Fluence Energy, Inc. (FLNC) Q1 FY2026 Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Fluence Energy First Quarter 2026 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 first speaker today, Chris Shelton, VP of Investor Relations. Please go ahead.

Good morning, and welcome to Fluence Energy's First Quarter 2026 Earnings Call. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. 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. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters and related to our business, including statements related to our future financial and operational performance, future market growth and related opportunities, anticipated growth and business strategy, liquidity and access to capital, expectations relating to pipeline, order intake and contracted backlog future results of operations, the impact of the One Big Beautiful Bill Act, projected costs, beliefs, assumptions, prospects, plans and objectives of management and the timing of any of the foregoing. Such statements are based upon current expectations and certain assumptions and are, therefore, subject to certain risks, uncertainties and other important factors, which could cause actual results to differ materially. Please refer to our SEC filings for more information regarding these risks, uncertainties and important factors. You are cautioned not to 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, including adjusted EBITDA, adjusted gross profit and adjusted gross profit margin. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. Thank you very much. I'll now turn the call over to Julian.

Thank you, Chris, and welcome to our stakeholders joining our call today. Turning to Slide 4. This morning, I'll highlight first quarter results and the momentum we're seeing in the U.S. order intake as demand for energy storage continues to accelerate. I'll outline the rapid expansion of our pipeline, driven by new customers and emerging use cases and share the tangible impact of our enhanced sales efforts. I will also update you on our domestic content strategy and the meaningful progress we made resolving early production challenges in the U.S. Ahmed will then cover our financial results and '26 outlook in more detail. To summarize our financial performance, First, our backlog has reached a record of $5.5 billion, reflecting a clear step-up in U.S. contracting activity driven by the One Big Beautiful Bill Act and rising demand forecast. The midpoint of our revenue outlook is now fully covered by our backlog. Second, with Q1 now complete, we are reaffirming our fiscal '26 guidance, supported by greater revenue visibility and line of sight on execution, which increased our confidence in delivering this outlook. And third, we ended the quarter with approximately $1.1 billion in total liquidity, which positions us well to support our growth. Please turn to Slide 5 for details on our order intake. During the first quarter, we signed over $750 million of new orders globally. More than $500 million of these orders were in the U.S., which represented strong growth from prior quarters. Activity in the U.S. market has been gaining momentum since the passage of legislation last July. We continue to expect growth in orders across all our core markets for this year with the U.S. representing about half the total, consistent with our pattern from previous years. Please turn to Slide 6 for an update on our pipeline. We are seeing growing demand from developers, IPPs, utilities and rapidly expanding data center opportunities. During the quarter, we also ramped up our sales efforts in all our core markets, including expanding our sales channels and outreach to existing and potential new customers. We are already seeing initial benefits with an approximately $7 billion or 30% increase in our pipeline with a majority of growth coming from the U.S. The task now is to convert our pipeline into signed orders, and this is where we are concentrating our efforts. Please turn to Slide 7 for an update on expanding sources of growth. We are seeing growing interest in our product from new customer segments as well as new use cases. In terms of new customer segments, our biggest opportunities is data centers. We are engaged in discussions covering 36 gigawatt hours of projects, including customers with large portfolios such as hyperscalers. We are working through technical reviews with them and working closely to show how our technology fits their specific needs. I will note that many of the 36 gigawatt hours of data center projects are not yet included in our pipeline, which represents meaningful upside opportunity. Another area of growth is long-duration energy storage, where we are in early discussions with 34 gigawatt hours of projects, largely in Europe and the U.S. Smartstack leading density positions us well to compete for these applications. Long-duration projects, by definition, require more volume and therefore, provide an additional growth opportunity. In addition to new customer segments, we are seeing an evolution in the way our customers use battery storage. Historically, our solutions have been used together with renewable projects to firm up their power generation. Utilities have also used our product to store electricity that can be utilized during peak demand periods, also known as energy shifting or in specific locations to support grid needs. Today, we're seeing new and developing uses for our battery solutions by large energy users such as data centers and C&I facilities. These include: first, speed to power. Storage can speed interconnection to the grid by adapting power demand to the grid capabilities and avoid the delay and expenses of grid upgrades. Second, quality of power. Storage can inject reactive power to resolve voltage disturbances, manage demand, including disconnection from the grid when needed and provide smooth run rate control, among others. We believe that no other technology can offer these 3 capabilities combined at competitive terms. Third, backup power. Energy storage lower cost and longer duration enables replacement of higher cost and carbon-intensive thermal gensets that have traditionally served this need. Fourth, support of on-site generation. For bring your own generation applications, energy storage can match up behind-the-meter power with the customers' energy needs by adding flexibility and efficiency to dispatchable generation or firming up capacity for renewable sources. Please turn to Slide 8 for an update on our domestic supply chain. Let me highlight 3 developments that are strengthening our competitive advantage and keeping us reliably on schedule. First, our domestic content supply chain is now performing at the levels necessary to meet our delivery schedule. Cell and module production continue to run ahead of the plan, and our enclosure manufacturing facility in Arizona is now on track to meet our projected needs. Additionally, we continue to expand and diversify our domestic supplier base to enhance our flexibility and cost competitiveness. Second, on battery cells, we continue to make progress with AESC in resolving the prohibited foreign entity or PFE status of its Tennessee facility. Our overall priority is to secure competitively priced PFE-compliant domestic sales. AESC is looking at various paths to addressing the ownership aspect of PFE compliance. We are confident that the outcome will be consistent with our stated objectives to secure competitively priced PFE compliance battery cells. Third, we are encouraged by the growing momentum of domestic manufacturing of components for BESS. Several facilities are shifting their EV battery lines into BESS production. This will enable valuable diversification to our supplier base. We believe that building multiple domestic cell partnerships will optimize pricing, resiliency and the supply we need to support our growth. Before turning the call to Ahmed to discuss our financial results, I am pleased to update you on the satisfactory resolution of 2 pending legal matters. The first is on Moss Landing, where the matter was settled for an immaterial amount by the company in conjunction with our insurers and subcontractors on confidential terms. The settlement includes a full release of claims with no admission of responsibility or liability for the 2021 overheating incident. The second is on the Diablo Canyon project, where Fluence has obtained a court dismissal of Diablo's $230 million disbursement claim. With that, I will turn the call over to Ahmed.

