Q4 2022 Fluence Energy Inc Earnings Call
Speaker 1: I'll see you next time.
Speaker 2: Good day and thank you for standing by. Welcome to the Fluence Energy fourth quarter 2022 earnings conference call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lexie Tenmay, Vice President of Investor Relations. Please go ahead.
Speaker 3: Good day and thank you for standing by. Welcome to the Fluence Energy fourth quarter 2022 earnings conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lexi Tenmay, Vice President of Investor Relations. Please go ahead. Thank you.
Speaker 4: Good morning and welcome to Fluence Energy's fourth quarter 2022 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 reconciliation.
Speaker 5: disclosures regarding non-GAAP financial measures are posted on the investor relations section of our website at fluenceenergy.com
Speaker 6: Joining me on this morning's call are Julia Niebreda, our President and Chief Executive Officer.
Speaker 7: HONOS-CIO, our Chief Financial Officer.
Speaker 8: Rebecca Bold, our Chief Product Officer.
Speaker 9: During the course of this call, Fluence Management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts.
Speaker 10: Such statements are based upon current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.
Speaker 11: 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.
Speaker 12: 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 13: This call will also reference non-GAAP measures that we view as important in assessing the performance of our business.
Speaker 14: 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.
Speaker 15: Following our prepared comments, we will conduct a question and answer session with our team.
Speaker 16: 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. I'll now turn the call over to Julian.
Speaker 17: Thank you, Lex.
Speaker 18: I would like to send a warm welcome to our investors, families, and employees who are participating on today's call.
Speaker 19: I would like to welcome a new CEO , a new CFO .
Speaker 20: And do join us in September . And it has already been a significant impact on the organization in the short period of time.
Speaker 21: Welcome.
Speaker 22: Today I will provide a brief update on our business and then review our strategic content.
Speaker 23: as well as some examples of the actions we already take towards the goal.
Speaker 24: Following my remarks, Manubh was installed her financial performance.
Speaker 25: as well as her outlook for fiscal year 20.
Speaker 26: Starting on slide four with the key highlights of the fourth quarter.
Speaker 27: I'm pleased to report that our team recognized $442 million of revenue.
Speaker 28: and even our highest quarterly revenue.
Speaker 29: and then growing more than what we are aware of.
Speaker 30: More importantly, we achieved positive growth margins for the quarter, both on an adjusted and cap-based basis.
Speaker 31: Our demand was strong across all three of our business lines.
Speaker 32: and new orders were approximately $560 million.
Furthermore, our sign count for SPATCLED as of September 30 was $2.2 billion and year to year increase of around 30%.
Lastly, our Recurrent Revenue Business, which consists of our services,
a recording revenue business which consists of our services and digital businesses.
The fear of strong growth was important.
Notably, our service attachment rate of 190% for the fourth quarter was in line with our expectation.
He was present in the catch of the service.
service contract we anticipate during our previous hearings.
Our digital pieces are nearly one-two of us.
disaster quag providing us the ability to future.
Bye-bye.
Turn it to slide five.
Over the past 90 days, the senior management team arrived.
I put them that a table
During this deep dive, we reaffirmed those aspects of the business that are working well and identified several areas that have to be fixed.
them to have the help they provide.
We confirmed that fluency energy storage solutions business has tremendous tall waves across the globe including from the Inflation Reduction Act in the United States of alone and higher. A new growing desire for increased energy security.
Although our database has strong potential, we have determined that the platform of this model will benefit from simplification and tighter integration with our storage solutions.
For example, are GORIMO Safe problems not able to expand into new markets?
quickly to score a tech candidate.
This is something that will be addressed.
Moving forward, we will concentrate on accelerating the integration of our offerings, including these unease terms over the next few years.
with our stories in order to serve customers.
when an end-to-end pops.
Concentrating on executing and strengthening our risk management capabilities to ensure we monitor our contracts.
contracting marches is a priority.
Additionally, for simplifying our PEDITA platform and retooling our growth market strategy in the future, we will be able to increase the scale of those who see it and observe it.
and to roll out these problems more quickly at lower costs.
Furthermore, we will compare our supply chain into a competitive event by leveraging our size and scale to drive maintenance for easier expectations.
I will provide a recorder for each of these initiatives.
After meeting with hundreds of our flu-less people in the past 90 days, I am confident in our ability to maintain our fluency position in the market.
deliver multi-year profitable revenue growth rates of more than 30%
and be adjusted every lap break-even in fiscal year 2014.
I believe our peace, passion and resilience will set schools up for long-term success.
to look at significant value for our customers and our shareholders.
Turn it to size.
Coming out of this process, I'm very and even more convinced that our strategy of using theSVe
provide energy storage solutions to our customers in the right way.
Our ecosystem gives us access to the largest any infrastructure providers in the world and important.
and provides opportunities to further integrate with our customers at any point of the manager.
A revised auto market approach is in.
We will utilize one sales chunk for our entire ecosystem.
This is different from our past, where we would use multiple cell channels across our organization.
These turn out to be an ineffective strategy when it comes to attaching our service and associated services.
one in these stores.
an integrated cell channel. This has a better ability to integrate our customers into our ecosystem.
As we have seen, our digital software is available beyond its own P&L contribution.
I see two more hardware in service.
Creating a file will affect the file.
Additionally, we will work to integrate our technology more closely.
to our teams that offer interface with our storage solutions.
does it please the attractiveness for customers?
watching.
Our ability to offer an integrated end-of-the-art solution is one of the two reasons our customers select. Our ability to offer an integrated end-of-the-art solution is one of the two reasons our customers
We are increasingly recognized as one of the premier energy solutions provided in the world by large. We are also recognized as one of the premier energy solutions provided in the world by large."
increasingly recognized as one of the premier energy solutions provided in the world by Koh RFI Tagatiable.
many of which are planning on deploying significant amounts of new technology.
