Fluence Energy, Inc. (FLNC) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Fluence Energy First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Sam Chong, Treasurer and Head of Investor Relations. Please go ahead. Sam Chong: I would like to welcome everyone to our earnings call for the first quarter of fiscal year 2022. On the call today are Manuel Pérez Dubuc, our Chief Executive Officer; Dennis Fehr, our Chief Financial Officer; Rebecca Boll, our Chief Products Officer; and Seyed Madaeni, our Chief Digital Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are neither promises nor guarantees and based upon our current estimates and various assumptions and are subject to material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. These and other risks are described in our filings made with the Securities and Exchange Commission. We encourage you to review these filings for a discussion of these factors, including our annual report on Form 10-K for the fiscal year ended September 30, 2021, and our other filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today, and the company disclaims any obligation to update such statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is available in our earnings materials on the company's Investor Relations page at ir.fluenceenergy.com. I will now turn the call over to Manuel Pérez Dubuc, our CEO. Manuel Pérez Dubuc: Thank you, Sam. I would like to extend a warm welcome to our investors, analysts and employees who are participating on today's call. Let's start on Slide 4 on the earnings presentation found on our Investor Relations website. This morning, I will provide an update of our market outlook, which remains strong and demonstrate the significant progress we have made since our last earnings call. During the quarter, we have seen a tremendous increase in demand for our energy storage products as evidenced by our recent contracting activity. The market for energy stored products service and digital applications continues to grow at a rapid pace with Fluence solidifying itself as an industry leader. We expect this strong demand to continue and we are on track to deliver our fiscal year 2022 revenue guidance of $1.1 billion to $1.3 billion despite some recent headwinds. Finally, I'm excited to share some additional details with you regarding our recently announced strategic initiatives, including our India joint venture with ReNew Power, expansion of our digital ecosystem through our partnership with Pexapark and our collaboration with QuantumScape on solid-state battery technology. Moving on to Slide 5. We continue to contract increasing amount of megawatts across each of our 3 business lines. Industry appetite for applications of energy storage remained robust, suggesting continued momentum for orders throughout 2022. As we have seen, energy storage is key to providing clean energy for a sustainable future. I am pleased to report that during the first quarter, we contracted 600 megawatts of energy storage products, which is a 525% increase from a year ago. This amount exceeded our expectations as the first quarter has historically been a seasonally lower one for contracting. We continue to experience very strong demand for energy storage products across the globe as companies and countries seek long-term solutions for grid stability and reliability as more renewables come online, creating challenges for grids around the world. As of December 31, we deployed or contracted more than 4.2 gigawatts of energy storage products. Turning to our Fluence services business. We added 250 megawatts of contracts during the first quarter. We also signed 35 megawatts of contracts for our Fluence IQ bidding application. More importantly, after the end of the quarter, we signed an additional 1.1 gigawatts with AES Clean Energy, which represents our single largest Fluence IQ order ever. This contract highlights the value that Fluence IQ can deliver. With this, we have already achieved our fiscal year '22 annual recurring revenue target for Fluence IQ, 7 months ahead of schedule. Turning to Slide 6. I would like to update you on the headwinds that we discussed on our last earnings call and the steps we are taking to mitigate their impact. This mostly stem from supply chain disruption as a result of COVID-19 as well as some cost overruns in the rollout of our first Generation 6 product installations and commissioning. Our team has acted swiftly to implement corrective actions that provide us the confidence to further execute on our plan. Some of these mitigation efforts include securing shipping capacity for our high-volume routes on a 2 to 4-month forward-looking basis, giving us better visibility to deliver our product to our customers on time. Furthermore, we have increased the size of our supply chain and manufacturing teams by 57% to provide us with the resources necessary to meet the robust demand we see. And finally, we are documenting lessons learned from our teams around the world and providing additional training so they can deliver our Gen 6 product installation and commissioning more effectively. During the second quarter, we will continue to catch up on some of the installations that were delayed in the first quarter. As of today, a vast majority of the products required to fulfill our anticipated Q2 deployments have already made landfall in their respective countries and are going through installation, commissioning and acceptance testing as we speak. I will also like to address another topic that is a concern for many in our industry. Inflationary pressures and raw material price increases. Our current backlog is hedged through the fixed price contracts we have signed with our suppliers and customers. Given the substantial volatility in commodity prices, we are introducing raw material indices or RMI-based pricing for future contracts. By implementing RMI on both the supply side and the demand side, we are further minimizing our exposure to future commodity price fluctuations. I would also like to provide a brief update on month lending. Although we cannot comment on the press release issued by Vistra in late January regarding this alleged technical findings about the overheating event last September, we can say that we continue to work with Vistra on the repair of the facility. Our own technical investigation is still actively in progress, and we will provide you an update once it has concluded. Turning now to Slide 7. As I noted earlier, we continue to execute on our business plan during the quarter to position ourselves for long-term success. I will cover a few examples. Let's start with one of our key wins in the new transmission enhancement segment of the market. As you may have seen last year, we were selected to provide a small 1-megawatt pilot to Litgrid in Lithuania. This pilot program was designed to test the concept of utilizing