FTC Solar, Inc. (FTCI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the FTC Solar Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would like to turn the conference over now to your speaker for today, Bill Michalek. You may go ahead.

Thank you, and welcome, everyone, to FTC Solar's fourth quarter 2022 earnings conference call. Before today's call, you'd likely have opportunity to review our earnings release, supplemental financial information and slide presentation, which were posted earlier today. If you've not yet reviewed these documents, they are available on the Investor Relations section of our website at ftcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's President and Chief Executive Officer; Phelps Morris, the company's Chief Financial Officer; and Patrick Cook, the company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speaks only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders, and our definition of this metric is also included in our press release. With that, I'll turn it over to Sean.

Thanks, Bill, and good morning, everyone. As I reflect on my first full calendar year as CEO in 2022, I am proud of how the team navigated many external challenges. The year began with historically high logistics and steel costs, followed by a rather challenging regulatory market in the U.S., which, as you know, has historically represented the primary source of our revenue. The team has responded well to the challenges, utilizing the downturn to focus on what we can control, improve our competitive positioning and emerge as a stronger company. As we close out the year, I believe we're on a significantly improving trajectory. We delivered fourth quarter results which showed significant improvement and exceeded the midpoint of our guidance on all metrics. We also continued our operational improvements, which I'll discuss in more detail, one of which includes improving our international exposure, which will allow us to take advantage of near-term opportunities while we wait to unlock our full backlog when the Uyghur Forced Labor Prevention Act, or UFLPA constraint fully resolves. Today, I'll briefly walk through the market and operational improvement categories we've been discussing to summarize what we accomplished during the first 9 months of the year and how we closed out the year on a solid trajectory in Q4. Starting at the market level and perhaps the one constant during the year, the long-term demand trends look great and continue to improve. They have likely never looked better. According to the IEA, renewables are set to become the primary energy source for electricity generation globally in 2027, accounting for about 40% of total electricity output and overtaking coal. Despite higher module pricing, utility scale solar is the lowest cost source of new electricity generation in most countries worldwide and accounts for more than 60% of all renewable capacity expansion. The low cost to install, coupled with additional long-term demand drivers for solar that include existing government policies, including renewable portfolio standards and the current ITC corporate awareness and technological improvements is only further enhanced by current high fossil fuel pricing discussions of energy security in many countries and the recent passage of IRA in the U.S. So we have an incredibly positive market backdrop and tailwinds for long-term global growth. The one gating item required to unlock the potential within the U.S. market, which represents much of our backlog, remains solar module availability. Looking at the U.S. regulatory landscape during the first 9 months of 2022, we saw 80 CBD and WRO concerns transition to one remaining issue in UFLPA. In the fourth quarter and more recently, we have seen some early signs on reports of improvement. These include positive trends in trade import data, market reports of small module shipments being released from customs, some module supply agreements being inked and optimism from some that we are getting closer to a more substantial improvement in the back half of the year. There have also been several announcements about new module capacity outside of China which is an excellent sign for module availability in 2024 and beyond. Overall, we're hopeful that we'll see more substantial improvement in module flow later this year, but as we'll discuss, we don't need to wait for UFLPA resolution to achieve improving financial performance. From a supply chain and procurement standpoint, we started 2022 at historically high prices for steel and logistics, but have since seen improvement in both. Steel is now well off its highs and logistics is essentially back to historical norms. Given the improvement in logistics, we have fully transitioned back to containerized shipping from the break bulk solution we had implemented to weather the high and uncertain market conditions. With that market, regulatory and supply chain backdrop, I'll turn now to our operational improvements. As I have mentioned on recent calls, we have not stood idle through the market uncertainty and have used the time to focus on what we can control to best position ourselves for the coming recovery. One area of significant focus has been on improving our cost and gross margin profile. In the first 9 months of the year, we maximized our design-to-value initiative, allowing us to take more than 20% of the steel content out of our tracker systems. This helped us create a product cost structure that will enable double-digit gross margins on future projects. We also launched a distributed generation business, which has a high margin profile and will be a positive addition to the business. We have received great interest with initial orders and a robust pipeline. In the fourth quarter, we continued our cost reduction focus and launched our design to manufacturing efforts, which aim to ensure that our products are not only designed for constructability, efficiency and effectiveness, but are also cost effective to manufacture. As it relates to our product portfolio, in the first part of the year, we were quite busy with the development of innovative new products that resulted in new product announcements during the back half of the year. In the third quarter, we announced a differentiated new 1P tracker solution called Pioneer, which significantly expands our ability to serve new markets, both in the U.S. and worldwide. This gives us more opportunities to win projects, whether it's a preference or benefit for 1P. Customer enthusiasm for our new product has been strong. And as you know, we launched Pioneer along with a 500-megawatt agreement from a top EPC. Our pipeline for Pioneer is growing nicely, and we continue to anticipate first deliveries in the second half of the year. In the fourth quarter, we announced the introduction of a new cost-effective first solar module solution for our 2P product, which filled a gap in our offering. We have already received orders for this solution and are recognizing revenue. Combined, these new product introductions expand our addressable market while also serving to bolster the non-UFLPA portion of our backlog as we continue to grow revenue. In terms of geography, we entered 2022 as very much a U.S.-focused company in terms of revenue. However, the investments we've been making to expand our international footprint started to bear fruit early in the year. We have since received awards in 4 new countries, bringing the total to 10 countries with projects outside of the U.S. We also recorded our largest project in Australia to date at 128 megawatts. Just today, we announced that we added $240 million in backlog since early November. Of that amount, more than 80% is from international locations, including 2 more projects in Australia, putting us at more than 25 in that country so far. We believe our new 1P tracker will significantly enhance our ability to further grow internationally. International growth is a key focus for us, particularly with the current regulatory challenges in the U.S. I'm quite pleased to see our continued growth in pipeline and conversion to backlog. We also recently announced a U.S. manufacturing joint venture utilizing domestic steel to strengthen and bolster our domestic supply chain. With the passage of the Inflation Reduction Act, customers are now asking for quotes with U.S. local content, including projects for delivery in the latter half of this year. While we still await additional details from the government on the mechanics of the IRA, we believe this JV will be instrumental in helping us support our customers' needs in the future. For this JV, we partnered with a known existing supplier. The facility located near Houston, Texas will initially be focused on torque tubes and is expected to begin operation around midyear. Turning to pipeline. In 2022, we saw robust growth and several new record levels, including the international portion of the pipeline, which more than doubled in the first 9 months of the year. Today, we again achieved new record levels in total pipeline with the international portion now up 150% relative to the start of 2022. International now represents an increasing majority of our pipeline. And as you can see from our near-term project awards is expected to make up a growing portion of our revenue base going forward, further diversifying our revenue and reducing exposure to projects subject to UFLPA review. And finally, with our continued focus on expanding current customer relationships and forming new ones, our backlog has continued to grow nicely despite the constraints in the module market in the U.S. As I mentioned, since our last earnings call in November, we have added $240 million in backlog, bringing the total above the $1 billion mark for the first time at $1.2 billion. The collective results of these initiatives have led to improved financial performance as we close the year. As we progress through the year, working on these initiatives, we completed shipments of our legacy lower-margin products in Q3 and reached what we believe was a revenue and margin low point in that quarter from which we expect to see improvement going forward. In Q4, our performance did improve as expected, and we came in ahead of the midpoint of our guidance on all metrics. This includes revenue that grew 58% sequentially off the low Q3 base and non-GAAP gross margin that improved from close to negative 50% to approaching breakeven at negative 3.4%. Non-GAAP operating expenses in the quarter were at the low or better end of our guidance range, resulting in adjusted EBITDA also coming in better than the midpoint. We are excited to see the results of our DTV and other initiatives begin to show through in a meaningful way in our results, and we see that continuing. So closing out on 2022, we have utilized the downturn to significantly improve our competitive positioning across nearly all aspects of our business. We now have a strong product cost structure on current and future projects, which puts us on track for double-digit gross margins as our revenue run rate recovers. We have a more comprehensive product line that expands our addressable market in the U.S. and internationally. We are growing and diversifying in new markets and are positioned with a strengthened supply chain, and we have a record backlog and pipeline that shows that customers option globally is increasing as we look ahead to a market that is not only poised to recover but is poised with powerful long-term tailwinds. As we look ahead to 2023, our focus is solidly on execution, supporting our customers worldwide, continuing to build on our progress and demonstrating capabilities for our improved business. We believe we can continue to show margin improvement even in a depressed volume environment, followed by a much more significant improvement as module availability and volumes improve in the U.S. With that, I will turn the call over to Phelps.

Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional color on the fourth quarter performance and outlook. So let's begin with the discussion of the fourth quarter. Overall, I'm happy to share that we delivered results that were better than the midpoint of our guidance trends on all metrics for the quarter. First, revenue was $26.2 million. While on a year-over-year basis, revenue was down 74%, it did represent a 58% increase versus the prior quarter as we begin to build some momentum moving up from the lows in Q3. We are starting to see new production tied to both the international products as well as non-UFLPA projects moving forward. We believe this is a sign that strategy we discussed last quarter of attacking non-UFLPA-impacted projects is beginning to benefit the company. While we saw nice sequential growth in revenue, UFLPA has constrained our near-term ability to convert backlog into revenue with the bulk of our backlog, roughly 2/3 remaining subject to UFLPA. Now on the plus side, our non-UFLPA backlog doubled quarter-over-quarter now represents 1/3 of our total backlog. Next, our GAAP gross loss for the quarter was $1.9 million or 7.3% of revenue compared to $9.5 million or 57.4% of revenue in the prior quarter. On a non-GAAP basis, the gross loss was $0.9 million or 3.4% of revenue, coming above the midpoint of the guidance range. Compared to our Q3 2022 non-GAAP loss of $8.2 million or 49.8% of revenue, we are able to deliver an impressive 46 point improvement quarter-over-quarter. We were able to accomplish this due to the following: First, the legacy low-margin products we discussed in prior quarters were completed during Q3. Second, the new products we now deliver benefit from our team's efforts on the DTV front, coupled with a more normalized supply chain costs in both steel and shipping. The team is excited to see the early fruits of our labor starting to show in our results. On a year-over-year basis, we delivered improvement to non-GAAP gross loss by $6.5 million, even in the face of significantly lower revenue in Q4 of 2022 versus the prior period in 2021, $26.2 million this year versus $101.7 million last year. The improvements were driven primarily by improved tracker and logistics direct margins. Our GAAP operating expenses were $17.9 million. On a non-GAAP basis, excluding the stock-based compensation charge associated with the FCX legal settlement and certain other expenses, our operating expenses was $10 million compared to $9 million in the year ago quarter. This was at the lower end of our guidance range. The slight year-over-year increase was driven by an increase in the R&D expenses as well as the absence of credits that we had in the year ago quarter. We continue to keep a keen eye on expenses as we manage through this period. To that end, we executed a targeted headcount reduction during the quarter, representing approximately 8% of our labor force. In addition, we continue to keep a close eye on our nonlabor spend. Next, GAAP net loss was $20.5 million or $0.20 per share compared to the loss of $25.6 million or $0.25 per share in the prior quarter and compared to a net loss of $23.9 million in the year ago quarter. Collectively, results from our improved margins and careful management of operating expense and overhead slowed down to our adjusted EBITDA results. For the quarter, the adjusted EBITDA loss was excluded approximately $9.1 million, including stock-based compensation expense, certain consulting and legal fees, severance and other noncash items was $11 million, better than the midpoint of our guidance range of $12.3 million. The results represent an improvement of $6.7 million compared to an adjusted EBITDA loss of $17.7 million in the prior quarter and compares to $16.4 million in the year ago quarter. Finally, regarding liquidity, we ended the quarter with a modest usage of cash and ended with $44.4 million. In addition, we continue to hold no debt on the balance sheet, have an undrawn credit revolver as well as a $100 million ATM program, which we have not accessed to date. With that, let's turn our focus to the outlook. Based upon our current view, we continue to expect sequential revenue growth in the first quarter. We also expect gross margin to continue to show improvement quarter-over-quarter and cross into the positive territory. Specifically, our targets for the first quarter call for the following: revenue between $36 million and $40 million, representing 37% to 53% growth off of the Q4 2022 results. Non-GAAP gross margin between $0.7 million and $3.2 million or between 2% and 8% of revenue. Non-GAAP operating expenses between $10 million and $11 million; and finally, adjusted EBITDA loss between $10.3 million and $6.8 million. And for the second quarter, we expect to see further operational improvements. Overall, we continue to believe the ingredients are in place for a very strong industry recovery and long-term growth. The rate of recovery in our largest market, the U.S., will largely be determined by the pace of improvement from the importation of modules. Once improvements do occur at scale, we believe FTC Solar is increasingly well positioned competitively to capitalize on that growth with a lower cost structure and an innovative product line, a record pipeline and more than $1 billion in backlog. With that, we conclude our prepared remarks, and I will turn it over to the operator for any questions. Operator?

