Fluence Energy, Inc. (FLNC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Fluence Energy Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Fluence Energy's Second Quarter 2023 Earnings Conference Call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; and Rebecca Boll, our Chief Products Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available on our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. [Operator Instructions] Thank you very much. I'll now turn the call over to Julian.

Thank you, Lex. I would like to extend a warm welcome to our investors, analysts and employees who are participating in today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the second quarter as well as our outlook for the rest of the fiscal year. Starting on Slide 4 with the key highlights. I'm pleased to report that in the quarter, we recognized a record $698 million of revenue and $32 million of adjusted gross profit. Our demand was strong across all 3 of our business lines. And new orders were approximately $847 million, highlighted by our services business contracting 1 gigawatt (sic) [ 2.8 gigawatt ], and our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog as of March 31, was $2.8 billion, a quarter-over-quarter increase of approximately $100 million, even after recognizing almost $700 million of revenue during the quarter. I will also note that approximately 81% of our backlog is with nonrelated parties. Lastly, our recurring revenue businesses, which consist of services and digital, experienced a strong growth during the quarter. Our service attachment rate was 263% for the second quarter, driven by the signing of the service agreement with Orsted. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains above 90%. Looking specifically at our digital business. We had a very strong quarter as we were able to contract 2.7 gigawatts, which is a 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our digital business, but we are very encouraged by the results so far. Turning to Slide 5, I'd like to discuss the 5 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 '23 guidance for both revenue and adjusted gross profit. As Manu will discuss in more detail, we are able to raise our guidance due to better execution, causing some of our projects being ahead of our expected schedule. Additionally, I'm pleased to report that we're pulling forward our profitability time line. As you may recall, we previously expected to be adjusted EBITDA-positive in fiscal year '24. We do not provide quarterly guidance. However, we are expecting to be close to adjusted EBITDA breakeven in the fourth quarter of fiscal year '23. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we received a 200-megawatt binding award for our Orsted [indiscernible], making this our third award of energy storage-as-a-transmission. As I've noted on our previous calls, we are very bullish on the transmission segment and expect this area to grow as transmission congestion becomes a critical issue around the world. Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem as we're one of the -- we're one of only a handful of companies in the world that possess the technology, experience and performance requirements necessary to use [ energy ] storage-as-a-transmission asset. Third, we will convert our supply chain into a competitive advantage. I'm pleased to say that we have signed a master supply agreement with AESC, under which we will procure battery cells. This partnership adds another high-quality battery supplier to Fluence portfolio, enhancing our ability to meet the growing demand for any storage solutions. This agreement supports our domestic module manufacturing efforts and strengthens our position as a leader in the energy storage industry. Fourth, we will use Fluence digital as a competitive differentiator and a margin driver. Looking now at our Nispera product. Starting this month, we will begin including Nispera in our standard hardware solutions offerings. This is an important step as it will provide us with a path to increase in our IRR as we bundle our offerings and execute on our one sales channel approach we discussed last December. And finally, our fifth objective is to work better. I'm proud to state that Fluence has published its Inaugural Sustainability Report on our website. In this report, we outlined our commitment to a circular economy that includes sustainable end-of-life management for our products as well as our firm stance against forced labor. To publish a sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we power our work for a more sustainable future and demonstrate our leadership within the sector. Turning to Slide 6. Demand for energy storage continues to accelerate. In fact, our pipeline now sits at $11.2 billion, which is up from $10.3 billion last quarter. We expect we will start to see some project awards in the second half of this calendar year that are directly attributable to the Inflation Reduction Act. We reaffirm consolidated revenue growth of 35% to 40% year-over-year for fiscal year '24, irrespective of the issuance of the final IRA guidance. Our '23 guidance increase and the incrementally higher '24 outlook represents an expected benefit to revenues of nearly $500 million over this 2-year period, relative to our expectations on our Q1 earnings call conference 3 months ago. It is worth noting that we're seeing and having success, regardless of the IRA. A few examples of recent successes include: the binding award in the transmission segment that I previously mentioned. Two, we were recently awarded a 400-megawatt hour contract in Australia for Shell's Energy Rangebank project. And as you may recall, we signed a 1,200 megawatt hour contract with Orsted in December. And during Q2, we signed a service agreement for this product. All of these were achieved without consideration of the inflation Reduction Act. Turning to Slide 7. We are pleased to see that some of the initial IRA regulation has been released by the U.S. Treasury. However, we are still waiting on the domestic content regulations, but we believe the actions we are taking will enable us to meet the domestic content requirement sought by our customers. In regards to our U.S. module manufacturing, we are on schedule and expect production to start in our Utah facility in the summer of '24. As it relates to Section 45X of the IRA or the production tax credit, we are targeting to be able to record the $10 per kilowatt hour incentive associated with manufacturing U.S. battery modules. Right now, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. We do believe it will be a volume driver for us as many of our U.S. customers have expressed the need for a U.S.-made product. Thus, we expect the $10 incentive will go towards offsetting the cost of reaching economies of scale. From an accounting standpoint, our current expectation is that we will account for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and services. However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the first 5 years of the credit. The exact timing of the cash payment is unclear at this time as we are still waiting for the clarification from the U.S. Treasury. Currently, we're eagerly waiting for the publication of the IRA guideline for any storage and domestic content, as several of our customers want the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, our '24 growth expectations remain unchanged, irrespective of the final regulations being published. Turning to Slide 8. As I briefly mentioned, we recently published our Inaugural Sustainability Report, which highlights our vision to implement digital solutions to further optimize the energy storage supply chain and life cycle. I'm pleased to state that we are committed to promoting social sustainability by fostering diversity and inclusion within the organization. We believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year '23, which includes that approximately 1/3 of our employees hire have identified themselves as females. In the report, you will also see that end-of-life management is very important to us, and we have committed to developing a circular economy framework for our products. Additionally, we highlighted in the report that we have established a robust supplier code of conduct that is aligned with the international deal of human rights at work. That ensures that our suppliers are here to [indiscernible] ethical and sustainable business practices. We summarized our policy on conflict minerals unethical sourcing, in which we commit to working towards avoiding the use of minerals within our supply chains from conflict-affected areas. Furthermore, in the report, it's a signed commitment letter taking a zero tolerance stance regarding forced labor. This is an area that is critical to our values. We also included a roadmap and time line so our stakeholders can monitor our ESG journey. In the spirit of accountability to transparency, we will provide an update on our sustainability program annually, so our stakeholders can track our year-over-year progress. Overall, Fluence energy and sustainability report demonstrates the company's commitment to sustainable practices and its efforts to drive positive environmental and social impact. Through its various initiatives and targets, Fluence Energy is working towards a more sustainable future forward. In conclusion, I'm very pleased with the achievements of the second quarter. Although we're mindful there's still a lot of work to be done, we will look to continue this momentum as we progress through the end, the remainder of the year. I will now turn the call over to Manu.