energy storage to an enhanced transmission and distribution network rather than incur the costly expense of installing additional transmission lines. The pilot turn out to be so successful that we were awarded a follow-on 200 megawatts order for virtual transmission lines. This outcome aligns well with our strategic effort to be the leader in this market segment. The transmission and distribution enhancement market requires a highly redundant and resilient technical architecture that supports advanced grid forming applications. This suggests a high-margin potential compared to other segments. We continue to be bullish of this growing market segment as there are numerous areas around the world that can benefit from this technology and we are proud to be among the first companies to bring it to the market. Additionally, we selected our contract manufacturer for our North American and European locations. We are on track to start seeing initial production for our North American facility in our fourth quarter. For our European facility, we expect to see initial production in the first quarter of our fiscal year 2023. Both of these contract manufacturing facilities will alleviate the burden of a single manufacturing location. On the software development side, we made several key additions that further strengthened our deep talent pool. These additions were part of the 139 full-time employees added during the first quarter, providing us with the knowledge and experience to keep the pace with the extraordinary demand we are seeing. Now I would like to provide you with some color on our recently announced strategic partnerships. Turning to Slide 8. In January, we signed a term ship to enter into a 50-50 joint venture in India with ReNew Power, which is one of the largest pure renewable IPPs in the country. ReNew Power is a well-respected renewables player and by establishing a joint venture, we will collectively leverage our first mover advantage in this significant market. India currently has just 24 megawatts of energy storage deployed. Almost half of that comes from affluence pilot that we built in 2019. Even more importantly, the Indian government has stated that we'll need at least 27 gigawatts by 2030, which provides Fluence a tremendous opportunity to be the industry leader in this significant market. The joint venture will serve as our primary sales outlet in India by licensing Fluence products and services. As a leading IPP, ReNew Power will also be a significant customer to the JV beginning with our recently announced first contract for 150-megawatt hours. Now turning to Slide 9. I would like to highlight the recent expansion of our digital ecosystem. As you may recall, we are developing several in-house applications to complement our flagship digital application, the bidding app. We are paving the way for third parties to build their own applications for the Fluence IQ platform. In January, we entered into a long-term strategic partnership with Pexapark, an award-winning provider of software and advisory services for renewable energy sales and risk management. Pexapark has supported 20-gigawatt worth of renewable PPA transactions and are currently in 18 markets with a large presence in the EMEA region. By partnering with Pexapark, we will bring together our unique insights that will help investors, IPP and utilities make better decisions as they navigate merchant markets while trying to maximize revenue. In addition, their significant EMEA presence will also help to accelerate the coverage for our bidding app in that region. This partnership is a significant milestone for Fluence. And it corroborates our vision for our ecosystem. Through this partnership, we will commercially introduce Pexapark and its 4 apps to our customer base via our digital platform. In turn, we expect to receive customer referrals for our products and services from Pexapark. And finally, turning to Slide 10. In January, we entered into a collaboration agreement with QuantumScape, a leader in solid-state battery technology. This agreement strengthens the advancement of solid-state battery technology in stationary storage applications. We will test QuantumScape's solid-state technology influence a smart energy storage products. This collaboration sets the stage for Fluence and QuantumScape to potentially enter into a large-scale supply agreement once commercialization is still to mine. We are encouraged by the benefit we see in solid-state battery, specifically around density and performance. And we remain battery technology agnostic and committed to providing our customers with the most economic and efficient product possible. I would like to take the opportunity to send our gratitude and admiration to our people during this pandemic. Thank you for your passion, hard work and commitment. I will now turn the call over to Dennis to cover our financial performance and fiscal year 2022 revenue guidance. Dennis Fehr: Thank you, Manuel, and good morning to everyone on the call. As Manuel stated, we delivered a very strong quarter of new orders for our energy storage products. In addition, we were able to execute on some of our near-term strategic initiatives, which position us for continued growth. Turning to Slide 12. We continue to deploy capital in line with our investment framework with a strong focus on supply chain and talent acquisition. In the first quarter, we prepaid $60 million into our supply chain to support capacity buildup for calendar year 2022 and calendar year 2023 battery supplies. And as Manuel already explained in detail. In January, we entered into agreements with ReNew, QuantumScape and Pexapark, which I would like to financially highlight in more detail. Our 50-50 joint venture agreement with ReNew is projected to be aligned with our capitalized approach as we will be licensing our technology to the JV. We anticipate that a JV will be mostly self-funded and operational with nominal amounts of paternal support. While the terms of the transactions are not yet publicly disclosed, this investment and expected results are in line with our previous expectations. The collaboration agreement with QuantumScape will be accounted for as R&D expense and is consistent with our previous expectations. At this juncture, we expect that it will be a few years until we can have a mass-produced, solid-state storage battery. Upon production, we expect that a future solid state-based energy storage product will contribute to achieving our long-term product margin targets. The Pexapark partnership is a validation of commercial relationships being built on our digital platform. As part of the partnership, we have a revenue share agreement in place for sales of Pexapark applications made through our app store. As our previous expectations did not include any such revenue share income, this partnership will be accretive to our