The integration of this offering is a tool for retaining customers beyond day one's health. We can access them anywhere along the line.
can be submitted to multi-year high revenue prospects.
We operate, we are not supply pieces, we have returns on the next of capital.
Now business is going to interact among the competitors.
which helps us to monetize data and help our customers thrive.
We also have our rapidly pooling cost from high-privacy.
We also have a rapidly improving cost of high revenue.
We believe we have a business model that's trying to set up the systems.
Turning to slides, I would like to discuss the five strategic objectives.
But I will provide the framework for the action we'll be taking over the next...
to overthink over the next few years.
First.
and will deliver profitable.
both profitability and growth are essential.
to maximize shareholder value.
Please focus on those market settings that provide continuous growth.
where I pump the solution.
allow us to maximize.
Sick.
We will develop the products and solutions that are cost to receive.
understand with our customer challenge.
challenges is the driving force behind our continuous technological...
We expect to provide customers with the most consumed product in our into previous years.
We will convert our supply chain to a competitive environment.
for establishing a best in class environment.
that is centered around diversifying our suppliers.
capture incentives from the inflation of the world tonight and improve the delivery time for us.
all of which will ultimately...
the increased radius of eti-b
Or to reduce what they do that is a competitive differential-
Bye.
harnessing the power of artificial intelligence.
children eat the ready
We can uniquely provide our customers with the ability to optimize their revenue and lower their overall cost.
It will increase this need to have a growing and profitable workforce in the private industry.
and find them. Our fifth objective is to work better.
This time will be decent with our capital spending.
and go on to another slide.
optimizing and using our resources efficiently.
resources and resources efficient and strong corporate expansion.
We'll join in our thoughts and maximize our financial performance for our children.
We have already taken action towards this object, someone which I would like to add.
Turn to slide 8. I'm pleased to announce that the news for us.
even towards the transmission side.
We're calling it the flu's uterus.
The Professional Assembly is a global market that currently seats at 450 megs.
which we expect will grow to 70 gigawatts by the year 2000.
We expect demand for this product will be driven by a posthumous need to reduce special content resulted for growth.
Furthermore, the transmission sent by highly public requires the best performance.
and how I say to people.
does increase in a barrier to the market, some of which are problematic.
All important.
Our complexity commands a higher breed for approach and service.
and often resource in HARP.
We will continue to lead to a transmission set as we deliver profitable growth.
develop new products and sort of be far more positive.
The report will precisely sign a contract for more than 500 billion dollars.
under which we will deliver 1.2 GWh at each store associated with the
in the United States.
complete with a 10-seat 6-string satsun.
By further increasing our scale, we will be able to better capture value from more supply chains.
We also know that Orsted selected us and they were looking for a trusted partner with a strong spirit and a direct competition.
As a comprehensive solution provider, we continue to outpace our competition to our scale, industry and experience and our ability to solve highly complex problems.
but we can establish ourselves as a leader among the mega-pawdience.
Turn it to slide 10.
including the Or Reviews pilribed slumped
to our fiscal year-end. Our backlog now sits at more than two and a half period of order.
Besides that, the strong demand was seen at the top of our phone.
They have now provided us with great assistance.
Please respect or move to your revenue.
Looking at the chart, you can see that even before any impacts from the IRA,
We have a pipeline that is nearly three times our current average.
It is also important to know that we are expanding ourselves to non-related art.
and that's a result, a minority over a body of two million.
is with these customers.
Turning now to slide 11. The
The LES is estimated as a time for heavy storage increased by more than 100 gigawatt hours for around 35 feet as a result of the IRA.
That is us.
The expected ITC pulls over all project returns for cost.
His benefit is expected to work through to last through in pro pricing.
to us to improve price or increase volume.
Furthermore, the production tax spread provides marginal goods from capturing benefits associated with manufacturing of all battery volumes in the United States.
It is also important to know that the IRR benefits are not necessary for achieving or adjusting EBITDA break in return in fiscal year 2014 and thus represent upside.
Thank you. Thank you.
I don't really see the IRA impacted.
But we are.
The first is the IDC for stack-on-storage.
This benefit accrues to our cost. And we expect to incentivize more projects to move forward and to greenlight other projects that were previously not economic for our population.
As a result, we anticipate the U.S. market growth to increase from 30 percent per year to around 40 to 50 percent.
Based on our compensation, we cost.
We expect to enter into the first of this conference.
in terms of labor agreement.
to the IRA about mid-Canada year 2020.
we will expect to see the impact on our financial resource.
results if they're going to happen.
production tax credit of the Section 45X of the IRA providing if there are opportunities for
And we're managing our own battery more than one factor.
I'll just go further.
As a result, we expect to qualify for the 10 dollars per kilowatt.
result with respect to quantified, $10 per kilowatt, our incentive from the IRA.
It's important to note that this is an outcome sent and guarantees a direct pay-off.
As a reminder, we open our youth production facility in September .
which will have an expected Q about nearly 16 hours per year by 2020.
We expect to be able to begin battery mode production starting in a domain of 24, thus capturing the $10 per kilowatt hour.
And we can see further supports are meeting growth targets.
Concern, Section 48C, provide for the one-time rebirth.
for onshore or established qualifying manufacturing facilities.
in the US.
As a result, we are currently looking at the possibility of expanding our operations in the U.S. with an additional topic.
Turning to slide 12.
I'm pleased to announce that we're launching our own battery module and battery pack manufacturer. And hopefully, they'll be plus three dollars.
This gives us greater control over the global supply chain and allows us to capitalize on the incentive of the RRA. Thank you.
One of the key benefits to a full battery pack that is easy is to incorporate yourself and diversify ourselves prior to it.
creating competition for ourselves.
For battery packs, it's easier to swap packs in and out of your product card.
It also allows us to incorporate our own pattern management.
but not with more plan on our data access and data.
and it's fine to prove that it is very, very easy.
