Q4 2021 ESS Tech Inc Earnings Call
In storage and its place in driving the energy transition.
And finally earlier this month the state of California approved plans to add over 25, Gigawatts of renewables and 15 gigawatts of storage by 2032, effectively raising the state's renewable portfolio to 73%.
But this is not some promise land often a distant future. The inbound inquiries, we receive continue to rise and the quality of the opportunities behind those inquiries is improving as well.
These are organizations that know that the future entails a move away from lithium ion and although we have only recently begun to build our sales and marketing efforts, we already have direct visibility through customer relationships into vast opportunities that have grown almost exclusively from inbound inquiries.
There is an undeniable need to solve for long duration storage and while the flood of LDS demand has brought new technologies into the Fray.
We remain confident that we have the best solution across cost reliability safety environmental friendliness that can be deployed in the market today and comes up with you all certification for battery modules energy storage systems and fire safety.
We believe the design work that got us to this point was ingenious our iron flow battery technology is relatively simple to build reliable and has at its core very inexpensive input components for a grid storage system iron salt and water.
Yes that separates the power from the capacity, which makes us even more economical at longer durations.
Zero capacity paid over 20000 cycles, our technology carries the additional benefit of being environmentally sustainable and non flammable.
Moving on to our fourth quarter results.
While we did not recognize revenue in Q4, we were able to make material progress with customer deliveries, new sales and ramping our operations.
We began shipping our second generation energy warehouses in the third quarter of 2021, and the first units were delivered to three separate customers and installed in the fourth quarter of 2021.
However, these were our first commercial units to ship to our revenue recognition process will be slow and deliberate.
Initially revenue recognition will be will be deferred until customer acceptance has been received for each unit, where until we establish a history of successfully obtaining acceptance from customers.
In the near term as our products are new this is likely to be a longer process than when our products are more mature and we have more history with customer acceptance.
We expect to improve our process for recognizing revenue more quickly in the future we.
We've learned a lot about how to accelerate our testing prepare the customer sites in advance and be more efficient in our startup. These learnings will help us bring up customers' applications more quickly not only so that we can recognize revenue, but also said that the customers can receive the remarkable value of our solutions even faster.
We feel fortunate that the groundswell that has brought long duration energy storage to the forefront just as Etfs as move to scale production that.
That timing has also coincide with unprecedented supply chain challenges that have slowed our initial shipments of energy warehouses.
As examples we faced limitations with some injected molded parts as well as challenges securing certain electronic components.
We are in the process of working through each of these we are broadening and strengthening our supply base and redesigning pcbs to leverage more widely available components.
Portly. However, we see these as short term constraints in the near term we have a handle on these issues and will they caused a delay in our ramp we believe we can put them behind us and anticipate a trajectory of strong growth.
With that said, it's a great accomplishment by the team to get units to customer sites and past the heavy regiment of testing that have been demanded of them.
<unk> are fully operational and running at a commercial customers campus in southern California, and as Softbank Testbed in Northern California.
Additionally, the first two units we shipped to SD Genia are waiting testing. We're excited to have undertaken. This next chapter and continue to prove that <unk> solution can help solve the grid storage challenges.
We also continue to make considerable progress building out the operations of the company, we doubled our company head count in 2021 to 161 and have added almost 25% to that since the end of 'twenty. One importantly, we were able to add Ben hang as SVP of engineering.
Ben brings broad technical background of the team and has held leadership roles at both solar city and Tesla.
We're building out our sales team and announcing new customers. Additionally, we added 54000 square feet to our Wilsonville facility in the fourth quarter, which helped us double our total footprint to 200000 square feet in 2021 given.
Given the supply chain environment, we have adjusted our production plan for 2022, we continue to plan a significant ramp in our energy warehouse shipments as well as commencing shipments of our energy center product this year.
Although the pace of growth will be considerable from quarter to quarter, we expect that the supply chain challenges, we faced over the last four or five months.
<unk> our production ramp to the right. This will represent a little more than a one quarter shift in our expectations Amir will share more details on the specifics of the plan.
We will proceed with two cost reduction initiatives planned for this year each of which is independent of our ramp speed.
The first is standard design for manufacturing activities like replacing Sutter connections with wire harnesses and redesigning Pcbs with more common components to cheapen and simplify assembly.
The second is to incorporate our advanced automation line to maximize our production capacity by the end of 2020 to these.
These initiatives are expected to lower labor inputs by more than 80% dramatically lowering unit costs and increasing production velocity and quality.
The change in production ramp is in no way a reflection of the demand for our products our confidence in our production capability or the overall trajectory of the business, but rather a prudent adjustments to our ramp in response to macroeconomic conditions.
This adjustment will have the added benefit of allowing us to implement cost reductions over fewer units shipped thereby minimizing cash burn.
