Bloom Energy Corporation (BE) Earnings Call Transcript & Summary

Hey, everybody. This is Mike Weinstein from Crédit Suisse. I'm the alternative energy and utilities analyst for the bank. We also have with us today, Greg Cameron, the Executive Vice President and CFO of Bloom Energy. I also have Maheep Mandloi and Andres Sheppard from my team onboard as well.

Greg, I thought maybe we could start. Why don't we start off with you -- you can make some introductory remarks and then we can begin. I'll just give you the heads up. My first question would just be, why don't we talk about 2020 results again, just looking at -- going into the future, the -- what you're doing with sales, sales growth, increasing the number of states that you're looking at now? What's changing in that sales landscape that you're seeing right now?

Yes. So great, Michael. Thank you. Thanks for the opportunity and thanks for all the meetings today. I thought they were extraordinary in the depth and the questions. As I've been here at Bloom just shy of a year, so I joined officially April 1, but started with the team kind of unofficially in mid-March so we're just a few weeks away from a year. For those of you who I've met, my background is GE, GE Capital, mostly on the business segment side. So it's been an interesting year for me transitioning to Bloom, transitioning to the new role as a public company CFO and just learning really a new industry from the financial services space that I came from. Listen, I think these are really exciting days at Bloom, I really do. I think the company is at an inflection point. I think whether it was the work we did last year on the balance sheet and ensuring the position of the company, the ability to invest to go forward. I think on -- where we are on our next generation of technologies, whether it's the next gen of the technology or the technology road map is there. And then lastly, as we look at our financial results, I have a ton of confidence in transparency into where I see for the financials in 2021 and as well a lot of confidence in the business going forward and its ability to grow. So if I start with where your question is, Mike, it's really around the financial performance in the year. I will tell you what, in a COVID-challenged year, the fact that this company was able to hold its revenue nearly flat to where it was a year prior, and if you remember, for those of you who haven't been around the story that long, we had a large repowering that would have been difficult for $225 million of revenue in 2019. In any year, it would have been difficult to be off of that, and the fact that we were able to offset that with core -- with the core business while we were managing our way through installations and new projects was amazing. The fourth quarter, I think for me, was some really positive proof point, right? Close to $250 million of revenue. And we've projected, for 2021, $950 million to $1 billion. So I think from a run rate basis, we're right there. On the gross margins for 2021, we said we'd be at 25% on our non-GAAP gross margins. We were north of that in the fourth quarter. When I look at our operating income, it was a big deal for us to get positive on operating income in the third quarter. We were even stronger than we thought at the end of the year. And we tightened our range and our expectation around -- from cash flow from being positive from operations. So I think the fourth quarter was an incredibly strong proof point. I think the financial algorithm of the business is strong. When I look at the things to get done this year on operationalizing Bloom 7.5, we'll create that manufacturing capacity. We have -- we know where we're going to do it. We'll double our revenue stack capacity this year. The technology road map, we can come back and talk about, but I think there are 6 things in there that are differentiating. And then on the growth of the company, transitioning and converting our $1 billion of backlog into revenue this year, and then as importantly, adding to that backlog with new deals this year and how we're expanding. It was -- as we prepared for the Analyst Day in December, and we did a lot of math around where we should be competing on the cost of electricity for our customers when we fully load our machines and what they can operate them on. And I think with -- it was a bit of surprise, maybe to some that have been around the company for a while, that all the progress we've made on taking cost out and where we saw that cost road map going, getting the $0.09, being able to sell a resilient product at $0.09 is a big deal. And I think that expands the map in the U.S. And we're hiring and we're expanding around our brand management, product management to go do that. And then with Azeez Mohammed coming on, former GE colleague of mine, also expanding internationally and finding other partnerships like we have in Korea with SK, in other countries, whether they're in Europe, the Middle East or other parts of Asia. So a long-winded answer to your question but it was a big question for us.

Where do you think the $0.09 goes into next year as Gen 7.5 comes online and becomes part of more of the manufacturing stack?

