Fluence Energy Inc. Q2 2023 Earnings Call
Okay.
Good day and thank you for standing by welcome to the Fluence Energy second quarter 2023 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today likes me Vice President of Investor Relations. Please go ahead.
Thank you good morning, and welcome to fluids Energy's second quarter 2023 earnings conference call a copy of our earnings presentation press release, and supplementary metric sheet covering financial results along with supporting statements and.
Schedule, including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at Fluence energy Dot com.
Joining me on this morning's call are who Leo <unk>, our president and Chief Executive Officer, Mono <unk>, our Chief Financial Officer, and Rebecca Ball, our Chief products Officer.
During the course of this call fluids management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.
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.
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 on 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 I'll now turn the call over to <unk>.
Thank you next I would like to send a warm welcome to our investors analysts and employees who are participating in today's call.
This morning, I will provide a brief update on our business and then review our progress on our strategic objectives.
Following my remarks, Madhu will discuss our financial performance for the second quarter.
As well as our outlook for the rest of the fiscal year.
Starting on slide four with the key highlights Im pleased to report that in the water, we recognize a record $698 million of revenue.
$32 million of adjusted gross profit.
Our demand was strong across all three of our business lines and new orders were approximately $847 million highlighted by our service.
Services business contracted one gigawatt.
In our digital business contracted two seven gigawatts.
Furthermore, our signed contract backlog as of March 31 was $2 $8 billion a quarter over quarter increase of approximately $100 million, even after recognizing almost 700 of revenue during the quarter.
I'll also note that approximately 81% of our backlog it was non related parties.
Lastly, our recurring revenue businesses, which consists of services and digital <unk>.
Peering a strong growth during the quarter our service attachment rate was 263% for the second quarter driven by the signing of the service agreement with us.
Furthermore, our deployed service attachment rate, which is raised on our cumulative active service contracts relative to our deployed storage remains above 90%.
Looking at specifically at.
Our beef our digital business, we had a very strong quarter as we were able to contract two seven Gigawatts wood you have to start 200% increase from the previous quarter.
These are the early signs that our strategic direction is progressing successfully.
Furthermore, we added approximately 800 megawatts of digital assets under management.
You'll have a lot of work to do regarding our digital business, but we're very encouraged by the results thus far.
Turning to slide five I'd like to discuss the five strategic objectives that we highlighted previously and provide you with an update on our progress.
First on delivering profitable growth I'm.
I am pleased to report that we are raising our fiscal year 'twenty three guidance for both revenue and adjusted gross profit.
As Manoj will discuss in more detail, we are able to raise our guidance due to better execution cashless costs in some of our projects being ahead of artist spectrum schedule.
Additionally, I am pleased to report that we're pulling forward our profitability timeline.
As you May recall, we previously expected to be adjusted EBITDA positive in fiscal year 'twenty four.
We do not provide quarterly guidance. However, we're expecting to be close to adjusted EBITDA breakeven in the fourth quarter of fiscal year 'twenty three.
Second we will continue to develop products and solutions that our customers need.
As such I am pleased to report that we received a 200 megawatt binding of water for our all star Trac product <unk>.
Making this our third of water of energy storage and transmission.
I noted on our previous calls we are very bullish on the transmission segment.
Expect this area to grow our transmission projects.
Yes, Don becomes a critical issue around the world.
<unk> is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem.
We're one of the we're one of only a handful of companies in the world that process, the technology experience and performance requirements necessary to use energy storage as a transmission asset.
Third we will convert our supply change into a competitive advantage I am pleased to say that we have signed a master supply agreement with ASC.
Under which we will procure battery sales.
This partnership that's another high quality battery suppliers supplier to fluids portfolio.
Enhancing our reality to meet the growing demand for energy storage solutions.
This agreement supports our domestic module manufacturing efforts and strengthens our position as a leader in the energy storage industry.
Fourth we will use through digital as a competitive differentiator and a margin driver.
Looking now at our R&D spend at Bravo, starting this month, we will begin including these fair in our span their hardware solutions offerings. This is an important step as it will provide us with a path to increasing it to increase and our IRR as we bundle our offerings and execute on our one sales John it up.