financials from calendar year '23 onwards. Furthermore, we continue to add talent and resources necessary to keep pace with the robust demand we are seeing. As such, during the quarter, we increased our supply chain organization by close to 60%. Our service organization by approximately 20% and acquire key talent to strengthen our software development team. These additions are in line with our model and are important steps for executing our plan. Turning to Slide 13. Before we move on to our Q1 results, I would like to remind everyone of the seasonality of our revenues and order intake. This seasonality is due to customers' desires to have products, operational and time for summer in the Northern Hemisphere. Historically, we recognized approximately 70% of our revenue, mostly in our fiscal second half. This aligned with our patents for order intake. As a result, fiscal first half results are usually lower compared to our second half. However, as Manuel mentioned, for our current Q2, there is a caveat to the seasonality and that we expect the portion of the delayed revenue from the fourth quarter of fiscal year '21 and fourth quarter of fiscal year '22 will be recognized during Q2. Therefore, leading to a higher revenue contribution than typical in the second quarter. Moving on to Slide 14, starting with the table on top of the slide. In Q1, we contracted 600-megawatt of energy storage product, which was an increase of 525% from Q1 of fiscal year '21. We are encouraged by the high demand for products in a seasonally slower quarter. Energy storage services added 250-megawatt of contracts, which was a 10% decline from Q1 fiscal year '21. We sold higher levels of products to utility customers, which typically acquire service at the later date, as they did in Q4 of last year. We do expect an attachment rate of at least 70% for the products sold in Q1. Finally, we contracted 335 megawatts for our Fluence IQ bidding applications in Q1, which was a decline of 36% from Q1 of fiscal year '21. However, in January, we entered into a 1.1 gigawatt contract with AES Clean Energy. With this order, we have already achieved our fiscal year '22 Fluence IQ annual recurring revenue target, about 7 months ahead of time. Now moving to the second table on this slide. Despite impacts on our supply chain, the number of megawatts that we deployed for our energy storage products grew 6% sequentially due to our strong contracting results. Contract backlog megawatts increased 20% from the fourth quarter. Our product pipeline is being driven by strong tailwinds from the market and demand for our proprietary Gen 6 product. It stood at almost 14,000 megawatts at the end of Q1. Turning to Energy Storage Services. Assets under management grew 8% and contracted backlog grew 10% from Q4. Similar to our storage products, our services pipeline remains robust, standing at almost 12,000 megawatts at the end of Q1. Moving to our Fluence IQ digital platform. In Q1, digital assets under management grew 25% to almost 3,900 megawatts from Q4, and while contracted backlog declined 26% due to successful transitioning to assets under management. Our digital pipeline achieved a new high of 4,500 megawatts at the end of Q1, which increased by almost 1,200 megawatts from Q4. Turning to Slide 15. Our Q1 fiscal year '22 revenue grew 50% to $175 million versus $160 million for Q1 fiscal year '21. Q1 fiscal year '22 revenue was below expectations, driven by the already discussed headwinds. We view the delays of revenue new recognition as temporary, this expectation to largely catch up within Q2 fiscal year '22. On the last 12 months basis, total revenue grew 9% versus Q4 to $739 million in Q1. Turning to Page 16. In the first quarter, gross profit was negative $53 million versus positive $5 million in Q1 fiscal year '21. This decrease was driven by $41 million of nonrecurring expenses in Q1 fiscal year '22, which included $31.3 million related to project charges and other costs attributable to the compounding effects of COVID-19 pandemic, $5.6 million related to nonrecurring excess shipping costs and other nonrecurring costs. In our last earnings call, we forecasted nonrecurring expenses related to shipping and other COVID-related items of at least $50 million to $55 million in the first half of fiscal year '20. In Q1, these expenses totaled about $37 million. We continue to forecast an impact of $50 million to $55 million in the first half. Adjusting for these nonrecurring items, we generated adjusted gross loss of $8 million in Q1 fiscal year '22 versus positive $5 million in Q1 fiscal year '21. Adjusted gross profit was negative in Q1 due to $13 million of costs associated with first time deploying our Gen 6 product. As Manuel noted, we have taken significant corrective actions. However, we expect to see some trailing costs over in the month in Q2. Continuing on to Slide 17. EBITDA in Q1 was impacted largely by the same nonrecurring expenses as the gross profit. Adjusted EBITDA excludes these nonrecurring expenses and additional $24.9 million of stock-based compensation, which we have started to record in our successful IPO. However, the $24.9 million includes catch-up entry since April 2021. Therefore, future quarters will see significantly lower stock-based compensation expense. Moving on to Page 18. Our cash and cash equivalents as of December 31 was $632 million. We raised about $940 million in IPO proceeds in October, net of offering costs. Immediately following the IPO, we repaid a total of $100 million in debt. Our short-term working capital in the quarter was negatively affected by the shift in revenue recognition and by the $60 million prepayment to secure battery capacity. However, we expect to catch up on cash flow later in the year. Our strong balance sheet is now enabling us to keep pace with the robust demand we see for our entire ecosystem. Going forward, we will continue to deploy our capital in line with our investment framework of enhancing unit economics, expanding recurring revenues and developing structured offerings to deliver attractive value for our shareholders. Turning to Slide 19 and our fiscal year '22 outlook. Our contracted backlog as of December 31 was $1.9 billion. Our guidance for fiscal year '22 revenue in the range of $1.1 billion to $1.3 billion takes into consideration risks and uncertainties related to our ability to recognize revenue from our energy storage products on a timely basis in H2 fiscal year '22. Despite a challenging Q1, we expect our H1 fiscal year '22 revenue to be in line with our historic seasonality of 30% of full year revenue plus the majority of the $125 million delayed revenue from Q4 fiscal '20. As previously discussed, we also confirm our forecast of $50 million to $55 million of nonrecurring expenses related to shipping and COVID-19 compounding effect. Lastly, we have already achieved our