Yes. So our internal goal is to take $0.01 out a year. And there's 4 cost levers in there. So there is the total product cost, which has traditionally been our focus, right? When we IPO'd the company or the company IPO'd, we were about $6,000 a kilowatt on product costs. We're now south of $2,300. We're in the $2,200 range and I see us with a plan to get south to $2,000 this year. So that remains a very strong lever for us on our cost of ownership for our customers. I don't think that we get into an entitlement discussion around here until we break $1,000. So when we push and think about planning and doing different things, it's not going to be a step function with 7.5, but it's going to be a continuation of that cost curve down 10% or 15% a year. And until we go through the next couple of years and get it and challenge ourselves to get down towards $1,000, I'm not even entertaining the entitlement discussion, which says that so far that curve should flatten a bit. It's definitely flattening with Bloom 5.0. That technology's been an amazing workhorse for this company and we're able to take out 17% last year. Think about that at the end of the technology through improvements in our manufacturing capacity. We took 17% of the cost out. So we clearly need to -- it's time to transition, given where the team is, to the next generation, and we will do that this year as we operationalize it. We also think that we've got tremendous opportunity in our installed cost. We think about it on a relative basis, if we're selling the product for -- in the $3,000 to $4,000 range, depending upon its configuration. Install cost, in some cases, is becoming as much as the cost of the product on some of our more sophisticated. All that cost, whether I spend $1 on install or $1 on the product, it's all cost to our customers. They try to do things. That's why you've seen us talk about the skid and other things where we're trying to simplify the way we install. In our traditional model, it's been, hey, we put the machine together, for the most part on a flatbed in Delaware, ship it to the customer site and use local labor in order to assemble the product. We think that by -- especially on the things less than 1 megawatt, putting it all together on 1 appliance, shipping it to the site, knowing we have gas, water and electric connection ready to go, and we can put that even in their parking lot, which is what we're doing at our own headquarters in San Jose. Very quick install, control the cost, control the speed as well, accelerate. Service we talked about last week. We are continuing to take cost out of that not only from the product side but how we manage the portfolio and when and how you put different power modules in to make sure you're maintaining your output. And then lastly, I think there's tremendous opportunity, given my background anyways, around what our cost of capital is for our customers. We've been very successful over time with these PPA structures and who we partnered with. I look at it slightly differently with my background and say, the more specific I can get to a customer type, a technology type and application type and find the investor that is looking for that scenario, we should be able to continue to put pressures down on those IRRs, which reduces the cost of ownership to our customers. So while TPC has predominantly been and traditionally been our easiest way or our most tried way of getting cost out, I think all 4 levers were there. I think clearly, when KR and I talk at night, he's been around this company for 20 years, it's his brainchild at the end of the day, he thinks, and I agree with him, we're moving from just the most cost-effective distributed generation clean power to one of the most cost-effective ways to generate electricity. That's where our goal is and we can...

Just period...

Period. No clean-ish -- just period and it works.

What dollar per kilowatt product cost you need to get down to -- assuming you do get a 20% gross margin level at -- on service?

Yes. So our product margins are 40%. They were north of 40% in the fourth quarter. So I'm pretty happy with that, and I think our goal is to maintain those. We're going to get more sophisticated around how we price. Traditionally, we've had a targeted selling price. And if you went below that targeted selling price, you ran into the entire organization questioning why you couldn't get back above that price. And I look at it and say, there's different parts of the country in the world, there's different customer types that pay different. We should be able to differentiate our product offering, all coming back to the average of 40%. If you say you want your average to be 40% but it's also your floor, you end up like we were in the fourth quarter north of 40%. So I think our cost per kilowatt, if we're at -- I think the last public number we gave was in the $2,300 range in the fourth quarter, that's what I'm talking about, that dollars cost per kilowatt, over what period of time we need -- you need to figure, that's -- until that breaks $1,000, I don't think we're close to entitled. So I really think we can push on that to go down. If you build up the build of materials backwards and say not what I can buy it at today, not what I can make it at today, all things are perfect. There's a DOE study out there that I continue to point out that says, it's kind of in that $800 range. So that's where I get through the cheapest cost of electricity, period.