We expect to see the initial pattern of production coming out of our new capacity.
during this summer of 2020.
Look at that slide.
Before they illustrate our supply chain and how our battery molecules are battery packed into them.
Starting on the left-hand side, we will continue to purchase the Thatcher
But the cell phones and cell phones are useless. And to our great friend, Akoone.
It tingles back to itself and it depletes it to our body.
ourselves and integrate it into our battery models, complete with our own battery management system.
for VMS. So we are taking those commodity tax brackets out and turning these into smart brackets capable of performing the tax bar solutions to VMS.
These battery models will qualify for the $10 per kilowatt incentive.
under the IRAs. We then put several battery models together to make a battery pack.
that is combined with our DCPN, which is a brain of the pap
This is a piece called a battery data for communication with the influence operating system. And it's a protocol for cloud-based.
Citi TOE processes providing basel Legacy flow Thank you for your participation.
Turn it now.
As I briefly mentioned earlier, we have assessed our digital business and have improved the model and model market strategy.
Now I would like to discuss what this means for the children, who ever born.
that was caused by this beautiful contingent of where we're going. First
we are sure we are offering an integrated quality and to have both those solutions to our customers.
To someone in South China.
And as I mentioned, this is a major change from our prior cell set.
a major change from our prior self-care. Thank you.
We will simplify our suite of digital options by focusing on our existing two applications.
suite of digital options by focusing on our existent two applications, wood, mosaic andzedAwake.
We plan to roll out the section for additional –
We plan to roll out MOSAIC to four additional U.S. markets over the next three years.
improve the ability of the sprayer to integrate with battery-based energy storage systems.
I think in a more focused approach we spend to reduce the cost complexity and time to market for these applications.
We do not plan to build up any additional applications at this time.
Third, we're celebrating the disparate platforms ability to be deployed onto battery and the use of our systems by the end of this year.
So enabling our new policy solutions to be more integrated into the planet.
What do we expect to achieve as a result of this activity?
improve attachment rates for services admitted to a vendor approach.
for each new panel.
and a low rate of cost to venture.
So, I will note that our chart rate is already very, very low.
Vote for the starting date in the speechpad year 2020.
We will report our progress with the city.
by disclosing the relevant KPIs.
We expect that this will have a relatively small impact of 5 to 10 milligrams.
As it relates to the financial outlook for our digital business.
We do not expect any more contributions from our business.
in 23 or 24.
We expect to have positive growth margin fiscal year 23.
and expect adjusted evidence to be at or near break-even.
year 25.
Moving to slide 15, where can I see the India technology center?
increasing the utilization to a workforce optimization that will affect roles in India in 2020.
to the benefit of our onshore audience.
these contributes are operating never they're operating expenses expected to grow at less than half the rate of revenue.
which one was played further.
Turning to slide 16 for a summary of recent actions.
as a management team, where you can meet to deliver and increase your order value.
and to execute on these five strategic objectives that I discussed at the foundation of our program.
We will provide you with quarterly updates on our progress toward a strategic agreement.
As we perform the way we operate and try to sustain the workplace.
Overall, we continue to see strong demands that are expected to be amplified.
by the current IRA bill that will start adding to our back up mid-20th.
We are committed to break even on an adjusted epidemic in fiscal year 2020.
needed to break even on an adjusted evidence based on year 24 as we enter into higher market costs.
who are committed to improving our project execution and our overall risk management.
I am pleased with the early results of the grant.
But there is still a lot of work.
As we move forward, we will continue to focus on executing the high growth capital high solution basis model.
No respect to me or who is the optimal best vehicle.
Happy to say.
say, I will not hold the call.
Thank you, Julian. Before I begin, I would like to express my gratitude to Julian and the Fluence Board for their confidence and trust in me.
The last couple of months have been a period of rapid learning.
I continue to believe that Fluence is positioned well to take advantage of a vast, untapped dam that was enhanced by the Inflation Reduction Act by more than $35 billion.
My focus is to strengthen the organizational foundation.
to enable profitable growth.
and this includes enhancing or deal underwriting, risk management and execution capabilities.
Let me now review the financial performance of the fourth quarter of 2020.
Please turn to slide 18.
In the fourth quarter, we delivered our highest ever quarter to $442 million revenue, representing an increase of 85% from the third quarter.
This is record revenue generation.
was primarily driven by strong project execution, as several projects achieved significant milestones.
We also achieved positive gross margin in the fourth quarter, 3% on an adjusted basis and 2% on a cash basis.
driven by strong revenue performance and improvement in our ability to pass through to the customer increases in certain input and supply chain costs.
This is a significant turning point for us.
And while 2022 was a challenging year, we ended the fourth quarter with positive cross-profit and believe that the issues we confronted are well understood and now are largely behind us.
Compared to 2022, we expect new contract margins in 2023 will be positively impacted by improvements in a deal underwriting process such as implementation of index-based pricing.
We've also improved execution on product rollouts, including leveraging a lab to test and debug solutions.
on product rollout, including leveraging a lab to test and debug solutions before we launch them into PEEP.
moving from gross profit to operating expense.
We improved our operating leverage in the fourth quarter of 2022.
by lowering our operating expense as a percentage of revenue compared to prior quarter and prior year.
Our operating expense can be divided into two categories.
The first is SG&E spend.
which is required amount of overhead spent to operate a business both at corporate and at the regional level.
We do not expect that corporate law affects the scale and growth of the business.
The second area of spend is what we refer to as platform investment.
This represents primarily R&D spread, which we view as a type of growth cap.
Full year 2022 operating expense was 15.5% of revenue, which we expect will be a high annual watermark.
Looking at 2023 and beyond, although we expect to continue to grow our operating expense in absolute dollar terms, but we expect it to grow at a rate less than half of the rate of our revenue growth.
We expect this operating leverage to be one of the drivers of the improvement in adjusted EBITDA we see over the next few years.
