Kevin Hostetler: So let me, I’ll take the latter first if you don’t mind. No, we still intend to have the H250 as a lower value product to be able to compete with others that may drop their price in order to maintain their market share in that segment. But again, what we’re truly seeing now is much more as we move our value line closer, that trade-off between us and one of those lower price competitors becomes somewhat negligible with our advantages and installation costs when you add those in and that’s what we’re seeing. So we’re seeing people start that project and say, look this is a much better, much more competitive price. I’m going to go ahead and start the project with the DuraTrack. The H250 is ready to go. Obviously, we have lots of quotes in there for that, and internationally it’s really, really quoting off the charts at this point.
We feel great about that. So what we’re really focused on is having that ready to be a response so that we don’t have to further decline the DuraTrack price, that we can do that with the H250. So the original thesis is still solid. It’s not playing out nearly to the degree we thought. What we’re seeing is the DuraTrack take over much more on that. I’m sorry, can you repeat your first part of the question? Oh, the push outs, so relative, in talking to a lot of our customers and developers, there were several that talked, I can only put it in a phrase that was used to me is, why go forward and finance a project today when I know it’s 50 basis points cheaper if I wait for the back half? And I look, I don’t claim to be an expert in project financing, and I would think there’s ways around that in the finance community, but that was a phrase, conveyed to me by a couple of developers over the last three months.
I don’t know honestly to what degree that’s impacting things.
Operator: Our next question comes from the line of Colin Rusch with Oppenheimer.
Colin Rusch: You’ve offered a lot of details, so I appreciate that. But I’m just curious, embedded in the guidance for this year, can you talk about the product mix and how that’s trending? You were just alluding to it, but I’m just curious what the assumptions are underlying that in terms of, some of the newer products versus older products and kind of larger versus smaller systems.
Kevin Hostetler: Yes. I don’t think we give that level of detail, to be honest. I would only say that the product mix as anticipated, vis-à-vis the OmniTrack is on track, and the comment I’ll make about the DuraTrack winning more against certain competitors versus the H250 in the near term.
Colin Rusch: Okay. And then just in R&D spending, is there an expected change in terms of how much you’re going to spend on the OpEx side, looking at new products now that it feels like you’ve got a pretty full portfolio here? Should we see that moderate a little bit?
Kevin Hostetler: No, you’re actually going to see that accelerate. We feel really good about the changes we’ve made to our engineering organization over the last two years, and it’s my commitment to the engineering organization that if they continue to bring forward really viable products with great margin enhancements, and this includes new software, this includes new additional services. The amount of work we’re doing on, say, accessories and clamping solutions and things like that, and value-added engineering efforts is very substantial at this point. So we’re going to continue to accelerate and spend, and I think we’re getting a phenomenal return out of that. And again, we talked earlier last year on a call, relative to the amount of patents, I think we’re now up to nearly 120 patents that have been granted in the last two years, which again is more than the previous 18 years combined.
So you’re just going to continue to see us build that mode around our business with technology and patents and continue to build that out as we go forward.
Operator: Our next question comes from the line of Kashy Harrison with Piper Sandler.
Kashy Harrison: So my first set are on the U.S. pipeline growth and conversion. You talked about a 3x growth in the U.S. pipeline between 2Q 2023 and 4Q 2023. And I just want to clarify, are you saying that the growth is mainly due to cost reductions in DuraTrack, or is it H250, or is it OmniTrack? And then you said your win rate has gone up recently. Is that compared to early 2023, 2022, 2021? And then, finally, how should we think about pipeline conversion into orders, the timeline?
Kevin Hostetler: Yes. Great questions, Kashy. So when I think about win rate, what I’m comparing it to is our baseline win rate is, think about it as our historical domestic market share. So think of it that way. So if our win rate was just simply equal to our historic market share, obviously the underlying assumption is that we’re seeing most projects that are out there in the market, which is not entirely true, but largely accurate, I would say. So what we try to do is, we look at that win rate accelerating above that, and that tells us that there’s market share takeaway happening, above that historical market share rate. And that’s what we’re beginning to see now. We’ve seen that consistently for several months. So we feel really good about the fact that our reduced pricing in the market from those structural activities is really holding.
And again, and I said, as I’ve gone out and met with many of our customers, they’re really focused on, I have one large EPC come to see me here in Chandler, and the entire part of the meeting was, please tell me that this is structural in nature and you’re not trying to buy business because at these prices I can lock in a lot of work going forward. And that was a great conversation. We walked that customer through in detail the amount of work we’re doing to reduce the costs for them and it was very satisfying meeting on both our sides. So I can tell you that. So again, relative to the pipeline, that pipeline is made up of a strong mix of OmniTrack, DuraTrack and H250. That’s all I can say on that. It’s all of the above is sitting in that pipeline at this point.
