we believe there is an opportunity to potentially expand our margins.

Speaker 2

We're working on it. I think it's too early still to communicate it. As I said, I don't want to negotiate against myself, announce and stuff that then comes and needs me. But we believe because of that point, because of it's not only the 1st mover advantage, which is something that we have mentioned many times in the past, But it's because when we have looked in detail at what the other our competitors are offering, we are by far the most secure way, the less risky way to capture that. Our offering is the most robust, the one that will provide higher certainty that customers will be able to capture that.

Speaker 2

And I think that is also a competitive advantage. So I hope we are staying tuned. We have always said just to go back, this is our order intake for 2024 generally Domestic Content, mostly revenue in 2025 and 2016 and going forward. But it will not we will not none of our 2024 revenue is dependent on domestic content of Innovate. This is a 25 onward revenue more.

Speaker 2

So

Operator

And our next question comes from Justin Clare from Roth MKM. Your line is now open.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Justin. How are you?

Speaker 4

I'm doing well. So just to follow-up on the domestic content here, it sounds like you're seeing very strong demand for products that will qualify for the domestic content adder. So just wondering, as we head into 2025 and then even into 2026, how much of your total sales in the U. S. Do you think will include domestically produced battery cells and battery modules?

Speaker 4

Could this be a considerable portion of your sales in the U. S. Market?

Speaker 2

Yes. I'll say that over time, this will be the main main we believe this is going to be table stakes in the U. S. That you will U. S.

Speaker 2

Players will demand domestic content as a table stake over time. It will not happen immediately. So 2025, there will be a combination and 26, and it will move forward as we get along. It's difficult to know to tell you exactly what will be the distribution of revenue in 2025, how much will be domestic content and how much will be because of the long lead time of some of these projects. But our view than the way we have designed our plan is that over time, this will be the only the most the domestic content will represent the great majority of the U.

Speaker 2

S. Market.

Speaker 4

Got it. Okay. And then just given that, can you just update us on your plans to potentially expand your manufacturing footprint either in the U. S. Or internationally?

Speaker 4

What could the timing potentially be and then the magnitude of potential expansion?

Speaker 2

Yes. We continue to work out of our facility in Utah in the U. S. We have looked at some plans of moving some near the production over the battery cells. But today, we have those dates have not been set.

Speaker 2

So for now, we'll our current plan in the U. S. Is staying in Utah. We have seen work most of our biggest markets are in the western side of the U. S.

Speaker 2

Still today. And that facility has the capability to expand. We can double the expansion quickly. So not any real plans even though we have not any we have not set any dates for the potential expansion on the eastern side of closer to the eastern side of the U. S.

Speaker 2

In terms of Europe, we continue to look at it. So that continues to be an opportunity that we are evaluating. We haven't set dates yet. We are it requires to build an ecosystem. So we are that's what we're looking for.

Speaker 2

And as we build that ecosystems and reach economy higher economy bigger economies of scale, we will set days and commitments. And then for APAC, even though we build out of we manufacture out of Vietnam, we're looking at India in, I will say, in more detail today, not only to serve that India market, but we believe that India will be could be a great place to manufacture our products and there's great manufacturing companies that we can combine we can create an ecosystem probably faster than what we can create an ecosystem in Europe. So that if I were to tell you where we are today, probably our first our the next announcements in terms of manufacturing capabilities will probably be in India rather than in the Eastern U. S. Or Western Europe.

Speaker 8

Okay. Thank you.

Operator

And thank you. And our final question comes from Kashy Harrison from Piper Sandler. Your line is now open.

Speaker 8

Good morning all and thanks for taking the questions.

Speaker 2

Hey, Kashy. How are you?

Speaker 8

Good. Thank you. Just a clarifying question for you, Julian. Were you saying that even if your customers have issues securing critical equipment that the contracts still require them to take title? And then just outside of force majeure events, is there any scenario in which there could be a delay in them taking title from you?

Speaker 2

What I said, if our contracts require our customers to take title, if there are significant delays, so there is a safeguard at the end of the process. If by certain day, things the customer doesn't have the site ready or ones who have any garage, they take title out of our equipment, usually in a warehouse close to the site. So but as a safeguard, I'll tell you, seldom use, it doesn't happen all the time, but it's a safeguard that makes me feel more confident that which is the messages I was trying to communicate that our 20 4th quarter revenue is very much secure. Now that even if our customers had a problem putting in the padlocks or doing anything, we will be able to take one customer. But where we are today, I said for the last years, we've been very, very good.

Speaker 2

Our customers have been very, very good. We that that's in any way significant. So that's how the contracts do work. And I was this is not something that we, as I said, a provisional contract that we do not we exercise constantly. But it's something that if the things were complicated, you can always use it.

Speaker 2

And generally, we do this in a very, very amicable way with our customers, so not major issues. So

Speaker 8

That would be super helpful.

Speaker 2

Yes, it was more to give to provide confidence to all of you because I understand all this revenue in the Q1, hey, you can do it. Amit mentioned, we've been doing this very, very well for the last year or so, year and a half. Great. It is essentially manufacturing and logistics, wonderful. Not that many customers, 20 to 25, wonderful.

Speaker 2

And if things get bad for any reason, we still have the safeguard. So that's the way I will put it at. Yes, except I think you mentioned it, except for Fort Myers, something that then that's a very different world. But even today with the situation in the Red Sea, we don't have a lot through the Red Sea. As we said, 15, 15, 15 of our volume passes through the Red Sea, very, very low.

Speaker 2

But even that, that added a couple of weeks more to the transit time of our equipment, we were able to manage it within our that. So even in a situation, let's say, a war in the Middle East, we were able we can manage it very, very well. So it will have to be something really, really disruptive in order to disrupt our capabilities. It could happen, unfortunately, but that's what we're supplementing.

Speaker 8

Yes. That's all very, very helpful. As you pointed out, the 80% is a big number. And just maybe for my follow-up question, more so about comments in the slide deck. You highlight demand is growing specifically in ERCOT, CAISO and MISO.

Speaker 8

Just wondering if you have a sense of what proportion of your customers have are signing PP and As versus just selling merchant and whether in your discussions with your customers there's any difference in their ability to secure financing just depending on which approach they take?

Speaker 2

Yes. On the financing, generally, we in the U. S. Have worked with or Global, I think it's the same with Tier 1. So financing hasn't been appear an issue.

Speaker 2

I don't really have a view in the U. S. How much is PPA versus merchant. But I will tell you from my conversations, mostly PPAs. But I don't have exactly the number.

Speaker 2

I don't want I cannot tell you 95, but mostly PPAs. And I know that, how I know about it, it's because of the what they ask for my what they want from my the KPIs they want from me. Our PPA connected are connected to the KPIs they are committing to their counterparties. So that's how I get a sense. I don't really know the number.

Speaker 2

We'll get a number. That's a good question to make a point of how much of the of what we have of our order intake. It is firm with versus what's merchant. But I'll say the great majority, I just don't know the number from the top of my head.

Speaker 8

That's still helpful. Thank you.

Speaker 2

Right.

Operator

Ann, thank you. And I would now like to turn the call back over to Alex May for closing comments.

Speaker 1

Thank you, Justin, and thank you everyone for participating on today's call. If you have any questions, please feel free to reach out to me. We look forward to speaking with you again when we report our Q3 results. Have a good day.

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Earnings Conference Call
Fluence Energy Q2 2024
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