Thank you, Julian, and good morning, everyone. As Julian mentioned, in the first quarter, we generated strong momentum towards achieving our goals for the year. Across our global portfolio, we executed reliably for customers and capitalized on strong growth trends by increasing our backlog to a record level. We also maintained our strong liquidity position that is integral to our strategy and growth objectives. More specifically, starting with Slide 10, we generated Q1 2026 revenue of $475 million, 14% of our full year guidance and nearly double the 18% of full year 2025 revenue earned during Q1 2025. This performance was in line with our expectations and keeps us on track to meet our full year 2026 revenue guidance. Our adjusted gross profit for the quarter was $27 million, representing an adjusted gross margin of 5.6%, well below our full year expectation of 11% to 13%. The result reflects cost impacts in 2 discrete areas, most of which we expect to recover over the remainder of this fiscal year. The variance reflects 2 specific factors. First, we incurred approximately $20 million of additional costs, a majority of which were associated with 2 specific projects outside the U.S. We expect these costs will be largely recovered over the course of this year, consistent with our experience in resolving similar items in the past. Second, our gross margin reflects our typical first quarter margin dynamics, where revenue is more lightly weighted while fixed overhead costs are spread relatively evenly across the year. Historically, this creates 1 to 2 percentage quarterly margin swing that normalizes over the course of the fiscal year. The lower gross margin also drove adjusted EBITDA to negative $52 million for the quarter. In short, our first quarter gross margin reflects the lower revenue weighting and some discrete project-specific items, not systemic or structural issues. Turning to Slide 11 for a broader perspective on our adjusted gross margin and how disciplined project execution and revenue growth initiatives translate to the bottom line. As you can see, we have been steadily improving our gross margin. Even with the softer result this quarter, our rolling 12-month adjusted gross margin is 12.3%, a solid double-digit result. This resilience reflects our disciplined execution and reinforces our confidence in our ability to deliver on our commitments to our stakeholders. Beyond this year, we expect continued margin improvement, driven by strong execution, supply chain-enabled cost advantages, innovation and scale as energy storage demand continues to grow. Turning to Slide 12 for an update on our liquidity. We ended the quarter with total liquidity of approximately $1.1 billion, reflecting the strength and flexibility of our balance sheet. This includes $477 million in ending cash and an additional $617 million available through our credit facilities. Our liquidity position underscores the discipline with which we are managing the business and provides us with the capacity to continue investing to drive future growth. Turning to Slide 13 for our 2026 guidance. We are reaffirming the ranges we introduced last quarter, reflecting our strong visibility into the year and continued momentum we see across our business. This confidence is grounded in 3 factors: First, the midpoint of our full year 2026 revenue guidance is now fully covered by orders in our backlog. Second, we have ordered all equipment required to meet our commitments, minimizing supply chain and commodity price risks. And third, we have clear visibility into the operating cost structure needed to deliver margins in the 11% to 13% range. On that basis, we are reaffirming our full year outlook. We expect revenue in the range of $3.2 billion to $3.6 billion with a midpoint of $3.4 billion. We expect annual recurring revenue to reach approximately $180 million by the end of fiscal 2026, and we continue to expect adjusted EBITDA in the range of $40 million to $60 million for the full year. In summary, with the right building blocks in place, our focus remains on disciplined execution for our customers and delivering value to our shareholders. With that, I will now turn the call back to Julian for his closing remarks.