[Operator Instructions] Our first question will be coming from Philip Shen of ROTH.

I wanted to start with your recent bookings. I was wondering if you might be able to share how much of the $240 million is 1P versus 2P? And also, can you talk through how much of the $240 million you expect to be delivered in 2023? And then for the $1.2 billion overall, what percentage of that do you also expect in 2023 versus maybe 2024 or later?

Yes. Phil, this is Sean. Thanks for the question. So we're excited about the progress we're making on non-UFLPA and as you described in the most recent bookings. So let me turn it over to Patrick and let him provide a little bit of color on the mix.

Yes, in terms of kind of 1P and 2P, Phil, we didn't give kind of specific numbers in terms of kind of the revenue split, but it will be a mix between kind of our one-in-portrait tracker and our 2-in-portrait tracker. And in terms of just kind of overall revenue kind of mix on the non-UFLPA, we do expect to start recognizing revenue for those projects in the non-UFLPA-impacted areas in the near term, and it's not something that's kind of elongated out. So we do expect to start recognizing revenue on that $240 million in the near term.

Great. And looking ahead, can you talk about what you expect in terms of the bookings momentum. You've had a really nice run here in spite of the UFLPA module constraints. Would you expect as we get into Q2 and 3, that the bookings momentum sustains given the Inflation Reduction Act and your international success there?

