Fluence Energy, Inc. (NASDAQ:FLNC) Q2 2023 Earnings Call Transcript May 11, 2023

Operator: Good day and thank you for standing by. Welcome to the Fluence Energy Second Quarter 2023 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 is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President, Investor Relations. Please go ahead.

Lexington May: Thank you. Good morning. And welcome to Fluence Energy’s second quarter 2023 earnings conference call. A copy of our earnings presentation, press release, and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning’s call are Julian Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; and Rebecca Boll, our Chief Product Officer. During the course of this call, Fluence’s management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts.

Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding the risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available on our earnings materials on the company’s Investor Relations website.

Following our prepared comments, we will conduct a question-and-answer session with our team. During this time to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I will now turn the call over to Julian.

Julian Nebreda: Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating in today’s call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the second quarter as well as our outlook for the rest of the fiscal year. Starting on Slide 4 with the key highlights, I’m pleased to report that in the quarter we recognized our record $698 million of revenue and $32 million of adjusted gross profit. Our demand was strong across all three of our business lines and new orders were approximately $847 million highlighted by our services business contracted at 1 gigawatt and our digital business contracted 2.7 gigawatts.

Furthermore, our signed contract backlog as of March 31st was $2.8 billion, a quarter-over-quarter increase of approximately 100 million, even after recognizing almost 700 of revenue during the quarter. I will also note that approximately 81% of our backlog is with not related parties. Lastly, our recurrent revenue businesses which consists of services and digital, experienced a strong growth during the quarter. Our service attachment rate was 263% for the second quarter driven by the signing of the service agreement with Austin. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage remains above 90%. Looking specifically at our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts which is at 200% increase from the previous quarter.

These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our digital business, but we are very encouraged by the result thus far. Turning to Slide 5, I’d like to discuss the five strategic objectives that we highlighted previously and provide you with an update on our progress. First, on delivering profitable growth. I’m pleased to report that we are raising our fiscal year 2023 guidance for both revenue and adjusted gross profit. As Manu will discuss in more detail, we are able to raise our guidance due to better execution, causing some of our projects being ahead of our expected schedule.

Additionally, I’m pleased to report that we’re pulling forward our profitability timeline. As you may recall we previously expected to be adjusted EBITDA positive in fiscal year 2024. We do not provide quarterly guidance, however, we’re expecting to be close to adjusted EBITDA break even in the fourth quarter of fiscal year 2023. Second, we will continue to develop products and solutions that our customers need. As such, I’m pleased to report that we received a 200 megawatt binding award for our Rooster track product making this our third award of energy storage and transmission. As I’ve noted on our previous calls, we are very bullish on the transmission segment and expect this area to grow as transmission congestion becomes a critical issue around the world.

Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem as where one of only a handful of companies in the world that possess the technology, experience and performance requirements necessary to use any storage as a transmission. Third, we will convert our supply change into a competitive advantage. I’m pleased to say that we have signed a master supply agreement with AESC under which we will procure battery cells. This partnership adds another high quality battery supplier to Fluence’s portfolio, enhancing our ability to meet the growing demand for any storage solutions. This agreement supports our domestic model manufacturing efforts and it strengthens our position as a leader in the energy storage industry.

Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. Looking out at our Nispera products, starting this month we will begin including Nispera in our standard hardware solutions offerings. This is an important step as it will provide us with a path to increasing — to increasing our IRR as we bundle our offerings and execute on our one sales channel approach with this cost last December. And finally our fifth objective is to work better. I am proud to state that Fluence has published its inaugural sustainability report on our website. In this report we outline our commitment to a circular economy that includes sustainable end of life management for our products as well as our firm stand against forced labor.

To publish a sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we power our world for a more sustainable future and demonstrate our leadership within the sector. Turning to Slide 6, demand for energy storage continues to accelerate. In fact, our pipeline now sits at 11.2 billion which is up from 10.3 billion last quarter. We expect we will start to see some projects awards in the second-half of this calendar year that are directly attributable to the inflation reduction act. We reaffirm consolidated revenue growth of 35% to 40% year-over-year for fiscal year 2024, irrespective of the issuance of the final IRA guidance. Our 2023 guidance increased and the incrementally higher 2024 outlook represents an expected benefit to revenues of nearly $500 million over this two-year period, relative to our expectations on our Q1 earnings call conference three months ago.