<unk> costs last December .
And finally, our fifth objective is to work better.
I'm proud to state that fluid has published its inaugural sustainability report on our website in this report we.
Outline our commitment our commitment to a circular economy that includes sustainable end of life management for our products as well as a firm stance against forced labor.
Too bullish on sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we powered our war for a more sustainable future and demonstrate our leadership within the sector.
Turning to slide six.
Demand for any stores continues to accelerate in fact, our pipeline now seats.
$11 2 billion, which is up from $10 3 billion last quarter.
We expect we will start to see some projects award in the second half of this calendar year.
Directly attributed attributable to the inflationary option there.
We reaffirm consolidated consolidated revenue growth of 35% to 40% year over year for fiscal year 'twenty four irrespective of the issuance of the final IRS guidance.
Our 23 guidance increase and the incrementally higher 24 outlook represents an expected benefit to revenues of nearly 500 million over this two year period.
Relative to our expectations on our Q1 earnings call conference three months ago.
It is worth noting that we're seeing that and hiring success, regardless of the IRI.
If you have examples of recent successes include.
The binding of water in the professional segment that I previously mentioned.
Do we were recently awarded we were recently awarded a 400 megawatt hour contract in Australia for <unk> energy range back project.
And as you may recall, we sign that 1200 megawatt hour contract will start in December and during Q2, we signed a service agreement for this product.
All of these were achieved without consideration of the inflation of the auction.
Turning to slide seven.
We are pleased to see that some of the initial area of regulation has been released by the U S Treasury.
However, we are still waiting on the domestic content regulations, but we believe the actions, we're taking will enable us to meet the domestic content requirement sought by our customers.
In regards to our U S module manufacturing, we are on schedule and expect production to start in our yield the facility in the summer of 'twenty four.
As it relates to section 45 acts of their IRA or the production.
Tax credits, we are targeting to be able to record the $10 per kilowatt hour incentive associated associated with manufacturing U S battery markets.
Right now we do not expect that we will capture incremental margin as a result of mono factory our own molecules in the U S.
We do believe it will be a volume driver for us as many of our U S customers have expressed their need for our U S made product. Thus, we expect that $10 will go towards offsetting the cost of reaching economies of scale.
From an accounting standpoint, our current expectation is that we will account for them for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and services. However, this could change based on defined their guidelines.
Furthermore, we expect to elect the direct pay provision for the first five years of that grade.
The exact timing of the cash payment is unclear at this time as we are still waiting for clarification from the U S Treasury.
Currently we're eagerly waiting for the publication of the IRI IRI guideline for any storage and domestic content.
All of our customers one the final lead deals that it will provide before moving forward with the account with contracts.
We encourage our policymakers to act swiftly however, if I mention our 24 growth expectations remain unchanged irrespective of the final regulations being partners.
Turning to slide eight as I briefly mentioned, we recently published our inaugural sustainability report, which highlights our vision to implement digital solutions to further optimize the any stores supply chain and lifecycle.
I'm pleased to state that we are committed to promoting social sustainability by fostering diversity and inclusion within their organization.
We believe this is essential to develop the.
No other organization we need.
We aim to increase the recipe within the organization by setting targets for diversity hiring.
We have established a target for fiscal year 'twenty, three which includes that approximately one third of our employees higher have identify themselves are female.
In the report you will also see that end of line management is very important to us and we have committed to developing a circular economy framework for our products.
Additionally, we highlighting their report that we have fabless are robust supplier code of conduct that is aligned with the international appeal of human rights at work that ensures that our suppliers are here to ethical sustainable business practices.
We summarized our policy on conflict minerals, and ethical sourcing and which we commit to working towards avoiding the use of minerals within our supply chain from conflict affected area.
Furthermore, in the report is a signed commitment letter taking a fewer tolerance spend regardless of forced labor. This is an area that is critical to our bodies.
We also include enrollment timeline, so our stakeholders can monitor our ESD Jordan.
In the spirit of accountability transparency, we will provide an update.
On our sustainability progress annually.
Our stakeholders can thrive our year over year progress.
It all flows any year sustainability report demonstrates the company's commitment to sustainable practices and its efforts to drive positive environmental and social impact.
