Q3 2023 Fluence Energy Inc Earnings Call
Okay.
Thank you for standing by and welcome to the fluids Energy, Inc. Q3, 2023 earnings conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation.
As a reminder, today's call is being recorded.
I'll now turn the call over to your host Mr. LEC May Vice President Investor Relations. Please go ahead.
Thank you good morning, and welcome to fluids Energy's third 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 schedules, including Rec.
Conciliations 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 land in Nevada, our President and Chief Executive Officer, Mono, Seattle, 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 relating 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, which we view as important in assessing the performance of our business our.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company's Investor Relations website.
Following our prepared comments, we will conduct a question and answer session with our team.
During this time to give more participants an opportunity to speak on this call. Please limit yourself to one initial question and one follow up. Thank you very much I'll now turn the call over to Julio.
Thank you Alex.
I would like to send a warm welcome to our investors analysts and employees who are participating on 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, Martin, who will discuss our financial performance for the third quarter as well as our outlook for the rest of the fiscal year.
Starting on slide four with the key highlights I'm pleased to report that in the quarter, we recognized $536 million of priority.
We continue to experience strong demand as new orders were approximately $565 million.
<unk> buy our solution base has contracted one four gigawatt hours on a digital basis, adding nearly one gigawatt of new contracts.
Furthermore, our signed contract backlog as of June 30 increased to $2 9 billion.
Turning to adjusted gross profit, we delivered $24 million or a margin of approximately four 4% for the quarter.
This is slightly lower than the Q2 level of 46, primarily because of one project that experienced delayed from our noncore supplier.
It was an isolated incident, which will not hinder us from our expectation of achieving double digit gross profit margins in Q4.
Lastly, our services and digital basis, which represents the sum of our recurring businesses continued to see traction.
Our deployed service attachment rate, which is based on our cumulative active service contract.
Relative to our deployed storage remains about 90%.
We have noted previously we typically see a lag between signing solution called drugs.
Entering into a service called which is why we believe that cumulative attachment rate is a better metric.
Turning to our digital business, we had a very strong quarter as we were able to contract nearly one gigawatt.
However, our digital assets under management at the end of the third quarter was slightly lower than the second quarter level as a result of our costumer not renewing its contract with us.
This slight decline will be more than offset the new contracts not yet deployed moved from our digital back look toward digital assets under management.
Well, we don't like losing customers the non renewal is within our expected 5% rate for churn a customer attrition.
Our low churn rates highlight the general stickiness of our customer base.
Overall, we still have a lot of work to do regarding our digital business, but we're on track to deliver on our commitments.
Turning to slide five I'd like to has caused the five strategic objectives that we highlighted previously and provide you with an update on our progress.
First on delivering profitable growth.
I'm pleased to report that we are raising our fiscal year 'twenty three guidance for both revenue and adjusted gross profit.
No we'll discuss in more detail, we're able to raise our guidance due to better project execution.
In large part to a supply change improving.
Additionally, we are reaffirming our expectations that we would be close to adjusted EBITDA breakeven in our fiscal fourth quarter.
Second we will continue to develop probes and solutions that our customers need it.
As such I'm pleased to report that we signed a 400 megawatt hour contract that will utilize north wall batteries. This.
This is a significant milestone and this will mark our first major project that will utilize European manufacturer batteries.
And illustrates our commitment to diversifying our supply chain.
Third we will convert our supply change into a competitive advantage and play still say that we have signed a U S cell supply agreement with ASC.
Their which we will procure U S manufacturer battery cell.
This is a remainder achievement for us as we believe this will position fluids to be one of the first companies to provide customers with a storage product that qualifies for the 10% investment tax credit tax credit bonds on the IRA domestic content rules.
This contract provides us access to a limited early use cell supply and gave US a first mover advantage, which position us to potentially increase our existing market share.
As I mentioned previously this agreement supports our domestic module manufacturer for which we expect we will capture there instead of $10 per kilowatt hour, which I will touch on more shortly.
Four we will use fluently as a competitive differentiator and a margin driver.
To report that we continue to make progress on our new spirit probe roadmap.
This quarter, we launched an artificial intelligence based predictive maintenance tool.
Our first artificial intelligence tool for battery storage on any spare platform I will also whose cost base in more detail momentarily.
And finally, our fifth objective is to work better and proud to state that fluid has increased its total gas position by more than $30 million from the second quarter level.
Further bolstering bolstering our liquidity.
Our total cash includes cash cash equivalents restricted cash and short term investments.
Turning to slide six.
Demand for energy storage continues to accelerate in fact, our pipeline now sits at 12 4 billion, which is an increase of more than $1 billion from last quarter.
Additionally, as I mentioned, we saw our backlog increased to approximately $2 9 billion.
To see some initial project awards in the second half of this calendar year, there are directly attributed to the inflationary option.
As such we reaffirm our belief that consolidated revenue growth will be between 35% to 40% in fiscal year 'twenty four relative to our increased revenue guidance for fiscal year 'twenty three.
Turning to slide seven as I mentioned earlier, we have secured enough take agreement with ASC four U S made battery cells disagreements strengthened our capacity to offer customers. A stars probe that we expect to we expect to qualify for the additional 10% investment.