We are very excited about the bookings momentum. And frankly speaking, I think we've done a lot of work internationally. As we mentioned in the remarks, we've also put a lot of focus on our product portfolio and enhancing our product portfolio now having a first solar solution for our Voyager 2P and developing our 1P Pioneer product, and so for the back half of the year, we're expecting continued momentum. In addition, we're hopeful that there will be some form of relief on UFLPA that we're certainly not counting on it, but we're hopeful that, that would also add to the momentum that we're seeing for the back half of the year. Again, Patrick Cook, our Chief Commercial Officer, is here, and I'll let him provide a little more color.

Yes, Phil, the way I think about that is you look kind of in the U.S., right, our product portfolio set. We've got the first solar solution. We've got our 2P, and we have our one-in-portrait solutions. We feel like we have a pretty sound portfolio set to go attack, not only new customers, but existing customers and grow kind of the share of wallet. We talked about kind of the international expansion that we have. It's typically kind of 2 years to revenue. if you kind of rewind the clock, we've been in a lot of these international locations for 2-plus years, and you're starting to see kind of the same trajectory and trend that we had in the U.S. back in 2019, where you start getting into 2, 3, 4, 5 different customers, you grow the share of wallet, you grow the footprint. And now you've got a backlog and pipeline that's dependable for kind of upcoming revenue. So we're certainly excited about the momentum that we're seeing in the bookings. The customer excitement around IRA in the U.S. is certainly extremely high, and we're looking forward to be able to kind of capture on that as well based on our customer relationships and the customer service that we bring to our customers, both in the U.S. and internationally.

Great. One last one, if I may. In terms of the torque tube subsidy. We put out there recently that it seems like for this year, the torque tube manufacturers may secure between 30% and 40% of that subsidy. And then you guys should be able to get the balance of that. And then over the coming 4 or 5 years that decrements maybe by 5% to 10% a year until we get to about 10% in year 5. Does that resonate with you guys in the IRA agreements that you guys are structuring here in the U.S., to what degree does that match and resonate with you guys? And if not, what kind of structures are you guys looking at?

So we are hearing similar things. And so I would say that indeed, it does resonate with us and what we've heard so far and then what our expectations are for our joint venture. So I'd say, yes, we're somewhat aligned. I mean, we're waiting to see what the final regs I'll say, but your view of things is similar to our own.

Great. Okay. Keep up the bookings momentum, and I'll pass it on.

Our next question will be coming from Donovan Schafer of Northland Capital.

So I'm going to kind of follow up on Phil's question here, I know you guys probably don't want to get too specific on some of these dynamics that help working around the UFLPA. But I'm curious if we can talk maybe in terms of like broader trends or kind of minority majority of sort of mix. So if I think about the maybe call it like 3 vectors that give you the flexibility to kind of work around the UFLPA. And so I think of those 3 factors is first having a better solution now that pairs with first solar panels is one for solar. And then the second one would be the international sales. And then the third one that maybe kind of overlap in some ways, is having the 1P product now because maybe that's part of what enables a certain amount of international sales. So it's too much to answer in one question, but you can imagine we can make like a 2x3 matrix or table or something and say, we're first solar panels, more than 50% or less than 50% of sales in the fourth quarter or in the backlog or in the pipeline. Our international sales above the 50% or below the 50% mark, fourth quarter backlog pipeline, whatever you're kind of comfortable talking about sensing of 1P, majority 1P, minority 1P. It sounds like the 1P won't be coming out or be deployed until second half of '23. So, of course, that's probably not a factor in Q4 sales. But just between those 3 vectors, having a first solar optimized product and international sales and kind of 1P versus 2P. Are you leaning more heavily on some of those and the other, it sounds like international, and kind of greater than 50%, less than 50%. Anything kind of high level there, just to help us flesh out kind of trends and key drivers.

Sure, Donovan. Thanks for the question. And I think those 3 vectors that you identified, First Solar, international growth and the 1P product, adding that to our portfolio are all critical because as we've said before, we really have tried to pivot the company and not be focused on, hey, when will UFLPA end. But what are the things we can control, how can we improve the company and drive the company's success, independent of UFLPA. So all 3 of these vectors are critical. So as you know, we're shipping for revenue with a First Solar Voyager 2P solution. And as far as the 1P product goes, we're going to ship it in the back half of the year. And it's our intention after we ship the initial crystalline-based product that we will have a First Solar solution as well for the 1P or excuse me, Pioneer product, and then international, like Patrick said, international takes some time. But if you think about sort of a 2-year period, we're in really good shape in many countries, and we talked about some of the great growth we've seen in Australia, where we've really invested over time, and Cameron and the team are doing a phenomenal job. We just announced our largest project ever in Australia. And so all 3 of those vectors are very critical to us. Obviously, we're not guiding for the year. And so it's hard for me to give you any specificity on the 3 vectors. Maybe I'll ask Patrick to provide a little bit more color. But those 3 vectors are all critical to our strategy to basically grow the company and have the company drive success independent of UFLPA.