So as various initiative and target fluids entities working towards a more sustainable future for it.
In conclusion, I am very pleased with the achievements of the second quarter, Although we're mindful theres still a lot of work to be done we will look to continue as romaine totals were all risks through the remainder of the year.
I will note I will now turn the call over to Michael.
Thank you Julien.
I will begin by reviewing our financial performance for the second quarter, and then discuss our guidance for fiscal year 2023, Please turn to slide 10.
Our second quarter revenue reached a record high of $698 million.
With a record adjusted gross profit of $32 million.
Revenues benefited from a pull forward of more than $200 million.
Into the second quarter from the second half of this year driven by improved project execution on select projects relative to our expectations and EBIT by the availability of materials.
In the second quarter more than 85% of our revenue are roughly $600 million came from legacy contracts. The revenue that is pulled forward into the second quarter was associated with legacy contracts and we now anticipate that almost all of our lower margin legacy backlog will be.
Turned over by the end of this fiscal year.
Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half.
With regard to operating expense and adjusted EBITDA second quarter operating expense, excluding stock compensation was $61 million or approximating, 9% of revenue, which is down from approximately 17% of revenue in the first quarter.
We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond.
Turning to our cash balance we ended the quarter with more than $380 million of total cash, including short term investments and restricted cash.
<unk> is in line with our comments on our first quarter earnings call.
Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300 million.
In the second quarter 23 from the first quarter of 2003 level.
A decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations give.
Given the improvements in the supply chain environment and.
As communicated in our last earnings call, we should expect improvement in inventory tons through the end of the current fiscal year.
We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to slide 11.
As <unk> indicated we have increased our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit and narrowed the ranges.
And now expect total revenue to be between 185 billion and $2 billion.
Which is up from our previous revenue guidance of $1 6 billion.
The $1 8 billion.
This is an increase of $225 million based on the guidance midpoint.
Driven by overall project timeline acceleration.
While we expect that most of our project will be executed within the 15 to 18 month timeframe.
We have previously discussed we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future benefiting both the second half of this year as well as fiscal year 2024.
This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects.
We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog.
Turning to our 2020 for revenue outlook, we continue to expect 35% to 40% growth in revenue from 2023 to 2024, notwithstanding the higher revenue base. We now see for 2023, this implies an incremental $300 million of revenue.
For 2024 relative to our previous outlook. Thus for the two year period, 2023, and <unk> 24, we now see revenues of more than $500 million.
Higher than what we had conveyed on our Q1 call.
We also increased our guidance for adjusted gross profit to be between $110 million and $135 million.
Which is up from our previous guidance of $85 million to $115 million.
It is important to note that this implies an increase in gross margin of approximately 50 basis points to six 4% based on the guidance midpoint.
I turn the call back to <unk> for final comments I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter with that I will turn the call back over to Julien.
Thank you Michael.
In closing I would like to reiterate what I consider to be the key takeaway from this quarter results.
First we had a record quarter in terms of our financial performance with our highest revenue.
And gross margin influences towards.
Second we continued to make significant progress on our risk management, most notably in Brazil, and our supply chain risks as reflected in diversifying our battery cell suppliers.
We continue to expand our offerings concentrate our efforts in developing new products and solutions that create value for our customers customers as shown in our served transformational segment Award.
Fourth we are proficient in fluids for increase IRR by including these fair I understand that offer starting this month.
And fifth the financial results and accomplished covers cover in todays call and provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 'twenty three.
To pull forward our timeline to profitability.
This concludes my prepared remarks, operator, we're now ready to take questions.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced.
Your question. Please press star one again.
Our first question comes from the line of James West with Evercore.
Yes.
Good morning, James James how are you.
No.
Hey, good morning, guys.
Hulu.
Quick question for me about your customer base.
Kind of how they're thinking about their storage needs.
Needs right now I know as you think about last year. It was kind of a mad dash scramble for.
For assets and for getting equipment batteries in place.
Obviously, you had the IRA and Theres been some talk.
Timeline lag on total understanding of what the IRR means in the U S.
But are the customers are they coming to you now.