Thanks, Ahmed. Let me summarize today's call with a few takeaways. First, strong financial foundation. Our Q1 performance and record $5.5 billion backlog puts us on track to achieve our fiscal year '26 guidance. We ended the quarter with $1.1 billion of liquidity, giving us strong visibility and flexibility to support growth. Second, U.S. momentum is accelerating. This quarter, our order intake exceeded $750 million globally, with over $500 million coming from the U.S., reflecting increasing demand driven by recent legislation and a strengthening of market fundamentals. Third, pipeline and growth opportunities are expanding. Our pipeline grew by approximately $7 billion or 30%, led by U.S. demand with additional upside from data centers and long-duration energy storage projects, not yet fully reflected in the pipeline. Fourth, broader use cases and differentiated technology. We are seeing expanding applications for storage, particularly from data centers and large C&I customers, where our solutions are uniquely positioned to serve emerging customer needs. And fifth, execution and risk reduction. We continue to strengthen our global supply chain by expanding and diversifying our suppliers base. In summary, we see accelerating demand, improving visibility and a strengthening of our execution, which together reinforce our confidence in meeting our commitments to customers and deliver long-term value for shareholders. With that, we will now open the call for questions.

[Operator Instructions] Our first question comes from the line of George Gianarikas of CG.

So maybe just to focus for a second on AESC, and I know you're in the process of resolving the ownership stake. But can you just help guide us as to what resolution will look like? I mean because there are certain -- several potential outcomes to this. So just help us understand how you're framing this for us.

Great. Thanks, George. Our main objective in our relationship with AESC is ensuring that they -- that we have access to PFP-compliant cells at competitive terms. That's our main objective. That's our priority #1. As part of that, we've been working with them on ensuring that they meet all the different conditions of the OBBBA. In terms of ownership, which is your specific question, we made them a proposal. Our understanding today is that they will resolve that problem but in some other form. So we've got assurances from them that they will meet the conditions of the law that they will resolve that problem and they will resolve it without the need for us to get it involved in the ownership structure of that plan. So for us, as you know, we have been working with them for many years. We trust them very much. We think they're going to do. And we're working with them and waiting for them to give us more light today. They have not communicated to all the details how they expect to do it, but we're very confident they will meet the deadlines of the law and the commissions. In terms of the other ones related to material assist and IP and all of that, we -- as part of our process, we have all that information that's ownership where we still need to wait. But I will make the point that I think is very, very important if you [indiscernible] which is a third point here. The market for sales in the U.S. is expanding like crazy. We have all these EV battery lines that are converted into now into BESS. So we are seeing for the first time, plethora of projects or people offering all types of things. So we are -- if you tell me, we will see here in the U.S. something similar what we saw in China 2 years ago or 3 years ago when all these EV lines converted into [indiscernible]. We're very excited about what the prospects for a company with our structure and our strategy will do in the U.S. during the next couple of years. So I think this is a great time. This is a great opportunity. We are very confident on AESC, and we are very, very optimistic about the future for the market for battery storage in the U.S. due to the -- how the market is changing the dynamics. We saw what happened in China the last couple of years with the Chinese -- when the EV demand came down and how that allowed for our markets to grow and brought in more suppliers, better quality, really changed how the BESS market changed. So we're excited about this.