Period, $800. Is that possible? I mean, I know that DOE says it's possible. And do you guys think it's possible to get down there at some point?

I could invite you to my operating meeting with my manufacturing team on Friday when it makes [indiscernible] -- getting to $2,000 is going to be hard. And I need some of my [indiscernible]. It really is. Nothing brings on more challenge than success. So listen, we're clearly getting towards the end of 5.0. It's going to remain a workout force. We're going to continue to have it. We'll continue to find ways to take cost out. When I got here, the question you might have asked me the first time was, where are you on Bloom 7.5? And I think at the IPO time, we sold it as, hey, we can take 30% of the cost out of when we change to the next generation. But we took 30% of the cost out with our own leverage.

But those power density savings are still coming, right? I mean that's like...

They are, they are. So we're going to operationalize 7.5 in our new space, state-of-the-art factory. It's going to look like -- you've been to Sunnyville, I'm sure, right? You come in the -- you go down the -- it's an old office build, right? And so imagine us having clean lines and clean manufacturing and having it look more like Delaware and California. I think it's going to be a great way for us to leverage it. So we're ordering the tools, we're getting the space. They're going to operationalize it this year. And by the end of the year, my expectation is at 7.5, even though it's not mature manufacturing that can get cheaper on a cost per kilowatt basis than 5.0. And when they achieve that, I'll give them the green light to go build as much as we can. We don't need the capacity, need-need capacity this year, we'll need it next year. So they got a year to figure out how to make sure that, that -- with any technology, right? If you don't do it right, you can actually drive your cost up, not down.

Yes. So what about new customers coming in the door now? I mean, we -- I think I've always viewed it as it's obviously coming. Eventually, as you get cheaper, you're going to be going beyond the big-box retail, the hospitals and the data center, which is mostly a reliability type customer, a resiliency customer. You're going to go beyond that, too, "Hey, we just want cheaper power and we get resiliency, right?"

Yes. No. Listen, I think traditionally, I mean, even when we're pre-microgrid, and we were grid parallel, the sale was cheaper power, right? And in some cases, some of our old applications, to the extent the power grid goes down, so do our machines because we don't have the ability to stop exporting power. So with the introduction with the microgrid, and we've had microgrids before, but never as a standard offer. So that's our standard offer now. So as we talked to our sales team 2 weeks ago with their sales kickoff, my instruction to them was sell resiliency because it's a value for our customer and we'll see value in it. Sell larger than smaller. We are not a small deal shop at the end of the day and training ourselves to more of a larger installation makes sense. I think the big hurdle for the company was when you drop from $0.16 to $0.14 and $0.14 to $0.12 a kilowatt-hour, you don't increase your TAM all that much, right? If you think about the power as a bell curve, you go from $0.14 to $0.12, you're not opening up a lot of space underneath that curve. But as you move from $0.10, from $0.11 to $0.09, you bring in half the states in the U.S. and then you can go sell. And then you can start differentiating your cost, right? If I'm trying to average to $0.09, there's places where we can sell a little bit more aggressively than that. So we're training our sales force. We're adding to our sales force. We haven't had a large sales force. We've been 4.5 states in 1 other country. So when you start talking about being in the upper Midwest, if you start talking about in the Southeast, if you talk about being in other places in the Northeast, you need to add not only direct sales force, but you need to add channel partners as well. And I think for us, as we look at it, I want to grow larger in the deal size that we have and go after maybe some places we traditionally haven't been able to play, given our cost. And then on the smaller side, I'd like to find partners that could sell a microgrid solution, where I'm just a part of that, right, and they could pull that through. I think all of those ways in the U.S. are ways that we expand the map and expand our customer base. Clearly, when we go into new states, we're going to look for our traditional customers and say, "I can now be cost-effective on more of your stores. But at the same time, I want to attract new industrial players, maybe some new utility players at scale and do more of a long range, single site installation but with a lot more power than that." I think that's going to differentiate. If I look at the power towers that we do in Korea, those are excellent applications for our technology, especially if we're able to drive the cost down.