fiscal year '22 Fluence IQ annual recurring revenue objectives ahead of time and have created upside to our digital plan with Pexapark partnership. At this time, I would like to turn the call back to Manuel. Manuel Pérez Dubuc: Thank you, Dennis. The first quarter proved to be exciting as we continue to execute on our mission to transform the way we power our world for a more sustainable future. We continue to see robust demand for our products, services and digital solutions as society continues to implement more renewables and reduce its reliance on fossil fuels, providing unique opportunity for Fluence. We are at a better place now that we were 3 or 6 months ago with improved visibility, more capabilities and more resources that we can deploy to meet the growing demand we are seeing. We are still in the very early stages of the clean energy transition, and I can say the future looks bright for Fluence as we look to deliver attractive value for our shareholders. Operator, we are now ready to take questions. Operator: Our first question comes from James West with Evercore. Your line is open. James West: Curious, so looking at the order intake for Q1 down year-over-year. But of course, you had the AES order that came in, in January. So kind of how should we think about order intake? Should we be looking at that on a quarterly basis? Or should we look at kind of a rolling 12-month basis? Is it lumpy and seasonal. And so I guess it doesn't seem to spark or concern at all from you guys. From your commentary, it sounds like things are very robust, but just curious how we should be thinking about that as we kind of monitor the business on a quarterly basis? Manuel Pérez Dubuc: Good morning. Thank you very much for your question. First is I see you're looking more at the Fluence IQ platform and not the overall backlog. First is that we are extremely happy and excited that we achieve our goal 7 months ahead of our plan, which is fantastic. The best way to see Fluence IQ is that on a rolling basis. It's a product that we are expanding to other markets. We enter into the California. We're making inroads in that market in Australia. We solidified our presence there with 20% of market share, incorporating additional projects in Australia, California. It's an open market for us. So you will see more coming. And it would take a few months until you -- first, you test and you model the product for the customer. We incorporate the portfolio into the platform. We do some -- Sometimes we do some modeling in parallel, so they can see what is the upside and the revenue uplift potential. And then you sign a contract that usually it's a significant amount of megawatts because the fact that we are just not using Fluence IQ for energy storage, but also for renewables make the market more significant, the addressable market more significant and also the growth is becoming the standard in the market. So the more people, they start testing us. The more people that they see the benefits, they will keep coming. So I would say that very excited. Extremely happy about the outcome, and we keep moving forward and developing new applications. Seyed, you want to share anything? Seyed Madaeni: No, I think that answers the question. As Manuel mentioned, we had great momentum over the past last 12 months. So if you want to think about it as a rolling basis, we're super excited about the progress of the application. As Manuel mentioned, we're very penetrated deeply in Australia, continue to grow in California. You'll see us growing into adjacent markets here in the U.S. And the landscape has been great for us. So if there are any further questions, happy to take them, but I think, Manuel, you covered it. James West: And then I guess, Manuel, the momentum in the business seems to be exceptionally strong right now. I mean, every time we speak you're on an airplane or heading to an airplane or being similar to the customer. Could you maybe describe kind of how the market is developing? What type of a -- where we are in kind of the land grab for storage and kind of where the customer acceptance and understanding this has been a necessity stands today versus 3, 6, 12 months ago? Manuel Pérez Dubuc: Thank you very much for the question. Yes, I mean, the market is exceptionally strong. Even if you consider all the headwinds that we see in supply chain and some of the concerns in some markets about the capacity to deliver. But the market is there. The more they test the technology, the more they like it. We see a lot of recurring customers coming back to us and repeating their orders and looking at additional applications. Because this is a -- it's a compound effect on growth. First, the sites are becoming bigger and bigger because the technology has been understood and really they see the benefit. So now you see more and more companies, IPPs out there and utilities, they combining renewables with energy storage, but they also replacing traditional fossil fuel generation with energy storage. So then the sites are getting bigger in megawatts in capacity, but also the sites are getting bigger in hours. So the total megawatt hours is a compound is the combination of both. But on top of that, look at what happens with the -- we have been working for some time on the Belton transmission line concept. We developed the architecture, which is extremely complex and a very, very unique -- there are very, very little people that really understand how to do that. We did a test just a pile of 1 megawatt. And immediately when they saw that operational, they came back to us and say, "Well, we need 200 megawatts." So that is 200 times the pilots. So -- and then you see our transmission line bottlenecks everywhere in the world, Germany, Chile, Vietnam. There are so many places where you have offshore and onshore wind that, that energy cannot be delivered to the low centers because transmission constraints. If we can solve that equation without the problem, we all know how difficult to build transmission lab without building new transmission line, that is a whole segment with a higher margins, and we are extremely uniquely positioned to take advantage of that. I don't know, Rebecca, do you want to say something? Rebecca Boll: Sure, Manuel. Thanks. Again, I think you covered a lot of it. I would summarize it that the market does continue to grow and the buckets of growth are in segments and the transmission opportunity is an example of that kind of segment. Another segment is data centers. So more segments is more upward movement of that total available market. We also see growth in new geographic regions. So regions that didn't -- like India, as an example, regions that previously didn't adopt energy storage and the associated services and digital, and they are now ready to adopt that. So clearly, in our story, we're on top of that with India and actually