Importantly, we have been in close communications with our customers and shared the news of our new delivery schedule to date, we have not had a single cancellation and our customers remain committed to the units they have ordered.
Finally, I would like to welcome Claudia guest to the board of directors with over 15 years of strategic and financial experience across leadership roles at Fortune 100 companies and investment firms Claudia brings valuable experience and bringing hardened industrial products to market and scaling commercial organizations Claudia will replace shortly speakman of cycle.
Capital, who led an early stage investment in DSS. We also want to thank Shirley for her years of commitment to ESF and her valuable contributions.
And with that I'll turn it over to Amir to take us through the financials.
Eric now I will review the financials.
While we shipped five energy warehouses in the latter part of 2021, we did not recognize revenue from these units in Q4.
Revenue recognition will be deferred until customer acceptance has been received for each unit or until we establish a history of successfully obtaining acceptance from each customer.
In the near term as our products are new this is likely to be a longer process than when our products are more mature and we have more of a history with customer acceptance.
As we are in the early stages of ramping the production of these units and are still under development a county.
The material overhead and labor costs to be incurred making the products, we ship to date, resulting in zero cost of goods sold.
Our non-GAAP operating expenses for Q4 were in line with our expectations at $15 5 million.
With that we reported Q4 non-GAAP adjusted EBITDA of $24 million in law.
Q4, GAAP net losses were $180 7 million or negative $1 33.
On a per share basis.
Moving to the balance sheet, we ended the year with $238 9 million in cash and short term investments.
In the fourth quarter cash used by operations was $23 5 million.
As Eric shared we have adjusted our production and delivery expectations for 2022.
The impact of the delays brought on by supply chain challenges to.
To a great degree that decision was out of our hands as they are navigating an unprecedented supply environment that began to impact us just as we were ramping manufacturing.
Given that our focus on production for 2022 will be in three key areas.
The units are supply will allow.
The cost savings programs that were already in flight and make the necessary capex investments to maximize our production exit velocity at the end of 2022.
Let me touch on each of these.
First despite our supply chain delays, we will continue with a strong ramp of our energy warehouse production in 2020.
As a result of these delays are planned shipment schedule is now a little more than one quarter later than we had previously expected.
We remain on track to deploy our first energy center product in this fiscal year.
Given our experience at early deployments and some legacy contractual terms in existing deals. We believe we will see a very level of delay between shipment and revenue recognition.
And our current process, we performed factory acceptance testing for each GW at our Wilsonville facility ahead of shipping units to a customer.
Once received we install and commission these units when the customer site is ready.
Finally, we perform additional acceptance testing protocols at the customer site, followed by a formal customer acceptance.
For our early deployments, we expect revenue recognition to follow customer acceptance.
As we build a track record of successful installation and acceptance, we expect customer acceptance and revenue recognition to occur more quickly.
Given our new ramp schedule, we now expect to ship between 40, and 50 energy warehouses in 2022, all of which are contracted at this point.
If we ship all of these units and are able to recognize revenue for that this would translate to approximately $10 million in revenue.
Second we will execute plans to reduce our cost of goods sold in each unit.
A significant portion of our cost reductions are design improvements that are not dependent on our scale, but reduce the labor input and lower total production time at.
As Eric alluded to these are design for manufacture ability initiatives, we had already planned for this year.
And third as we shared last year, we're going to an automation lines to dramatically expand our power module manufacturing throughput a critical cogs ramping capacity. We expect this line to be up and running in late 2022.
With each of these production improvements design for manufacture ability and automation in place with a healthy supply chain backdrop. Our annual production throughput is expected to expand dramatically to 750 megawatt hours by the end of 2022 more than three times, where we started the year.
But allow us to continue rapid growth into 2023.
To reiterate an extremely important point, we have been very open with our customers about our delivery timing and we have not received a single cancellation among our booked orders nor have we seen any slowdown with ongoing customer conversations.
This speaks to the value proposition esf's brings to our customers as well as the long term strategic importance of implementing long duration storage in their applications.
Given our current plan and the assumption that we will remain under development accounting for the full year, we expect our operating expenses to come in at about $100 million as we execute our plan in the coming year, we have more than ample liquidity to run the business and expect to end the year well in excess of $120 million of cash on the balance sheet and.
With that we can open up the line for questions.
Thank you.
At this time I would like to remind everyone and I wanted to ask a question.
Today's press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Okay.
First your first question comes from the line of Jeff.
<unk> from Canaccord Genuity. Please go ahead when you're ready.
Alright, Thanks, guys wondering if you could just.
Elaborate and provide more details on.
The specifics of the customer acceptance it sounds like.
Three of the five are actually running so so what specifically needs to be a team for that.