Are you guys involved in Texas at all? Or have you seen -- do you have any success stories out of the -- from Storm Yuri that came out of this? I mean, we heard about a lot of gas constraints here that were part of the problems for some of the big generators. And I don't know if that leads to any additional business for you guys but...

It definitely leads to a conversation, and for me, it's another proof point, right? It's whether it's the wildfires in the West Coast, the storms in the Northeast, the storms in the Southeast and now the storm in Texas and the impacts that it had there. It's just another proof point to me that weather events are getting more severe and they're having larger impacts for a greater significant period of time. And when you look at Texas, in particular, I would tell you, they're moving through the stages, right? Early on, when it was first happening on, the discussions we were having on the ground with people we know there, it was really around first responders, getting people shelter, getting people fed, et cetera, not the right time to have a discussion around the go forward. I think we've moved out of that stage and we're now in the stage of, okay, let's restock the grocery shelves. Let's start assessing the damage, let's think about it. I think we're just beginning to turn the page in the discussions which are, okay, so what do we want to do about it? And traditionally, we haven't played in Texas, right? The cost of electricity there is somewhere between $0.04 and $0.06. And if you're selling at $0.12, you're not getting a lot of callbacks. But what we're finding when we talk to the folks on the ground in Texas, one is we're actually open to a conversation, given where we are in cost. Two is, we're having both conversations with the private and the public sector. In the public sector, it's a lot around the resiliency of things like the water, right? Losing waste treatment centers because we lost the electric grid and not being able to process sewage nor get people safe drinking water, I think it's a great application for us to go talk to folks about our biogas applications, right? And that is a virtuous cycle that we've got the fuel right there from the wastewater treatment. And you could effectively make that a very resilient play where if they lost electricity, even if they lost the gas grid, they'd still have the gas that they needed in order to create that water resiliency. And I think there's a lot of use cases like that. Clearly, what we saw in Texas, right, was whether it was the electrical grid, the water or the gas, there was some cross-alignment there, some cross -- they weren't mutually exclusive. So when we lost the electric grid, we lost other parts in different grids, which is different in other parts of the space. So we'll have to think about that as we think about resiliency. And if that's going to continue and you think about on-site storage or other things to provide that level of resiliency. The other part of it is around the public -- is around the private sector. And I would say, given that it's Texas and given the large industrial nature there, a lot of interesting discussions. I think, clearly, we have felt for a long time that resiliency in power security, having the ability to ensure you've got power, is going to be as important of a conversation in the boardroom as say, Internet -- network security was 15 years ago, right? And how do you think about protecting your business, especially not only to continue manufacturing, but to the extent you are a company that needs cold storage and you lose that and you lose your product or a company that is dealing with hazardous waste and you lose power, what do you do with it? Given the extended period in which we're seeing these outages, for us anyways and for a lot of our customers or potential customers, it questions whether diesel backup gen sets, which has always been the go-to, are going to be able to meet that. So we think it's a great opportunity. We want to be there to help. But again, I think it's just yet another proof point that the world is moving towards resilience.

Where -- I think you just recently shipped the first prototype electrolyzer out to Korea.

No, it's actually a hydrogen fuel cell. We've not shipped the electrolyzer.

Hydrogen fuel cell. Not the electrolyzer. Okay. When is that supposed to go out?

So we think we could be ready by year-end and put a demo unit of the electrolyzer. So we got -- yes?

Right. And what's the time frame you're thinking in your head about when sales will actually start to materialize? And is it all going to be in Korea first or...