It is worth noting that we’re seeing and having success regardless of the IRA. A few examples of recent successes include: the binding award in the transmission segment that I previously mentioned. Two, we were recently awarded a 400-megawatt hour contract in Australia for Shell Energy’s Rangebank project. And as you may recall, we signed a 1,200 megawatt hour contract with Orsted in December. And during Q2, we signed a service agreement for this product. All of these were achieved without consideration of the Inflation Reduction Act. Turning to Slide 7. We are pleased to see that some of the initial IRA regulation has been released by the U.S. Treasury. However, we are still waiting on the domestic content regulations, but we believe the actions we are taking will enable us to meet the domestic content requirement sought by our customers.

In regards to our U.S. module manufacturing, we are on schedule and expect production to start in our Utah facility in the summer of 2024. As it relates to Section 45X of the IRA or the production tax credits, we are targeting to be able to record the $10 per kilowatt hour incentive associated with manufacturing U.S. battery models. Right now, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. We do believe it will be a volume driver for us as many of our U.S. customers have expressed the need for a U.S. made product. Thus, we expect the $10 incentive will go towards offsetting the cost of reaching economies of scale. From an accounting standpoint, our current expectation is that we will account for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and services.

However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the first five years of the credit. The exact timing of the cash payment is unclear at this time as we are still waiting for the clarification from the U.S. Treasury. Currently, we’re eagerly waiting for the publication of the IRA guideline for any storage and domestic content, as several of our customers won the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, our 2024 growth expectations remain unchanged, is respective of the final regulations being published. Turning to Slide 8. As I briefly mentioned, we recently published our Inaugural Sustainability Report, which highlights our vision to implement digital solutions to further optimize the energy storage supply chain and life cycle.

I’m pleased to state that we are committed to promoting social sustainability by fostering diversity and inclusion within the organization. We believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year 2023, which includes that approximately one third of our employees hire have identified themselves as senior. In the report, you will also see that end-of-life management is very important to us, and we have committed to developing a circular economy framework for our products. Additionally, we highlighted in the report that we have established a robust supplier code of conduct, that is aligned with the international deal of human rights at work.

That ensures that our suppliers are here to ethical sustainable business practices. We summarized our policy on conflict mineral of unethical sourcing, in which we commit to working towards avoiding the use of minerals within our supply chains from conflict-affected areas. Furthermore, in the report, there is a signed commitment letter taking a zero tolerance stance regarding forced labor. This is an area that is critical to our values. We also included a time line so our stakeholders can monitor our ESG journey. In the spirit of accountability to transparency, we will provide an update on our sustainability program annually, so our stakeholders can track our year-over-year progress. Overall, Fluence Energy’s sustainability report demonstrates the company’s commitment to sustainable practices and its efforts to drive positive environmental and social impact.

Through its various initiatives and targets, Fluence Energy is working towards a more sustainable future. In conclusion, I’m very pleased with the achievements of the second quarter. Although we’re mindful there’s still a lot of work to be done, we will look to continue this momentum as we progress through the remainder of the year. I will now turn the call over to Manu.

Manavendra Sial: Thank you, Julian. I will begin by reviewing our financial performance for the second quarter and then discuss our guidance for fiscal year 2023. Please turn to Slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue or roughly $600 million came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year.

Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second quarter operating expense, excluding stock compensation, were $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. Turning to our cash balance, we ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call.

Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300 million in the second quarter 2023 from the first quarter 2023 level. Our decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment and as communicated in our last earnings call, we should expect improvement in the inventory turns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to Slide 11. As Julian indicated, we have increased our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit and narrowed the ranges.

We now expect our total revenue to be between $1.85 billion and $2 billion, which is up from our previous revenue guidance of $1.6 billion to $1.8 billion. This is an increase of $225 million based on the guidance midpoint, driven by our overall project time line acceleration. While we expect that most of our projects will be executed within the 15 to 18-month time frame that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024. This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects.

We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog. Turning to our 2024 revenue outlook, we continue to expect 35% to 40% growth in revenue from 2023 to 2024 notwithstanding the higher revenue base we now see for 2023. This implies an incremental $300 million of revenue for 2024 relative to our previous outlook. Thus, for the two-year period 2023 and 2024, we now see revenues of more than $500 million, higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110 million and $135 million, which is up from our previous guidance of $85 million to $115 million. It is important to note that this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint.

Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter. With that, I will turn the call back over to Julian.