some other countries as well that we're moving into. Something about the regions is that they move from short duration to long-duration solution. So that helps us grow that total available market as well. And then, of course, to summarize as Manuel said, just the penetration of renewables. I think it's clear in the market right now that to make the renewable story work, we need to pair renewables with battery energy storage, so... Manuel Pérez Dubuc: Allow me just to make a very, very short sample because this is -- we are so happy and so proud that we are part of this story. Last weekend, in Ireland, they broke the all-time record of renewable generation of 89% of renewables in the system last weekend. During a storm, our ultrafast response energy storage solutions in that market. We are the only ones in that market. If you see the performance of our site with ultrafast, which is the only one that is in the market right now, how we absorb the ups and downs of the wind generation and keep the lights on and reliable, 20% of the load -- 20% of the load in Ireland or close to that is data centers. And you know the need of the end of the 5 9s of reliability and availability. And we supported that market. If you look at -- if you go to the statistics and you look the way that the system operated, we are really, really enabling the high penetration of renewables in a sustainable and reliable way. Operator: Our next question comes from Maheep Mandloi with Credit Suisse. Your line is open. Unidentified Analyst: This is on behalf of Maheep. Can you talk a little bit -- you talked a little bit about the near-term headwinds that you're seeing. Could you help us think through the impact on margin and cash flow through directive the year? Dennis Fehr: Yes, absolutely. Let me take this. This is Dennis speaking. So first of all, when we think about especially the second half of the financial year, we look ahead with confidence. When we say confidence, that's stemming from 2 parts. First of all, it's about the measures and the actions which Manuel outlined in his prepared remarks that we are seeing to take them -- have them taking traction. Second and overall, we are seeing that the Omicron wave is going down. So that means why we have seen stronger headwinds from the pandemic before, that's declining. So in that regard, we're looking ahead with confidence. But that now means in terms of the margin development and the cash. So on the profit side, gross profit side, we are seeing that gross profit margins are to be improving and increasing on a quarter-by-quarter basis to come back to the level of our previous expectations by the year-end on a rolling basis. But also just to be clear on that, on a full year basis, considering the full 12 months, we won't be able to recover on what we have debated in the first half. On the cash flow side, in the first quarter, we have made the prepayment to secure battery capacities, which is an important step for us to secure our backlog and the demand until the end of the calendar year 2023. In addition to that, cash flow has been also impacted by the delays and the shifting in the revenue recognition from the first quarter into the second quarter. As we are catching up and looking forward with confidence on that, on the revenue recognition, we will also catch up on the cash side and on the working capital side in the later part of this year. Unidentified Analyst: Switching gears a bit, we're expecting to perhaps see changes in the net metering policy in California, which could potentially drive significant demand for residential batteries. As that market potentially grows at a much faster pace, would it be increase to Fluence to bring your capabilities of manufacturing and modular batteries to residential market? Rebecca Boll: So we see the same thing in the market that there is potential for residential. I would say shortly that we're evaluating it. So we're not in the market today, but we're evaluating it. Operator: Thank you. Our next question comes from Mark Strouse with JPMorgan. Your line is open. Mark Strouse: When thinking about the India market, are there any local manufacturing requirements that we need to be aware of? And how are you planning for that, if so? And how does that impact the potential ramp that we might see in orders in that market? Manuel Pérez Dubuc: Yes. Thank you. India, very, very excited about India. We established the first -- our first pilot of 10 megawatts in India in 2019. We wait for several months or even few years to the right moment to find the right time, the right partner and be ready for such a big market. Because it's not just that we have the technology, it's also that do we have the capacity to ramp up production and to really, really be able to penetrate a market with a reliable and enough resources to fulfill the demand that we might see there. We found the right partner. Very, very happy with the JV we ReNew Power, the leaders in pure renewable projects in India. There's -- Initially, there's no requirement of localizing, but you know how competitive that market is. So eventually, when the time is right, we will be publishing and letting you know about how we are going to be starting to use local suppliers to complement our technology. But the target is just to fully localize the production. We have all this tremendous first mover advantage. Imagine our pilot -- the actual amount of energy storage in India is very, very small. And we represent right now, 50% of that -- of what is already operating in India. They will do a multi-gigawatt demand. We see that coming. The good thing is that the government already did a local tender for battery manufacturing, giving them a price subsidy on energy for those who will want to establish up to 50 gigawatts of energy -- of battery manufacturing. So the government is already thinking about that. In the short term, there will be -- most of the equipment is going to come for abroad. There are some inverters manufacturers in India. We're already talking to them. We are already exchanging some technical specifications with them. I don't know, Rebecca, if you want to give us some color about that. Very exciting right partner, right time, the government is supporting. There's some very, very strong political -- economic and political support, economic incentive. So I think that the time is right for us to enter into that market. Mark Strouse: And then you kind of touched on this earlier about the opportunity for more transmission upgrades over time. Just curious, though, is just kind of looking out kind of more near term. Do you have any similar-sized projects in your kind of late-stage pipeline? Manuel Pérez Dubuc: Yes. I cannot disclose exactly who we're working with, but yes, we are working with world-class developers and energy companies actively participating in bidding processes that are already