Still with Okay, what theyre going to cost me or is it more of a question of when can you get to me whats the timeline because we know you are not just.
Focused on land and expand which focus on profitability to it which is it's clear this quarter and so congratulations again on this quarter.
Thanks James.
A lot of.
Our ability to expand our margin pumps.
Main driver has been.
A real detailed segmentation of the customers we work with not so.
Sure.
We are a long way to answer your question, but so why do we though we look for customers that value what we offer.
That value clearly problems that are that we got that we are sure that we were going to evaluate that they've got a performance with delta and that is going to be.
Reform that will provide services that will keep this.
Solutions up to eight and that will have them running for them when they need it.
They can ensure it very well and that they can finance so the customers who care about the customers we work with.
Some of that.
Prices are more important in order for thermal Emmys and shortened the performance of some of that.
Especially where their regulatory systems are going to change I need somebody who will know will help me.
Adopt my Macy store.
Why don't we see this.
Quarter, which I guess is related or what are we seeing that Barry run it clearly the reduction in lithium prices and the more liquid market for batteries.
Opens up more optionality I think that the rmi that we offer our customers, which when prices were going out with something that will make them at El Morro Costa will know that it makes them feel better on signing a contract because I know at the analyst day.
You'll get something that's in line with what the market spending or close to where the market space. So that's great.
Globally, Youll see that doesn't that that on the other side you have in the U S. The inflationary option that they are delayed.
Some of our customers.
Are talking to their offtake.
Asking their offtake is do you need the probes by certain date or do you want to wait until we know what the.
<unk>.
We're going to get this 10% upside that will convert into winter prices.
For whatever services they are fat it yes.
Saturday front, I think that some customers will need to have the projects online by certain dates already offtake as will need. So those will move forward with some of them already know this got weight, that's kind of where where you know where this will land. So I don't know if thats kind of the landscape of <unk>.
Where we are today and the reason why we were able to affirm our growth for next year irrespective of the IRA.
Wes because we have seen very very strong demand outside of the U S.
You looked at our backlog, where we are fine already what we're seeing outside of the U S and we believe that.
That we can meet the 35% to 40% growth irrespective of where the IRS regulations come out.
Okay. Okay. That's very helpful. Thanks for that and then maybe a quick follow up on me on margins basically for affirmative.
We're getting into EBITDA breakeven by the end of this fiscal year, obviously could could target and making good progress there, but how should we think about EBITDA margins as we go through fiscal 'twenty, four and getting to a level of profitability.
Stable profitability on EBITDA.
Yes, so consistent with what we have said in our.
Last call, we expect to be EBITDA positive in the fiscal year 2024, I think you'd see the margins progressively improve as we go through the quarters in the fiscal year 'twenty for it as well and that's because if you look at our.
Trajectory and look at it from a trailing private bank kind of revenue average we continue to grow our revenue and as we've said, we'll grow out operating expense had less than half the revenue growth rate and if you couple that those two comments with the fact that we are signing new contracts in the 10% to 15% margin rate you can see the profiling of the EBITDA.
Progressively occurring through the quarters.
Okay got it thanks, guys. Thanks.
Thanks.
Our next question comes from the line of Brian Lee with Goldman Sachs.
Good morning, Bryan Bryan.
Hey, everyone. This is miguel on for Brian .
Maybe just a first question here on the 500 million incremental for fiscal 'twenty three 'twenty four you are talking about.
Repeating that to just better supply chain visibility and obviously the better execution here.
Maybe could you just expand a bit on.
On that.
With some specifics or some examples is it just.
A function of getting more visibility of batteries is that being able to pull in projects faster than expected.
Hoping to get a bit more color there on the execution front. Thanks.
Brian the way I will first clearly the fact that our machine is working better we had there.
After about mono factory did a great job this quarter and we have been able to de risk our deliveries.
Our contracts with our customers.
I think the airport off you know.
A lot of work from everybody of our supply chain for our sales team from our manufacturing team, but also at the end that we have been able to de risk our our our delivery in a way that the debt.
It allows us to recognize revenue.
Some of our customers are not fully ready to install the equipment. That's the way to think about it and the combination of the three yes I cannot tell you now is that one.