Great. Thanks, Greg.
Bonus granted two probes compliant with their prescribed criteria for domestic content on there the IRI.
We expect the first U S sales to be the leader in calendar year <unk> calendar Q4 of 'twenty four.
Additionally, we're still on track to begin manufacturing or battery modules on a facility in Utah in the summer of 'twenty four.
We know that the bathroom volumes with Brazil, starting in the summer of 'twenty four to qualified for the $10 per kilowatt hour incentives and will support the offering of a probe complying with the iras domestic content requirements. Upon the integration of U S manufactured ourselves in the Q in Q4 of 34.
In regard to our U S module manufacturing, we do not expect.
That we will capture incremental margin as a result of minor factor narrow modules in the U S.
Instead, we expect that $10 per kilowatt hour.
Incentive will go towards offsetting the cost of reach and economies of scale.
From an accounting standpoint, our current expectation that we will account for $10 per kilowatt hour incentive on our income statements I start a reduction to cost of goods and services.
Furthermore, we expect to elect direct pay provision for the first five years of their credit.
The exact timing of the cash payment is expected to lag our accounting recognition.
We expect it to be in conjunction with our federal income tax reform.
With respect to the U S manufacturer broad, we're exploring whether our first mover advantage will allow us to share some of that benefits our customers will enjoy from our offering and thus provide us with incremental margin is too early to define a concrete view, but as the situation evolves, we will provide more color on this potential.
Sorry.
As you may have seen earlier this summer the U S Treasury department related domestic content regulation.
Overall, we're pleased to see the regulations. However, they are still outstanding questions that we're hoping the areas, we'll clarified by the end of it coming earlier.
Turning to slide eight.
Im pleased to announce we recently lounge and artificial intelligence artificial intelligence based predictive maintenance Fisher for battery storage as part of our newswire offering this.
This is our first in disparate divisional intelligent based feature following the success of the AI capabilities on our books at mosaic building application.
Despair AI based predictive maintenance features that advanced solution designed to upgrade the performance and reliability of any store system.
By harnessing the power of artificial intelligence models with cutting edge technology Prioritizes and act upon the store's performance issues, thereby significantly reducing downtime and insurance are interrupted power supply.
From a customer standpoint, the AI based predictive maintenance Fisher of offered by new Sprayer will provide numerous benefits including <unk>.
<unk> downtime significant maintenance cost savings.
Asset reliability optimize maintenance scheduling and improve safety.
I am pleased to say that we deploy the solution, although its first project in California Molly.
More importantly, this feature provides another tangible proof point that we're on track with LBW sales commitments, which we say we will not be meaningful before 2025.
In conclusion, I am pleased with the achievement of the third quarter, Although we're mindful theres still work to be done we will look to continue this momentum as we progress through the remainder of the year.
I will now turn the call over to Michael.
Thank you Julien I will begin by reviewing our financial performance for the third quarter, and then discuss our guidance for fiscal year 2023.
Please turn to slide 10.
Our third quarter revenue was $536 million.
124% above prior year, we continue to execute well as we work through our legacy backlog, which accounted for more than half of our revenue in the third quarter.
As we alluded to on our last call third quarter had a larger impact from the roll off of our remaining legacy contracts. Then we expect to occur in the fourth quarter. We continue to anticipate majority of our lower margin legacy backlog will be done over by the end of this fiscal year.
As I've indicated previously a small portion will bleed into fiscal year 2024.
We generated approximately $24 million of adjusted gross profit in the third quarter.
Which was an adjusted gross margin of four 4% slightly lower than.
Second quarter level at who didn't mention a driver of the decline was one specific legacy project that incurred delays driven by our noncore supplier more importantly for the fourth quarter, we expect our margin to be about 10%.
This reflects an increased weighting of the higher quality higher margin orders that we have recently signed relative to prior years.
And expect this to be a good proxy for the expected margins in fiscal 2024.
Third quarter operating expense, excluding stock compensation was $54 million or approximately 10% of revenue, which is lower than prior quarter in absolute term.
We were up just slightly as a percentage of revenue.
We remain disciplined about holding that operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond.
This is also reflected in the year to date third quarter operating expense as a percentage of revenue, which was 10, 9% down from 17, 2% in year to date third quarter 2022.
Turning to our cash balance.
I'm pleased to report we ended the third quarter with $416 million of total cash, including short term investments and restricted cash.
This represents an increase of more than $13 million from the second quarter.
Rounding out the balance sheet discussion and in line with previous communication, we saw a decrease in inventory of approximately $250 million in the third quarter relative to the second and continue to see improvement in inventory tons. This coupled with improved collections drew.
The increase in our cash balance. In addition, we ended the third quarter with 165 million Undrawn revolver capacity and $80 million of unused supply chain financing, providing us additional sources of liquidity.
Please turn to slide 11.
I am pleased to report, we've increased and narrowed our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit.
We now expect total revenue to be between $2 billion.
And $2 1 billion.
Which is up from our previous revenue guidance of $1 eight 5 billion.
Two 2 billion.
As <unk> indicated we are maintaining our outlook for 35% to 40% revenue growth in 2024.
Despite the higher 2023 revenue guide.