Yes. Donovan, I think the way I look at it, kind of around Q4 and beyond. I mean, obviously, we've had international wins. We talked about kind of the First Solar solution. So you're seeing kind of the historical kind of growth off the Q3, we said lows in relation to us adding those kind of additional product portfolio and as well as kind of ultimately expanding internationally. And we're seeing that kind of in the front half of the year. You see kind of sequential growth from what we delivered in Q4 and our guide ultimately in Q1. So we're seeing adoption of our different product portfolios and ultimately, our expansion internationally, and that is a portion of our overall growth in spite of what's going on in the overall market and UFLPA, which is why we talked about on our last earnings call that Q3, we believe, was our historical lows, and we're going to springboard from that. And I think you're seeing that with our revenue growth as well as kind of our gross margin expansion as well in those products and geographies.

Okay. Great. And then as a follow-up, I know you have with the Q3 trough and still kind of early in coming back from that. You're at a lower revenue number. And so the guidance for Q1 2023 has a healthy range there, maybe in percentage terms, maybe it's not much in absolute terms but I'm curious if the range, I guess, first would just be whether that range really just comes down to project timing. That seems like it's probably quite likely the situation, but just a confirmation there. And then kind of related to that, if it is just around project timing, does that leave potential for sort of significant upside for 2023, like generally? And maybe circling around to kind of UFLPA, we're talking a lot about working around that, but there's always sort of the hypothetical possibility of some meaningful resolution there, right? Tensions are high between the U.S. and China, but with everything going on with Ukraine, some people are interested in picking up with China, some people aren't and so there may be parties that be that try to come to the bargaining table and reach some kinds of agreements or accords or understandings or whatever. So the U.S., given the range for the first quarter and if the UFLPA were kind of [indiscernible] sort of resolved with the whole UFLPA, the actual exposed part of your portfolio backlog, would that expose part sort of just come online quickly and you get a really big like pop or super positive performance? Or would that continue at a normal trajectory anyway because of for other reasons or if projects were canceled or postponed or have to file for a permit extension, so on and so forth.

So Donovan, thanks for the question. So if you look at our guide, the revenue guidance is like, I believe, $36 million to $40 million. So we tried to provide a reasonable range for what we think we're going to achieve and not a wide range. Obviously, sitting here today, we feel good about the guidance we're providing for Q1. And as we said before, we're looking at UFLPA, if something does happen, and we're hearing what I would call some positive signals from UFLPA in terms of shipments. But if there's something big happens like you described, that UFLPA opens up and indeed modules are in the U.S. and available for projects because those would really have to be the modules that are being held today. But once the factories come back up and modules start flowing again, yes, that's certainly an opportunity for us because we have built into our plan that UFLPA will persist at some level. And frankly speaking, yes, I would believe there would be some upside depending on what level of modules that UFLPA solution put into the U.S. market. I don't know, Phelps, if you want to...

Yes, no, Donovan, it's Phelps. So as Sean talked about, when we talked about guidance in terms of Q1, it is a relatively narrow range. We're feeling very good about the bookings we've had in Q4. Obviously, to your point, we're a project-based business, we're supporting projects, if there's a delay of timing to any individual products I can delay for revenue recognition. The other thing that we're really excited about for this quarter is the guide in terms of the gross margin range. It's 2% to 8% in positive territory, which what you're seeing here is really a lot of the work in the legacy products that we had last year have rolled off, and we're starting to see the new products take advantage of the DTV initiatives, et cetera. And so that, we think, is a very important thing for us on the margin side. But you're exactly correct. I mean the ramp of the revenue on a quarter-over-quarter basis, will be continued upon projects and really, the people that we've had in our backlog, how quickly they can get modules, it can be the really the pivot point for us to recognize revenue as quickly as possible. Maybe Patrick, you want to add on to that?

Yes. I think the one thing too Donovan to focus on is just the growth kind of sequentially the last 2 earnings calls of our backlog that's not subject to UFLPA review. We talked about what we were able to achieve in kind of in our Q3 earnings call. Obviously, we grew backlog by another $240 million, and the vast majority of that is not subject to UFLPA review. And so what we've talked about is those have a shorter cycle time to revenue. So we've grown our backlog to kind of historical highs or record highs, but we're getting a majority of the last 2 quarters that have come from non-UFLPA-related zones. And so that time and cycle to revenue is ultimately faster because you're not subject to when or the availability of modules.