If I may ask a follow-up, a segue into what the competitive environment looks like. And I would imagine some of these data center bake-offs, some of the big hyperscalers don't want to use one of their competitors as a supplier. But are you seeing any increased competition from the likes of Ford, who's doing the exact thing that you mentioned, converting some of their cell supply into energy storage-related cells. So help us understand what the landscape currently looks like, particularly in data center.

I don't think the competitive landscape has changed today. There have been other people -- but I don't think the competitive landscape has changed at all. What we have seen is a significant diversification of battery cell suppliers. It probably will change over time. I don't disagree that it might change because some people might decide to do different things. But what we have today is no real changes in the competitive environment, but a real change in the way the supply for battery cells in the market, especially for the second half of '26. And there will be new entrants. This market is exciting. It is growing great, there will be new entrants in the market. And we compete in the world with the Chinese state with our Chinese competitor with the support of their government. So here competing against some of these players, I don't think it will be more difficult than what we do globally. So we like competition. It's a great driver of our innovation and gives me wake up -- allows me to wake up early put it very well, but wake up early excited about what we're doing, excited about the prospects for the U.S. market. It is going to be the golden years of battery storage are coming.

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

I guess just starting on the data center-related pipeline, the 36 gigawatt hours, it's pretty impressive, grew again quarter-on-quarter. I guess the focus and the execution question now is, first, how much have you actually converted to backlog? And is there any of that in the $750 million of bookings you reported this quarter? And then secondly, just what's -- it's a big number, 36 gigawatt hours. Can you just kind of give us a sense of the outlook in conversion ratio, timing that you're targeting? Maybe when do we really start to see this move into bookings and P&L impact for you?

Right. I mean, there's no -- these are the new type of use cases. We have served data centers with behind -- in front of the meter solutions with the renewable companies, those were not included in this 36 figure. These are behind the center or dedicated lines to data centers. So it's behind the meter or dedicated lines to data center slightly different than we have done globally the first point. So to answer your question completely, we have not converted into backlog any of the new data center. That's today. This is a new market segment for us. These are markets that we have not served directly before September or before a couple of months ago, we were serving this company indirectly. It's a new market segment. We are engaging with them, but it's very, very difficult for us at this stage to give you a clear view of how much of that will convert and how will it work over time. However, we do -- when we look at the pipeline and we look at what we are -- the maturity of the projects that we're working with, we should expect something happening in the second half of the year, say, fourth quarter, third or fourth quarter of the fiscal -- of the calendar year. That's what we should expect to do some conversion of this. We clearly would love to do it earlier. And this is such an important segment that as we learn more about it, we'll probably communicate more about. But as of this stage, unfortunately, we are learning how to do this, working with them at the first time. As you can imagine, some of these companies have been -- are very, very -- the supply chain teams are very detailed and they're really -- there's a lot of value involved, big projects. So it's a lot of work we're going through that our teams are selling learning and working very well. But today, we do not have an actual number that I can share with you. What's exciting about this, if I can give you, Brian, the point is that how fast it's growing. That's today what we are communicating, it is growing very fast. We think we have a competitive advantage. We look at the other technologies. We believe we can do better than anybody else. So -- and we're working very hard. We -- it goes very much to our capabilities, the interconnect, the things that where we excel. So that's what we're so excited about it. But today, as this is a new market segment, we cannot provide more clarity on it.

Absolutely. No, that's great color. Maybe just 2 quick follow-ups on the guidance. One, on the $20 million of incremental costs here related to the 2 projects, can you be -- elaborate on kind of what those costs exactly were and then how you plan to recover those costs through the course of the year, the $20 million? And then secondly, Julian, obviously, you're pretty bullish on the outlook for energy storage broad data center or not. And you're saying that the guide is fully covered by backlog. So with pipeline and bookings continuing to grow, maybe it's a little bit too early. It's only fiscal Q1, but how would you characterize the upside potential to your kind of 2026 guidance outlook here starting off the year?