In the interest of greater transparency,
This quarter we have begun providing a supplemental quarterly metric sheet on our investor relations website that is designed to provide analysts and investors with a deeper understanding of our financial and operating performance.
Please don't say thank you.
I am pleased to report that we ended 2022 with total cash of $540 billion, which includes our short-term investments.
report that we end in 2022 with total cash of $540 million, which includes our short-term investments and restricted cash.
and is in line with what we have decided.
As shown on this cash bridge, the majority of our cash usage in 2022 was proven by negative just to keep it down.
That trend is expected to continue in fiscal year 2023.
Let me also provide some color on the other drivers of our 2023 cash out.
We expect to incur modest traffic spend, including for our digital business retooling.
In addition, as we did in 2022.
We will use some operating cash
at a rate roughly 10% of a year-on-year revenue pool.
We believe that we have ample liquidity to meet our 2021 cash needs.
ample liquidity to meet our 2023 cash needs. Please turn to slide 20.
We are initiating guidance for fiscal year 2023 for total revenue of between $1.4 billion and $1.7 billion.
Additionally, we expect our adjusted gross profit to be between $60 million and $100 million.
We're coming into 2023 with approximately 90% of expected revenue at the midpoint of our fiscal year 2023 guidance already in our backlog.
We have also secured additional supply chain commitments for 2020.
This gives us confidence in our revenue guidance.
On the next slide, I will provide additional color on why we are confident of achieving our 2023 adjusted gross profit items.
Please note that our guidance does not assume any financial benefit from the Inflation Reduction Act as we expect to see ordered growth in 2023 with a benefit to sales occurring mostly in 2024 and beyond. In terms of revenue sexuality, our guidance does not assume any financial benefit from the Inflation Reduction Act as we expect to see ordered growth in 2023 with a benefit
We expect to see a split of approximately 40% in the first half and 60% in the second half. Furthermore, we expect operating expense to grow at less than 50% of our revenue growth.
providing a significant operating leverage. As Houshay mentioned, we will be utilizing the India Technology Center more, enabling us to scale at a much lower cost.
Please turn to slide 21.
but better walk you through.
key drivers of our 2023 Adjustment Gross Profit guidance when compared to 2022.
We are confident in our 2023 adjusted gross profit guidance of $60 million to $100 million driven by improved contract under IT.
This reflects a combination of signing new contracts at margins that are at or close to double digits.
and improvement compared to the past.
our ability to recoup some of the increase in our supply chain costs and improve execution.
I would note that we expect our exit 2023 close margin grant rates to be higher than the full year 2022 margin.
as a legacy contract is completion and new deals start to have a larger impact on them.
Before we open the box of questions.
I want to reiterate that we have visibility to achieve 2024 Great Even adjusted EBITDA as well as multi-year 30% plus revenue growth.
and are positioned to take advantage of the upside from the Inflation Production Act.
With that, we will open the floor for questions.
Good morning, terminal phones or electronic fans
I wanted to apologize for the way the sound worked. It looked like my voice accent did not mix very well with the mic and the speakers that live in my room. So in order to correct this...
Lex will be sending, we will be posting our script on the website to ensure that everybody has access to it. And Lex will be sending by email to his contacts all over. And it will be open if you have any questions on the script later on after this. You will, you know, you can send a contact Lex Direct. Let me tell you this before we start, which I think is important.
the quality of the recording was an inverse proportion to the quality of the message. So unfortunately it did not come true, but it was in direct proportion, you know, just quite the opposite. So it's going to the Q&A and I really apologize for that. It won't happen again. We're testing and you'll see.
Please stand by while we compile the Q&A roster. Our first question comes from James West with Evercore ISI. Your line is open. Do you think and how do you keep your mind off the score?
Hey, good morning Julian and Manu. Good morning James.
Good morning, Jay.
on profitable growth and profit being of course the key word there. Has your bidding strategy changed? Obviously there's a huge amount of growth in the business itself but
have you adjusted the way the company bids on projects? What we have done, just to look, this is a question we get all the time, James, that we segmented the market.
in more detail to identify where we, which market segments and geographies we could actually aim for our 10, you know, our double digit margins. So every time we engage with a new customer or engage in a new project, we know that that the customer's business case will allow and the value will be created.
we're allowed for our profit objectives to be reached. So that's how we have been working. We also, you know, this is on the manual leadership, we have put in place a new contract review process internally to ensure not only that, you know, that we reach our double digit margins, but also that the risk profile of the product enters.
into a reason we were allowed to monetize the full margin. So that's how we have worked. Generally we have inmates that we have throughout some segments.
or at least we're not very active in those segments, but at the end of the day, it has allowed us to keep our volumes and reach our profit objective as we move forward.
Okay, makes sense. And then another key differentiator with your strategy is more focus on the digital aspects of the business and maybe highlight is that a lot of
internal kind of R&D and maximizing what you have or are you looking at external kind of M&A opportunities as well?
What we want to do now is kind of integrate the work that we used to look at.
integration. So what we're doing is integrating the sales channel. That is what requires training and some investments, some capability. We are integrating our OS and our operating systems with our digital offering.
That's not that they will be one, but that they will communicate more effectively. So our customers will have a seamless experience when they buy our hardware solutions and then they hire our people.
And then we're working, and that's where the R&D comes in, is on improving the platform of Mosaic. You know, this is normal in the SaaS business, but we really need to invest to ensure that we can actually continue spending that project at a lower cost point and a lower complexity point.
So, we can do this much cheaper and much faster. In terms of M&A, we are not planning to do M&A. We are not planning. I will tell you how to do it. For now, what we will do is concentrate on our current offers. We believe these are the two territories that are the most attractive today.
where the business cases are very, very clear, and that it coincides with our market sectors, you know? And as we move forward, as we are able to reach our pre-given point for a digital business in 25, we will then look at whether we should develop older apps, older apps.