Julian Nebreda: Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter’s results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluence history. Second, we continue to make significant progress on our risk management, most notably in reducing our supply chain risk as reflected in diversifying our battery sales suppliers. Third, we continue to expand our offerings, concentrate our efforts in developing new products and solutions that create value for our customers, as shown in our third transmission segment award. Fourth, we are positioned in Fluence for increased IRR by including Nispera in our standard offer starting this month.

And fifth, the financial results and accomplished covering today’s call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 2023 and to pull forward our time line to profitability. This concludes my prepared remarks. Operator, we are now ready to take questions.

Q&A Session

Operator: . Our first question comes from the line of James West with Evercore.

Julian Nebreda: Good morning James. How are you?

James West: Great, good morning guys. Julian, quick question from me about your customer base and kind of how they’re thinking about their storage needs right now. I know as we think about last year, it was kind of a mad-dash scramble for assets and for getting equipment and batteries in place. We’ve obviously had the IRA, and there’s been some time line lag on total understanding what the IRA means in the U.S. But are the customers — are they coming to you now still with, “Okay, what’s it going to cost me?” Or is it more of a question of, “When can you get to me? What’s the time line?” Because we know you’re not just focused on land and expand, but focused on profitability too, which is — obviously it’s clear this quarter, and so congratulations again on this quarter?

Julian Nebreda: Thanks, James. I mean, we do a lot of — our ability to expand our margins comes — the main driver has been a real detailed segmentation of the customers we work with. So it might be a long way to answer your question, but so what do we do? We look for customers that value what we offer; that value clearly, products that are — that we — that they are sure that they were going to be delivered; that they’re going to perform as we tell them that they’re going to perform; that will provide services; that will keep this solutions up to date; and that will have them running for them when they need it, that they can ensure it very well and that they can finance it. So the customers who care about that are the customers we work with.

Some of them, price is very more important than others. For some of them is ensuring the performance. For some of them means, hey, especially where the regulatory systems are going to change, I need somebody who will know will help me adopt my fees to. Why don’t we see this quarter, which I guess is a little — what do we see in the very front end? Clearly, the reduction in lithium prices and the more liquid market for batteries opens up more optionality. I think that the RMI that we offer our customers, which when prices were going up was something that makes them a little bit uncomfortable. Now it makes them feel better on signing a contract because they know at the end of the day, they will get something that’s in line with what the market is or close to where the market is based, so that’s great.

So that’s globally, you see that. On the other side, you have in the U.S., the Inflation Reduction Act that relayed some of our customers are talking to their off-takers and they are asking their offtakers, “Do you need the products by certain date or do you want to wait until we know what the — we’re going to get this 10% upside that will convert into better prices for your offtake, for whatever services you are selling?” Yes, the answers are different. I think that some customers will need to have the projects online by certain dates or the offtake as we need. So those will move forward, we think. Some of them are, “No, this can wait.” And that’s kind of where this will land. So I don’t know if that’s — that’s kind of the landscape of where we are today.

So we — today, and the reason why we were able to affirm our growth for next year, irrespective of the IRA, which was because we have seen very, very strong demand outside of the U.S. And that give — you looked at our backlog, where we have signed already, what we are seeing outside of the U.S., and we believe that we can meet the 35% to 40% growth irrespective of where the IRA regulations come up.

James West: Okay, okay. That’s very helpful Julian, and thanks for that. And then maybe a quick follow-up from me on margins and maybe for Manu. But getting to EBITDA breakeven by the end of this fiscal year, obviously, a good target and making good progress there. But how should we think about EBITDA margins as we go through fiscal 2024 and getting to a level of profitability and sustainable profitability on EBITDA?

Manavendra Sial: Yes. So what — consistent with what we have said in our last call, we expect to be EBITDA-positive in the fiscal year 2024. I think you’ll see the margins progressively improve as we go through the quarters in the fiscal year 2024 as well. And that’s because if you look at our trajectory and look at it from a trailing 12-month kind of revenue average, we continue to grow our revenue. And as we’ve said, we’ll grow our operating expense at less than half the revenue growth rate. And if you couple that — those two comments with the fact that we are signing new contracts in the 10% to 15% margin rate, you can see the profiling of the EBITDA progressively going through the quarters.

James West: Okay, got it. Thanks guys.

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

Julian Nebreda: Hey, good morning Brian.

Unidentified Analyst: Hey everyone, this is Miguel on for Brian. Maybe just the first question here on the $500 million incremental for fiscal 2023 and 2024. You’re talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples, is it just a function of getting more visibility on batteries, is it being able to pull in projects faster than expected, just hoping to get a bit more color there on the execution front? Thanks.