I'll go over the guidance for the year and then Ahmed can give you details on the gross margin on the 2 projects. I'll say on the guidance, our approach to our performance that we want to -- we're working towards meeting our guidance. We're committed to meeting our guidance that's where you should expect from us. And that we -- most of where we want to like to provide you better opportunities will be for '27 on. That's what we want to do. So if you ask me today, our order intake for this quarter will be the lowest one of the year. It will be the low point of the year, and we should be able to go and deliver better order intake that will provide stronger visibility for '27. And that's how we expect to it rather than giving you a quarter-to-quarter point, we want to keep this year where it is or in line with our guidance, hopefully, the topper side or whatever, but not -- we do not want to exceed. We're working towards make in '27, how we provide good news to the market. That's what we're working on. Today, we cannot provide guidance on '27, but we will -- that's what we're working on, and that's the way you should think about our company. So on the 20...

Brian, so the $20 million impact, so this is -- the impact is at 2 projects, non-U.S. projects, 2 different countries, different technologies, different stages of completion. And the change is essentially the change in scope of the project in both cases. One is the scope change in equipment and the other one is in the schedule. So I think our plan is to -- basically, as we have done in the past is whenever these changes happen, we always recover those under the contract from our customers. And that is what we plan on doing. during the rest of the year. So we feel pretty good that we can recover this impact.

Our next question comes from the line of Dylan Nassano of Wolfe Research.

Just wanted to check. So Tesla mentioned on their earnings call that they foresaw some mega pack margin pressure this year. I think they named some things like competition, tariffs and the like. So I just wanted to check, have you seen any kind of intensification on any of these issues recently? Or do you feel like you've already accounted for this all in your current outlook?

Yes. I mean, yes, we also saw that. We don't see any major competitiveness, no real changes. So unless Tesla is referring to us maybe. That's the only thing I can see confident they're saying that we are too close, I mean. But in terms of tariff and all of the other stuff, I think we are very much in line. So we are confirming our guidance with a view that there's no real change. So we are not very clear what they were referring to. No more -- the competitive environment, which has always been very, very intense, not any different and the tariffs have been very stable. So we don't expect any major changes in '26 numbers. There are some movement -- no real movement. So we're confident in what we're confirming to it.

Got it. Appreciate that. And then for my follow-up, just kind of given some of the margin headwinds this quarter, can you kind of confirm that if you do end up being the acquirer of the AESC facility that you feel good about kind of the -- your liquidity situation and no need for any kind of external capital.

Yes. No, from an AESC perspective, we already talked about in the last call. We have factored that in, in our forecast that we shared in the last quarter outlook for the year. So we feel pretty good.

But as I said, I don't think we don't expect that they will resolve this issue some other way. That's our understanding.

Our next question comes from the line of Julien Dumoulin-Smith of Jefferies.

Can you hear me okay?

Yes, Julien.

So maybe just to follow up on the data center opportunity here. I wanted to press a little bit further. How are you thinking about your products fitting into what the data center community wants, especially when it comes to ramp time or activity? Again, I get that the product could work, but how do you think about it fitting into your product road map, if you think about this? Again, there's probably an iterative nature of what they're looking at versus what you're providing here. Can you speak to that a little bit? And then separately related, how do you think about setting expectations to include explicitly data centers into your pipeline and backlog specifically?

In terms of our product road map, I think as we have communicated different needs that we're meeting I would say in the great majority of needs, there's no real change, and we have a very strong competitive advantage. Why? Dense product, very safe. We are designing the risk of a thermal runway is very limited. Reliability, we have a reliability last year, last year was like close to 99%, very few people can do this. So we've done very, very well. Cybersecurity, nobody -- we've been working very, very strong. So we are very, very happy on that part. For one of the needs, which is the quality of power, they need response time of below 10 milliseconds. And we have a road map to deliver that part. But when I look at the pipeline, that's one of the areas where we are competing with other technologies. And we're not necessarily the -- that's not what's driving the contract that we see today. There are some projects that are connected to that, but that's not what's driving. We want to serve it. We want to do and we're offering the high very, very quick response. But just to be clear, today, it is more connected to speed to power and to bring your own generation applications than necessarily to quality of power. So we're very confident. We are also -- we're not a competitor of the data center. We are -- we've been very historically, a company that has been very customer-centric. So we -- and these are big buyers. So we are adapting the way we control what we see to them. So I think that we are in a very, very good position. In terms of [indiscernible], as I said, unfortunately, -- on your second question on our ability to give you a proper guidance on when will things will go into the pipeline and when we will convert it into backlog. It's a new customer segment. So for us, we're learning. We are moving forward, and I think we're getting better and better every day, and my sales team is really excited about this, and probably Jeff is doing a great job on this. But today, it's very difficult to commit to this. Additionally, as you know, I have to be very careful with my competitive information. So we will try to provide you as much information as we can without necessarily playing our card on what we're doing because there are a lot of people trying to do this job, and we don't want to provide them with competitive information. So that's where we are. But excited about the growth, excited about how we fit into it, excited about our -- the way we approach our customers that will work very well with these customers. And with that -- and our product will do a wonderful job. And hopefully, we will see more and more coming up. And as this market segment develops for us, we should be able to provide you more clarity.