But I think that at the end of the day, we will look at apps that are based on our commercial capabilities, that our apps, that our customers can use and can monitor.
Part of the problem with some of the apps we had before is that they were connected with customer segments where we were not that happy. So we'll have me put in place a new sales channel and an additional fixed cost that we think is not a good idea at this time. Okay, got it. Thanks, Julian. That was a really great video.
Thank you James.
Thank you, James. Thank you. One moment.
We have a question from Brian Lee with Goldman Sachs. Your line is open.
Hey guys, good morning. Thanks for taking the questions.
I had a couple around the margins. I guess first off maybe more of a clarifying question. At points in time during the script, I think, Julian, you said adjusted EBITDA break-even target in fiscal 24, but then being at or near break-even for full year fiscal 25.
we break even in 24. Hope to be able to break even in 24.
and digital itself will be breakeven in 2015.
Okay, I guess that kind of prompts the follow-up question, which is a lot of investors, we speak to assume that kind of the digital software applications piece of your business model would be more profitable than the hardware-centric side. So, why, I guess, is digital taking so long to get to profitability? It seems like some of your peers...
saying, you know, our beating strategy.
The ability to gain economies of scale requires expanding into a new market, moving from Australia to California and to the world.
But we realized that it was a very, very complicated and expensive tool.
And that has made it a little bit more difficult to meet our growth. What we're doing now is concentrating on replatforming that solution to ensure that we can get into it at higher speed.
So that's the rationale, that's the reason for the mosaic being further down the road than what we expected.
at this stage, the building up. This PERA, our APM, our asset management tool, is going in line with our portal. And that way, that's just essentially, we bought them, but late last year, late last fiscal year, we are integrated into our systems, integrated into our sales channel.
and it's going along the, you know, just in line with our board book so we're, you know, we're very confident. I think those are the two, you know, I'll say that today. The main driver for our delay has been the need to recap for the day.
Just one clarification on your last comment is beyond positive or we expect to be positive on the market and digital in 2023 as well.
Just one clarification on your last comment is we are positive or we expect to be positive across margin and digital in 2023 as well. And then the only other thing I'd say is, you know, we've talked about margin rates.
between 80 to 90 percent in the digital business. That still holds true over the next several years. Julian's comment was much more around the EBITDA as well.
and individual business that still hold true over the next several years. Olean's comment was much more around the EBITDA as well.
No, that's super helpful. I appreciate the color. Last question for me and I'll pass it on is the EBITDA breakeven target for fiscal 24. I think in the past you had said, I think two quarters ago, there's a path to gross margin sort of in the 10 percent range.
So we feel very confident about getting adjusted with the.
even for 2024 on the backs of double digit cross margins. And then from an operating leverage perspective, you know, we expect, we believe that 2022 and will with a high water market, percentage of revenue that we expect to.
reduce that as a percentage of revenue, given our OpEx will go at less than half of the revenue.
reduce that as a percentage of revenue given our OPEX required less than half of the revenue. Okay, great. Thanks guys. I'll pass it on.
Our next question comes from George Giannarchas with Canada Cordenuity. Your line is open.
Hey, good morning, everyone. Thanks for..
Thanks for taking my questions. So maybe I could start around your decision to manufacture PACS in the US. Can you just talk about the incremental CAPEX required to do that, the incremental hires you need to make, whether or not this will be a global move, and whether or not this moves you away from an asset-light strategy?
Thank you. Well, it's the same strategy, strategic position we have today. We will use contracted manufacturing so we will not be owning the manufacturing facility. We had invested in the design and the IP and the software but not y Bye now
We will still be a capitalized business. This will be manufactured by our contractor manufacturer provider. This is directed at the U.S. market. So we are this – our current approach and the decisions that we will build, the fluids make for the U.S.
At this stage we're not selling from the US to third parties. We might, as we grow in other regions, we might also build it for Asia and Europe , but just as today is only for the US. And we believe that our capitalized business model will continue. We're committed to it. We believe it's the right way to do it.
One of the things that has always surprised me is the quality of the contractor manufacturing that is available in the USA. What these people can do for you, how they do it, how much value they can create out of it. We are very happy with our contractor manufacturing.
Thank you. And maybe as a follow-up, could you discuss the cell supply situation and whether or not it's improved incrementally over the last few months? And what, if any, other equipment may be causing bottlenecks still for deployments? Thank you.
Yeah, thanks. You know the battery situation is improved. We haven't had any delays.
I know the market is tight, you know, generally. But, you know, our relationship with our suppliers, our ability to engage with them, and our scale allows us to ensure we have ensured that we have no issues, you know, on the delivery of our batteries on time.
with it on the terms that we agree. You know I will say that you know
That's clearly a major part of our supply chain channels. Many other markets were, you know.
is tied that we're concerned about. Clearly we are constant. This is one of the reasons why we believe scale is so important. In order to manage our supply chain effectively, our scale and our close relationship with suppliers may not beout München.
Thanks. Thank you. Thank you. Thank you. Thank you.
Our next question comes from Mahit Mendloy with Credit Suisse. Your line is open. Your line is open.
Hey, good morning and thanks for taking your questions. Just maybe on the previous question, could you understand the difference between the Flux stack, or sorry, the Fluence stack and the Fluence cube? Just trying to understand the code difference here. And part of that is just...
to get the domestic content added under the IRA. Would the new systems qualify with just the battery pack manufacturing in the US or would you have to procure the batteries from the US markets as well? Thanks.
I will let you know later on before we start, I think it is important. The regulations of what will be considered a U.S.-made battery module system have not been issued.
So it is still clear how down, how upstream they will go, whether they will go only for their family.
I think that will be more than that, whether they will require steel to be from the U.S., whether the cells need to be from the U.S., or further that, whether the mining needs to happen. What we're doing is we're building a strategy of not regretting. Things that we believe that in any event will be included. And try to go upstream as much as we can. To ensure that we can meet the quality.