Julian Nebreda: Yes. Brian, the way I will — first, clearly is the fact that our machine is working better. We had the right manufacturing, did a great job this quarter, and we have been able to de-risk our deliveries in our contract with our customers. So I think the effort of a lot of work from everybody from our supply chain, from our sales team, from our manufacturing team, but also at the end that we have been able to de-risk our deliveries in a way that allows us to recognize revenue, even if some of our customers are not fully ready to install the equipment. That’s the way to think about it. And the combination of the three, I cannot tell you now is that, one, each one is very essential for this. If the supply chain had not worked, we won’t to be here.

If the manufacturers have not been able to pick up production, he wouldn’t be here. If we had not de-risked on our implementation, people have not done the work they’re doing, we wouldn’t be here. So it’s the machine working better. And we have identified the projects that we — where we believe we can do this, and those are the basis for our $500 million better revenue over the next — between this year and next year.

Unidentified Analyst: Got it. I appreciate that. And then the follow-up question here is — kudos on the update to the guidance, obviously. But outside of that, just we’re hearing about marginal constraints in the U.S. in general still hampering a bit the solar projects. Could you maybe give an update on what you’ve seen specifically for projects in your backlog for solar plus storage projects? And maybe to what degree you’ve seen those kinds of projects push out because of these module constraints? Thanks.

Julian Nebreda: Yes. I mean, my understanding — we haven’t heard anything specific from our customers. As you know, we sell to customers who are probably on the bigger side and have the capability to manage that better. But I will tell you, that’s clearly one of the reason we took into consideration when we looked at our enterprise risk management. And one of the things we changed in our contracts was that if our solutions are ready for delivery, we — the customer needs to take them irrespective of where they are in their solar part, if they disconnected the solar part or irrespective of where they are with some other elements. So that’s what I will tell you. But we — our customers today haven’t heard anybody coming up to us and telling us, “hey, I’m not going to be — more of the questions on being a little bit cautious are connected to the IRA, that where they can get modules or not in the U.S., clearly.

Unidentified Analyst: Okay, got it. Thanks everyone. I will pass it on.

Operator: Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Julian Nebreda: Hey Maheep, how are you?

Maheep Mandloi: Hey, good morning. Thanks for taking the questions here. Sorry, I was hopping between calls here, so I might have missed this. The $500 million over the two-year period, is that higher revenues versus the prior run rate or is that just looking at FY 2024 versus FY 2023?

Manavendra Sial: Yes. Hey Maheep, so the way to think about the $0.5 billion is as follows: we’ve increased the guidance for 2023 and at the midpoint, it’s $225 million. And then we’ve kept the same run rate. So you have a higher 2024 implied outlook or outlook based on a higher 2023. So if you take that math to 2024, that’s incremental $300 million for 2024. So you add the $225 million with the $300 million, you get to over $0.5 billion of revenue. And that’s on the backs of great project execution, and that’s in the second quarter, and that has a read-through for remaining 2023 and 2024 as well. And I would be remiss if I don’t reiterate the fact that we have very strong demand signals with over a $1 billion increase in our pipeline.

Maheep Mandloi: Got it. I appreciate that clarification. And then could you kind of talk about which regions are driving that and is this customers accelerating the projects or more benefits from manufacturing or procurement on your end? Thanks.

Manavendra Sial: Yes. So what I would say, in terms of the demand signals and if you look at our order book for the second quarter, and as Julian mentioned, we are winning globally. And we are winning both in solutions and in services. So that’s kind of color and context for your question on the top line or the demand signals. Obviously, the Americas is two thirds of our overall business, and that’s going to be the larger dollar driver of it, but we are winning globally. In terms of what’s driving the revenue upside in the second quarter is we typically will see — execute our projects between the 15 to 18 months. But because of better execution, as well as how we are writing our contracts now, we have the ability to pull forward some select contracts in the lower end of the 15 to 18-month range. And that carries through in the back half of this year and next year as well.

Maheep Mandloi: Appreciate it, thanks. I will take the rest offline. Thank you.

Operator: Our next question comes from Tom Curran with Seaport Research Partners.

Julian Nebreda: Hey Tom, good morning.

Thomas Curran: Good morning. For the growth you’ve had in services assets under management for fiscal 2023 year-to-date, could you share with us for the contracts you’ve added, the split between those with augmentation and those without?

