Q4 2023 ESS Tech Inc Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you will need to press star one on your telephone keypad.
I would now like to turn the conference over to our host Eric violin. Please go ahead.
Welcome to <unk> fourth quarter and fiscal year 2023 financial results Conference call.
Joining me on the call today from U S. S. R. Eric Dressel household CEO and Tony Rob CFO.
Following managements prepared remarks, we will hold a Q&A session.
Earlier today, Yes, that's released financial results for the fiscal year 2023.
The earnings release is available in the Investor Relations section of the company's website.
As a reminder, the information presented today will include forward looking statements.
<unk> without limitation statements about our growth prospects.
The partnerships financial performance and strategy for 2024 and beyond.
The forward looking statements are subject to known and.
Known risks and uncertainties that could cause actual results differ materially from those projected or implied during this call.
In particular those described in our risk factors set forth in more detail on our most recent periodic reports filed with the Securities Exchange Commission.
As well as the current uncertainty and unpredictability in our business.
Issues with our partnerships.
Question the markets the economy and the current geopolitical situation.
You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and we disclaim any obligation to update any forward looking statements, except as required by law.
During the call. We will also present certain financial information on a non-GAAP basis.
Management believes that non-GAAP financial measures taken in conjunction with U S. GAAP financial measures provide useful information for both management and investors by excluding certain items that are not indicative of our core operating results.
Management uses non-GAAP measures internally to understand manage and evaluate our business and make operating decisions.
Reconciliations between U S GAAP and non-GAAP results are presented within our earnings release.
With that I'll turn the call over to the CEO, Eric just loss.
Welcome and thanks for joining the call DSS continues to make substantial progress on our strategy building a world class scalable company that is well positioned to serve the immense long duration energy storage market in front of us.
Although we had numerous accomplishments and grew the business to record levels in 2023 due to unforeseen customer delays. We ultimately came up short of our revenue goal for the year.
In spite of this shortfall I expect the milestones achieved in the course of the year bode well for our future.
Our market opportunity and customer engagement remained robust.
Energy providers are increasingly recognizing that there was a basketball and their plans to get to carbon neutral that only long duration storage can Phil.
And I believe utilities are increasingly recognizing the limited options that you have to supplement their renewable portfolio with a commercially viable solution.
Thanks to the decision <unk> made more than a decade ago to hone in on our iron flow technology, we have a seat at the table with many of the largest most forward thinking utilities today.
As you have seen from our announcements we deliberate numerous systems to these partners in 2023, including Smug Army Corps of engineers, Burbank water and power and more <unk>.
See extraordinary opportunity for ESI as some of the near term and well into the future.
Thanks to the great work of the team here, even with the intense floating measured pace. We are developing the business I believe we can make the case that we are ahead of other elders companies as we look across the landscape today.
Indeed, we are poised to ramp our shipments and revenue late in 2024 and into 2025, while maintaining a sizable financial cushion, which should bolster our market position.
The road to building the company in a new space is bumpy, particularly during the early stages. When companies are more reliant on the timing of revenue and shipments and often things don't happen as quickly as one would like.
Certainly we've experienced that as we've been ramping up here at DSS.
However, the behind the scenes work to execute on our strategy has progressed to plan.
Our near term challenges to maintain moderate and consistent skills shipping and installing energy warehouses have led to inconsistent financial results.
As we have shared on virtually every earnings call. Most of these challenges are caused by customer related delays that are unavoidable in our industry and the other reflection of customer engagement or market demand.
That said, we as a team ultimately take ownership of the outcomes and we are certainly disappointed we were not able to deliver the expectations. We set for the back half of 2023.
Two key customers ESI and Honeywell were expected to be material contributors to achieving our fourth quarter revenue target, but were delayed and not able to be included as part of Q4 revenue. However, I can share that we did clear these delays in the first quarter.
What we were expecting roughly $2 million in revenue from these two customers in the fourth quarter to meet our full year objective of $9 million. We now expect to include that revenue as a part of our Q1 results.
In fact, we continue to make great progress with these customers and I'll share more on that in a moment.
Well the leaves are frustrating in the near term, especially as an early stage company, we expect that as we grow and diversify our business across customers and work to continue to standardize our contracts and operations. These pumps will smooth.