Right. So if you look at the total backlog in aggregate, 1/3 of it is now nonsubject to UFLPA, right? And so, as Patrick alluded to, that's a very big pivot for us. And that's where the focus of the sales team is. They've done a phenomenal job of building backlog with international projects for solar projects or certain developers are getting crystalline modules and availability in the U.S., and that's going to represent that as well.

Okay. Fantastic. I'll take the rest of my questions offline.

The next question will be coming from Jeff Osborne of Cowen.

Just a couple of questions. I had one clarification for a comment that Patrick made it. You made a reference to 2 years from an international presence to revenue. Was that from a sales perspective? Or were you trying to say once something is added to backlog, it takes 2 years to record revenue on that?

No. Sorry, Jeff. So I appreciate the clarifying question. That's when I say 2 years, really, when you put the boots on the ground and enter a new geography from time to ultimately revenue because it takes time to build the relationships, get certified, build everything around kind of the product portfolio and backlog. So we've been in these geographies for 2-plus years now, and we're seeing the benefits of that. Once we get the PO, it's really pretty quick to revenue. So no it's not...

8 to 9 months from PO to revenue for these international...

In some of the international locations, it's going to be shorter than that.

Okay. Good to hear. And then...

We got a footprint already, right? So if you look at Australia, for example, where we've done 25 projects, you get a purchase order, you're recognizing revenue in accordance with kind of our lead times. So you're talking about a period of weeks to a few months.

Got it. That's helpful. And then with the JV, how do we think about CapEx for 2023? Is there any capital that you're committing to that? Or is that all through your third party and the use scenario?

So in the partnership, we are making what I would characterize as a modest contribution as is the partner. And then we expect to start and ramp up the facility beginning in the back half of this year.

Yes. Yes. In terms of context, I just think mid to low millions of dollars. It's not a massive capital investment that will go into an existing facility, and we're going to take 45% of the JVs we disclosed previously.

Got it. And is that all for the Texas area? Would you need one in the Midwest as well?

No. We can source out of the Texas facility for all of our needs at the current time. And then we have the ability in future phases if we wanted to, that we could add additional capacity at the existing location.

Got it. And then the last one I had is just if you could give us a context with the nice backlog growth, why you feel you're winning? Obviously, you've had design to value. It's great to see the margin guidance, but is it something around labor rates and install time? Or is it price? Is it availability? Just any context would be helpful.

Yes. So we continue to see very positive feedback on the constructability aspect, and we really do feel like we have the best 2P tracker product out there. And we continue to hear from our customers, and there's a lot of excitement as well given the availability of First Solar modules that we now have a First Solar solution. People also are excited about the expansion of our product portfolio to include now a 1P product as well. I'm sorry, Patrick, I didn't mean to...

I think Sean is exactly right. I mean I think if you could break it down, I think one is the constructability advantage and especially in kind of inflationary environment, high labor cost rates and shortage of labor, that value gets exacerbated. And customers really look at ways to shape costs and shape labor and certainly, the construction times with our 2P solution, ultimately, does that. The other part that we hear a lot is customer service. If you look at kind of our legacy team, we do have the mindset of the developer and our ability to engage with our developers and EPCs and kind of bring that mindset to the tracker. We're viewed as more than just kind of a racking partner, really viewed as a strategic partner and someone who helps bring solutions to the table. And if I hear more often than not, why we win projects, it's really kind of centered around the customer service. And obviously, you've got to have a competitive price, and we're able to compete against all of our competitors. And obviously, with our gross margin guide, you can see that we're able to do that profitably as well.

Our next question is coming from Pavel Molchanov of Raymond James.

On the Alpha Steel joint venture, just to clarify, will this be contributing to revenue? Or is it purely going to reduce your cost of goods? Like how does the accounting work on that?

Yes. So thanks for the question. So from accounting perspective, we've been working with the latter. We do not anticipate we'll be consolidating the results on our books. So we have a 45% interest in the joint venture. And so it won't be contributed to revenue on the top line.

Okay. So you will be minority interest essentially?

That's correct.

Right? Okay. Okay. That's clear.

Yes, that's correct.

Yes, kind of zooming out for a moment, when you guys went public 2 years ago, one of the statistics that you were highlighting was 75% of utility scale projects in the United States were using trackers. But outside the U.S., it was the mirror image only 1 quarter. How have those numbers changed in the past 2 years given everything that's happened?

Yes. I mean I think we've seen the adoption of trackers and kind of continued progress, especially in the regions that we operate. Typically, when more sophisticated capital gets deployed in those regions, you see ways for the developers to maximize their IRR. Australia is a good example. We've seen more and more trackers ultimately get picked up there, places in Africa, for example, where we've won a number of projects to date, that's traditionally been a fixed tilt market, and we've seen more and more growth and adoption there. I mean I think you've seen kind of, we talked about at the IPO roughly 25%. I mean I think the 2023 numbers are somewhere in the low to mid-30s. So we are seeing ultimately kind of forecasted kind of sequential growth in trackers. We expect that to continue to improve as the markets outside of the U.S. become more and more sophisticated and they're focused on IRRs and returns.