Thank you, Julian. I will begin by reviewing our financial performance for the second quarter and then discuss our guidance for fiscal year 2023. Please turn to Slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue or roughly $600 million came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second quarter operating expense, excluding stock compensation, were $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. Turning to our cash balance. We ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call. Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300 million in the second quarter '23 from the first quarter '23 level. Our decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment and as communicated in our last earnings call, we should expect improvement in the inventory turns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to Slide 11. As Julian indicated, we have increased our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit and narrowed the ranges. We now expect our total revenue to be between $1.85 billion and $2 billion, which is up from our previous revenue guidance of $1.6 billion to $1.8 billion. This is an increase of $225 million based on the guidance midpoint, driven by our overall project time line acceleration. While we expect that most of our projects will be executed within the 15- to 18-month time frame that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024. This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects. We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog. Turning to our 2024 revenue outlook. We continue to expect 35% to 40% growth in revenue from 2023 to 2024, notwithstanding the higher revenue base we now see for 2023. This implies an incremental $300 million of revenue for 2024 relative to our previous outlook. Thus, for the 2-year period 2023 and 2024, we now see revenues of more than $500 million, higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110 million and $135 million, which is up from our previous guidance of $85 million to $115 million. It is important to note that this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint. Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter. With that, I will turn the call back over to Julian.

Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter's results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluence history. Second, we continue to make significant progress on our risk management, most notably in reducing our supply chain risk as reflected in diversifying our battery sales suppliers. Third, we continue to expand our offerings, concentrate our efforts in developing new products and solutions that create value for our customers, as shown in our [ third transmission ] segment award. Fourth, we have positioned Fluence for increased IRR by including Nispera in our standard offer starting this month. And fifth, the financial results and accomplished covering today's call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year '23 and to pull forward our time line to profitability. This concludes my prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of James West with Evercore.

Julian, quick question for me about your customer base and kind of how they're thinking about their storage needs right now. I know as we think about last year, it was kind of a mad-dash scramble for assets and for getting equipment and batteries in place. We've obviously had the IRA, and there's been some time line lag on total understanding of what the IRA means in the U.S. But are the customers -- are they coming to you now still with, "Okay, what's it going to cost me?" Or is it more of a question of, "When can you get to me? What's the time line?" Because we know you're not just focused on land and expand, but you are focused on profitability, too, which is -- obviously it's clear this quarter, and so congratulations again on this quarter.

Thanks, James. I mean, we do a lot of -- our ability to expand our margins comes -- the main driver has been a real detailed segmentation of the customers we work with. So it might be a long way to answer your question, but so what do we do? We look for customers that value what we offer, that value, clearly, products that are -- that we -- that they are sure that they were going to be delivered, that they're going to perform as we tell them that they're going to perform, that will provide services that will keep this solutions up to date, and that will have them running for them when they need it, that they can ensure it very well and that they can finance it. So the customers who care about that are the customers we work with. For some of them, price is very more important than others. For some of them is ensuring the performance. For some of them means, "Hey, especially where the regulatory systems are going to change, I need somebody who will know will help me adopt my systems to it." What do we see this quarter, which I guess is a little -- what do we see in the very front end? Clearly, the reduction in lithium prices and the more liquid market for batteries opens up more optionality. I think that the RMI that we offer our customers, which when prices were going up was something that makes them a little merely uncomfortable. Now it makes them feel better on signing a contract because they know at the end of the day, they will get something that's in line with what the market expected or close to what the market expected, so that's theway. So that's globally, you see that and that -- on the other side, you have in the U.S., the Inflation Reduction Act that relayed. Some of our customers are talking to their offtakers and asking their offtakers, "Do you need the products by certain date? Or do you want to wait until we know what the -- we're going to get this 10% upside that will convert into better prices for your offtake, for whatever services you are selling?" Yes. the answers are different. I think that some customers will need to have the projects online by certain dates or the off-takers will need. So those will move forward, we think. Some of them are, "No, this can wait." And that's kind of where this will land. So I don't know if that's -- that's kind of the landscape of where we are today. So we -- today, and the reason why we were able to affirm our growth for next year, irrespective of the IRA, which was because we have seen very, very strong demand outside of the U.S. And that give -- you looked at our backlog, where we have signed already, what we are seeing outside of the U.S., and we believe that we can meet the 35% to 40% growth irrespective of where the IRA regulations come up.

Okay. Okay. That's very helpful. And then maybe a quick follow-up for me on margins and maybe for Manu, but getting to EBITDA breakeven by the end of this fiscal year, obviously, a good target and making good progress there. But how should we think about EBITDA margins as we go through fiscal '24 and getting to a level of profitability and sustainable profitability on EBITDA?

Yes. So what -- consistent with what we have said in our last call, we expect to be EBITDA-positive in the fiscal year 2024. I think you'll see the margins progressively improve as we go through the quarters in the fiscal year '24 as well. And that's because if you look at our trajectory and look at it from a trailing 12-month kind of revenue average, we continue to grow our revenue. And as we've said, we'll grow our operating expense at less than half the revenue growth rate. And if you couple that -- those 2 comments with the fact that we are signing new contracts in the 10% to 15% margin rate, you can see the profiling of the EBITDA progressively going through the quarters.

