Bloom Energy Corporation (BE) Earnings Call Transcript & Summary

Thank you so much, good afternoon, everyone. This is the 48th JP Morgan Technology Conference, the first virtual version thereof. It's going quite well so far. My name is Paul Coster. I cover alternative energy as well as applied and emerging technologies at JP Morgan. And it is my pleasure to introduce K.R. Sridhar, the founder and CEO of Bloom Energy. K.R., welcome.

Thank you, Paul. Pleasure to be with you.

All right. It's nice to see you. And before we start, though, this is a fireside chat Q&A, and the audience can participate. And the way in which you do so is by touching the Q&A button at the top or bottom of your screen. And I will do my best, despite a cognitive overload, to incorporate your questions into the flow of this discussion.

So K.R., thanks again. And I think I'm going to start with a very generic question. What is Bloom Energy Server? And why is it a big deal, which I think it is?

Okay, sure. Look, Bloom Energy Servers are devices that produce on-site power without fire or combustion and provide a customer with what, we think, real electric power should be in the 21st century. So let's ask ourselves what is real electric power in the 21st century. Number one, it should be customized for you like everything else. So far, it used to be the days when computers were not customized. They were mainframe one size fits all. You got your personalized computers. Same thing happened with telephony. We had one size fits all, rotary dial or touch tone telephones. Today, each one of our cell phones, mobile phones is a personal technology. How do you personalize, how do you customize electricity for a particular business or a building's needs? So Bloom believes that there are 6 attributes to electricity, and not all 6 attributes are equal to everybody: safety, sustainability, reliability, resiliency, affordability, accessibility. They are different in different parts of the world, who you are, what you do. It is that combination of all 6, being customized exactly to your needs and tailored to your needs is what you should do. You cannot do that with a one size fits all grid. So we believe that we can customize it for every building. So at a very high level, that is what Bloom Energy does, provides a solution to a customer that's customized for their needs to take care of the most important of all resources your business needs, which is electricity.

All right. And before we go into sort of big picture ideas, this is a tech conference, and I'm kind of keen to just tie it back to technology because this technology is used extensively by the tech industry isn't it?

Yes. So some of our big customers are data centers that require their power to be on. Let's take one good example. We power the PayPal processing data center in Salt Lake City, Utah, where somewhere between $300 billion to $400 billion worth of revenues transacted a year. So a second of power loss is an astronomical number in terms of lost power. It's not like a data center ever loses power for one second. If it loses power, it's a long period. It is their -- literally their business. This is a data center where there are no backup generators, no UPS. We are the primary power because we have a fault tolerant architecture, and the grid is the backup. So from that kind of an application in data centers to continuous manufacturing for semiconductor industries, to telecoms, using that for their central offices. So we are in the telecommunications field. And we also power some iconic buildings for tech companies with microgrids because they want it.

And the other interesting thing there is how scalable it is, right? I mean, it can be just a simple 1 box configuration that supports a store in and -- at a big box retailer, and then it can scale up to that kind of magnitude.

So the way for you to think about it, again, the tech audience will understand this extremely well. A single blade server sits on your desk and takes care of your or your wife's or your daughter's needs, whereas the same blade server just assembled in thousands becomes a hyperscale data center, but it's the same fundamental copy exact repeat technology of a server blade being put together. So what we did in Bloom is to say we want to adopt the same playbook for electricity in that we build a single modular power module, which is 50 kilowatts. So we put 4 of these together, we can power a Home Depot store. We put hundreds of these together, and we power a substation that is producing enough power in Delaware to power about 25,000 people. So it's the same technology, copy exact being assembled as Lego blocks. And the beauty of this, Paul, is number one, each one of these blades is hot swappable. So this concept of not having power, taking down something for shutdown does not exist, right, because of fault tolerant architecture. You can hot swap a module when you're doing something, number one. Number two is pay as you grow. If you just think of the old days of electricity, a business or a community has to come and say, for the next 10 years, what do I plan for my energy needs, I need to buy that right now because the substations, you're not going to add a little piece of a big transformer or a substation every other day. You just need to plan ahead, and that's wasted stuff. Here, you pay as you grow. So this -- there are great advantages to it.