Julian Nebreda: Let Manu take that one.

Manavendra Sial: Yes, I don’t think we give that split, but the way to think about it is a significant portion of our contracts have the ability to augment the site, if the customer so chooses.

Julian Nebreda: Yes, gives them an option.

Manavendra Sial: Gives them an option. So that’s the way to think about it. So most of our customers do have the option in their contract, if they so choose to augment.

Julian Nebreda: So years ago or before, it was not an option for customers. They had to take our augmentation proposal. Now the way these service agreements are, they do have an option, and they can decide to take or not take our augmentation proposal. We believe that we’re all going to take it, well, because but that’s how it works.

Thomas Curran: And so you are seeing evidence to support the expectation of a trend towards ever more augmentation opt-in?

Julian Nebreda: Yes. The issue is that it is an option that the customer can take, we cannot put it as a backlog value. You know what I mean? So it’s an option that they have. But I think that when we have looked at this, we believe in most cases, it will — I mean, it will depend a little bit on where the customer needs are on his side or his contract and his offtake or top bar . But if there’s a need for augmentation, they will do it with us. And we have work — from a product perspective, we have made some changes to our offering to ensure that we can provide our augmentation offering is a lot wider. So we can offer our augmentations with different technologies. So that, I think, will also make us a lot more competitive when the time comes. And I think it will — I don’t think anybody will be able to get into that territory, but I don’t want to brag about something that hasn’t happened yet.

Thomas Curran: I appreciate that, Julian. And then for the consolidated pipeline, can you give us a sense of how much visibility you had on the portions of that, that are mega projects or storage as transmission awards that could be doled out over the next 12 to 18 months? And then for storages transmission, would you expect your next award to most likely come from the U.S., Australia, Germany or Chile?

Julian Nebreda: Yes, I mean I prefer not to go into the details about our pipeline. I think it’s — so that will be my preference, not to go and to start giving details on the pipeline. We’ll make our life — all of our life more difficult. On the transmission as a — storage as a transmission, we’re working both in Europe, in Chile and the U.S., like you mentioned. I will say that most likely we will be again in Europe. That’s my opinion. But — and I can say this and I will say it, the Chile regulation for transmission do not work, do not work. That system like it’s they design it, it’s not going to work. They came up with this 15-minute storage. That’s not going to be good. They’re not going to get. It’s not going to work.

So I think unlikely. I don’t know if it will be or not, well, probably, it will be. But I think that’s going to be a successful project. We continue to see the transmission regulators in Europe, much more clearly understanding how this works and how to make the work. The U.S., we’re just starting. So — and I said this in the regulator, I’m sure they don’t listen to these calls, but it will be good for them to go back, look at it because they — we have — we have told them, this is not going to work. But I think they have a different view of how they — what they want to do.

Thomas Curran: Got it, thanks for taking my questions.

Operator: Our next question comes from Julien Dumoulin-Smith with Bank of America

Julian Nebreda: Hey Julien.

Julien Dumoulin-Smith: Hey, good morning guys. Hey Julian, glad you are a namesake. Thank you very much for the time. Appreciate it. So listen, I just wanted to first come back to the $0.5 billion revenue commentary that Manu provided. Can you elaborate a little bit on what this says about getting to kind of the target gross margins, especially as you think about what that says for next year here, obviously, you have that improvement through the course of this year, but what does that say on the incremental margin that you’re getting for next year now that you’re really accelerating the revenue side of this?

Manavendra Sial: Yes, so — thanks for the question, Julien. So just the way to think about our gross margin, and you can see that come through our guidance updates. Like, we are signing the new contract in the 10% to 15% margin rates. And more importantly, the new contracts we are signing, we’re keeping those margin rates. And as you look at the increase in the guidance from the last call, the current call, you can see the increase from a gross margin perspective or a gross margin rate perspective of 50 basis points. And the new contracts being signed at in the 10% to 15% margin rate units. As you roll forward into 2024, that’s a good assumption from a gross margin perspective. And as you translate the gross margin into EBITDA, it gets even better and it increases our confidence from an EBITDA positive outlook for 2024, is because we are getting operating leverage, and we are very disciplined about our overhead expense.