taking place in Europe and in America. There are -- there was more -- certainly, I mean, if we get this right, there will be a very, very good segment for us, opening up with good margins, and we are -- so far, we are the only one, but we have developed so many applications in the past. We'll know that others will follow, but we keep innovating. We keep having this first-mover advantage and creating more and more applications. Rebecca, do you want to say something about the transmission? Rebecca Boll: Again, I think you summarized it well. There certainly are opportunities that currently exist, particularly in Europe, and we have bids going on right now. Operator: Our next question comes from with Goldman Sachs. Your line is open. Unidentified Analyst: Maybe the first one, just going back to the margins. I know there's some pressures here near term. It sounds like they should ease moving through the back of the fiscal year. But it sounds like we should expect sort of steady-state margins by year-end. So Dennis, I think based on your prior model, that would imply like positive mid-single-digit adjusted gross margins by, let's call it, fiscal Q4. First, is that fair? And then maybe can you give us a bit of the bridge here, that's about a 1,500 basis point expansion from today's level over just the next couple of quarters? And then I have a follow-up. Dennis Fehr: Brian, thanks for the question. So in that regard, I think you like where we started in Q1. So in Q1 has been impacted by the nonrecurring expenses as well as by the cost overruns, which we disclosed on the call. So if you're thinking forward into the second quarter, we will still have some portion of the nonrecurring expenses where we had reconfirmed our outlook of $50 million to $55 million. And then we said we will still have a small amount, a trailing off amount of that cost overrun. So that means in that regard, we will see a reduction in the nonrecurring expenses as well as in the cost or in the second quarter. And then while we are entering in third quarter and into the fourth quarter into the second half of the year, we are seeing that we are moving back towards this previous expectation levels into the mid-single digits as we had previously discussed. Unidentified Analyst: But it's all the nonrecurring going away? Or it seems like there's a bit more to the bridge than just that. Dennis Fehr: Yes. On the nonrecurring side, let's say, like this, I mentioned before that we have high confidence in the measures which we put out. Nevertheless, we had stated a $50 million to $55 million as a guidance for the first half. At the end, just through quarter one of this year. So -- and therefore, we will give you an update on the -- on potential nonrecurring expenses in our next earnings call. Unidentified Analyst: And then just a second question around this Fluence IQ contract with AES. Congrats on the scale of that. Just wondering, it sounds like, clearly, this is a big deal, the biggest one you guys have ever done over 1 gigawatt. I recall you had like a $3 million or $4 million revenue target for the digital business this year. So if I kind of back into this 1 gigawatt deal is worth maybe $1 million or $2 million annually since it adds about 25% to your assets under management for that piece of the business. Is that the right way to kind of think about the scale of the revenue opportunity every time you're getting like a gigawatt into the IQ business segment? Seyed Madaeni: Yes. I mean, I'll pass it to Dennis in terms of going to some more details about our targets. All I can tell you, it's been a great deal for us, very energizing to see the rate of adoption of Fluence IQ in California. As Dennis mentioned, we've already achieved our expected ARR targets for this year, way ahead of the schedule, and we're building a lot of momentum. I also want to note that I'm really proud and excited about the diversity of our customer base. Obviously, the deal with AES is very exciting. It's over a gigawatt. At but if you look at the 6 gigawatts that we have contracted and the diversity of our customer base, we have utilities, we have community choice aggregators, we're helping communities with Fluence IQ. We have IPPs. We have renewable developers. We have renewable asset managers. And most importantly, we have investment banks involved in Fluence IQ. So a lot of great momentum. Maybe I'll pass it to Dennis, if you want to speak more about the revenue targets? Dennis Fehr: Right, let me take that, Brian. So what makes this deal so attractive for us are 2 things. So first of all, this has a high share of battery storage. So that means in that regard, I mean, typically going out with Fluence IQ to also go after the renewables side. This year also includes renewable, but it has a high share of the of the energy storage, which brings a higher ASP in terms of dollar per kilowatt. That makes it attractive first. And then the second portion is that it has also a highly attractive performance sharing revenue portion to it, which, as you may recall from previous discussions, we have been very conservative on how we have put that into our model. And so therefore, we are seeing an upside here on our digital side. Manuel Pérez Dubuc: Something that I would like to add because I think it is important is every market is different. I mean just the same proportion by percentage of the portfolio increase. There are markets with higher volatility. There are markets with higher price points. They are in contracts that they include renewables. They are not just renewals. And remember that the revenue uplift potential for just renewables is between 10% to 15%. And but when you have energy storage or you add energy storage, that number goes up to 50%. And if you have the revenue sharing and you know that the uplift is 50%, so that is not -- it's not linear. You actually have an exponential -- the possibility of exponentially higher revenue sharing when you have a higher revenue uplift, I mean, capacity for the AI system or software, but also by the dynamics of the market. Operator: And our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open. Julien Dumoulin-Smith: I'll make it quick here. Just two follow-up questions, if I can. First, on AES, how do you think about the future backlog from AES. And you think about the percent exposure to AES as a counterparty both in the quarter? And then in terms of your future backlog and both in the context of IQ, but also overall in your business, how do you see that evolving here, right? Obviously, things were fairly elevated. We've talked a lot about it on this call, for instance, with the IQ. But how would you frame that '22 onwards from what you know already with your backlog and otherwise? Manuel Pérez Dubuc: Yes. Julien, thanks for your question. And yes, I -- we saw -- you rolled this morning about our call and your