Acceptance too.
To account for the Rev Rec.
Sure. Thanks, Jed I'll take it.
We shipped a number of units at two of the sites. The units have gone through the full installation commissioning system start up and actually as of the time of this call. One of those units is totally completed with its revenue recognition process. So thats full testing in customer sign off.
Another one we expect to be done in the next days, maybe a week.
And then for the for some of the other units.
Been delivered they'll go through that startup routine and then they go through this very rigorous complete testing when that's done the customer signs off.
We get Rev Rec at that time.
Got it and.
<unk>.
You mentioned that supply chain and in particular chips.
I know the containers were an issue at one point.
But the chip issue it sounds like that the bigger.
I guess near term headwinds.
Are there any others that you see us.
The potential supply chain.
Headwinds or if all of the other one been resolved and it's just about.
The redesign of the PCB.
Yes. Thanks.
Good memory.
At one point last year were having delays in getting shipping containers, but we were able to work through that we've got plenty of.
Of containers now.
On the chips.
Thanks to that problem now we had to do some redesign it slowed us down back in the fall, but we've got alternative solutions now when we pre bought stock to not have that be a constraint.
You called the right thing, which is these come up and you just have to work through with them as they can.
Come up so.
We sit here today, we feel good about having.
The supply that we need and as we said in the release.
We're working hard to ensure that we have alternative sources of supply. So we have a bit more robust.
Fly chain at every turn.
Great last question for me, then I'll jump back in the queue.
Given the learning curve that you've gone through or continue to go through with the EW I'm just wondering.
Has that changed any of the expectations around the EC.
Either positively or negatively as you as you think about that and.
What you know now versus a year a year ago.
Yes, I think modestly positive inclinations towards the EC in the sense that we're just getting more experienced of all of the interface to our systems with renewable systems of grid systems out in the field. So the more experience we get the faster we get a return and so I think that will help with ECS as they come.
Online later this year.
Thank you.
Thank you.
Thank you Jeff.
Our next question from Colin Rusch Oppenheimer, Hi, Colin Please go ahead.
Thanks, so much can.
Can you talk a little bit about how much of the manufacturing process is left to be quantified at this point as you move towards automation.
All of the engineering done or is there still some work to be done in this process.
Yes, I think the engineering is done for the for the automation line that's coming on.
Online here this year, so I don't see any.
Engineering on our side of course, we have partners working with US that are building out the line. So that design is complete.
Just waiting for all of the components of the automation to arrive.
Okay. That's helpful.
And then as you build the pipeline of business.
When you look at the pricing environment, we're seeing prices go up.
Solutions, certainly theres going to be a tight environment for supply.
Storage for a number of years.
I'm just wondering about your pricing power here on how youre thinking about the pricing model as you go forward.
Right.
Sure well I think our pricing approach has always been trying to work on really being focused in a value approach, what's the value of our solutions versus.
The alternatives versus doing nothing and so to that extent.
Lithium prices have not only stop declining but starting to go up a little bit I think that might give us a little bit.
Pricing power.
But really for us it's more about making sure that our total value proposition is being appreciated by the customers.
Okay.
Offline thanks, guys.
Thank you.
Okay.
Thank you. Your next question comes from the line of Thomas Boyes Cowen and company.
Thomas Your line is open.
Excellent. Thank you for taking my question.
Just the first one.
I was wondering if you could give us an update.
<unk> composition look like for 2023, how much has been awarded how much is still being negotiated really what's in that kind of a qualification phase.
Yes. Good question Thomas were right now with just given the shift in our production schedule that we're seeing in 2022.
We're not guiding towards what.
<unk> awarded or negotiating right now in 2023 as Eric alluded to.
Continue to have healthy robust conversations with customers.
We do anticipate the EC shipments starting this year, so I think youll see that shift in 2023 with the continuation of our EW product and the introduction of more EC projects, but at this time, we're not guiding to whats booked are awarded for 2023.
Understood then would it be fair to.
Categorize maybe that pipeline is it still around 8 billion as it was in <unk> I know, obviously that things have continued to expand as far as the overall demand.
About update Amy.
Yes, so what we've shared is that our global opportunities are in that $8 billion range of customers that we've connected with for named projects that we have.
Either exchanged some type of information such as an NDA or participated with them in.
And in an RFP that there is no shortage of those opportunities in that pipeline.
Pipeline remains robust.
And now it's about our execution through that pipeline for both the EW and EC products.
Great.
Last one if I can sneak in real quick what is the feedback that you've gotten from customers who have received the second generation unit that maybe have also had a chance or opportunity to work with kind of that first generation unit.
Well I think there's a lot of excitement around it as we said, it's really a more hardened product its just at every turn.
Yes.