Got it. All right. Just maybe not quite ready. And then on AESC, just to clarify earlier, you would not expect an ownership outcome. This is more of a contracting relationship and [ ERCOT ] perhaps we could see other potential counterparties that you'd be negotiating with for your domestic cell supply?

I will say we have an MSA. The MSA will say the perspective. But we were looking -- we have made we provide an opportunity for us to take ownership on it, which they now have resolved with that. So we -- our concept will not change at all. I mean we will be an offtaker. Our technologies are very much intertwined, and we understand that the solution that AESC is working on, which I'm not -- I don't have the details, will not affect in any way any of the issues we have. So we will try to resolve this issue for them. We gave them what we thought was a good offer, but clearly, they have something better, more solution that is much more attract. So we'll be an -- we'll continue being an offtaker of that facility as we move forward.

Right. And you could add a second uptake just to expand your...

We already -- remember, last quarter, we already added a second update. And as I told -- so we already are working with some of the EV lines that are converting into BESS. And that market is getting very, very exciting. And as I said, this is no different than what we saw in China 2 years ago or 3 years ago when you had all that EV capacity that suddenly didn't know where to go. So I think this is -- it's a good opportunity.

Our next question comes from the line of Mark Strouse with JPMorgan.

Julian, I just want to go back to something you said in the prepared remarks. When you're talking about some of the data center opportunities not being in the pipeline, are you saying that, that would be in addition to the 36 gigawatt hours that you're specifically calling out for data centers? Or are you saying some of the 36 gigs of data center pipeline is not included in your $30 billion kind of overall pipeline? And then maybe just some color on kind of what delineates what goes in and what stays out.

Yes. So the 36 gigawatt hours we have there are projects we're working on. Some are in the pipeline, some of them are leads. We're giving you a number because that compares to the 30 gig that we gave you last quarter. In order to get into our pipeline, we need to ensure that we believe there's more than a 50% probability of the projects occurring within the next 2 years. So some of the projects, these are new things. So we are trying to -- and we're very careful because we want to be sure that what comes into our pipeline that drives another set of decisions internally on how we invest, manage it. So we're very careful looking at this. As this is coming in very, very quickly, we're looking at them and deciding which going to a pipeline and some of them will probably not become part of our pipeline over time. But the ones that come into our pipeline, those are the ones we're going to be investing money and providing offers and doing the engineering and working on that. So that's the 36 giga if they will convert -- if they were all to convert into the pipeline will be -- it's an upside to the pipeline we have today to the $30 billion pipeline we have in front of us.

Okay. All right. That's helpful. On the long duration side, don't think this as a complaint. 34 gigawatt hours is a very big number, but it is down from what you were talking about last quarter. So I just want to ask kind of what's going on there quarter-over-quarter.

That's a good point. Last quarter, we talked about what we believe the TAM was or the addressable market was 60 gigas of which we had a small portion. We put a team to look at that. And these are now the 30 giga projects that we are either in pipeline or in lead people that we're working on preparing the engineer, looking at it identified. So the numbers are different, was more of a TAM. I'm sorry that I got -- I saw that in a few notes that we created that confusion. The 60 gigawatts last time was a more total addressable market that we saw at the TAM. That includes the projects that were in markets that we do not serve or customers we don't work with or seasonal. So now they certainly are projects that have the potential to become part of our pipeline because they are in markets we serve with customers we like to work with, and we're just going over the work on how much of it we believe has a 50% chance of really. And the 50% chance looks at interconnection, land right and ensuring that, that is actually a project that has not [indiscernible]. And I'm sorry for the confusion on that point. I read that in a couple of notes and -- we probably were not clear enough the last time, but the 60 was a TAM, not projects and leads that we're working.