first impressions. And you highlighted that in this quarter, we had a high concentration on Fluence IQ on AES. First, let's say that we're extremely happy that AES as one of our sponsors and main shareholders, but also one of our very, very important customers, they are ramping up. They're expanding aggressively their renewable targets. And they have done that in a very solid way. So we're very happy to be linked to them. That's one element. Second, we have customers all over the world. And the fact that California is such an important market for AES, and we will keep capturing market share in California. Well, I mean, AES will be in the mix. There's no way that with the huge portfolio that they have in California, we will not be there. So that's one element. But we will see, and we are expecting that, that number will go back to the traditional long-term numbers that we have seen in the last 3 or 4 years in terms of what is the contribution from AES on the overall ecosystem platform expansion and populating process that we are achieving. So -- and we're very, very excited about AES, and we will see them in California, obviously. But as we expand to other markets on Fluence IQ, well that proportion might change. Julien Dumoulin-Smith: Yes, clearly always good to run on the of the company expanding like AES. All right. No doubt about that. Manuel Pérez Dubuc: Other companies will follow, Julien, you know that. Julien Dumoulin-Smith: Yes, totally, totally. Well, so if I can, actually, I'm just curious on -- as you think about the balance of this year, certainly talked about some delays from 4Q from last year here. Can you talk about when you get some of the $130 million back, if you will? Manuel Pérez Dubuc: Yes. Let me take this high level. I want to send a message to you and the rest of our investors and customers out there. First is that the demand is very strong. We're working very close to each one of our customers to overcome those delays, to close the gaps. We've seen already that happening in many of our projects. We developed our technology for the first time, the Gen 6. So it's normal that you will see some things that you need to find. You need to fine-tune. The size of the mega -- the mega sites that we have is a significant step up in the company. We brought in new talent which in these times is really difficult, and we have been able to attract very, very good talent. They like our mission, they like that we are the leaders. So in that sense, things are going in the right direction. We haven't had any cancellation, which is a very, very good sign. And Dennis, do you want to add something? Dennis Fehr: Yes, Julien, to your question. So we expect to recognize the majority of the $125 million of revenue which shifted over from Q4 '21 in our first half plus being back in line with our historic seasonality of 30% of our annual guidance. Operator: And our next question comes from George Gianarikas with Baird. Your line is open. George Gianarikas: First, can you talk about your service attach rate at 69%? Some of the dynamics that went into that and your confidence of that improving over time? Manuel Pérez Dubuc: Yes. First is that you -- First, we are very confident that the attachment rate that we have seen in the past is stable, it's going forward. So it's going to stay there. We -- as you know, Fluence in general, the Fluence services, they lag a bit after the -- you get the signing of the systems and the products for the energy storage and smart solutions. And it will take some time to get those contracts up on sign and then incorporating into our metrics. You saw that in our last earnings call that we had an increase of 750%. So you will probably see that coming. But we look our -- the way that we see it is that around 70%, 75% attachment rate is going to stay at those levels. George Gianarikas: And just one follow-up, just to make sure that we all understand your guidance for the year and the context around it. Are you assuming that the world continues to improve from a COVID perspective, that supply chain disruptions get better, and that's how you'll hit your guidance? Or do you assume continued disruption? I just want to make sure we all understand the context around it and what to look for to understand it. Manuel Pérez Dubuc: Yes. My first reaction, and thank you for your question. We cautiously optimist as we see the Omicron variant suiting and we see less port congestions, for example, in the West Coast of United States, as we have most -- A vast majority of our products already in country in the different locations where we have to install and commission for Q2. So we are cautiously optimistic. And we do see an improvement for the second half of the year. But we are also accounting that there might be some still places where things will get a little -- it will delay their process to get back to normal. But we are considering both. Dennis Fehr: Right. So we maybe internally would call that like considered a new normal. That means like pandemic/post-pandemic kind of level of supply chain reliability. That means not as good as pre-pandemic, but also not as bad as we have seen especially over the end of the last calendar year with the high levels of Omicron. Manuel Pérez Dubuc: I also would like to add that the fact that we are already selected our contract manufacturers for Europe and the U.S. That will also help us on the supply chain and logistics. Operator: Our next question comes from Graham Price with Raymond James. Your line is open. Graham Price: Just on the newly announced Pexapark partnership. I was wondering if you could talk a little bit about how that expands coverage for the IQ platform and maybe specifically what that does for the addressable market for the bid app side of that? Seyed Madaeni: Yes. Thank you. Great question. So let me take you all back to what we shared during our road show and Analyst Day conversation. So with Fluence IQ, our flagship application as being the bidding application. But we have been contemplating and in the process of developing new applications, but we also noted that an upside for us is to create opportunities for third parties to integrate or get into partnerships with us for additional applications. Now I should also note, none of that was built into our financial models in terms of revenue upside. By the fact that we have actually announced this partnership, we're way ahead of the schedule in terms of creating that momentum around third-party applications. Obviously, Pexapark with their presence of Europe, that gives us a greater insight in the European market and allows us to get into that European market with deeper customer relationships. So all great, ahead of schedule. And let me pause there if there's any follow-ups. But I should say it's very positive momentum in the right direction. Graham Price: And then I guess quickly on