As you continue to benefit from growing demand and strong supply chain assurance, though we expect roughly 75% of 2020 for revenue to be generated in the second half of the fiscal year based on the current contract schedules we have seen.
Of all of 2020 for battery supply secured and the continued improvements in our supply chain position also help support incremental increase in 2023 revenue guidance compared to prior estimate.
We have also narrowed our guidance for adjusted gross profit to be between $117 million and $132 million, which implies a slight increase at the midpoint from our previous guidance of $110 million to $135 million.
As we have indicated on our second quarter conference call, we expect to be close to adjusted EBITDA breakeven in the fourth quarter of 2023.
As we focus on achieving adjusted EBITDA profitability for fiscal year, 2004, and beyond we intend to provide formal guidance for fiscal 2024 for both revenue and adjusted EBITDA on our next earnings call, while continuing to provide transparency of other key.
<unk> and modeling assumptions from.
From a cash standpoint, we expect our fourth quarter total cash levels to be near breakeven and we believe we have ample liquidity to meet our 2024 revenue targets.
Note that use battery cell supply agreement currently calls for a down payment of $150 million.
This capacity.
Which will be paid in installments over fiscal year, 'twenty, four and fiscal year 2005, and will be funded by our liquidity and customer deposits for these batteries.
The first $35 million will be paid in the first quarter of fiscal year 'twenty four and another $35 million will be paid in the second quarter of fiscal year 'twenty four.
Before I turn the call back to <unk> for final comments I would like to reiterate that we continue to see strong demand, which is reflected in the significant growth of our pipeline, which gives us confidence that we will be close to adjusted EBITDA breakeven in the fourth quarter and generated positive adjusted EBITDA.
In 2024 with that I will turn the call back to Hulu.
Thank you Michael.
And I would like to reiterate what I consider to be the key takeaway from this quarter results.
First we had a solid quarter in terms of our financial performance clearing it out much of our legacy low margin contracts, while generating cash and raising our guidance yet again.
We have also reiterated our expectations that we will be close to adjusted EBITDA breakeven in our fourth quarter.
Second we have taken steps to secure our future by locking up our fiscal year 'twenty for battery supply as well as locking up early domestic battery cell production, providing us a clear first mover advantage.
Third we launched our new AI based feature phone is better to help provide our customers with additional tools necessary to lower the total cost of ownership.
This concludes my prepared remarks, operator, we're now ready to take questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star 111 moment for our first question.
Our first question comes from the line of James West of Evercore ISI. Your line is open.
Good morning, John Good morning.
Morning, how are you.
Well then how are you doing.
Well very happy to say.
I'm sure you are as a good quarter and the outlook.
But it looks it looks very strong.
Curious as we've had Myra guidance provided now.
And we.
Obviously no.
You and I know kind of the demand drivers here for energy storage has there been any net change in that demand.
Either up or probably.
Up or down, but probably up with.
Your guidance out there.
For the U S. And then how are you guys thinking about also the European market.
<unk>.
Out the Green industrial plan that they've put out there.
In terms of the U S. I don't think we have seen them may your.
Movement since the guidelines came out so it is in line with what we said no.
Ed.
For our total demand 35 to 40 and Thats why we are guiding revenue for next year.
Sure.
A little bit higher than that.
For Europe , we do we are seeing some a leader the market has been a lot more I will say moving a lot, but we're not well firstly, Germany, Germany was a market where you are seeing CPM now with say a lot more more more activity and then the Nordic countries is are there another group.
We actually know a lot more of them I don't think there's enough today to go for a rate review in our 35 to 40 bought but good signs, especially Germany being such a big economy, I'm, sorry is going to be a competitive market. So it will be.
It will be a fun ride for us Bob.
Bob.
That might be a meaningful but that's kind of where we are I think we feel very comfort out 35 to 40 for next year.
Positive that we will see them and getting better.
One we're seeing that.
That maybe is kind of I would draw something that I think I talked about with some of you before.
CCA is we started seeing the mining kind of molding, mostly in Ontario.
And that has been very very you know that's also very meaningful and it could be.
Mark.
And that proves that point I think that if I can make it maybe a little bit about that.
The kind of the kind of electric fleet to have a lot of either a power and a lot of people when they see hydropower they don't see a need.
Need for battery storage and our view is that you know.
Reservoirs do their jobs, our job is completely different and we provide services to the agreed to ensure stability to more capacity faster or factories around to provide you know black black block.
<unk>. These are things that are not necessarily renal reservoirs and also it really proves the point that even hydro systems or systems that have a lot of hydro capacity need robotic storage to ensure that they can.
Two are new.
Power sector landscape so.
Okay, that's fair.
Thanks for that.
And then <unk>.
That's fair.
Adoption of this fair or how is that.
You've put more emphasis last couple of quarters on that.
The adoption rate on the software side of the business how is that progressing.
We signed like go out round one G was mostly new spirit will have some that will segue there and it's doing very well I think the fact that we have the.
Fares.
You know integrated.
Portfolio management asset performance management tool that covers all the renewal technology storage with solar.
It really makes a difference and we have really really.
Really helpful. So, we're very very happy with it.