And our path to scale remains intact.
We are building GSS with a very distinct strategy in mind, focusing on refining our iron flow battery designed for optimal manufacturer ability, namely the lowest cost coupled with the highest quality and throughput while conserving our cash.
This should allow us to capitalize on the fundamental cost advantage, we enjoy using iron salt water to store electricity.
As we worked to reduce our product costs, we strategically chose to moderate the number of energy warehouses rebuild and focusing on the customers and the segments that provide the greatest long term opportunity.
This strategy is working.
As it has allowed us to conserve our cash balance, while making great strides on the design initiatives to lower material and labor cost and enable us to reach non-GAAP gross margin profitability on a unit basis and objective. We still believe is achievable by the back half of the year.
Given our strong cash balance and the progress we've made with the design of our products and operations I feel the team has been extremely successful.
In parallel we are proving the necessity of long duration energy storage by signing large multiyear deals that could deliver well north of $1 billion in revenue from future orders as we execute on scaling our technology.
Let me repeat.
Simply executing on our existing customers and partners can deliver all of the volume we need over the next few years.
In 2022, we landed Sacramento municipal utility district or <unk>.
<unk> was one of the most aggressive and detailed plans to get to carbon neutral and we have already delivered and commissioned our first six units with them.
We signed a partnership with energy storage Industries Asia Pacific and Australia, whose initial customers include stairwell and energy, Queensland and supportive of a very exciting initiative announced by the government in Queensland, which deployed over three gigawatts of batteries to reach their de carbonization goals.
In 2023, we signed an agreement with <unk>, the second largest electricity generator in Germany, whose plan is to deploy 500 megawatt hour iron flow battery building blocks, coupled to renewables to supplant coal generation plants all told.
To build 20 to 30 gigawatt hours of storage.
We're pleased to share that we have now completed the first stage of engineering design with Liard.
While these are extraordinary validation of our market and technology. The deal we completed with Honeywell in September of last year is probably the most transformative.
Honeywell took an equity position in <unk> at a premium to the market price.
Into a co development agreement for energy storage and most importantly plans to resell our technology into their channels within an initial target of $300 million in the first six years, which included a prepayment of $15 million.
In the fourth quarter, we hit the ground running and as mentioned we have already delivered their initial order.
Our go to market teams are deeply engaged and we are moving towards our first joint development projects all designed to improve the cost performance and scalability of our solutions.
This partnership was more than six months in the making and Honeywell did extensive due diligence into our technology operations IP and customer base.
This room is true is an incredible proof point for our technology, our operations and the progress we've made.
Encouraged by the belief of these influential customers and partners. We remain convinced that DSS has a strong right to win in the market.
The long duration energy storage market has tremendous tailwind and the primary alternative technology lithium ion is rife with flaws.
There are numerous nascent technologies trying to climb that mountain to scaled viability, but DSS is a substantial lead on all of them, improving our solutions and scaling our processes.
We have been developing a unique technology for more than a decade and have surrounded it with an incredible IP mode.
Yes S is blessed with the solution that stores energy and some of the most abundant and inexpensive raw materials available iron saltwater.
Some catch fire explode or require a difficult to source raw materials and is manufactured with a very capital efficient process, creating a fundamental cost advantage at scale.
Executing on our manufacturer ability initiatives and our customer relationships is the key to our success and that is why I'm. So pleased with our operational progress.
Well, we have given you glimpses into the progress we have been making operationally I would like to recap some of the highlights from our accomplishments in 2023.
At the top of the list our cost out initiatives have resulted in tremendous savings for each EW rebuild.
We brought down the cost to build an EW by almost 60% in 2023.
This improvement included numerous noteworthy highlights, including lowering labor hours to build the balance of system by 45%.
Decreasing cycle times for power modules by 52% and proton pumps by almost 70%.
All of which lowered EW build cycle time by 73%, while reducing the hours required by more than a third.
We improved our electrolyte so that our energy density increased by 25%.
Additionally, we did great work optimizing their bill of materials and vendor base.