No, no. I think, listen, the SK relationship is great. It continues to be very strong. The fuel cell that we shipped to them in December and they're installing now. It was one of my first meetings with SK last year was they were very focused on getting that hydrogen fuel cell. And we were very, very happy to provide it with them as a way -- as a demonstration. But I think clearly, you should see -- on the electrolyzer, I don't think you're going to get really big orders until we can demonstrate that we have a product that works. You and I have had this conversation before. I always question the large press release that go out for a potential product that's yet to be -- that's yet to come, yet to be defined financing, with yet to be determined offtake agreement. I don't know what that means from a purchase order standpoint. I know that makes a really interesting press release. So for us, we want to make sure we focus on having a product in the field that people can come look at, we've got proof on, and we think that's what drives real orders.

Where do you envision solid oxide electrolyzers fitting in? Like what -- who is the typical -- who's going to be the typical customer for this later on?

You look at the different markets, right? You've clearly got transportation as a use case for hydrogen. You've got storage as a use case for hydrogen. And then you've got merchant applications, right, industrial, commercial applications in hydrogen, especially around green hydrogen. I think that is probably likely to be the first uses of hydrogen. Now whether that's sold through a traditional distributor or some place else, yet to be determined. But I think that's going to be the most immediate because you're going to have the -- you've got less degrees of difficulty implementing that. And your consumers are going to demand a bit sooner than maybe building out all that we're going to need for transportation and/or storage. So I think that's going to be the first place that we play. And I think the solid oxide in particular, listen, it works well in kind of the core places that we see that, whether that is using excess available power from wind and solar, whether or not that works for excess power out of nuclear or whether or not with carbon capture technology, we can scrape the hydrogen that's naturally created today. So our fuel cells create hydrogen as part of the reform process. Today, we cycle that back through. We could clearly see a situation in which we capture that hydrogen and take that away from the unit and sell that separately, especially as you add carbon capture to it and get to a blue hydrogen. So I think there's a lot of different use cases there. We've clearly taken a lot of time and thought and energy and thinking about kind of the intermittency of PV and wind and making sure that given that solid oxide operates at very high temperatures, that we can still maintain our efficiencies. And even with maintaining the thermo at standby, we still think we can get -- achieve our 13% to 30% improvement versus other technologies, higher efficiencies, which will create a lower cost of hydrogen. So we're standing by what we laid out in the fall. We've done a lot more work on it. The team owes me a white paper to get it out. But unfortunately, they had a couple of real -- now fortunately, they've got a couple of real deals take precedent of over doing a white. So I'm like get the real deals, I'll approve the real deal. We can always issue the white paper later.

Got you. And solid oxide should provide the lowest cost of hydrogen, be the most efficient process of creating hydrogen, right, electrically efficient?

Agree, agree. The only question, and it was a good question is I learned that -- remember, I'm a Liberal Art Econ major. So this -- the financial service person. So if people ask me questions, well, if you're only going to run the machine 10%, 25%, 30%, 50%, you pick the amount of time these different technologies are going to be up creating hydrogen. And you're operating at a high -- yes, clearly, if you were running at 24/7, solid oxide would be the best. But as you think about putting it in standby mode, it's still the best, I think. And I -- what's great about -- it's not only the most efficient, the barriers of entry are so high for our technology, right? I mean, just -- there's -- I get an e-mail a week about some new solid oxide player. And can I respond to this new person that's going to eat my lunch? And I look at it and it's a $4.5 million DOE grant to 3 people that are going to outsource their production, outsource their distribution, outsource their supply chain, but they've got a great technology. We're $1 billion in it, right? $1 billion of R&D and commercial earnings. We got a $1 billion revenue base this year. I feel very strong that I've got high barriers of entry around my technology and high barriers of entry around scale.

Do you ever wonder if -- I don't know -- do you ever worry about maybe something like Dow Chemical or GE -- or you're GE. I mean, or Siemens or any of the larger, more well-capitalized companies who have a lot of experience in this area and they have an incentive or an interest in competing. Could they catch up relatively quickly?