I think these new tool that we just announced the maintenance tool chest every gaming nowhere. These one is based on temperature readings body vault charts. They don't charters, there's a lot more.
The batteries are very very rich in data. So it is that a lot of value, we will create by by harnessing that data and convert it into information that our customers can use to manage our systems a lot better.
Got it thanks Helane.
Right.
Thanks James.
Thank you one moment please.
Our next question comes from the line of Brian Lee of Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions Cuda kudos on the solid execution here again.
Good morning, Brian how are you Hey, Brian .
Good. Thank you question I guess on margins.
It's a high quality problem that but.
You seem to have gotten through a lot of the.
The backlog that had some of the lower margin less profitable projects Q4 <unk>.
Or I guess the annual guide here for the rest of the year implies Q4 is going to be somewhere in the 11% range. If my math is right. So I know you're talking more about like 10% for 24, and Youre going to give us more of an official view here in the next quarter, but what are what are kind of some of the puts and takes between the 10 and 15%.
<unk> <unk>.
Our long term guide and then mapping that 224, given you're sort of at a good exit rate here.
For 2003, and it seems like a lot of those legacy projects are now off the books are mostly off the books.
Yeah, absolutely so brand has a lot to unpack.
In your question. So let me go take it piece by piece. So I think just from a.
How to think about the 24 and margins we are signing contracts in the 10% to 15% margin range and Thats that is still the case.
But the Q4 margin is.
He is a good proxy for how to think about 24 margins right and as we have a little bit more contribution from <unk>.
Our services business and our digital business, maybe it picks up a little bit, but Q4 is a good proxy for a 424 and that continued to increase as we go from 24 to 25. So that's one in terms of legacy you are right. We are done with.
Most of our legacy projects I think there's about $100 million to $150 million that trickles into 'twenty four mostly done in the first half of the year. So as you.
Do the quarterly profiling in the calculus of twenty-four margins keep that in mind.
And then you're right the business is performing really rather.
I would I would want to point out the fact that one we've been fairly disciplined from an overhead perspective, and thats important because as we've done the page two.
For the focus is going to be a lot on EBITDA dollars right that is.
It is a better measure of profitability than gross margin, our gross margin percent and I think thats, what we want the investor community to be focused on.
And Thats reflected in our comments that we get close to EBITDA breakeven in the current quarter or in the fourth quarter.
And then I'll round out my comments from a cash perspective, we generated cash in.
Third quarter, we my comments talk about cash breakeven in the fourth quarter, which means we will generate cash in the back half of the year.
So that is another area of your focus on so EBITDA and cash becomes much more relevant in gross margin and gross margin percent.
My last comment.
Before I pass it on back to you is.
We've been very pleased with the performance of the business and what that has got US is it's got us to be <unk> enabled <unk> well known seasoned issuer.
And we intend to file a universal shelf tomorrow after the market for good housekeeping.
And that's really reflective off.
The confidence.
That the shareholders have placed in our business that allows us to be able casino.
My only comment.
The filing is that we do not intend to race, we have no plans to raise.
Capital in any way.
For 'twenty four we don't need it and I think this is Jeff for housekeeping.
Consistent with the comment Doug.
We have a mastercard.
Okay.
Okay, Yes, fair enough and I appreciate all that additional color.
I guess second question shifting to maybe the top line here I know.
Even with the.
Pull forward. It seems like you had here in being able to raise the 'twenty three guidance youre comfortable with the 35% to 40% growth.
Trajectory into 'twenty four can you maybe give us a sense of how much of that is just additional demand.
Looking at activity Youre comfortable with heading into next year and how much of that is.
Maybe conversion timeline it seems like some of those are maybe pulling in a little bit if he can provide a little bit more color around that and then I'll pass it on thanks guys.
We are.
The way I would look.
Maybe phrased it is that when you looked at our backlog and you looked at our 24 revenue.
I cover right in line with where we were last year. So we feel very very confident that for what you know the backlog that will convert in 2040 is what we will do this quarter and next.
We will be more than enough to meet the 35 to 40, so we feel very confident about it.
We will provide you exactly how much of our 24 back.
All of our revenue is covered by backlog in our next earnings call. We will provide guidance on 24. So I don't want to get ahead of ourselves, but we are in a similar position to where we were last year. When we were doing this year.
The planning process.
Alright, great I appreciate it.
Our plan is to provide guidance on 'twenty forward in the next earnings call in November in late November .
Thank you one moment please.
Our next question comes from the line of Justin Clare of Roth. Your line is open.
Yes, hi, everyone. Thanks for taking the question.
Hey, Justin how are you.
Sure.
Doing well.
I wanted to ask you about project timeline. So this quarter you increased the revenue guide again here.
So I was wondering if youre seeing project timelines further compress.
You were at around 18 months.
A little while back here, but things have been trending lower.
Timelines today, and do you see a path to continuing to shorten the timelines potentially too.
A timeframe of 12.
12 months say.
In general we don't see timelines compressing.
So I think that as we looked our hour.
Financial planning, we see steel projects around 18 months.
We told you.
Hey, this is a line that we want to work done.
I think this is something that's work to be done.
Clearly.
You know there are two drivers for these one is supply chain.