So there's -- really the COVID-19, which is a dreadful situation. But nonetheless, we're learning some interesting things in the midst of it. And one of them is it kind of shines a light on the debate around Bloom Energy. And is it green technology or not? Well, I don't know if it's much of a debate at this point. COVID-19 has revealed a convergence here. What is that convergence? Perhaps you can sort of talk us through it.

Sure. So there are multiple levels at which we can talk and compare COVID and the climate change, both being like global crisis, but one, having a very short timescale of impact, one having a longer timescale of impact. That's the difference. Otherwise, they both are similar crisis in terms of its impact on the world and our lifestyles as we know it. However, here is what's interesting. You just look at these beautiful pictures of my home country where I was born, India, and you look at Delhi, with all the smog and then you look at this beautiful, clean air and you see the birds and the flamingos coming out and then you see the clear visibility. And then a very recent report of the Guardian that talks about in Europe alone, 460,000 people die because of smog-related respiratory illness. And this study that they cited, it was a very extensive research study, which we can't do in normal days because this is a massive social experiment, right? You turned off all the smogs pretty much in Europe because there are no factories putting that out, and there are no cars putting out the smog. And what they showed is it has huge impact that totals up to about 0.5 million people a year impact on death -- life and death. So now the question is this, is it CO2? The answer is no. And why? Yes, there is CO2 reduction. But the impact of that CO2 reduction is long scale. You're only going to know about it much longer. A bird or an animal or the human heart, the lung does not know the difference between 380 parts per million of CO2 and 390 parts per million of CO2. It's an invisible, odorless, colorless gas. So what's the difference? It's the smog, it's the particulates, it's the SOx, it's the NOx. That's the undertalked -- that's the less-talked, less-understood aspect of climate change that we simply have not understood well and embraced enough. And that has immediate impact. It has social impact. It has health impacts. It affects everything we do. And with COVID, we got an opportunity to do a global-scale social experiment and see what that means. Obviously, we cannot have clean air at the expense of us all sitting at home and not driving anywhere. That's not an option. So -- but options like Bloom offer you clean electricity with none of that smog, even when we use natural gas as a fuel. So clean matters a lot. Clean has not been spoken about. It's just the carbon footprint that's not being spoken. I'm not saying one is more important than the other. One is a short-term impact. One is the long-term impact. You got to think about both together. We have only thought about CO2, which is the class of -- which is the cause of climate change. We have not dealt with the smog, which is consequence that's affecting us right now and something we can do something about.

NOx and SOx is very localized in its impact, meaning that if you had a gas generator or diesel generator, even worse, adjacent to a hospital that's now addressing the COVID-19 situation. Well, you've got a really big problem there, right? So is this -- first of all, have I got that right? And secondly, given the sensitivity of the human lung and the compromised lung as well, are you seeing immediate action as a consequence of that realization?

We are seeing an immediate action. And in fact, we have actually acted on a couple in this very short term, right? So here are 2 examples. In one case, one of the hospital chains in California, one of the biggest in California that has one of our systems for their building was putting up this pop-up field hospital in its parking lot. And the notion of having to power that with a diesel generator was just unthinkable for anybody in the medical staff. Here at tent hospitals, are you going to have a diesel generator that is producing the power and putting out those toxic gases to patients who are literally fighting for life and gasping for air. A known toxin is what they need to breathe if you need to keep the ventilator on. That's a terrible choice. So they reached out to us. And within 3 days, from the day we started the work, we were able to provide a reliable solution, redirect the power to the parking lot and power that hospital, within 3 days, okay? The time to power becomes extremely important. And in another case, this was the Cal Office of Emergency Management. They were organizing a Sleep Train Arena, which is the old Sacramento Kings Stadium, and they wanted to power that for exact same reasons and did not want dirty diesel generators to be the source of power. And this is interesting, Paul, in that from day 1, when they gave us the green light to the day we turned on the power was exactly 5 working days. And this is 0.5 megawatt of power. No other known commercial technology today can give you clean, reliable, resilient power with such a short time to power. We think that's a value proposition. But you asked a bigger question, where can this go? Think about this, right? COVID is going to leave millions of people around the world with compromised respiratory conditions, even the survivors. And many of them who can ill afford it are in economically deprived neighborhoods. And typically, these kind of backup generation and diesel happens in those neighborhoods. So if you think about social justice, economic justice, all that kind of stuff, our solution is well suited to be able to address both.