Yes. So the history here, right, is you had GE tried, Siemens tried, Westinghouse tried. This is 100-year-old technology. It's not like we came up with something new, right? Where I'd say the team was very successful and KR and the team was very successful is they were able to commercialize, operationalize a technology that nobody has been able to do at this scale. So could somebody enter this space? I think the way I think about it is many will try. And yes, some are going to be successful and some are going to be nipping at my heels, our heels. But our goal is by the time they get to where we're standing today, we're 10 years further down the road. We cannot stand still. We are paranoid about that every day. It's about how fast can you move. So our -- this year is really about taking all of the 6 use cases that we've got, getting them out of Venkat's lab and getting in the field getting -- so we can get commercialized and get orders. But as you think about the financial plan I created and that algorithm, there's not a lot of that stuff I need in those financial algorithms for 24, 25, right? Being able to execute the natural gas play that we have today to compete on resiliency in a cost-effective way, that generates a 25% to 30% revenue growth we expect over the next few years. As those other things come on, marine comes on, hydrogen comes on, electrode, hydrogen fuel cells come on, biogas comes on, carbon, all those things, I believe, increase our growth, but they're not in my current growth trajectory. That is just core product continuing to execute, get to $1 billion this year, get to 25% to 30% next year, get the orders booked this year to do that.

I think we're out of time, but 1 more question I just wanted to ask is, what other places in the world are you thinking of expanding besides U.S. and Korea? Move to the next order point, what's the next priority?

Yes. So Azeez Mohammed is here. I got to get him out more. He was a colleague of mine all the way back at GE, and he's very deep in not only the European power markets but the Middle East as well. So I meet with that team quite often. There are a lot of ex-GE people there, so in some ways, it's an easy meeting for me to take. But listen, they are in the countries you would expect them to be in, right? And the sale process is going to be different. In some places, kind of our core technology, whether it be natural gas or green biogas, makes a ton of sense. Other places resiliency, you go to sell it in places like Europe, and they're like, "I don't know what you mean. Like we don't have these issues. We've built a grid that's different." So I think Western Europe is clearly a place we can sell all our products. I think the Middle East is very interesting, and the size of the purchase orders there are really interesting to me. The demos aren't small demos like they are in other parts of the world. It's like we'll demo it, and it's going to be tough to fulfill that order. And then in other parts of Asia, whether we do it with our partner, and there's places that we've clearly identified that we think we can leverage them or other places where they aren't as interested in, and we may be more interested in. So Azeez has built out a team that he's got people on the ground. I think traditionally, why we're not bigger in Europe now, why we're not big in another -- it's hard to call on those places from San Jose. You've got to be in the time zone, you've got to be local, and you've got to have the relationships that you can leverage. And I think those will get there. So Azeez is hard-driven. He's given each one of his country leaders his target for the year and told them all they're responsible to deliver that number. So we'll get 1 or 2 done this year. And I think it took us 3 years to get South Korea up to a point where it was, what, 35% of my revenues in 2020. I think that was -- that's still the gold standard from a running start to a valuable franchise, but I think there's a couple of more places there. So I think between expanding in the U.S. and expanding globally with our core product, and then you add on all these other technology things, listen, on a relative basis, I think we are extremely attractive versus our peers. And I think we've got the ability to grow at scale. And that's what we've set the company up to do.

All right. Well, thank you very much, Greg. These sessions go faster than I expect. Not to really get to every question, but thank you very much for your time today. And keep in touch. We'll be back to you as soon as we can. Hopefully, we'll be able to do more in-person conferences too. I think you've never been to our Vail conference, but...

No, no. You could tell me about it. We've agreed on it before and I'm all in.

It's a lot better than this.

Yes. By calling from my daughter's -- in my daughter's bedroom while she's off for college. I'd rather be in the office.

Especially after 5 p.m, yes.

He's right, he's right. All right. Well, take care and we'll talk to you later. Bye.

Thank you.

Thanks, Greg.