Operator: Our next question comes from the line of Andrew Percoco with Morgan Stanley.
Andrew Percoco: Maybe just as a follow-up to some of the margin questions earlier, you’re kind of alluding to some declining ASPs this year, some of that’s being offset by lower commodity prices, lower manufacturing costs potentially. But I was just curious, how much additional room do you have left to lower the cost of your product from here? If you were to take a 12 to 24-month view and pricing continues to come down, whether that’s competition driven or otherwise, how much cost per watt if you want to use that measure, how much left or how much further can you drive down that metric versus where you are today?
Kurt Wood: I would say a couple of things, this is Kurt. One, the R&D spend that Kevin spoke about earlier isn’t only for new product introductions. We’re constantly designing for how we can reduce costs out of our program as well. And also, obviously, getting smarter in the supply chain side around how we price logistics in and redesign clamps and other things like that to optimize. And then, obviously, there’s each EPC or developer does things a little bit differently, so we work with them, if they have volume with us to make sure we’re optimizing, to make sure, you know, not just our product, but the residual balance of system costs that overall [LCLE] [ph] is taking into effect as well. Because there could be some instances where our price is a little bit higher because we’re driving value on the backend where they reduce costs there.
So I think we continue to have room. You know, we will continue to design costs out. H250 is another example. It is a lower cost product of the DuraTrack. We have the ability to use that product if the price points get down to that level and still maintain our margin. So we will continue to focus on that. I will say our operations team has done a phenomenal job in executing the cost reduction goals that we had in 2023 and is a big reason of why we’re sitting in the mid-20s margin without any 45X or other benefits included in there at the time. So I think there’s still headway and every company will do that. You have to match that. And I think you’re seeing that across the industry and we’re committed to lowering the cost of solar energy globally.
Operator: Our next question comes from the line of Derek Soderberg with Cantor Fitzgerald.
Derek Soderberg: Just one for me. I was curious if you could just talk a bit more about non-tracker revenue opportunities. Any plans or introductions this year? Did non-tracker play into the gross margin guidance? If so, to what degree? Just any call-outs on the product development side there how we should think about non-tracker revenue trends in ’24? Thanks.
Kurt Wood: I’ll start, Kevin, and maybe you can add on if you have it. I think, look, we’ve made some good progress on there. Again, I’ll talk about the structural enhancements, starting with Q4. If you take the 45X, which was 9.3 million, and we said we had 8.5 million of one-time charges, so they net each other out, that gives us 520 basis points year-over-year. About 3 quarters of that was coming from structural cost enhancements that Kevin talked about, and the remaining 25% was coming from these non-tracker revenue sources that we have. We expect that to continue to grow in the year, probably not a very material amount above what you’re seeing here, but there lies a potential tailwind we have going out, we’re promoting it, but it is factored into our guidance.
Kevin Hostetler: And just adding some color to what those entail, there’s kind of three major buckets we’ve been focusing on. The one is accredited training programs. In order to qualify for the ITC and domestic content provisions, you have to be able to demonstrate you’re using accredited training programs. And there’s really a lack of them out there in the industry. So as our customers, as those EPCs are hiring labor to handle future acceleration, they need to be able to have that labor set for accredited training. So we’ve taken the time to create many training modules and get them fully accredited. And that’s already up and running at this point. And again, as I’m in front of customers, even as recent as two weeks ago, they’re thrilled that there’s another resource where they can send people for this accredited training.
That second area was in, for lack of a better word, [process-tizing] [ph] our services, if you will, and taking some of the things that we do in terms of commissioning, golden row inspection, health assessment inspection services, site optimization services, all of those things that we do from time to time and productizing them so that they’re highly repeatable and that we actually generate revenue for them. And again, that’s really good high value revenue for us. And then, the last is, really comes down to project management and looking at where we can in-source engineering services that maybe some of our customers are doing from time-to-time. And for example, the civil engineering terrain analysis that would be required to use Omni, bringing some of those services in-house and being able to provide that value added for our customers.
So we’re really excited about that. We’re really excited about the team we’ve built around our services offerings, and we do expect that to continue to grow.
Operator: Our next question comes from the line of Dylan Nassano with Wolfe Research.
Dylan Nassano: Sorry if this was already covered, but I just wanted to go back to the 300 million that you guys talked about last quarter as being on the sidelines. I guess what I’m trying to understand is what is the churn? Was any of that included in this quarter’s bookings? And just generally, what is the churn in those kind of delayed projects? Thanks.