the cost overruns that you saw for the Gen 6 product installations. Just wondering, are those largely due to commodity price inflation, kind of the typical logistics issues? Is there one thing you can point to? Or is it just kind of a combination? Rebecca Boll: Sure, I'll take that. So we've kind of separated the cost overrun some of the logistics issues. And on the cost overruns, they are temporary, and they are associated with installation and commissioning. So the way that we have addressed that is we have done root cause analysis of either operational issues or technical issues that we could optimize to ensure that those cost overruns get to zero closer to the end of this quarter. We've implemented those fixes either in our field installation manuals or in our factory, and those are in play right now. So we've identified the issues and we've implemented the fixes. We've also hired a significant number of more people to be able to handle the installation and commissioning. So that was one of the lessons learned is that we needed more people, and we have trained those people in the installation procedures and updated our installation manuals. Operator: Our next question comes from Ryan Levine with Citi. Your line is open. Ryan Levine: Has the AES-Fluence IQ contract duration compared to the existing portfolio? And are there any material term differences in that agreement versus other contracts that you sign? Seyed Madaeni: So it's actually more on the longer duration side in terms of the contract length, which is more exciting. So that gives us further momentum to really adapt IQ with the dynamics of the California market. And like I said, it's more on the longer duration side. Ryan Levine: And then in terms of your hiring ability or trends. Can you update us to your ability to hire new people, both on the engineering and sales force side throughout the organization? Manuel Pérez Dubuc: Yes. As I mentioned, I mean, we're very pleased that in such a difficult market, and we all know that the labor market is -- especially for high-qualified engineers and professionals. It's is very tight. And it has been a quite nice surprise to us that the number of people that they want to come, they want to be a part of Fluence story. They want to -- they like our mission and our purpose. They like what we're doing and our global presence and that we are truly, truly enabling more and more renewables around the world. So we increased our teams in supply chain and manufacturing, logistics by 57%. We hired a significant amount of engineers and control engineers and commissioning engineers. Honestly, the demand has been tremendous. We have extremely high volume, we might call it, growing pains. We are surprised by the amount of demand that we have. So -- and the simultaneously effect that having all those sites being commissioned and installed at simultaneously, it was a big challenge. I think that by the almost 150 people that we added in a very, very tight market is remarkable. So thank you very much for asking. And we -- I mean an opportunity for us to welcome all of them and thank them for all their hard work. Ryan Levine: And then just to clarify a comment around fourth quarter, achieving single-digit margin. Is that referring to on a GAAP basis? Or is that on an incremental, contracts signed or incremental sales basis given the revenue recognition that you have throughout your organization? Dennis Fehr: So that's referring to the in-quarter numbers on a on an adjusted gross profit level. Ryan Levine: When do you think you'll be able to achieve single-digit on a GAAP basis? Dennis Fehr: We will see that same trend on the GAAP basis as on an adjusted basis. As mentioned before, we are a bit early in the year, and we are, therefore, we'll give you a more concrete answer on that one in the next earnings call. Operator: And our last question comes from Steven Fleishman with Wolfe Research. Your line is open. Steven Fleishman: Just I guess just on the shipping costs and the like, how are you thinking about as we move on, kind of what to consider onetime versus ongoing to the degree that we stay in kind of a higher inflation environment? Dennis Fehr: Yes. Let me take that. So in general, we think that -- or we are seeing that prices have been stabilized on a high level in the shipping market. And that since Q4 fiscal year '21, we have been including this higher logistic cost into our customer prices. And have been pushing them, therefore, into the market. So that means overall, in terms of the shipping cost side, we are seeing actually a kind of a light at the end of the tunnel. And seeing that this type of nonrecurring expenses are subsiding throughout this fiscal year. Steven Fleishman: Okay. So we should assume those costs, we shouldn't have nonrecurring shipping costs pulled out as we get later in the year? Dennis Fehr: That is correct. Steven Fleishman: And then could you just clarify the comments that you made about Moss Landing? And are you implying that you may disagree with the report that was issued on Moss Landing ? And are you there's plans to build a lot more storage there? Like are you in the running for that or not? Or I just like more clarity on what's going on there. Manuel Pérez Dubuc: Yes. I can -- I just want to repeat what I stated in my initial remarks is that we are conducting. First, we're helping and we are working with Vistra, putting that facility back in operation and fixing the installations. We are conducting our own investigation. And it's too early, once we have the final results, well, we will share that with the market. It's too early to say exactly what it is. And so we will be informing you on the market when that happens. Operator: And that's all the questions we have for today. I'd like to turn the call back to Sam Chong for any closing remarks. Sam Chong: Thank you. We would like to thank everybody before listening to our earnings call today. If you have any further questions, please contact us at investorrelations@fluenceenergy.com. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.FLNC Ratings Summary
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Fluence Energy Price Target Raised to $23 at RBC Capital
Analysts at RBC Capital raised their price target on Fluence Energy, Inc. (NASDAQ:FLNC) to $23 from $18, noting they see the recent management changes as an opportunity to prove that the company can overcome supply chain challenges both near and far.
The analysts anticipate more clarity on long-growth prospects in Q1/23 in a potential Analyst Day. The analysts continue to see margin breakeven as the top driver of the stock. The analysts believe near-term factors that support better margins will come from relaxing COVID policies in China, suppliers adjusting to forced labor laws and favorable results from the Commerce Department's solar tariff circumvention study.