Each one is very essential.
If the supply chain had not work we will be here.
Manufacturers have not been able to picked up products and they wouldn't be here. If we have not the risk on our implementation teams that have not done the work. They are doing what we want to be here as always is the machine working better.
And we have identified the projects that we know where we believe we can do it and those are the basis for our 500 million better revenue over the next.
Between this year and next year.
Got it I appreciate that and then follow up question here.
It kudos on the update to the guidance, obviously, but outside of that.
Hearing about module constraints in the U S. In general still happening I bet solar projects could you maybe give an update on what you've seen specifically for projects in your backlog for solar plus storage projects and maybe to what degree you've seen.
Those kinds of projects pushed out because of these module constraints. Thanks, Yes, I mean, our understanding some we haven't heard anything specific from our.
Our customers as you know we sell to customers, who are probably on the bigger side and have that bubble related to minus up better, but I would tell you what that is clearly one of the reason we took into consideration when we looked at our grief.
Enterprise risk management in one of the things we change in our context was that if our if our solutions are ready for delivery.
<unk>.
The customer.
<unk>.
Just to take them irrespective of where they are in their solar project.
If they disconnected plus all the priority irrespective of where they are with some of the elements. So that's what I would tell you, but we you know.
Our customers today, I haven't heard anybody coming up to us and telling us hey, I'm not going to be more of the question was on being a little bit of cash flows are connected to the IRI that where they can get molecules in or not.
Okay got it thanks, everyone I'll pass it on.
In the U S and opening.
Our next question comes from the line of Mohit <unk> with credit Suisse.
Hey, Matt.
How are you.
Hey, good morning, and thanks for taking the questions here.
Im sorry hopping between calls here, so I might have missed this the 500 million over the two year period does that higher revenues versus the prior run rate or is that just looking at FY 'twenty for specified 20 June yes.
Yes.
So the way to think about a half a billion dollars.
Followers, we've increased the guidance for 2023 and at the midpoint is $225 million and then we've kept the same run rates. So you have a higher 24 implied outlook our outlook based on a higher 2023. So if you take that math to 2024.
Incremental $300 million footprint in 24, So you added 225% of the 300, you get to over half a billion dollars of revenue.
And that's on the backs of <unk>.
Great project execution, and Thats in the second quarter and that has to be true.
Our remaining 2024 as well and.
Remiss if I don't reiterate the fact that you have very strong demand signals with over $1 billion increase in our pipeline.
Got it I appreciate that clarification, and then just kind.
Talk about which regions are driving that.
Customers accelerating the projects are.
More.
Benefits from manufacturing procurement on New Orleans, Thanks, Yes.
Yes, so what I would say.
In terms of the demand signals.
And if you look at our order book for the second quarter and as Colin mentioned, we are winning globally.
And we are getting both in solutions and services, so thats kind of color and context.
Your question on the on the top line or the demand signals obviously.
<unk>.
Two thirds of fiber overall business and thats going to be the larger dollar driver of it but we are waiting to open in terms of what's driving.
The revenue upside in the second quarter.
We typically.
We will execute a project within the 15% to 18 month, but because of better execution.
As well as <unk>.
How we are writing our contracts now we have the ability to pull forward some select contract.
In the lower end up to 15% to 18 month range.
And that carries through in the back half of this year and next year as well.
Got it appreciate it.
Okay. Thank you.
Our next question comes from Tom Curran with Seaport Research partners.
Hey, Tom Good morning.
For the growth you've had in services assets under management for fiscal 2023 year to date.
Could you share with us.
For the contracts you've added the split between knows with augmentation and those without.
Manuel I don't think we give that split but the way to think about it.
Significant portion of our contracts have.
Our ability to augment the size of the customer so chooses.
It gives them an officer give them an option.
So that's the way to think about it so most of our customers do have the option in their contract if they so choose to augment.
So.
Year to cycle or before.
No.
It's not an option for customers they have to take our organization for both <unk> and now the way these.
Service agreements are they do have they do have an option they can decide to take or not take our augmentation for bowls, we believe they're all going to take a while because without that.
Bob.
That's how it works.