The lead times, we need for our supply chain shortly where the problems in time and the other one is ensuring that our customers are ready.
With the infrastructure so.
Between the two I think that today I think we can actually we can work with the supply chain to accelerated there are customers. We can also help them to withstand but theres a limit to that.
Hi.
But today, what we have is an 18 month plan.
Got it any better.
Got it Okay and then just wanted to ask also about your.
U S manufacturing you signed an agreement cure with AFC.
Much of that agreement really covers your need for U S cells does that cover all of your anticipated alright USL.
<unk> cell supply or are you looking for additional suppliers potentially.
And then also maybe if you could just speak more broadly about the plan for potentially expanding your capacity footprint in the U S. I think your plan as six gigawatt hours in fiscal 'twenty four.
How should we think about potentially moving above that.
Yes, I think that in terms of we believe this deal which are signed we will we will essentially cover or.
A large amount of our U S.
<unk> demand.
We believe that the U S market will there will be a competition between U S might have filed U S. Manufactured sales an important sales and we will be working on both sides of that fence.
But we believe that what we have is enough for our expected demand for for the portfolio.
For the next years.
Sorry. Your second question, if you don't mind repeating yesterday I don't know if I got it.
I'm, sorry, I'm more of a matter of fact I'm sorry.
On module manufacturing. We are we are we built this plan with our ability to.
Yes.
Increase the output if we wind up for the module manufacturing, we most likely are paying somehow evolves, we can very very quickly.
This is up you know if we can.
<unk> doubled the production very very quickly, but maybe triple it.
So we are but we will see how it goes and then make decisions about that.
Yeah.
Got it thank you looking at that.
Okay. Thanks very much.
Yes.
Thank you one moment please.
Our next question comes from the line of Julien Dumoulin Smith of Bank of America. Your line is open.
Good morning, Julien how are you.
Hey, Julien, it's actually Alex <unk> for J Alex.
I'm, taking the question.
Thank you.
Yes.
And keeping on the theme of sort of the U S piece here congrats on the ASC I guess and I've said.
Yes. It is how sustainable are an advantage do you think that this is is there any sort of I guess value wedge that you think you can create there relative to you.
Pricing and where youre able to get those batteries and then I'm not sure. If you mentioned it but are those raw material indexed I know that you have some sort of indexation of some of the other contracts just curious as far as you guys, having an early mover advantage. If you could elaborate on that a little bit yes.
I will tell you talking to customers.
What I hear from them is that we are the only ones offering this.
We are the only ones talking to them all of these were.
So that's my view how long of.
One advantage.
Our way out of the order.
The suppliers I don't know we.
There are different things from different people. Some people say that they do not believe that the U S bathroom and a factor will be competitive I disagree with is I agree on week Seaworld show it to them.
And we'll see how long how long how far outweigh how far away are there and I think that it will be in my opinion, they will be very simple why don't they see that we're here that we can do and that we can offer our projects are very competitive.
No we can put the U S flag on top of it that it really.
I'll see you in trying to copy it.
There probably be a few years, we had a couple of years behind it is difficult to know.
Clearly people on.
The one announced they haven't seen any announcements and what I hear from our customers that nobody's talking to all of its Bob.
That's what I guess, how much of a I guess your second question goes away.
We can we capture higher margin on this on the second part of your question well, we believe that we have to but we're just starting to win these conversations with our customers and this is a plan that is a little complex. It is very difficult to give a concrete view on where we see that happening, but we don't see that.
Customers are going to get a significant.
The upside.
Part of it with them as we then we have to leave it at this.
It will also be for sure what I would like we said for sure they will convert into higher volume.
Because as I said earlier, we will work on both offering.
<unk> sales in the U S content sales. So we will play it on both sides of the fence and that's what I think will be a trickier, we're not we're not going only or we're not only driving one horse we will work toward customers, who have got some have different preferences that customers will do not prefer.
U S content U S domestic content.
Comply in solution, we will offer to them also our solution, but also not beat that.
So really we're really excited about it.
Frostburg band I think that he will solidified our position in the U S market.
With that.
Yeah, No that's fair enough.
Just two quick follow ups sort of clean up questions. If you will for me maybe for value.
Just on the delays in <unk> should we expect any deferred slow back of LDS I know you guys have seen that in some historical examples and then on the deposit piece I mean do you expect that to be entirely excited by by customers or is there some sort of working capital dynamics between cash.
And from that versus cash out from.
From you guys on the deposits you can clarify.
Yes, So I think let me take the two questions in order from a margins perspective, I think any potential LTV kind of box that can really bad third quarter actuals and our fourth quarter guidance. So I think that kind of clear that in terms of.
How to finance the $70 million of deposits for the first half of 'twenty four.
I think a good assumption from a modeling perspective is a little over half funded by the customers and the rest funded by our liquidity at any working capital lines that we have.
Got it I appreciate the clarification thanks guys.
Thank you one moment please.
Our next question comes from a lot of Ben <unk> of Baird. Your line is open.
Yes.
Hey, good morning, guys. Thanks for taking my question.
And how are you.
Good morning.
Thank you Joe sticky on ASC.
Just talk a little bit about your diligence with them.
You chose.
I think the one plant operated well under construction.