Our customer success team dropped the time to commission, an EW that'd be customer size by 50%. We continued to fortify our intellectual property mode and filed an additional 82 patents. While also having 52 patents granted within the year, bringing the total to 367 patents filed.
And 77 patents granted.
We vastly improved our revenue recognition process and shifted out of development accounting.
We accomplished this while almost cutting our Q4 adjusted EBITDA loss in half year over year.
Which enabled us to end the year with $108 million in cash on our balance sheet.
Our read of operational execution improved dramatically in 2023.
And with the team hitting their stride, we have detailed plans to lower the cost to build an EW by up to another 40% in 2024.
This includes further dramatic simplification of the design and assembly along with optimization of our power module automation.
In fact, as we move to our next Rev of our EW design.
I can share some details that you can elicit how we're lowering cost and time of assembly.
Simplifying the design to make it easier to manufacture means lowering the number of touches in pieces and as we move through 2024, we are lowering our pipes couplings by 34% and pay bonds by 18% lowering our hardware count by 44% lower than the wiring and EW by <unk>.
28%.
This simplifies every step of the manufacturing process from procurement to assembly to final test.
All told this should also increase our capacity by another 20% without further investment simply from optimizing the design.
Perhaps most importantly, as we shared last quarter. We are building, our first energy center with Portland General Electric.
This process has gone well and we are currently testing the CEC and expect to complete validation this quarter.
The energy Center.
<unk> greater energy capacity and density and we expect it to be a preferred incarnation of our technology for utilities and other large energy providers due to its scalability and value proposition.
We expect to start delivering the first commercial energy centers late this year to Teco and Sacramento Municipal utility district.
With this we remain on track to start ramping ECS as we head out of 2024 and into 2025.
I hope I've conveyed our excitement about the progress we've made this year and the trajectory we are up.
As we look forward to this fiscal year, our focus remains consistent we plan to develop scalable processes that lower cost manage our growth to conserve cash build our long term book of business and continued to demonstrate the critical role we expect elders to play in the energy transition.
The lessons we learned in 2023 as we made progress scaling the business should be invaluable in helping us successfully execute on our vast long term potential.
Given the variability with our customer's deployment activity, we are taking a conservative view toward our external projections in 2024, and we will defer giving specific guidance at this time, but we will share that we expect to grow substantially in 2024.
Driven by an inflection point in the second half that is enabled by achieving our cost out targets and beginning the initial commercial shipments of our energy center, allowing us to dramatically increase our growth rate and drive efficiencies across the business.
We expect to triple or quadruple our 2023 levels in the coming year.
But project timing is still in place.
Our visibility improves during the year, we hope to be more specific about our ramp plans.
This is an exciting and dynamic market space and we look forward to continuing to scale our business to meet the growing demand.
We feel that with the team we've built the technology we're developing.
The market driven by the strong tailwind provided by the IR Ray and increasing regulatory imperative DFS is positioned to capitalize on its first mover advantage in this new category of long duration storage and as we've seen in other industries early leadership can deliver enduring competitive advantage long into the future.
And with that I'll turn it over to Tony.
Thanks, Eric.
Yes, otherwise noted all numbers, we discuss today will be on a non-GAAP basis.
You'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website.
In the fourth quarter, we delivered eight energy warehouses across a number of customers. However, there were certain delays that caused revenue we expected to come in during Q4 to get pushed out to the first quarter.
This was across two customers Honeywell and ESI and amounted to approximately $2 million in revenue.
As a result, our revenue fell short of expectations coming in at $2 8 million for the fourth quarter and $7 5 million for the full year.
Despite the disappointing top line results I'd like to reiterate what Eric said about the significant headway. We have made in the last year and scaling the business streamlining our revenue recognition process, reducing costs and improving manufacturing efficiency.
<unk> has worked tirelessly to position <unk> for continued growth in the coming year, and we remain confident in our ability to execute successfully on our long term strategy.
As a reminder, beginning in Q3, we transitioned out of development accounting and into commercial inventory accounting.
So we are now reporting our cost of revenue separately from our operating expenses and beginning to report inventory on our balance sheet.
Our cost of revenue was $10 3 million in the fourth quarter.