So you are seeing evidence to support the expectation of a trend towards.
More augmentation.
Yeah the issue is that.
It's an option that the customer can take we cannot put it us up.
Backlog value you know what I mean.
So it's an option that they have but I think the.
But when we have looked at this we believe in most cases it will.
It all depends on a little bit on where the cost tumor needs rovs side or <unk> contract and these offtake Starbucks, we say there is a need for augmentation day, we'll do it with us.
And we have we're going from a product perspective with.
We have made some changes to our.
Two our offering to ensure that we can provide our augmentation offering is a lot of why they are so we can offer all mutations with different technology. So that that I think we will also make us a lot more competitive when the bank comes in I think it will.
I think anybody will be able to get into that territory.
I don't want to brag about something that hasn't happened yet.
I appreciate that.
Then.
For the consolidated pipeline can you give us a sense of.
How much visibility you have on the portions of that that are mega projects or storage as transmission awards.
Nick.
Could be doled out over the next 12 to 18 months and then forced storage transmission.
Would you expect your next awards, most likely come from the U S, Australia, Germany or Chile.
Yes.
I mean, I prefer not to go into the details about our pipeline.
I think it's.
So.
That would be my preference.
Not too long to start giving details on the <unk> levels, we will make our life of all of our lives more difficult on the transformation.
Sure.
Storage is a transformation we're working.
And both in Europe in Chile, and the U S. Like you mentioned.
I will say that most likely will be again in Europe . That's my opinion.
And I can say this.
And I will say the Chilean regulation for transformation do not work do not work that we felt like it's they sign it.
They came up with 15 mean storage that is not going to be good they're not going to get is not going to work. So I think I'll likely I don't know, if we will beat or not will probably it will be but I think that's why we are successful project, we continue to see that transformation and regulators in Europe much more clearly on the.
And how this works now.
I'll make the work.
We are just starting so.
And I said that color in the Red later I'm sure. They don't listen to these calls, but it will be good for them to go back look at it because.
We told them. This is not going to work, but I think they have a different view.
No.
Got it thanks for taking my questions.
Great.
Our next question comes from Julien Dumoulin Smith with Bank of America.
Hey, Julien good morning, guys.
OEM glass our namesake. Thank you very much for the time appreciate it.
Alright.
Yes.
So listen I, just wanted to first come back to that $1 billion.
Revenue commentary that you provided can you elaborate a little bit on what it says about getting to kind of target gross margins, especially as you think about what that says for next year here.
Do you have that improvement through the course of this year, but what does that say on the incremental margin that you're getting for next year.
Youre really accelerate you're accelerating the revenue side of this.
That's so.
Thanks for that question.
Yes.
The way to think about our gross margin and and you can see that come through on <unk>.
<unk> updates we are signing the new contract in the 10% to 15% margin rates and more importantly, the new contracts, we are signing theyre, keeping those margin rates and as you look at the increase in guidance from the last call. The current call you can see the increase from a gross margin.
Perspective, or a gross margin rate perspective of 50 basis points and the new contracts being signed at in the 10% to 15% margin units as you roll forward into 2024, that's a good assumption from a gross margin perspective.
And as you translate the gross margin into EBIT guide gets even better and increases our confidence from EBIT and a positive outlook for 2024 is because we are getting operating leverage and we are very disciplined about our overhead expense and our model off spending overhead at less than 50% off.
Our top line growth. So if you model out 23 going to 24.
Topline growing at 35% to 40% over a higher revenue base.
In 2003, our gross margins contracts being signing in the 10% to 15% rate remember one of the advantages of <unk>.
Better execution in 'twenty three is we're able to pull forward our legacy backlog earlier and in our <unk>.
Lifecycle and therefore, there is very little legacy backlog to be executed in the fiscal year 2004. So the gross margins on the new contracts are coming through and then that translates into a very healthy EBITDA.
Excellent alright, great and then just going back to the commentary on the call on <unk> you talked about this new strategy this month about including it.
Standard and your hardware offerings, what does that say vis vis the fluids side Q outlook and the revenue contribution and its level of meaningfulness spread I think earlier you guys had said it wasn't really that meaningful until 'twenty. Five now that you are including it sort of quote unquote standard does that change that expectation.