From an investor perspective, right? I mean, there's a gestation period here. Hopefully, not very long because this is a really immediate crisis that we're dealing with. Is it -- is it evident yet that any other hospitals are looking at basically changing incumbent systems rather than these field hospitals that are being deployed on the fly?

We have seen a very significant uptake of hospitals reaching out to us, having heard these stories now. So we think the hospital sector, to be clear, has been 1 of our 4 pillars in terms of strong customers. We are a natural fit for them, but we are seeing a significantly increased uptick from these hospitals reaching out to us. So again, as you know, our business, it's a long-cycle business, but they want to move really fast. When they're calling us now, one of the questions we get asked from them is how quickly can you implement your solutions once we give you a purchase order.

So let's just address a known controversy, which is -- okay, so now we know you're clean. But are you green? And I know this kind of keeps echoing around. And the answer is, well, you're using natural gas. So you cannot be the cleanest solution available. But your thesis is that you're nonetheless greener than much that's out there. Talk to us about that.

So we take a phased approach to it. We have -- we are absolutely committed to putting the greenest possible product out there. So what are we doing towards that? Number one, every generation of our product gets more and more efficient, which means for the same amount of power you generate, you have a lower carbon footprint. And that alone is a very good step in the right direction, number one. Number two, there is no solution other than nuclear today, where you can get very large amounts of baseload power with 0 carbon, and there's only so many nuclear plants you can build even if you want to build them at any given time. And we cannot not have electricity until then. If you just look at the world today, 500 gigawatts of coal power plant is being built. By just converting that to natural gas and the cleanest way to convert that natural gas to electricity, the amount of carbon reduction you can bring about in the world is enormous. And the whole climate change is a race against time. Why would we not do good in the name of waiting for better when the enemy is time, right? That's our first argument to that. The second thing is, we are continuously working to green the molecule. We are working with partners to figure out how to use our systems on hydrogen as well as mixtures of hydrogen and natural gas. Assuming the hydrogen is going to come from renewable sources, it being renewable hydrogen. That would be a big step towards reducing the carbon footprint, going to 0 carbon. We have several biogas projects where, again, on a net carbon basis, we go to 0. We are working on innovative technologies to capture the carbon, so we can go from natural gas to 0 carbon using what we do. So these are all projects we are working on, expect us to make progress in each one of these things with time to come.

It's extraordinary what's happened around your company in the last year. I mean, this time last year, we suddenly saw perfection get in the way of the good, which was this idea that natural gas was just a really bad thing. And it just doesn't seem -- I mean now that time has passed, and we understand that you're a clean version thereof and that it has a transitionary role and that you are yourself moving in to a sort of post, sort of, carbon model anyway. I mean, it will seem so different. And then COVID came along. And things just seem so much better from a momentum perspective at the moment. That said, COVID nonetheless disrupts things, right? It's disrupting -- well, what is it disrupting for you?

Look, for us, we've been very pleasantly surprised, but I shouldn't be surprised because we have an amazing team, our operations team on supply chain and factory manufacturing, they've not missed a beat. So even though we have a very complex global supply chain, we have been able to maintain business continuity in terms of getting the parts. We have completely reimagined and retooled our manufacturing, where every single operation step, there is social distancing. And we can continue to operate in the -- under the COVID restrictions for a long time to come, if we need to. And we have done this extremely safely. So from supply chain, manufacturing, being able to put out products, we don't have a problem. The second thing, given our long-cycle business, we have a very strong backlog. The one place that we cannot control is installations, which is even though state-wide mandates exist in most of the states where we operate, where power generation is considered essential business and anything relating to power generation, there are local pockets and patch work of permits and construction rules that put moratoriums on those. We have to adhere to those local laws. And we are a company that works with people to follow the laws that exist where they exist. And so that causes a certain level of uncertainty, number one. Number two is, there are general contractors and subcontractors we use for those construction projects. We have seen, in some cases, them just delaying things because they had an exposure, they had, things like that -- things we don't control outside of our walls. The third thing is we have seen a similar thing with utility workers in terms of their ability to connect gas or connect to the utility because of COVID-related delays. So it is only that portion of our business that is delayed. The business momentum is very strong. So what does that leave us with? We cannot tell you whether from a revenue recognition perspective, if certain projects will slip out by a few weeks or not. However, those projects, the key thing to remember is the revenue is not lost in these projects. Our customers want these projects to be completed as quickly as possible. So if at all, it slips out, it'll slip out by a few weeks, and it may miss a quarter to the next quarter, but these are not lost opportunities. And cash comes in on an incremental basis as we build so we are managing to cash as opposed to managing to P&L.