The next question will be coming from Kashy Harrison of Piper.

So first one for me. Great to see gross margins with a positive in Q1 and your cost reduction initiatives manifest in those numbers. If you're able to generate 5% gross margins at just under $40 million, I was wondering if you could speak to where your gross margins would be at a $100 million quarterly run rate? And then maybe if you could give us a sensitivity on where gross margins go if you roll in the manufacturing credit?

So thanks for the question. I think our belief is still that we can achieve the gross margins that were discussed back at the time of the IPO. So that still remains our objective as a company to get to the 20 and ultimately 20-plus percent gross margins.

Yes. I mean I think the other way to think about it if you want to go out of theoretical, just go back to where I think it was our Q2 deck Kashy in terms of, we are showing kind of that different revenue ranges 12% to 18% at $150 million. That's a good area just at least to put a pin in and start thinking about that. Obviously, this is really good result at this low revenue base. Again, we anticipate these would improve over time as the revenue base grows, as you're willing to get some operating leverage on the business and amortize some of that overhead and COGS overhead, et cetera.

Got you. And do you have any sort of comment on where gross margins could go with the manufacturing credits from the 45X?

Yes. So we're not billing the baseline. We think it's going to be upside. As Sean alluded to, we're hearing different share in the pools right now. We think the manufacturing JV was really critical to provide and service our customers with the domestic content. We do think there'll be some benefit coming back to us. With that being said, until we finalize some of the IRA benefits, I think it's a little bit uncertain to this point.

Yes. The 12% to 18% that Phelps mentioned there, that does not include any benefit from...

Yes, that was pre IRA.

That's pre IRA. So we expect some benefit not forecasting any benefit in, but any benefit would ultimately be accretive to the bottom line. So that 12% to 18% does not include that.

Okay. Fair enough. And then I was looking at the guidance section of the earnings release. In the release, you indicated that you expect to see continued operational improvements in the second quarter, but you took out the commentary surrounding your expectation of sequential revenue improvement that you included in the last earnings release. And so I was wondering if you guys could just provide us with some qualitative direction on the revenue trajectory entering the second quarter.

So we're not guiding beyond the first quarter, obviously. And so I would just say the qualitative guidance we provided is that we feel good given the work that the team has done, given the international success, the product portfolio that now includes the 1P, the product portfolio that now includes First Solar solution. So we feel good about the positive trajectory we're on. but we're really not at this point, given the overall market situation, we're not guiding beyond Q1.

Yes. And just as I said, when we talk about continued operational improvements, right, I think the way you want to think about that is, as Sean said, there's a lot of uncertainty as you go out in the future quarters. That's why we're not guiding to the full year at this point. But we do think Q3 last year was a low, and we'll continue to build revenue off the revenue base on a quarter-over-quarter basis. It would be our expectation.

Absolutely. I feel very optimistic about that given where we are and the great work the team has done.

Got you. Fair enough. And if I could just maybe sneak one more in. Apologies if you may have alluded to this a little bit earlier. But did you give us a sense of the commercial operational date of the $400 million of non-UFLPA projects? I'm just trying to get a sense of what the time line is for that $400 million to be harvested since it's not restricted by UFLPA restrictions? And I'll leave it there.

Yes. We didn't specifically call out kind of quarter-by-quarter when non-UFLPA items are going to be recognized. I mean, I think kind of the expectation as you look at non-UFLPA, whether it's domestic or international, the cycle time to revenue is obviously much shorter because these projects have modules and they're moving forward in kind of accordance with what we would call a normal course business. So these are projects that are kind of nearing PO and will be recognized over the kind of coming quarters sequentially.

And one little qualifier. I mean some of those backlog wins would be over a multiyear, though, right? So they're 2023 as well as some 2024 deliveries.

The next question is from Maheep Mandloi of Credit Suisse.

Maheep Mandloi from Credit Suisse here. Just following on the previous question, how much of that $400 million is in beyond '23?

Yes. We're not guiding kind of the breakdown of '23 versus '24. I guess the way I would look at it is there's projects that are going to be delivered over multiple quarters. So purchase orders that you receive in 2023, you're going to recognize in Q2, Q3, Q4 and ultimately, some could spill into 2024 as well just based on project size and ultimate delivery schedule. But the way we're looking at these is they are going to be shorter time to revenue than what we've seen kind of historically on modules or projects that are subject to UFLPA review.

Got you. And...

I would say with these multi-project awards, what's nice is it gives you a good base and good kind of ability to forecast short and long-term revenue basis. So we're excited about these multi-project, multi-customer award wins because it does build us a nice baseline for revenue and revenue growth for us to be able to feel comfortable about what we're talking about externally as well.

