Shoals Technologies Group, Inc. (SHLS) Earnings Call Transcript & Summary

Hi, good afternoon, everyone. My name is Christine Cho. I'm the Clean Tech Analyst here at Barclays. Next up, we have Shoals, a provider of electrical Balance of Systems and power distribution solutions for solar energy, Battery Energy Storage Systems, and data centers. Here with me to discuss the company is Brandon Moss, Chief Executive Officer. Thank you for joining me.

Thank you, Christine. Good afternoon, everybody.

Um, so you evolved from a solar EBOS company to one that's now doing BESS solutions. And I think, um, one of your more recent things is working inside the data center with your product called AirLink. Can we start off with how the market looks like for all three of these—solar, BESS, energy, by the data center—uh, and how it's evolved over the last 12 months?

Sure. Yes, maybe just to start out with our strategy, you know, we set the course now a couple years back that we were going to continue to grow our core market, obviously, solar, but also diversify into new end markets. And we're starting to see that materialize with our BESS business and, and now, uh, soon to be AirLink, as you mentioned. So, you know, really working through those markets one by one. The solar market today is certainly as good as I've seen it since I've been at Shoals, which is a little over three years, but probably as good as the market's ever been. As everybody knows, there's an underlying demand for power that is extremely significant. And I think it's important, I think the thesis of eclipse, so to speak, happening after the tax credits rolled off, is maybe subsiding a bit, and we are believers in the market and that the market will be strong for longer. So, you know, Wood Mackenzie and BloombergNEF have projected things, you know, through the end of the decade and a bit beyond. I think it's probably a high 30s, low 40s market from a domestic perspective, which is a fantastic market for Shoals and our peers to operate in, quite frankly. So we're very bullish on the solar market. As it relates to Battery Energy Storage, one of our new vectors for growth, it's a really exciting market. I think about the product that we're providing specifically to data centers. We're probably in the first quarter of the maturation of that product segment. And as AI data center architecture continues to change and evolve, we will have more and more opportunity to satisfy those particular markets. As it relates specifically to our AirLink product inside of the data center, it's fantastic for us to be able to provide power to the rack versus just power to the physical structure of the data center. And that market size is very significant. Christine, you've done a bunch of good work on working into this product, so you understand the market landscape. We think about that market of being about a $2 billion market opportunity for us now, growing to about $4 billion later in the decade. And our product is primarily a substitute for traditional busway to deliver power again to rack. So, um, exciting opportunity for us to continue to grow in that space.

Can you talk about, um, sort of the competitive landscape and the profitability profile?

Among the three. I know that gross margins and how they'll continue to evolve over time has been a hot topic.

Sure, yes. Each market is different for us. But maybe before I go there, talk a little bit about what is unique and what makes those market opportunities the same. Shoals really at its core, our core competency is the ability to build at scale a very high mix, so custom solutions at scale. So when you think across whether it be solar, whether it be BESS, whether it be data center, that value proposition really holds true. And how that translates to the customer is product reliability, being able to deliver it fast the way that they want it, and our products will stand the test of time in the infrastructure that it's going into. Each of the markets, obviously, and the margin profiles are a bit unique. In the solar landscape, we've got an IP portfolio protecting our Big Lead Assembly product or solution, which is very strong and intact, as we've seen here in recent weeks through the judgment, you know, and our IP litigation. So with that IP and the solution that we provide, we are able to drive, you know, a price point in the marketplace that is deserving of the value that that product delivers. There is unbelievable demand for EBOS products now, as we talked about with the robustness of the market, and I would say that pricing and margin behaviors in this market are behaving rationally with that type of demand. As I think about our Battery Energy Storage product, similar scenario, highly engineered custom solution for our customers. When you think about our margin stack, Battery Energy Storage is at the higher side of our margin stack as we're getting essentially paid for that value in the engineering that we're delivering to the customer. As it relates specifically to our AirLink product, we've not priced that product in the market yet, but there's a tremendous amount of value there, and speed to power safety. And also the scalability of the power that we can deliver to the rack server. So I would expect that product to be sort of at the higher end of our margin stack when it comes to market.

Okay. And from a competitive landscape, uh, the, uh, AirLink, you just said that, you know, that competes against the more traditional busway systems. Have you gone out there in the market or have you seen if anyone's trying to do something a little more out of the box like you? Then on the BESS side, you know, you historically have talked about, you know, some of the smaller players that are, you know, some of your competitors on the EBOS side who are too small. And be bothered to customize solutions. Is that still the competitive landscape for us?

I believe so. I mean, I think as it relates first to Erlang, I'm not aware of anybody bringing a product to market that has the capability to deliver the power that we can in a custom, configurable, modular solution that can be installed as quickly as our product will be able to be installed. So it's quite an exciting product for us and we look forward to that product probably coming to market and starting to manufacture that product after the first of the year. As it relates to Battery Energy Storage, yes, I would say that same thing applies, Christine, that there are smaller players in the marketplace that can serve smaller jobs that are willing to do the front-end engineering legwork to do the customization that's required for these data centers, but I would say a lot of those companies are unable to build at the scale that we can build at, with the production line that we've set up. So we offer, really, the best of both worlds in the market. We are custom but can build also at a pretty extreme level of scale. If you think about a 1 gigawatt data center that's paired with 1 gigawatt of battery, we're going to be delivering 500 to 700 units to that site over time. And so, you know, for us to keep up with the delivery schedule required by the customer, we've got to be able to build these products pretty rapidly. And what we've set up in our facility enables to do that almost in an assembly line sort of production.