You would be getting the cells from.
With that I have a follow up on a different topic.
Uh huh.
Why not disclose too much but I would tell you is what are the main reasons why we.
<unk> them and decided to work with them because we are.
But those will come out of a rent compared to plan a plan that meets that just going through it as.
It is producing and it will convert to produce battery cells for the especially in our historic So we believe that in the current environment.
There were further ahead than anybody else in offering this.
And you already have any employees already have as you know which is a major issue for us some of his plans. They already have the technology. They have their supply chain is working very very well. So you know that they've been very very good.
And clearly also ASC.
Is that one of the tier one manufacturers they have been working.
Globally or in the U S for some time so that's a reason why we say that.
They were.
Good partner there in <unk>.
Very very good position to offer.
These writers today.
And my follow up question different topic is just market dynamics.
I'm thinking about chess will talk to you about having pricing power in the market.
The storage business.
I understand you guys are seeing that and what's causing that.
The competitive dynamics and how it is.
Changed either so.
Competitors are not as financially strongest you guys or.
New competitors or anything like that.
More so on the pricing power.
I don't think the competitive landscape has improved to our advantage when they put it that way I think this is a very competitive market.
<unk>.
We have very very strong competitor in their orders and as you said there are a lot of small players who might not do not have the capacity to stop we can offer but I think we're far away its still I see what we're far I'm going to say far away.
But far from it.
From the bar and one of them.
The industry consolidate in a way that we are a limited number of players.
Housing, where they're so far off competitive message driver internally to ensure that we beat everybody.
On price, but not only on price prices that drive it is not the main driver on ensuring our customers have a product that meets their needs.
And one day our performance what we do how they can bank or finance our investments that they book the type of guarantees will provide them to assure that they feel comfortable alone and our assets going forward.
And I think that.
We're very very hard and we work hard every day and we have everybody looking internally at onshore.
We'd be.
And then the other one.
Alright, congrats on the results guys. Thank you.
Thanks.
Thank you one moment please.
Our next question comes from the lineup Aveo, marking of Raymond James Your line is open.
Thanks, Laura.
No.
Hi, good morning.
At 22024, so recognizing youre going to give kind of more detailed guidance a bit later by much more backend weighted.
Revenue picture compared to this year and Im just kind of curious why the difference in sequencing.
Yes, so I.
I think the way to think about 'twenty four.
From a first half second half perspective is as follows.
If you look at how the 'twenty three guidance has evolved.
As we have gone about from our original guidance, which I think the midpoint was $1 $55 1.6 to where we are which is closer to two point or five <unk>.
Kept the growth rate the same.
Roughly at 35% to 40% right and that adds incremental between six and $700 million of margin and so.
So I'm sorry of revenue and given the cycle times of our projects, that's more backend loaded compared to the first half.
So I think the.
The split between first half and second half.
Largely driven by the strength of our order book as we've gone through 'twenty three that has resulted in a higher revenue for 24.
But it's coming in the back half, we feel really confident and I would point to the fact that we have $2 9 billion in backlog as we enter the fourth quarter and more importantly, we have close to credit around a $5 billion in pipeline. So we feel very good about where we sit for clinical.
Okay, Let me follow up on the AME digital.
Yes.
Kind of coming down in the quarter, you mentioned that it was on non renewal by a particular customer is there a certain churn rate or some other way to just think about data.
More broadly.
I mean, our churn rate is fairly low.
5%, So you know and this customer that didn't renew.
If an asset that was sold.
They don't borrow.
Sold to another company that company had their own system, and they decided to which.
In a way makes sense David.
They've decided to use his he's familiar with that asset.
I think that the.
This was within our within our 5% churn churn very very low.
I don't see I, just raised that because it would appear in the in the numbers. So I wanted you to be aware of what happened, but we signed more than one almost one giga.
So.
I think it was a good quarter from for our digital business in general.
And these things will happen from time to diamond that as long as they're winning they are no indications that.
We will end the year within the 5% churn rate that we usually have that would you have for this business.
Understood Thanks very much.
Okay, great. Thanks.
Thank you my mom it plays.
Our next question comes from the line of Kashi Harrison.
Piper Sandler your line is open.
Hey, guys. Good morning, Hey, good morning, Jordan.
Doing well thank you.
So.
I wanted to go back to just this discussion on self sourcing.
Youre highlighting USL capacity for me AFC Youre, highlighting north pole.
As well, but obviously you still have a lot of.
Chinese cell exposure today and so.
If you if you look out a few years from now is your expectation that your U S. That you will find enough USL capacity just for U S projects, and then Europe European cells solely support European projects and then what does that mean for your Chinese exposure again, a few years out from where we are today.
This is Matt I think that a.
I see.
Today in our planning scenario, we don't see a world where the U S will be fully.
Applied by you as a matter of fact ourselves.
Nor in Europe , so that will take some time.
The U S. The Chinese manufacturers are.
The best thing made the adding back that they had a.
This started earlier they have invested a lot in technology. It will take a long time for European and U S manufacturers still get there. So that's the way I see it.
We want to continue working with our Chinese suppliers.
To continue to work with them for some time, they provide us with very very good.
They have good product roadmap and we work with them well and so we want to continue working with them.