You're close to record levels of backlog. You've got $1 billion of contracted revenues. You've got another $2 billion that's tied to the existing fleet, and you've got another $1 billion in kind of potential additional -- I mean, it's all starting to pile up for this small cap name, and people really should be paying attention, especially given what's happened recently. I think the bit of the -- and I've got a question here from a client, which gets to the heart of it is the cost curve mix because if you can get the cost curve down, your -- the price of your electricity is somewhere in the region of $0.12 kilowatt hour. But if you can bring down the cost, of course, either your margins improve or you can bring down the price even further and drive up demand even faster. So it all comes back to the current-generation Server, and what momentum you still have there in terms of unit cost and then Gen 7.5. What -- the concern is that it's all been delayed, and it's going to take much longer than expected. What's going on, please?

So if you take the $1 billion in backlog orders as well as any orders that we book today, we are only booking orders where on average, we get a healthy margin. And you've seen from our numbers, our product margins are somewhere in the 30%, okay? That's what we target for on average. Now the customer really does not care what generation product goes in, the contract does not specify what generation product goes in. So the key thing to -- and also the thing to remember is in our version 5.0, if you look at it on a yearly basis, we have achieved a 20% cost reduction. And we are looking at -- in every generation product that we have brought along, a 30% cost reduction coming out on top of wherever we end with the -- like, previous generation product. So number one is our existing product still has room for development, still is going to give us what we need to do, and we can still hunt in a significant number of areas. We are never going to be satisfied with that. We're going to be constantly pushing that boundary. So 7.5 is very important to us. And our engineering team, again, makes it seem really easy. This is the fifth big iteration of a product within 10 years, and we've been delivering on time. And what people fail to understand is this is a single company doing this whole thing. It's not a large ecosystem like the semiconductor industry where Semicon puts it together, right? So we've been doing this extremely well, and we will continue to do that. I am extremely confident we will do that, right? So that's the second thing. And what we are doing with this time that we have is figuring out how to even further reduce the cost and bring this product out -- when we bring this product out, start realizing those cost gains sooner than we had with our previous-generation products. So we're being very smart about it. We are conserving cash like we should in a crisis. But we are not giving up -- we are not taking our eyes off the prize, which is when we roll this product out, how does it come out even better than it did. And how do we work smartly through this period.

And it comes to market at the end of this year?

End of this year, we will have field testing in multiple sites.

And if you want to -- well, the customer, of course, doesn't care. But if you were to upgrade from a 5.0 to a 7.5 how do you do that? Is it just the swapping out of the FRUs? Or is it a complete sort of a frame swap-out?

Well, the way we would implement the 7.5 technology would be very similar to what we've done with our previous-generation technologies. It's only the new installs where the new product completely will go in. But everything we learned in the hot box and the stacks, when we will incorporate it to be backward compatible to the previous generations. So when we do a swap-out of the hot box that's part of our routine service, rather than use the older-generation technology, we will insert a newer-generation technology. It will cost us less on service, and it will provide the customer with a higher efficiency and a lower carbon footprint. So it's a one unit cost approach.

Why will it reduce your service cost?

It will reduce our service cost because the cost to make the same amount of electricity, that hot box will be cheaper with the new-generation product compared to the old-generation product.

Okay. Let me start just hone in on 1 area of concern, which has been the fuel replacement units, right? The average life of which is such a key consideration in the service cost. I mean as you go from 5.0 where you seem to have made a lot of progress, what is that progress? As you go from 5.0 to 7.5, don't you reset that particular variable?