In addition, as we detailed last quarter as part of the transition from R&D accounting to inventory counting and the associated LC and RV adjustment.
There are a fair number of items included in Cogs that dramatically impact our current Cogs results that would not be material contributors as we reach scale.
Due to this our Cogs results will not fully reflect our cost reduction progress, thereby making it difficult to assess our progress towards profitability.
As we increase scale and approach adjusted gross margin breakeven on our AWS in the second half of 2024, we expect the impact of the LC and RV adjustment to our non-GAAP gross margins to decrease.
Our non-GAAP operating expenses for Q4 were in line with our expectations at $9 $5 million and our non-GAAP R&D came in at $3 5 million, which we believe is reflective of our current run rate.
With that we reported Q4, adjusted EBITDA of negative $12 8 million.
Another significant sequential and year over year improvement and indicative of our trajectory to profitability.
Following the cash infusion of $42 $5 million in Q3 from Honeywell, we ended the fourth quarter with $108 $1 million in cash and short term investments.
We plan to continue to effectively manage our cash burn rate in the coming quarters and the cash on hand should last us well into the first half of 2025.
While not pressing we expect to continue to Opportunistically look to strengthen our balance sheet through dilutive and non dilutive means to provide the necessary capital to give us operational flexibility to respond to market demands we.
We feel very good about our current cash position and liquidity and the extended runway. We now have to push towards our longer term goal of getting to cash flow breakeven.
And with that I'll open it up for questions.
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We'll pause here briefly ask questions are registered.
Okay.
Our first question is from Thomas Boyes with TD Cowen. Your line is now open.
Perfect. Thanks for taking my questions maybe.
Maybe first I wanted to just touch on the project delays.
Customers is this primarily an interconnection issue or are there supply chain impacts I mean, we've heard from a lot of project developers that are being stymied by transformer availability. Some of those lead times are over the two years at this point. So I'm just wondering if you could kind of talk through maybe the nature of some of those delays or at the market at large what youre, saying.
Sure Thomas Eric here I'll take that it's a it's a great question and it's I think as you pointed out something that's happening across the industry.
Combination of impacts there is no one thing in some cases it's.
It's <unk>.
Inverters Transformers and delays.
Other delays related to site readiness. So we will have a project plan with a customer and they will say I'm ready for the products to arrive on a certain date and then.
They'll call it the 11th hour and say well wait a minute.
The civil works arent done yet pads arent in place so sometimes its things as simple as that in some cases, it's delays in getting.
Contracting done.
Or.
Other kind of operational things in terms of the logistics of the planning so far we haven't had any short term problems with interconnect, but as the projects are getting bigger we're paying a lot of attention to that because we've seen we've seen what other folks have gone through.
Yeah.
Got it that's helpful and maybe as my follow up I just wanted to maybe understand how youre thinking about 45 X credits or was this something that you would think about.
Consuming or are there plans to take advantage of the transferability of the credit we've been hearing about ranges.
10% to 5% discounts on the Dol.
Pennies on the dollar depending on the size of the credits that one would be able to transfer just wondering if you have any thoughts.
Hey, Thomas this is Tony.
Yes, so we've elected to go with direct pay on the production tax credits.
We've already realized some in.
In 2023, and the expectation with our volume ramping up this year would be substantially bigger impact.
And based on some conversations we've had with folks we do believe that there will be a <unk>.
Market for us to be able to finance and those production tax credits.
And so we're evaluating those those options and alternatives now.
Great.
Appreciate it I'll hop back in the queue.
Our next question is from George <unk> with Canaccord. Your line is now open.
Hi, everyone. Thank you for taking my questions.
I just wanted to make sure I heard correctly did you say that you expect a tripling or quadrupling of revenue in calendar 'twenty four.
Yes, George Eric here.
Kind of a range that we expect to see as we've.
Third because of some of these lumps and the timing, we're being a little cautious on being too specific about it but it's certainly going to be substantial growth in the year.
Got it and I think you also said that you expect that to kind of ramp in the back half of the year.
What specific projects you expected to push the revenue higher in the back half we can share that thank you.
Yes, I think about it from our standpoint, the two biggest drivers to where we are on our cost out curve as we shared we've made really great progress on driving costs out of the product in 'twenty three and have.