Just to let you know, we're working on it and we're working on moving as much value as we can into the U.S. to ensure that we are as close, you know, that we do qualify and make the decisions that influence make that are not regret decisions. No matter, we believe that no matter what happens, we will have to build our modules in the U.S. in order to make that point. We're also looking to... Thank you.
We're talking to battery cell manufacturers to buy cells in the US. Looking to buy still in the US to try to create as much value.
that's where we are. I will let Rebecca answer the first part of the question.
Sure, thank you. Hi Mahib. So to clarify your question back to you, it's just that you're looking to understand the difference between the Fluent Cube and what we might call UltraStack or GridStack. So you can think about the way we design products as we build a platform for it.
In the platform we have this thing called a cube which is the enclosure with the batteries inside of it. But our platform also includes inverters, control systems, fire safety systems. And we put all of those pieces together in well-defined units that create our stacks. So grid stacks for example is a product on top of that platform that is inclusive of inverters.
today, the UltraStack, where its differentiation really lies is in the control system. So it's a highly redundant system because of the work that it needs to do with the transmission operators. It responds to the grid very quickly in 150 milliseconds now, that will be down to 100 milliseconds.
the future. It does all kinds of cool things like it has a really high reliability feature, it has a very high effort on power oscillation damping which helps just the grid become more stable. So it's a different product and the real differentiation of that product for that ultra stack paired to grid stack is in the control system.
And I would mention, just to connect back to something earlier, that's where we can also start to look at higher margin deals, because when we create such a set of differentiation with our technology, it makes it easier for us to look for that double digit or more margin.
And if you can say anything better, you go to the site, they all look the same. But they do very, very differently. That's the way you should think of it. They're all cute. You see that they're the same, they look the same. For them to agree and to our customers, offering them.
services which are very different with different levels of response time, quality, security, depending on what our quality is.
Nope. Are you still there?
We have our next question.
It looks like it comes from Mark Strauss with JP Morgan. Your line is open.
Good morning. Thanks for taking our questions. I wanted to go back to the IRA. The $10 per kilowatt hour that you're calling out for the modules, is there a good rule of thumb that we should be assuming as far as how much of that you keep versus what you share with
all from the side strategy so you should not go to be something that will add 2% additional margin. It will be part of our 10 to 15% margin as we move forward.
But we will be part of our practice.
but we will be part of our practice position or our cost position.
And Mark, that's how our terms with our contract manufacturers work. We believe we can keep most of the handbags.
Okay, thank you. And then just a real quick follow-up, Manu. Looks like the pipeline metrics that you're providing, you're taking a bit more conservative view of what was reported previously. Can you give some more color on what's going on there? Is that just kind of the likelihood of that pipeline, kind of the timing of that pipeline, anything else to call out?
I think the two things I'd say, one, we raised the bar on both the likelihood and the lens of profitability, which kind of goes in line with our general theme around focusing on profit and control. So that's kind of a little bit of color on how we thought about pipeline or, you know, year-end reporting. I'm going to point out the fact that we have to...
about not just the back-up position we're in, but also the pipeline that sits behind our back-up and frankly the top of the funnel that sits behind the pipeline. Okay, very helpful. Thank you. Thank you, Mark.
Our next question comes from Julian Dumoulin Smith with Bank of America. Your line is open. Julian Dumoulin Smith Hey, good morning. Pleasure to chat here. My name is Jake and my pleasure. Congrats again. If I can just come back to the cash conversation quickly here. How are you thinking about that?
even a positive world.
Sure, sure Juli. Just from a cash perspective, let me start with how we think about it. First of all, our model is asset light and operating cash efficient model, which means as you bridge from EBITDA down to cash, you have very low CAPEX and operating cash usage.
that we have dimensioned for 22 and 23 at 10% of our revenue. So with most of the cash usage in 23 being driven by our EBITDA performance with a little bit of cash being used for CapEx and then 10% of our revenue growth kind of taking the bridge all the way to the bottom line. That starts to turn pretty.
particularly in 2024, where we believe we'll be close to break even. For cash not all the way there, we'll be breaking even even better and then as we get to 2025, we start.
where we believe we'll be close to break even for cash not all the way there. We expect to start generating.
What I'll close with in terms of my comments is, one, there's a little bit of cache time in between first half and second half.
And the second thing is we feel very comfortable with the cash on the books, plus our unused revolver in terms of our ability to meet our cash needs.
The guy to get to cash cloyeah able to the number there can speak back a little bit and be that again. That's ry working capital. Clearly there was the. You know, if you look at the balance sheet there there was some consumption.
Can you talk about that? Yes. So if you're listening to our 2022 fourth quarter working capital usage. So if you start with, you put the total year in context and then I'll bring to close what happened.
If you put the total here in context, you put a bridge out there as well. The operating cash, which is principally working capital, as well as some money that we collect from our customers is repayment.
which is also part of the expanded definition of working capital. It was about a 10% usage in terms of our revenue increase year to year. So that was our total conduction for the total year. As you pass the quarters, most of the cash usage in the fourth quarter was effectively done for free.
us making good in terms of buying inventory and paying off our suppliers. That was in execution of our project that was already funded in the most part at the beginning of the year from a customer pre-payment perspective, which is why you see that phenomenon in the fourth quarter. But as you zoom out and look at the total year, you don't see that as much.
That model will continue which we really like because it is a very working capital.
Got it. Thank you.
Thank you, Yudh.
Thank you.
One moment. Our next question comes from Ben Callow with Baird. Your line is open.
Hey, good day guys. First, just maybe backing up to the competitive environment. I know you guys have only been there 90 days. How are you seeing bids change in terms of the number of competitors and why someone like an Orsted would pick you?
boom and projects we think. So how do you think about labor and environment? Thank you.