Our next question comes from the line of Dimple Gosai of Bank of America.

Just given your commentary on strengthening the domestic supply chain and module cell output ahead of plan, can you give us a sense of the mix of U.S.-made versus imported cells that's kind of embedded in your '26 delivery plan? And specifically, how much of that supply is kind of already on hand or contracted for the year? And then I have a follow-up.

Yes. Okay. I'll have Ahmed walk you through the numbers.

The mix is -- so mix is roughly half and half, I think is the domestic versus import, yes. And your second question was -- sorry I missed that.

That's fine. And then I asked how much of that supply is already on hand or kind of contracted for the year.

So we have secured 100% of our domestic and international needs for this year.

Okay. And then secondly, just to draw on that, right, as we kind of think about this gross margin or structural gross margins, can you help us frame the gross margin delta between systems that are built with non-PFE U.S.-made cells versus today's imported mix under the current 48% tariff load?

So I think we look at, frankly, from our perspective, is blended grade. I mean the guidance we have given is 10% to 15%. It all depends on the project scope. Sometimes we are EPC, sometimes we don't. So I think net-net, that is what we are looking at between 10% to 15% margin.

Regardless of where the sales come from, regardless like when it's non-PFE and with the tariffs, with ex the tariffs...

I think -- I mean, it could be depending upon situation. So I think -- but net-net, that's where we land in that range.

Our next question comes from the line of Ben Kallo of Baird.

My question is around leverage, but I want to get at it from volume. Could you talk to the amount of volume because you have this pipeline that you can execute on? Just how do we think about your contract manufacturers and your own supply chain people and capital constraints that you guys have. If you want to go up to, say, 10 gigawatts a year or something like that, what is the process for that? And how much flexibility do you guys have to ramp and execute that? And then specifically, outside of manufacturing and your contract manufacturers on the liquidity side because we did see you do a capital raise for working capital. And as these numbers get bigger, I know you have $1 billion of liquidity plus but that might not be enough as we start talking bigger numbers. So if we could just address that.

So I will address the supply chain, and I will ask Ahmed to talk about working capital and the capital plan. On supply chain, the way we work is we have a long-term plan of volume that has a base case, that has an upside case and that has had hit it out of the park case. And we serve those needs with different sources of suppliers that work either way. So we have base suppliers that support our normal work, upside suppliers that have [ accretion ] capability, and we also identify players of which we can play. So we feel very comfortable we have the supply chain to go even beyond what we -- our upside cases that we communicate to significantly above that. So -- and it's a work of working with our suppliers with building a little bit of spare capacity, providing suppliers that have spare capacity they can deliver. So it's a little bit of a renegotiation. And it has been working well. And my ambition will be to use it. You know what I mean, but to be able to use it today. And we believe that we're entering into this might be probably an option that will happen. In terms of capital, I will ask Ahmed to...

So I think you're right. We have $1 billion liquidity, which we believe is sufficient to support our current plan. And I mean, in terms of the additional capital needs, I mean, Julian talked about today significant opportunities we see. And those opportunities will require additional capital once they materialize, I think, and then we will be, frankly opportunistic to see what -- how we can raise that capital. And -- but at the end of the day, we will be very mindful of creating value for our shareholders. I think that's our job as a management.

And then just a follow-up on the leverage side. Can you just talk about what type of scale translate in that like operating leverage under the current gross margin that's what we should expect even as your volume grows? Or does that gross margin get bigger? Is there any leverage there? And then how that translates into operating margin? If you can give me any framework there would be helpful.

I'll tell you the way we've been communicating -- I mean, the way we think about it actually is that you should assume that our gross margins will stay the same our ability to grow our EBITDA will come out of our operating leverage. And how do we think about it for you, that our top line -- our overhead would only grow at half and no more than half of the growth of our top line growth. So say, if we grow at our top line growth goes at 100%, our overhead will grow at less than 50%. And that's where the operating leverage is, and that's the way you should think about it. If you believe that we can grow, let's say, at 100%, then that operating leverage gives you significant EBITDA growth. [indiscernible].