Pedro product in terms of its delivery and its performance. So people are excited about that I think.
The other thing that's probably come up since the first generation products, where <unk> is that the awareness of the market need for longer duration is more well known more acute today. So people see the same product the same functionality and theyre more excited about it.
Than they had been before.
The most surprising things that.
At least to me that we've heard when we shipped one of the two the two of the energy warehouses down to a customer in southern California, and there is a video of this I think on the website. The units were installed right next to the building.
And.
People when they think about battery as they think about something thats got to be remote it's got to have a big safety perimeter because with lithium that's what you do and I have just been amazed at how many people see that picture in there.
The table and they can't believe that you can install long duration storage in that easy of package goods hoisted into place.
The system has brought up and it can be installed so close to our building.
And so with the wildfires and other kind of safety issues that you've heard out in the marketplace.
The number one thing we hear about from people when they see the installation happens.
Excellent I appreciate the call I'll take the questions offline. Thanks.
No. Thanks for the question Tom.
Again, if you would like to ask a question.
And then number one on your telephone keypad.
Okay.
You now have.
The next question from Joseph Osha of Guggenheim.
Your line is open.
Okay.
Hi, there hi, Eric.
Hey, Joe how are you.
Okay. Good good just a couple of questions here to go back to the guidance and that $10 million in revenue and I believe that core waited too.
The.
EW units is that.
That's what you said right.
Yes, that's right.
Okay.
Yes.
Those those would all be 50 units that were actually recognized for revenue.
Or is it more that youre going to have 50 units out.
By the end of 2022, but.
Some of those would actually have manifested at revenue as revenue at that point I, just kind of want to understand what whats being said here.
Yes, so what we've said is we expect to ship that many.
And that's how the Rev. Rec will play out as we alluded to on the call is a little hard to predict.
If they would all get Rev rec or where that cut off would be depends a little bit on time.
We're able to accelerate.
That commissioning process to move through the revenue recognition process.
Okay.
So that 50 units kind of units that you'd like to have in the deal by the end of the year and some of those will be recognized in some some more modest is that the best way to think of it.
Well I would say that certainly we would expect the vast majority of them to be recognized.
A question of whether they could all be recognized or not.
Yes.
Okay, that's fine and.
Just to follow up on <unk> question, obviously the EC.
He is kind of a different thinking.
Can we expect to see any.
Any of the larger form factor.
And in the field in 2022.
Yeah, as we've said we expect to start shipping the units. This year again same question on revenue recognition will be get fully revenue recognized within the year.
At this point.
Not claim to that but we do expect to start shipping units. This year and as we've said, we expect that ramp up will continue.
More dramatically as we get into 'twenty three.
Sure Gotcha that makes sense.
And then just.
It seems that some bolt stuff here.
Okay.
Engine that you're expensing.
100% of essentially 100% of the cost of some of.
These units that are in the field awaiting recognition.
When you talk about that $100 million in Opex for 2022.
Does some of that $100 million include the absorption of potential product costs that are <unk>.
We're out there, but not recognized yet or is that all like real Opex opex.
Yes, great question, so as long as we are under development accounting. The Opex would also include the product costs and future inventory purchases, we're making.
For future quarters or future years, where all the expense in that period. So that opex number includes the.
Inventory and purchases for those products.
Okay would you care to kind of break that $100 million down in terms of that.
That sort of product absorption versus like R&D, and just kind of.
Normal course of business.
Opex run rate.
Yes, we've not guided to that.
And wouldn't comment on that right now I think as we get our fully automated line up and running in the cadence of shipments fines finds its way to a more normal state of business, we can provide more guidance on that.
Okay and then the last question from me sorry to beat you guys out.
When you do recognize revenue.
Some of that Opex reverse back to Cogs or do you just that revenue with 100% fall through or how does that actually work.
Yes.
We'll wait until we get to that point I mean, there's certainly the opportunity to recognize revenue.
The Cogs recognize the revenue.
And then the Cogs would match the revenue or go to formal inventory accounting, where you would see that.
We will we will guide on that when we get to that point.
Okay. Thank.
Thank you very much.
Well, thank you Joe.
Thank you.
That is all the questions at this time.
Jeffrey I turn the call back over to <unk>.
Well. Thank you all for joining the call today in summary, we're excited that we've ever been to be delivering our solutions and contribution to the global effort to Decarbonize the energy system.
Governments and corporations have set ambitious goals and are extremely we are extremely well positioned to help them meet those needs as a well funded public company. We now have the resources to make that vision a reality.
Coming months, we encourage you to mark our progress with announcements on customer shipments new projects and continued expansion of our production facilities.
Until then we thank you for your time today, and we look forward to keeping you apprised of our progress.
This concludes today's conference call you may now disconnect your lines.