Thank you, Andy. Kind of maybe the rule of thumb is the following. As you go up in the complexity scale, you will see that the questionATER and you will see the Houston map beingasers are
You know, competition gets less, you know.
Competition gets less.
gets, you know, softer. So if you go to a simpler solution where you see a lot of these startups, you know, there's a lot of competition as you go up the scale either because the projects are very big.
or they need specific characteristics or features that we can only deliver, then the competition kind of builds a little bit and it becomes the disease. Not only the disease, you always need to find it. I think that, you know, why do people pick us? Why do they say Lantos?
The reason that we talk to our customers about it is our ability to manage complexity, both in terms of project or product, are safe people.
We had a problem which has proven to be very, very safe. We have gone through burn tests. We have done all the testing of the safety of people. You know, we are really impressed.
And then, you know, our end-to-end solution, the fact that when people hire or they know they will have a partner for the next 20 years that will deliver. And we have seen it today, you know.
with new regulations coming in place in Europe . The UK is here. We were out there, it released the apps and helping all our customers, ensuring that they will be meeting the regulations that will HY Mer really contain for the government.
So I would say those are the three things. Complexity, both in product and project. You know, the.
safety, you know, and they are, they see us as a partner that will, you know, offer them, you know, will continue with them as they move on.
And they see us as a partner that will offer them, will continue with them as they move on. You are a driver.
Thank you. One moment for our next question. Raise your hand.
Our next question comes from Sean McLaughlin with HSBC. Your line is open.
Good morning, thank you for taking my questions. Firstly, just on the IRA, you've talked about your expectation for the first orders in June 23. Will there be a lag into that? Are customers waiting until they understand the fall?
complexities and details of the IR from the IRS over the next quarter or so. And also then, I mean, how should we think about the actual volume of orders? Are we going to see a real explosion in June or is it a kind of a gradual ramp up over the 12 months from June ? Any color that would be.
would be helpful. The second question just on UltraStack, your first success has been in Europe , I mean is this a product targeted at the European market and are the margins in Europe actually better than in the US market? Thank you.
In terms of the RA, what we have in our conversation with our customers.
They are working on the standalone storage projects.
Just working on the connect, looking for the sites, let's define the connection point.
I think this will be a gradual increase. I'll say the one comments that all of them started in June will get to the full amount of the confluence. They will start coming in. The way I've seen these projects develop, the ones we'll see first are the ones that are closer to.
transmission lines where they can connect easier. The substation is, you know, it's got some spare capacity. And as we move along, they will continue moving forward. So that's the way we see it. It takes a little while for these projects to be, you know, for our customers.
to be ready to have these projects at a point where they can sign. To develop the project, find the off-take and then work with us. In terms of our transmission grid, we see this as a global problem.
It was started in Europe , it was started in Italy. So that's what we had at 200 male an hour project.
Now we're in Germany. Clearly in Europe there's a lot of need for this because they're looking to integrate and strengthen. But the U.S. has a major, major challenge to do this. Not to make this work.
We are also working in Chile where we have talked and worked with the regulators there to ensure they understand the value so we have a success there and we hope to see standards coming out for this type of solution in Chile.
very soon. And then we're working in the US with ourselves, talking to regulators, to customers, and so we can create regulatory ways for this to join.
very soon. And then we're working in the U.S. with ourselves, talking to regulators, to customers, and so we can create a regulatory base for these two joints. We are confident that this is going to meet our needs and that this is what we're trying to Twe domains and to keep all those connect Muscle states, bending away are all things that knock on
So this is a global product that is 17 gigawatts by the year 2030. I will talk to you about it. It is a global product.
global product, the 17 gigawatts by the year 2030, that we talked about it is a global product. Thank you.
Our next question comes from Pavel.
Molchanov with Raymond James, your line is open. Thanks for taking the question. We talked a lot about the US and Europe . Historically you've had a strong presence in the Australian market where there is more and more talk about storage as part of the new Labour Party.
climate policy, can we get an update on what's happening in Australian demand?
We have a very, very strong pipeline in Australia.
We're working with good clients and customers who have a few projects that are coming along. I think that you will see some significant projects.
some significant projects coming into our backlog. We don't disclose numbers by market, but we're confident this is clearly a market that is probably showing to me.
It appears to be very, very promising for 20, for 23, for our fiscal year.
be very very promising for 20 or 23 for our fiscal year. Okay, sounds good.
Given that you're vertically integrating, but you'll still be insourcing battery cells, is there any appetite to look at the difference between the two?
chemistries beyond lithium ion, so nickel zinc, vanadium, iron flow, any of these new models that are starting to scale up.
Yeah, I'll let Rebecca answer that one. Sure, so you know in the short term we of course look beyond a single type of battery and currently use both LFP and NMC batteries in our solution.
We work very closely with our battery OEMs to look beyond that as well. Our platform is designed such that it's agnostic. So we can absorb whatever kind of battery solution is out there that meets the sort of customer ROI requirements. And the next thing I would say that we would look at would be solid state batteries and sodium, with sodium being the one that we see.
the nearest term right outside of what we're doing currently with LFP and NMC.
right outside of what we're doing currently with LFP and NMC. Understood. Thank you very much.
Thanks, thanks for that. Our next question comes from Ryan Levine with Citi. Your line is open. You are an expert at doing things.
Good morning. With the focus on profitability, has the company slowed its hiring or can you provide color on your views on the tools to manage the cost structure? So what we're doing in terms of...
We're looking at our Indian technology center, it has been a very, very successful initiative. We already have around 100 people there and we have been attracted to train tasks. We're very happy with the contributions they have done, the tools, the problem development. We are looking at expanding that facility.
to support some of our other areas, our back office, our digital development, continue grumbling about und founding and tour to help raise awareness on a second question. And I just think I'm bringing that sort of thee thing together and just hoping that switch
supply chain. So that's what I think will be the main driver of our improvements in efficiency.