Great questions. So first and foremost, in every generation technology that we have brought forward so far, the life of the hot box has actually gotten better than the previous generation product at its maturity. Let me repeat that. With the new-generation product that we bring out, forget the early-life failures and the testing and all that, by the time we commercialize it, that commercialized product has a longer average life than the previous-generation technology at the end of its maturity. So we will never introduce 7.5 and start from a very low life and try to build it to a high life. If it's not better than the life that we have today for our 5.0, which is 5-plus years, we will not introduce that in the marketplace because it's the total cost of ownership that matters, right? The service cost gets into the electricity cost. So that is something we know how to do. We have demonstrated that 4 times over. We will demonstrate it the next time, that's number one. Number two, you asked the question of where are we on 5.0? Today, for the last 2 years on individual service contracts that we write, we are aiming for and achieving roughly a 20% margin on the service business on those contracts. However, remember that we have hundreds of megawatts of installed capacity out there, legacy systems, which have different hot boxes. As we replace them, we replace them with the newer-generation technology. So that overhang coming from the legacy systems is leading to a loss that you see on a contemporaneous basis, on a time basis. Look, 5 years from now, if services business is not making us a lot of money, we're doing something fundamentally wrong. We are confident about it. We know we're going to get there. We're going to look back 10 years from now and say, that is an annuity business that's just constantly making us money no matter what. That's what this company is positioned for. That's why we have put so much effort into this. It is critical to our business model, and we have no doubts that we will get there.

Got it. So I've got an annoying question for you, which is sort of the glass is half empty type question. And that is, you have deployed your Bloom service at 25 of the top -- of the Fortune 100 companies. What about the other 75? I mean, the point of that question is if this is such great technology, why is demand not bursting out with every vertical at the moment.

No. So that's a great question. No, I don't take that as an annoying question. I would love to have all of them as my customers. Let's advertise out here that we are open for business and please sign on. How -- to answer your question. Look, not all electricity demand is the same, right? And when I look back right now, how we emerge out of post-COVID. I'm actually glad that we are in this sector at this point in time. And I'll explain to you why. None of our customers are the 8 to 5 office buildings. Because we constantly produce baseload power. Those buildings don't consume that large amount of power during the evenings. So if you had turned the question around and asked the half full question of, will any of those customers go away because we're all going to work from home, post-COVID like some people are saying, our answer would be no because we don't power any of those buildings, okay? We power data centers, we power hospitals, we power foodservice people, we power warehouses. These are all always on, 24/7. And about 50% of the entire electricity used in the world is those kind of applications. That's a few trillion dollars, I would be happy with that half full few billion dollars worth of marketplace to go after.

All right. Got it. One other question, sort of similar vein is that you don't have the ability to use distributors. You do everything yourself. You've got your own supply chain, you had to invent a supply chain in the states. And you also have to go to market and do EPC stuff, and there's no reason -- I mean, in an ideal world, you would not be involved in that. But you have no margin to give to a distribution channel. So if you were a part of a larger company, you'd be able to maybe use -- imagine you were a part of Siemens, for instance, you'd have their go-to-market channel available to you. How do you get from here to there? It feels like you're constrained.

Excellent question. So the obvious answer is we have to become that big company very soon, right? So look, if you take Korea, that's a fabulous example of what you're asking that we're already doing, right. SK is our EPC partner. SK is our sales and marketing partner, and they finance those systems once we ship those systems to them. We recognize the revenue. That is the perfect model for us, right? So we are exploring other opportunities, similar opportunities here in the U.S. also. So we did not be -- end all and be all in everything because we wanted to. Because we had no choice. Nobody else would do it, given the immaturity of the technology and the novelty and the newness of the technology when we got started. Today, we are in a different place. So I would say that we are exploring options of partnerships. And here is where I would change what you just said slightly in terms of margins. If we had a partner, who was a financing partner and a construction partner, there would be enough margin for them between everything put together and us still being able to sell, and we have demonstrated that model in Korea. So we should be able to replicate that model out here. And we are beginning to have those conversations. I can't tell you when -- when and how it may happen. But when we see the right opportunity, we will jump on that opportunity.

Well, I'm going to leave it on that high note. We've only got a minute or so left. And rather than kind of patch it up, I just -- I'd like to thank you K.R. for spending some time with us today. I really appreciate it. And the story sounds great. Thank you, sir.

Thank you, Paul. Thanks for your support, and stay safe.

All right, you too.

Bye-bye.

Bye-bye.