Got it. And steel prices have gone up almost up 60% since the lows we saw in December, at least in the U.S. How does that impact the discussions you're having with customers either for future orders or existing bookings. Just trying to understand the impact on pricing and margin for you guys in that.

So we have quite a few lessons learned from the past year when we dealt with the historic highs in both steel and logistics. And while you're right that as of late, some of the steel pricing has gone up, but we continue to provide quotes to our customers that have a limited window of time because we want to prevent any sort of surprises with our customer base, which they like about the approach we've taken. So we basically manage it the same way we managed it before, which is to give quotes that have a limited shelf life.

And then how should we think about like pricing later this year as steel prices remain low? Do you expect pricing to come down over here? Or is pricing relatively stable right now this year?

So we continue to watch the market very, very closely. And there are so many factors at play right now. If, for example, the positive outcome happens for UFLPA and suddenly, there's a significant increase in demand for trackers driven by crystalline module supply with the resolution of UFLPA. I mean there are so many geopolitical issues and things going on. It's hard to predict exactly what's going on, but we continue to have our DTV or design to value and our design to manufacturability initiatives to continue to have a cost down road map. So we can regardless of where the pricing goes, that we'll continue to be able to have a good margin outcome for our shareholders.

And then just one last one from me. I presume like since there's a limited market for the non-UFLPA projects, does that increase competition and that non-UFLPA RFPs? And how should we think about the margins for those projects versus your normalized margins for the UFLPA or your regular projects?

So we never ever underestimate the competition. But frankly, we're really happy with the way that the sales team has been able to win projects. going up against some pretty stiff competition. But frankly speaking, we feel really good about the manufacturability advantage that we offer our customers. There's more to it than the price. And many of our customers recognize that and give us value for that manufacturability when we go head-to-head against the competition.

Yes. And the thing I'd add is that I think that's informed by everything Sean said about the Q1 margin guide that we have of positive 2% to positive 8%.

The next question is coming from Alex [indiscernible] of Bank of America.

Just wanted to ask on the backlog. I mean, it's pretty well, right? If we look at what you guys are guiding to in 1Q, I mean, even on a sort of growing rate through the year or annualized, the level of backlog or line of sight however you want to think about it is really long versus what we would see from your peers. Just wanted to ask because I know you guys include sort of a combination there between contracted and awarded. What portion of that is not contracted currently? And I guess if it's sort of you're on a verbal or there's a negotiation of terms still to come, like what's to prevent somebody from, I guess, adjusting or walking from those contracts as it sits currently?

Well, I mean, I think the way we look at kind of the contract and awarded, obviously, these are projects that are, at times, multi-project awards kind of PO date over multiple quarters and multiple years. And so as we look at kind of the non-UFLPA, the 400, as Phelps talked about as well as myself, there's a portion of that, that's going to be recognized in 2023, and there's a portion of that that's going to be recognized ultimately in 2024 as well based on project delivery schedules. But if you think about from the customer's perspective, they're looking to simplify their overall supply chain. And so going out and having these kind of 1Z and 2Z type negotiations, they're really looking at, I've got 3 to 5 to 7 projects that I want to go out and kind of lump together in a portfolio more approach, and certainly, we've been approached by those customers that want to look at kind of these multi project awards and there are certain benefits in doing that.

Got it. That's super helpful. And then just one more. I wanted to ask just on the cash piece. Congrats to gross margins trending back in deposit or territory is a very welcome sign. But I realize you're still going to be negative cash, it looks like on an EBITDA base, at least in the first quarter. When you think about cash on balance sheet, and I know you have, I guess, the debt covenant terms extended the first quarter. What do we think about there just as far as like your liquidity base, anything that has to happen there? I know working capital looks like it's relatively drawn. Just anything we should be watching on the debt covenant versus cash in 1Q specifically. That would be helpful.

No. I mean so cash ended at $44.4 million. If you think about the cash usage for the year, most of that was actually in Q1, right? We are pretty neutral over the last 3 quarters of the year. You are correct, the revolver covenant will go back to $125 million at the end of Q1. But overall, we're thinking that cash should be relatively neutral for the quarter. There will be some potential timing that we could pull some cash in that you have every quarter or push cash out. But overall, we feel good from that perspective. And again, getting the term in terms of getting an improved margin profile, et cetera, we think that's going to help alleviate some of the potential cash usage going forward.

And that concludes the Q&A session for today. I would like to turn the call back over to management for any closing remarks.

Thanks, everyone, for joining today. We believe we ended 2022 on an improving trajectory and that we're well positioned for the future. We have a lowered cost structure, innovative product line, a record pipeline and very strong backlog at $1.2 billion, and we're looking for good revenue growth in Q1, along with continued margin improvement. Thanks again, and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you all for joining. Enjoy the rest of your day.