A very ambitious plan to continue that into year end 24, so the EW on the existing EW products.
Hitting that trigger.
Two it into lower cost points is frankly more important than any one customer or another customer in.
In driving our ambitions for volume and then the second thing is starting to ship <unk>. So as we've shared we've got the initial project with Portland General Electric that's going to go into pesos. When we feel great about that and the current plan is for teco and smart to receive their first EC units.
In the second half of the year. So it's really the combination of those two things that drive that inflection point in the second half.
Got it.
And maybe as a follow up I'm, just curious on pricing given the pretty much a collapse that we've seen in lithium prices in lithium ion Gulf prices are you seeing kind of a stable pricing environment from your perspective or is that a pricing umbrella impacted deal. Thank you.
Sure. So so far it's been pretty stable on our side, but we're certainly watching what's happening in the lithium market.
And.
And monitoring the impact that that will have we have a very ambitious cost out plan that extends through this year and beyond and we know that we've got a great long term cost entitlement, but certainly competitive prices falling continuous too.
To drive the imperative to stay on schedule.
Thank you.
Our next question is from Colin roof with Oppenheimer. Your line is now open.
Thanks, so much guidance.
These adjustments on the design can you talk a little bit about how different the supply chain is.
And what does the supply chain looks like in terms of all sorts of components on your ability to kind of navigate to.
A complete set with the existence of mines.
Sure I'll take that.
Greg a bedroom Tony.
And if need be.
Certainly have transformed a lot of our supply chain to try to take out some of the risk and variability that we've seen.
And in.
In the past and we've talked about that on these calls a number of times, so that equates to a lot more domestication.
Also equates to a lot of our transformation has been to higher volume manufacturers, who have by definition in most cases multiple facilities. So what we've been trying to do is drive lower prices with more reliable.
Pliers, who have built in redundancy into their products and then separately we've been looking to find places to have alternative sources of supply for key components wherever that is practical now as we get higher and higher volumes. The idea of diversification in the supplier base gets a little easier to execute than it is for us today, but we think.
If we can get a lot of that.
Diversification and kind of a surety of supply by working with larger vendors, who have multiple facilities in the first place.
Yes.
That's actually Super helpful and then in terms of.
Debt providers and underwriting.
Standards, along with potential insurance providers for some of these products can you talk about the maturity.
Those processes to really look at performance of the.
The assets in the field and how comfortable all those underwriters are getting worse.
The technology and these assets are performing at this point.
Yes sure.
I answer it in two parts really.
I've had a lot of engagement with people, who do underwriting at the project level.
And that's both for independent power producers, but also kind of more traditional legacy producers and we've broken that out into two parts. There's one kind of just a general product breakdown.
I think we're very mature and certainly the agreement we have with <unk> and all of the diligence we've been sharing with people for years. It gives a lot of comfort on that front as we get more and more.
Operating cycles in the field that helps drive the bank ability study in terms of performance the number of cycles that we got.
I look at that I think it's getting increasingly comfortable for people, but there is there is almost no more no no limit to it the more products you get into the field the more different operating environments that you demonstrated in the more cycles you put on the unit the better that so it's just kind of part of our everyday work.
Okay.
Thanks, so much guys.
Our next question is from Karen Blanchard with Deutsche Bank. Your line is now open.
Hey, good afternoon.
Could you talk two days ago, there was a filing.
Good morning.
Saying that.
Stock price doesn't go try that much all up I think there's maybe a risk.
Shebeen.
Ongoing on that what's your CFO.
Tying together AWS cardio on.
What could be the difference in your opinion on that finding.
Sure no. Thanks for the question yes.
The notice from the NYSE, which we've responded to it's got a relatively long kind of observation and cure period to it of about six months. So theres no immediate action. That's required. So we're monitoring that we have a number of options to.
To address it if it doesn't kind of cure on its own.
But we certainly don't have any intention of being delisted or trading down to alternative platforms.
Okay. Thank you.
Maybe the second question and sorry, if I missed this earlier in the Q&A, but can you give a little bit more color as well about the fuzzy question, Jack Kasprzak, Shannon, maybe the timing and how you you.