We will, as Manuel mentioned, we believe our SGA will grow at a place that will be half of our revenue growth. So we will continue to become much more efficient in terms of revenue production with our current cost drops that have to go forward.
Thanks, and then on that vein, can you provide color on the pace of adjusted gross margin recovery you're seeing for 23 from the 3.4% in the recent quarter towards the double digit target that you highlighted by the end of next year?
I will also point out the slide 21.
I will also point out a slide that I mentioned.
There are two principle drivers of our confidence level in getting through.
of our confidence level in getting to a much higher gross margin.
compared to 22 when you look at a guidance. One is I think you know
A lot of our execution issues brought pretty good awareness.
You saw early signs of that in our fourth protocol.
So we think that's a big driver and we've mentioned that on slide 21 in the range of 23 to 33. And then we are signing new deals that are at or close to double digit margins that is already in our backlog and that starts to bear fruit.
23 when you think in terms of gross margin delivery. I will point out that we do have, let's call it our legacy contract that we'll have to work through the fiscal year 23. So by the time we exit 23, which for us is September 30th, we will have to work through the fiscal year 23. So that's the first step.
you will start to see the double digit run rate start to show up in our results. And definitely pretty pure play going into 2024. That does drive our confidence level in getting to a justity pick up.
given the operating leverage comments that we just made. Just want to make sure we're hearing that right. Are you saying that the step up is really going to come towards the last quarter of the year and that we won't see a more ratable recovery of the gross margin? I think you see
improving gross margins quarter on quarter as the new deals kick in into revenue and we go through the old deals and fourth quarter of our fiscal year 23 will be a close approximation of how you will expect to see 24 fiscal year as you pretty much walked through most of our legacy matters.
Appreciate the call. Thank you.
Thank you. Our next question comes from Tom McCarran with Seaport Research Partners. Your line is open. Hi. Thanks for squeezing me in. I appreciate it. Just one topic left for me. I know we've run over, so I'll try to keep it short. I'll try to keep it short.
About 2 weeks ago, the California Public Utilities Commission approved PG&E's request to amend 4 of its mid-term reliability contracts for storage. Apparently, all 4 storage contracts have had their pricing raised, 3 have had their schedules delayed, and 1 has had its size cut in half.
Could you speak to the implications of these changes, especially the approved increase in pricing for your current backlog and expected future awards for California?
I'm very, very specific. I'm not aware of
of these issues that you're just raising with me. So I'll have to get back.
these issues that you're just raising with me. So, you know, I'll get back to my sales team.
I guess that hasn't been an issue, but you know, it will come up to my attention. We'll take a look at it.
I think in general we are seeing in group practice, I probably not attributed to just one single phenomenon and let's get follow up on your questions. Great. I appreciate that. And could you just give us an idea.
of what California represents as a percentage of your current backlog? We're not providing numbers per market because then we'll get into this. But I'll tell you, California is clearly one of our most attractive markets. In the U.S. it's a market that
where we see a lot of demand and where we see a lot of opportunity for creation. So, you know, that's what I would say. Maybe one way to think about it is, you know, our revenue, you said two-thirds. If you look at our historical revenue and our backlogs have represented.
about that. I think two-thirds of our revenue comes from the Americas. Within the two-thirds that comes from the Americas, California is meeting proportions. Do not break it down by state. Yes, sir. You can't break it down by state.
I figured it was worth a try to dig a bit deeper, but I appreciate the help. Thank you. Thank you. One moment for our next question. Do we have one more question?
positive about China opening up in the end of zero COVID, but perhaps for some quarters people might actually be getting COVID and we might have disruptions that won't last, you know, forever. But I wanted to inquire about your contingencies and thoughts about those risks into next year on the supply chain. And then longer term I was
truly amazed at the AES Aeroproducts announcement for their Texas hydrogen JV. And I wonder if you can comment on the degree to which, obviously you work heavily with AES, but the degree to which Beth has a
you know, huge opportunity in the nexus of clean, supporting dedicated intermittent renewables that then produce, you know, steady state green hydrogen production.
I mean on the hydrogen clearly –
Battery storage will play a role in hydrogen production in order to ensure that your electrolysis works more efficiently with renewable sources. DON'T Houle fans at green go
There are – battery storage plays a much more important role when you are producing ammonia when you are producing hydrogen because electrolytes are easier to adapt to changes while the ammonia production systems require more stable. So depending on what – how you are organizing your hydrogen production, whether you're going on the wind down –
But we're using our technology producing wood operating the electrolytes. So that's what I would test.
to work. And on the 2023. Yes.
And on the 2023 list, yes. Well, you know, I think that's a good question.
We continue to be exposed to China. We are a significant portion of our our matter is going from China, not always, but a significant portion of it. And we clearly this is an issue of concern. Something that we care about is that we're looking towards diversifying out of China.
The flow of space will allow us to do that, will allow us to move more and to make it easier to move products. But we continue working with producers in Europe and in the United States.
in all the Southeast Asian countries. And we're looking to continue diversifying, but I will say that today, China is still a major supplier. We haven't seen any issues. There are no problems in production in any of our suppliers. There have been no problems in shipping some and logistics.
We have no signs of any disruption at this stage. But clearly it's something that our risk management, when we looked at our risk management capabilities, it's something that we spend time on to ensure that we can manage any potential.
Thank you. I want to thank everybody for participating. As I said at the beginning, I could not understand what I was saying when I was reading the script. Clearly my voice, the mic, and the speakers in my room and my accent did not work very well.
We have the screen in the IRR website. Please take a look at it. If you have any questions, contact Lex and we will gladly answer that. We will assure you next quarter when these won't happen again.
the screen in the IRR website, please take a look at it. If you have any questions, contact Lex and we will gladly answer that. We will assure you that next quarter, this won't happen so thank you very, very much for your time.
Be awesome. This concludes today's conference call. Thank you for participating. You may now disconnect.
The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.