So that's the only point I would say that.
One of the World, where there is pretty tight so I want a world where you know weakened by bathrooms for many places because I think that's a world that's better for all of us at <unk>.
World, where our technology will continue evolving where you know we'll have the ingenuity and the capacity of the U S engineers coming up with new Ibs, I'm, making but also competing worldwide Chinese and Europeans are doing so that's where I hope that we will have for our industry now not in the slide.
A little bit of our planning reflects that concept.
That was that's where we think that is a word that is a better better for our technology and better for our son thereof, leaving for unit two as you know, obviously, we will be able to.
Okay.
Properly address the challenges of climate change.
Try to each region each country apart, we need to cooperate and work together and Thats what.
So that's the way we see it.
Thanks for the thoughts there and then.
Then.
Maybe a follow up question for <unk> I appreciate the commentary on cash for Q4, but maybe just on the.
A multi year basis, or maybe haven't been a target basis can.
Can you just help us think through what the what you think the cash conversion of this business is once you.
Hit your targeted long term margins do you think this is a 50% EBITDA to free cash flow business is at 60%, 70% just some thoughts on how you expect EBITDA to convert to free cash long term.
So.
I think we laid out a cash model.
Maybe like two two earnings calls back and I think Thats a good way to think about the model going forward right.
And the margin goes something like this right we have our EBITDA, we have some amount of capex and in the last few years it's been.
High single digit low double digit that will oscillate, a little bit depending on specific needs of the business and then from a working capital piece, which is the heart of your question I think what we've said is.
The revenue growth year on year, and 10% of that as a proxy for the working capital uses and I think thats a pretty good model to think about as you.
Plot out the next couple of years, when we get to positive EBITDA territory and beyond.
Thank you.
Thank you one moment please.
Our next question comes from the line of Tom Curran of Seaport Research. Your line is open.
Good morning.
Good morning, Tom how are you.
Good good.
Over in the EU when it comes to this churning SKU of policy proposals initiatives regulatory changes that the European Commission has been cutting up in Brussels, whether it's green industrial plan Repower EU or this just past renewable energy directive.
Is there anything in there thats specifically targeted towards.
The store just transmission market and expect it to expand <unk> accelerate your set of store gas transmission opportunities.
That.
Why.
Transformational rules are very very local.
So we have to work market by market as you know there is a transformational system for all of Europe , but we had work.
The work we're doing today is market by market, what we have done and Jeremy.
Duane Yes, we have not we are not engaged.
From a from a pan European type of process I think that what they cost.
The way the European generally the way you should think about Europeans is that the way the regulated transmission system is free access.
You know.
Essentially free access has put it that way and that means that it allows for you.
You will need to allowed energy coming from third parties in terms of what we are trying to do a regulatory challenge when we go into this asset.
Simple one is the followings that most regulatory systems restrict.
Transmission operators.
From dispatching assets.
When you put the router is supported transmission line the system, operator, or a transmission owner needs to dispatch assets needs to use the bathroom storage I, so the man or SaaS.
Badger or charge it and that has created some sort of a legal question four four that we were able to restore two iron ore we were able to resolve in Germany and that were working to resolve in all places.
The UK and Ireland, but it is a challenge for for some of the regulators because it in a way.
His questions.
Segmentation of our industry, our industry segment that is an on demand or distribution transmission and generation and the use of the three should be very very separated their way to create value is by having them be very very independent so demand came off that wont transmit distribution transmission cannot dispatch.
Generation and all these things that all these rules I think as our technology goes into the grid that Dod segmentation bloggers and that's why that's a challenge.
And the challenge we have in the U S and that's the challenge we have.
I think that this will happen and they will have to be a regulatory.
We have been able to successfully resolve it in Germany and in Europe , but it is something that we need to work with all of the regulatory failures before but idle.
I don't see a pan European solution for this this is more of a local issue or we need to work with the local.
System operators and system regulators.
It was a very helpful clarification. Thank you for that and then.
Mono in the quarter UN carrier Capex of $7 3 million related to software investments would you expand expound upon the nature of that spending and provide us with an estimate of software capex for fiscal 'twenty four.
Yes, let me have Bob.
Stock based they are 24 question first and then kind of bring it back because I think it goes to our long term view on how we think about software.
And.
As a key driver of the business right. So I think we've talked about call it double digits low double digits type of Capex.
Capex spend that includes capitalized software as we.
Well.
And I think it's both auto and parties.
Our employees as well as.
Any any third party is that kind of help.
Developed from a software perspective it covers both our operating system projects that we're doing as well as the digital initiatives to advance both <unk> and mosaic and that adds more capabilities to our current functionality. So that kind of encapsulates, where we've been spending money for this quarter and going forward, but I think it.
The overall capitalized software as part of our $10 million to $15 million.
Yeah sure. So this is Rebecca and I will tell you from my perspective, leading the technology team we.
Have a large group of people who create the operating system software platform and we're actually Reintegrating that platform right now and Thats, a big part of how we see the money.
<unk> estimates and for capitalization, we follow along our product development plans to create new functionality on that software for the different markets and that mostly is labor and labor turns into an opportunity to capitalize it as when you mentioned that's also paired with the investment that we make in our cloud based software and again, mostly that's labor and delivering some of the new functionality.