Okay.
Yeah.
Yes, correct.
This is Tony.
The 40%.
The cost reductions that we're expecting to achieve this year.
Similar to what we saw last year in terms of the various projects that we have associated with cost reduction initiatives.
So again, there's going to be some more.
<unk>.
Our related initiatives.
In generation changes.
That will.
Simplify the EWC.
As well as remove some of the material that's in there.
And we also expect to continue to reduce the cost of our electrolyte.
So theres a number of.
Projects that are all going to be realized throughout the year as there are multiple of these projects. In addition to some supply chain related projects, where we are.
Continue to evaluate alternative vendors, who can provide us.
Better or.
<unk> materials.
So as we realize those throughout the year, that's how we're going to be able to take.
The cost of the product down by 40% by the end of the year.
Alright, Thank you very much.
Tom.
Thanks.
Our next question is from Brian Dobson with Chardan capital markets. Your line is now open.
Yes, thanks very much. So you had you had mentioned earlier in the call that your core Q delivery misses were mostly from client disruptions.
Would it be safe to assume that we should view those deliveries is delayed rather than rather than missed entirely.
No absolutely in fact, both of those have already subsequently been delivered and we expect to recognize them in Q1.
Yes, very good I think that that's an important point.
And just just shifting gears a little bit to your to your agreement with Honeywell.
Have you seen any I know, it's early but have you seen any early synergies, but from having access to that company sales channels or have you received any early feedback from your new card.
Sure No I think there has been really positive feedback and a couple of things kind of popped up certainly honey.
Honeywell has a vast experience technically products similar to ours.
Across a range of industries and so.
Our actions with our technical teams have had on the joint development.
Project basis, and evaluating things to do together.
First thing from.
From a channel perspective, we have great access to.
Two tons of channels across across the space I would say two things have kind of come up one very large customers, sometimes have a strong preference to dealing with very large suppliers and so honeywell has a lot of great relationships with very large customers.
And that's opening up some doors, but then also things like.
Yes, I think military bases and government contracts. There is a lot of connections into those so I think you're absolutely right. It's early days in that.
There are big ship.
So we're working hard across the teams on both the commercial and the technical side to kind of get specific things.
Locked in and ramped up but we feel really good about the progress we've made so far.
Excellent good to hear thanks very much.
We have a follow up from Thomas Boyes with TD Cowen. Your line is now open.
Yes. Thanks again, just one more it was great to see the improvements on the system commissioning times I was wondering if you.
If you could kind of rank order the actions that kind of led to those improvements.
So the contracts kind of overwhelming component there is a lot of it the team that you had put in place to assist with commissioning.
Yes. Thomas this is this is Tony.
A lot of it has to do with.
How our.
In the field as we are.
Getting set up to do the startup and the commissioning so as productivity on our field service engineers part.
And part of it is productivity from just implementing.
More units throughout the year.
Part of it is that we've changed some of the procedures that we follow is we are out in the field.
And starting up and commissioned in the units and then.
And then it's also because of the simplification and the work we've done to improve the reliability and durability of the units as they are put out there. So it's a number of things, but a lot of it is a testament to the learnings that our customer success team has been able to realize throughout the year from the early units.
We are installed to the units later in the year.
And more specifically with something like mud, where theres multiple units at <unk>.
Right.
And youre able to get quite a bit of productivity when youre working through multiple units at one time.
So as we see that.
The type of increase going forward, we would anticipate that we'd be able to continue to make progress.
Those types of.
Field field initiatives and that will significantly reduce our cost.
And allow us to to spend.
That would be a lot more productive with our field service engineers as we scale up the business.
Okay.
I appreciate the color there thanks again.
I'll now pass the call back to the management team for any closing remarks.
Well, we'd like to thank everybody for joining the call today and for your interest in SaaS we are.
Now almost a quarter into 2024, and we're really excited about how the business continues to progress our really great progress around the key initiatives around driving costs out and keeping us on our path to profitability. We look forward to talking to everybody again in just a few weeks as we talk about Q1 results.
Yeah.
Yeah.
That concludes today's conference call. Thank you all for your participation you may now disconnect your line.
Participation you may now disconnect your line.