Our next question comes from the line of Vikram Bagri of Citi.

A lot of discussion about competition. And Julian, you've highlighted significant opportunities as well. I wanted to ask how important is it for you to be vertically integrated given the rising competition? How are the M&A opportunities that you see today? And then finally, could you share the threshold of return that you -- for you to make an acquisition, whether it's AESC or someone else, how do you look at the possibility of M&A in terms of accretion or return on invested capital? What's that threshold?

So how do we think about vertical integration? We are very much integrated with our suppliers because our suppliers sell back to us, our designs, our IPs, our -- that's how that work. Very much they we're using our own engineering is what's driving our supplier base. So generally, our contracted manufacturers are allowing us to have a competitive cost with access to the technology we need. So we don't really see a strong need for vertical integration. If things change, that will be -- that you could think about it. But today, we don't see any strong need to. We are -- we can work with contracted manufacturers that integrate our technology into hardware that we can -- and our software into hardware that we can then convert into product at a very, very competitive price. So we're happy on that. In terms of any acquisition generally it has to be accretive for us. So that's how we looked at it. When we were doing -- evaluating the potential acquisition of AESC or participating in that deal, it has to be accretive. So it has to make sense. So -- and the accretion needs to create that needs to reflect the additional risk that you take when you integrate vertically because what the great capability we have is that we are very agile. We can have 3 or 4 different battery manufacturers integrated into our system that we have developed our Smartstack that it can integrate any battery. I'll tell you more. We can make any battery great using political solvency, but it is true, any battery, we can make it great if you put it into our system. So that's what -- that's our approach to supply chain. So if we were to integrate vertically, we will lose that agility and that ability to things. So we also take that into account when we were looking at this. We need to take into account that we're going to lose some of the agility we have today that today, we are talking with a plethora of potential suppliers that we can integrate and all of them with different capabilities and we can make them all right.

Got it. And as a follow-up, could you provide a split of leads versus pipeline in data center and long duration sort of numbers that you've shared on the slides? And could you also remind us how do you define leads versus pipeline in this category?

Roughly -- between leads and pipeline, roughly 25%. And the difference between leads, so 25% of 34, 36 gigawatt hours are in pipeline today. In order to go into a pipeline, it to be a project that we believe within the next 2 years has a 50% chance of we converted it into backlog. So we will say a customer that we will do with that he has a good credit that the project is real. It's not -- there are a lot of people talking a lot of stuff you go sit down and get an idea. So those things don't come into -- we don't bring it into a pipeline because what comes into our pipeline drives cost, drives engineering, drives planning, drives -- so we are very, very careful what comes in. I think my main point on data centers is how fast it's moving. We have to see how this see how this big market opportunity converts into real execution within the next quarters.

And our next question comes from the line of Christine Cho of Barclays.

I just have a clarification, I guess, on the last response. I think last quarter, when you talked about the 30 gigawatt hours, at least at the time of the call, you had said half was in the pipeline, and now you're saying 25%. So just curious as to what drove the change over the last quarter.

Yes. Things come in and out. So maybe that when we did the engineering, didn't work or something. Things come in and out all the time. So we're very excited about where we are. I mean that's we're giving you information that usually we don't communicate on how the things move in and out all the time. And as we go in and they put in the money and the things doesn't work. There's no way you want to do what you want to do. So we take it out of our pipeline and tell the customers go and figure out what you're going to do or some other issue.

Okay. And then if I look at your pipeline from the $23 billion to $30 billion, just nominally, the U.S. went from $10 billion to $17 billion. So just based on all the comments that you just talked about with the data center, is it fair to say that increase was primarily driven by your typical front of the meter customer?

That's right. Yes, that's right. We had -- we reorganized the company with this growth group now rather than having the regions. We brought in Jeff Monday to help us run that group. He dedicated in the first quarter on preparing the pipeline, expanding our capabilities of business development and that you see some of the results in the new pipeline numbers we have.

This concludes the question-and-answer session. I'll now turn it back to Chris for closing remarks.

Thanks, everyone, for joining our call today. Please reach out with any additional questions, and have a great day.

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