<unk> discussed today, the artificial intelligence based functionality.
All of that labor that goes into creating the different software offerings and leads into capitalization effort.
Got it thanks, Manav, thanks for that additional color Rebecca.
Okay.
Excellent great.
Thank you one moment please.
Our last question comes from the line of Craig Shere Tuohy Brothers. Your line is open.
Hey, Greg how are you.
Hi.
Thanks for squeezing me in.
So first I wanted to dig in a little bit on the European transmission answer to Toms question I did notice the New York ISO was studying energy storage is transmission.
And I think youll find a little bit on the last earnings call about other markets having to address this and having issues I believe you were mentioning Latin America at the time.
Could you could you opine on the prospects of working through the system by system issue worldwide.
Being one of the top three or four companies in the world That's an even do this.
How big a market this could be in five years.
Let's start with the last part of your questions.
This we believe could be.
Yes.
Material driver for our performance, we have the standard <unk> Poor's analysis selling them at scale. So you'll have 30 gigawatts by 2031, I think it fell when you really look at the challenges that transformation has globally.
The in terms of our I understood. The first part of your questions.
How are how's our lobbying effort and are we making progress.
This is as I said earlier this is Toby, though I don't think we need to do this regulator by the regulators.
And one by one then.
Team identifies where we believe we have the highest chance itself.
The highest Johnson of success and then that's why we work so.
And our team in this is what we did this with a yes.
Hardener with Aes, we have been very successful in Chile.
Right.
We're working on.
Tom.
A thorough jurisdictions in the U S. A.
We have success, depending on where we are but I think after this summer.
And all the transmission challenges that we have seen this is going to become a more urgent matter and as people will see our projects coming on line in Germany.
I think we're going to see.
The U.
Some operators they can't go on what they can see how to work and to see all the value. We can create I think that we will see I may or may you acceleration.
That's the worst.
Very happy Unfortunately, I cannot announce anything yet, but we're working on a few concepts that hopefully will be come into reality.
Understood.
The other one is standard and Poor's takes I know Luca this market it will it will.
And if we can increase it from where they weren't expecting I think that.
That analysis that Brad a couple of years back because I know you cited a leader with scale.
Thank you for that and I wanted to dig in a little more on the answer to <unk> digital question.
Is there a trend of <unk>.
Customers, increasing or decreasing their use of internal systems or is the market kind of.
Deciding that.
Specialized third party digital services is the way to go or is it still kind of.
Case by case.
So when we talk to customers.
Here the need state for us to provide digital solutions that help them operate these battery systems better so thats an open space in the market and that's the one that we're focused on.
When you talk about third party software system, usually that related to.
People that have decided to self integrate and thats, a very specific section of the market.
Net.
They're really not competing with that so we're playing with customers developers 19 teams that are consuming our products and theyre asking us to provide these digital solutions to help them operate the batteries over the long term. So if your question is are we competing with self provided software I would say not really.
And for that matter.
One thing from pro the roadmap view, our concept is to integrate our software solutions into our hardware solutions in a way that you know.
There is.
Significant value by by by having the two two.
To really create that additional cost as you know we sell our mosaic.
Technology to third parties, we sell our our portfolio manage our asset performance.
Management system to third parties, but we really see that.
Fully integrated into our assets makes will create the ownership of our asset a lot more it will help our customers reduce their total cost of ownership and make ourselves more competitive in the market and muscle that conceptually what we're doing.
What I will say that today, clearly our CSM everybody from us our battery management system.
We deployed it will come from us that where do you see that people might have different systems are in the more in the BLA application. There are other players, even though ours integrates as I said very very well with ours.
With our infrastructure.
In performance.
Performance management tools that a they.
They are not that many players who can offer what we do which is integrating your solar your renewals.
On your battery storage systems into one system that is Huawei.
Just a quick follow up so like 234 years out.
You morph this into a more fully integrated business line.
Historically wasn't necessarily.
Do you see the churn that you experienced in this last quarter kind of.
Reducing are going away.
I think that the 5% a year is kind of the way we'll look remember.
The BT and Apple because actually applies to our whole.
Our whole offering.
Applications that competitive market there will be some some people are Lloyd and then there is also the asset.
The performance management tools also Youll have third party competitor I think 5% is a good number.
And then for digital obligations is fairly fairly low.
Great. Thank you.
Great.
Well I think that the event for today, So maybe I can just say Barton remarks so.
We're very very proud of the work that our team has done here.
Turn it around mono was asking me earlier today.
Almost a year since we arrived here, we're very very happy for that.
The turnaround that our team has done here really.
I on the ball on all the drivers that we needed to bring this company to where we are we're in the brink of getting to a double digit gross margin.
Our breakeven point in 2000, and the four quarter of 'twenty four.
So very very happy with the progress on this is this is an industry that is evolving is a competitive industry, but we have the size of the capacity and the ambition to.
To make this great.
I really thank all of you for your questions for board.
Are there any insights you provided us every time, we engage with you because that helps us.
Our jobs here every day. So thank you very much and talk to you soon.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Okay.
[music].
Okay.
Okay.