Kevin Hostetler: So what we saw is about half of that came into the order book at this point. These are projects that they could just no longer delay. They need to get the orders to us — for us to begin working with our supply chain. So we did see about half of that 300 million that were on the sidelines specifically related to IRA clarity come in. I think the rest will just roll in project-by-project normal course of business. We won’t really call it out with any specificity as we go forward. But half of that is already converted now.
Operator: Our next question comes from the line of Philip Shen with ROTH Capital Partners.
Philip Shen: Can you quantify how much of the 45X you might pass along to customers? When the IRA first came out, you guys quantified the torque tube credit being roughly $1.06 a watt. The torque tube guy might get maybe a third or a quarter. Do you think you pass along as much as a quarter or a third to customers, and you guys keep maybe a third or half of it? And did you pass any along in the 45X? Sorry, did you pass some of the 45X credit with the recent $600 million in bookings in Q4? Or if not, when do you expect to start to pass some of the 45X credit along to customers? Thanks.
Kevin Hostetler: So, Phil, our margin guidance assumes that there will be a portion. So what we’ve been clear in our messaging is that that low 30s margin is net of the retained portion of our 45X credit. We have not entered into any specific contracts requiring us to do that as of yet. But our view, when we’ve been working with our customers and certainly our large partners, we’ve committed to them that there would be a level of sharing of that credit as we go forward. So we’re not about to negotiate that over an open conference call, but our expectation and what’s baked into our guidance is an expectation that there’ll be a portion of that that we’re going to share with our customers.
Operator: And our next question comes from the line of Vikram Bagri with Citi.
Vikram Bagri: I think in the prepared comments you’d mentioned that you’re evaluating multiple avenues to gain clarity on structural fasteners. Can you talk about what avenues you’re evaluating and anticipated timing of clarity? The common period for 45X clarification expired mid-Feb, but I believe you did not see clarity through that process. And on the same topic, the $40 million of 2023 IRA credit realized — earned in ’23 to be realized in 2024, is that a one-time boost to this year’s EBITDA, or we may see a similar amount of IRA credit from ’24 to ’25. I’m just trying to understand what is the right EBITDA excluding any one-time boost or one-time items that I should use for ’24. Is this $40 million shift from ’23 to ’24, is it one time or we’ll see ’24 also — at the end of ’24, a similar amount shifting from ’24 to ’25? Thank you.
Kurt Wood: Now I’ll take the second part first, Kevin, and then you can go on to the first part. On the second part regarding the one-time nature, we think it’s, one, you didn’t have all of the 45X negotiated at — including the structural factors that we know will be included going in. There’s parts that are a little bit more vague that we’re waiting for clarity on. So I think at least from what we know now, you’re probably safe that you’ll have an equal amount pushed to the following year. That amount will provide a little bit more clarity as we go throughout the year and we provide 2025 guidance. But from what we know now, that’s what I tell you at that point. And I think what we’re focusing on is the structural margin in the mid 20% range on the core.
Kevin Hostetler: And I’ll address your comments on structural fasteners. So specifically, some of the things we’re doing. So first of all, I’m really thrilled that at the end of the year we increased our government affairs team and hired a new SVP of External Policy and Government Affairs and Jessica’s really having a great impact working with us and being able to navigate some of these challenges around Washington, D.C. So setting that aside, we are active in working with providing additional clarity to the IRS in terms of additional variations of definitions around structural fasteners for one. We’re certainly active in a broader political push to ensure that the structural fastener elements as is are further supported. And I think for us there’s kind of two categories we’re focused on.
The first are the amount of parts that we are already today very confident they qualify for credits based on the current guidelines as written. And our focus there isn’t about changing the definition, it’s really about negotiating with our parts suppliers, in terms of the split, much like we did at the end of the year into early this year with our torque tube suppliers. We’re in those same negotiations with our suppliers in hopes of retaining a disproportionate amount of that benefit as well. So once we do that, once we have clarity, we’ve committed to come back to the market and give you guys an idea of what the size of that bread box really is. The second is a little bit more nebulous. It’s a bunch of parts that may qualify and the efforts we’re doing there is we’ve hired some third-party engineering companies to go and evaluate those parts and the definitions and give us rendered opinions on whether or not part A or B or C would actually qualify under that definition.
But again, we’ll then take that on board once we get the rest of that body of analytics done. And as a management team, we’ll decide whether or not we feel confident enough to take some additional elements of structural fasteners. So there’s a lot of work going on around that. Again, we’ll maintain our commitment to come back to you when we have full clarity and disclose that. But what I will say is that’s, again, upside to the guidance we’ve currently provided.
Operator: Thank you. We have reached the end of our question-and-answer session. And with that, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