Our next question comes from the line of Brian Lee with Goldman Sachs.

This is Miguel on for Brian. Maybe just the first question here on the $500 million incremental for fiscal '23 and '24. You're talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples? Is it just a function of getting more visibility on batteries? Is it being able to pull in projects faster than expected? Just hoping to get a bit more color there on the execution front.

Yes. Brian, the way I will -- first, clearly is the fact that our machine is working better. We had the right [indiscernible] manufacturing, did a great job this quarter, and we have been able to derisk our deliveries in our contract with our customers. So I think the effort of -- a lot of work from everybody for our supply chain, from our sales team, from our manufacturing team, but also at the end that we have been able to derisk our deliveries in a way that allows us to recognize revenue, even if some of our customers are not fully ready to install the equipment. That's the way to think about it. And the combination of the 3. I cannot tell you now is that, one -- each one is very essential for this. If the supply chain had not worked, we won't to be here. If the manufacturers have not been able to pick up products, then it wouldn't be here. If we have not derisked on our implementation, people have not done the work they're doing, we wouldn't to be here. So it's the machine working better. And we have identified the projects that we -- where we believe we can do this, and those are the basis for our $500 million better revenue over the next -- between this year and next year.

Got it. I appreciate that. And then the follow-up question here is -- kudos on the update to the guidance, obviously. But outside of that, just we're hearing about module constraints in the U.S. in general still hampering a bit the solar projects. Could you maybe give an update on what you've seen specifically for projects in your backlog for solar plus storage projects? And maybe to what degree you've seen those kinds of projects push out because of these module constraints?

Yes. I mean, our understanding -- we haven't heard anything specific from our customers. As you know, we sell to customers who are probably on the bigger side and have the capability to manage that better. But I will tell you, that's clearly one of the reason we took into consideration when we looked at our enterprise risk management. And one of the things we changed in our contracts was that if our solutions are ready for delivery, we -- the customer needs to take them irrespective of where they are in their solar projects, if they disconnected to the solar project or irrespective of where they are with some other elements. So that's what I will tell you. But we -- our customers today haven't heard anybody coming up to us and telling us, hey, I'm not going to be -- more of the questions on being a little bit cautious are connected to the IRA than whether they can get modules or not in the U.S., clearly.

Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Sorry, just hopping between calls here, so I might have missed this. The $500 million over the 2-year period, is that higher revenues versus the prior run rate? Or is that just looking at FY '24 versus FY '22?

Yes. Maheep, so the way to think about the $0.5 billion is as follows: we've increased the guidance for 2023. And at the midpoint, it's $225 million. And then we've kept the same run rate. So you have a higher '24 implied outlook or outlook based on a higher 2023. So if you take that math to 2024, that's incremental $300 million for 2024. So you add the $225 million with the $300 million, you get to over $0.5 billion of revenue. And that's on the backs of great project execution, and that's in the second quarter, and that has a read-through for remaining '23 and '24 as well. And I would be remiss if I don't reiterate the fact that we have very strong demand signals with over a $1 billion increase in our pipeline.

Got it. I appreciate that clarification. And then could you kind of talk about which regions are driving that? And is this customers accelerating the projects? Or more benefits from manufacturing or procurement on your end?

Yes. So what I would say, in terms of the demand signals and if you look at our order book for the second quarter, and as Julian mentioned, we are winning globally. And we are winning both in solutions and in services. So that's kind of color and context for your question on the top line or the demand signals. Obviously, the Americas is 2/3 of our overall business, and that's going to be the larger dollar driver of it, but we are winning globally. In terms of what's driving the revenue upside in the second quarter is we typically will see -- execute our projects between the 15 to 18 months. But because of better execution, as well as how we are writing our contracts now, we have the ability to pull forward some select contracts in the lower end of the 15- to 18-month range. And that carries through in the back half of this year and next year as well.

Our next question comes from Tom Curran with Seaport Research Partners.