This was always part of the plan remember we had one when we looked at our business one of the changes what weird way integrate into sales channel.
Our view on when this maintenance will be material when we will get to have not changed so.
So part of what we were we wanted to when we announced our plan our new plan in December of last year. This was.
A borrower with them.
The plan is with respect that we remember we talked about.
Single channel.
Then re platforming.
Wholesale business and we re platform has gone very well and the single, China, which is essentially formless ferret out which will give us a base for both Upsells and cross sells.
We were able to pull it out so we are starting to see what <unk> done is were already offering to our customers as borrower standoff.
Excellent Okay, perfect I'll leave it there. Thank you guys very much alright, Thank you Julien.
Our next question comes from Ben <unk> with Baird.
Hey, good morning, Ben Hey, guys good.
Good results and good progress. Thank you for taking my question.
I just wanted to follow up.
On margin that's hard to predict.
You touched on this question, but.
I just wanted to think about the different levers.
And cost improvements versus legacy contracts.
Julian asked something similar to this.
But as we go into.
Attachment rates of other services software.
As we go into 'twenty four and beyond.
And how are you guys thinking about that.
And then just.
Follow up.
Kind of housekeeping, but.
Just the irate benefits.
Profitability is I'm sorry.
If you said this but.
Have you baked any of that into your profitability change going forward. So the production tax credits or anything like that.
<unk>.
Yeah sure so.
And if I can.
Lots to unpack there so let me let.
Let me pick it as how I understood. The question. So if we bridge gross margins from our legacy contracts to some of the new deals we are signing in the 10% to 15% margin range right and we put a bridge in.
In the back half.
Off the deck as well, but the drivers are off our margins between the legacy contracts and in the newer contracts. We are signing is.
Better execution, better pricing and then I would say better risk management.
So those are the big drivers.
We had also.
<unk> increased our margin expectations to be to be 10% to 15% from a much lower single digit expectations. We've had in the past and as a result, when we are executing our legacy contracts usually executing them.
At very low single digit margins almost close to breakeven.
As compared to the newer projects.
That we are executing in the 10% to 15% margin rates, depending on size and complexity in the region.
Can see that trend.
Through in the gross margin guidance, you could take our first half actuals gross margin rate and compare that to the guidance for the full year and calculated implied second half you can get to high single digits gross margin rate for the second half of the year and that's important is because it gives you a.
Good read through of gross margins going into 2024, and EBITDA going to trend going forward, which is what we are pulling forward.
EBITDA expectations.
To be close to adjusted EBITDA breakeven in the fourth quarter.
So thats kind of contextualize in the margins of the legacy business compared to what we are signing.
From.
New contract perspective.
Terms of the eye.
PTC benefit that you specifically asked to what we've said is look.
It will be a contributor.
Two more volume potentially.
As opposed to taking us outside of the 10% to 15% margin range maybe in the.
In the rounds it takes us to.
No.
For those contracts that have the fluence make too to the top end of the range versus the market but.
But we're still within the 10% to 15% margin rate.
As as we go through the years to kind of round out your question.
We are seeing high attach rates for services.
The assets, we have deployed we are seeing 97% of our tax rate that is slightly better than what we had last quarter are kind of in line with what we had last quarter.
In terms of a meaningful contributor to our.
Margin rates and margin dollars.
Be better in 'twenty for more meaningful in 'twenty, five and and then kind of gets to a higher number in 2006 those contracts are at a higher margin rate than our average solutions margin. So.
It is a part of the installed base. It also gives us a great option to sell incremental services as well as digital contracts to them.
Great. Thank you very much.
That concludes today's question and answer session I would like to turn the call back to Hulu and the Brito for closing remarks.
Great well, thank you everybody for participating and joining off on your question.
You know what we are really really really proud of the work of the team here.
This success is clearly working better.
And what.
We were expecting so that's great great news and this only will I think in a way.
It reaffirms our commitment to continue working hard on because as you know really really makes a difference at the end of the day, So really happy and thank you again for participating and we'll talk to all of you allude in the water.
Hopefully see you soon bye bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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