I'm going to have a follow-up on that. But on the solar side, before I go to the BESS stuff, you recently saw a win on the case against PV Hardware. How do you expect this to impact market share? Have you already seen customers come back? Or do you think more than anything it just signals to potential competitors, existing and new, that you take IP very seriously and will fight against anyone who remotely infringes?

Sure. Well, I appreciate you bringing that up. I'm sorry for bringing this up. It's been, since I've started with Shoals, we have been involved in this patent litigation. So it's exciting for the company and a great for our shareholders that we've effectively brought this to a close. We were not only successful in the ITC and having the product that our competitor was importing banned, but now also more recently in the last couple weeks, in our case in District Court in North Carolina, winning a $96 million judgment and willful infringement from our competitors. So it was a great win for our company and our shareholders. But as it relates to how it impacts the market and showing the market that we'll protect our IP, I think it's a bit of both, right? I'm a firm believer in... don't file a patent application if you're not willing to defend your IP, and Shoals will always defend our intellectual property as long as I'm with the company. So I think it's a signal to the market, obviously, that we've got important IP and we're willing to protect it. As it relates to the competitive landscape, we've been experiencing that probably over the last year, year and a half maybe as these proceedings have been going on. We certainly have brought in new customers into our mix, expanded wallet share with other customers that perhaps were customers of our competitors. So, we have seen some of that happen over time, and I would expect we'll continue to do so.

Hypothetically, just because I don't really know what happens in this case, you know, let's say this competitor exits the market. And the install base it has in the U.S., like if there's any issues and, you know, the customers need replacements or servicing, like what happens there? Is that a potential opportunity for you or not?

It would be an opportunity for us. You know, if they had componentry, um, and we could support the customer, I think, you know, we can certainly look at that. Uh, it will obviously be a challenge for that competitor to support any product that was found infringing, obviously. So, yes, certainly an opportunity for us.

And then moving over to storage, you know, um, the storage revenue hit about $20 million in the last quarter. The backlog has continued to grow. You have this partnership with ON.energy. Um, but so far, I think the bookings have been roughly in the $60 million range. ON.energy has partnered with Crusoe to deploy up to 5 gigawatts. How should we think about what this impact is? Sure. You potentially, yes, reminder, on this product category specifically, it's early days for us, right? We were really beginning to produce this product.

In the second quarter. I mean, we made a couple units in the first quarter of the year, so scale production in the second quarter. The way to think about this arrangement with, um, with ON.energy is, I think, over the long term, it's a great opportunity for us. They will be a great partner to us, but we're again in early days on this. I would expect bookings to continue to be a little bit bumpy. And then we obviously will produce product according to the customer's delivery schedule. I think changes will happen over time, and again, the market will expand as this architecture becomes more prevalent in the data center space. So I can see it as a growing market. '27, I think, will be better than '26. And as we attract new customers, which we are doing, we announced TerraFlow, our MOU with them, last quarter. I think, you know, you'll see our booking stabilize and our revenues stabilize, obviously, as the business matures. But we're, uh, we're excited to have ON.energy as a partner. Uh, we're excited to have TerraFlow as a partner. And, uh, obviously, uh, the goal is to bring on more opportunities like that.

Okay. Okay. Um, and then, AirLink. You know, this is a potential growth platform beyond traditional utility solar where you've played. Um, can you just, for those in the audience who are not as familiar with the product, can you just talk about what customer problem you're solving? I guess you already kind of quantified the opportunity as $2 billion to $4 billion.

Maybe just talk a little bit about what the product is. If you think about our BLA product today, it's a trunk bus solution that is collecting power from modules. So, we have leads that come off our trunk bus solution, which ultimately connect to the modules. That power is collected and runs down the trunk bus line, which is then – eventually delivered to the inverter. AirLink is really a similar product on the cable standpoint. It is very like what we do with BLA, just a different type of cable. But we're using that trunk bus solution and the leads that come off it to deliver rack power. So again, it's very similar to the BLA, just sort of flip the way the electrons flow on the product. Um, what this product does specifically for the customer, there's, there's really three big concerns about rack power. One is speed to power. How fast can you get the product, in many cases traditional busway. How fast can you install that product, which I think we've got a very unique solution the way that this product installs. Because it's a cable, uh, versus a traditional busway that has to be, you know, fabricated together on-site. Uh, we've got a pretty unique system in which the cable is affixed to the structure that is very unique and quick. So, speed to power, we have a pretty distinct advantage. The other thing that data center owners are concerned about is scalability. Obviously, as chip sets continue to improve, the power consumption is much, much higher. Our product compared to traditional methods, the power density, our ability to deliver rack power is far, far greater than what is on the market today. So, as architecture transitions to 800 volt, and even higher than that, we're getting some requests if we can handle 1500 volts, which is what a solar field is today. We are well positioned with our particular product. The last thing is really safety. Um, traditional busway does have some exposed conductor in it as the voltages become higher and higher on these sites. Always a safety concern around that. There is also, you know, concerns about how that product is installed where the joints create potentially hot spots. Our product obviously does not have that because it is an insulated aluminum, the aluminum trunk bus. So, some pretty distinct, um, features that offer immense value to the potential customer.