And our model of spending overhead at less than 50% of our top line growth. So if you model out 2023 going to 2024, top line growing at 35% to 40% over a higher revenue base in 2023. Our gross margin contracts being — signing in the 10% to 15% rate. Remember, one of the advantages of better execution in 2023 is we are able to pull forward our legacy backlog earlier in the — in our life cycle, and therefore, there’s very little legacy backlog to be executed in the fiscal year 2024. So the gross margins on the new contracts are coming through, and then that translates into a very healthy EBITDA.

Julien Dumoulin-Smith: Excellent. Alright. Great. And then just going back to the commentary on the call on Nispera, where you talked about this new strategy this month about including it as standard in your hardware offerings. What does that say vis-a-vis Fluence Q outlook and the revenue contribution and its level of meaningfulness, I think earlier you guys had said it wasn’t really that meaningful until 2025, now that you’re including it as sort of “standard”, does that change that expectation?

Julian Nebreda: No. Julien, this was always part of the plan. Remember, we had one — when we looked at this, one of the changes that we did was integrating the sales channel and our view on when this business will be material or when we will get to — has not changed. So this was part of what we wanted to do when we announced our plan — our new plan in December of last year, this was a part of — it’s going as planned as we expect. Remember, we talked about a single channel and then replatforming our Mosaic business, and replatform is going very well. And the single channel, which is essentially for Nispera, which will give us a very good both upsells and cross-sells, we were able to pull it out. So we are starting — as figured has been done is we’re already offering to our customers as part of our standard offer.

Julien Dumoulin-Smith: Excellent, okay, perfect. We will leave it there. Thank you guys very much. Excellent.

Julian Nebreda: Right, thank you Julien.

Operator: Our next question comes from Ben Kallo with Baird.

Julian Nebreda: Hey, good morning Ben.

Benjamin Kallo: Hey guys, good results and good progress. Thank you for taking my questions. I just wanted to follow-up just on margin. I’m sorry to keep going on this question. But I just wanted to think about the different levers and cost improvements versus legacy contracts. I think Julien asked something similar to this. But as we go into attachment rates of other services software as we go into 2024 and beyond and how you guys think about that? And then just my follow-up is kind of housekeeping, but just the IRA benefits and profitability. And I’m sorry, Manu, if you said this, but have you baked any of that into your profitability change going forward, so the production tax credits or anything like that? Thank you.

Manavendra Sial: Yes, sure. So Ben, if I can — there are lots to unpack there. So let me take it as how I understood the question. So if you bridge gross margins from our legacy contracts to some of the new deals we are signing in the 10% to 15% margin range, right, and we put a bridge in the back of a deck as well. But the drivers of our margins between the legacy contracts and the newer contracts we are signing is better execution, better pricing and then, I would say, better risk management. So those are the big drivers. We have also increased our margin expectations to be 10% to 15% from a much lower single-digit expectations we’ve had in the past. And as a result, when we are executing our legacy contracts, we are usually executing them at very low single-digit margins, almost close to breakeven.

And as compared to the newer projects that we are executing in the 10% to 15% margin rate, depending on size and complexity in the region, you can see that trend come through in the gross margin guidance. If you take our first half actuals gross margin rate and compare that to the guidance for the full year and calculated implied second half, you can get to high single-digits gross margin rate for the second half of the year. And that’s important is because it gives you a good read through of gross margins going into 2024 and EBITDA going to 2024, which is what we are pulling forward our EBITDA expectations to be close to adjusted EBITDA breakeven in the fourth quarter. So that’s kind of contextualizing the margins of the legacy business compared to what we are signing from a new contract perspective.

In terms of the IRA PTC benefit that you specifically asked, so what we’ve said is, look, we — it will be a contributor to more volume potentially as opposed to taking us outside of the 10% to 15% margin range, maybe in the rounds, it takes us to the — for those contracts that have the Fluence make to the top end of the range versus the bottom end of the range. But we are still within the 10% to 15% margin rate. As we go through the years to kind of round out your question, we are seeing high attach rates for services on the assets we have deployed. We’re seeing 97% attach rates. That’s slightly better than what we had last quarter or kind of in line with what we had last quarter. That in terms of meaningful contributor to our margin rates and margin dollars will be better in 2024, more meaningful in 2025 and then kind of gets to a higher number in 2026.

Those contracts are at a higher margin rate than our average solutions margin. So it is the power of the installed base. It also gives us a great option to kind of sell incremental services as well as attach digital contracts to that.

Benjamin Kallo: Great, thank you very much.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back to Julian Nebreda for closing remarks.

Julian Nebreda: Great. Well, I want to thank everybody for participating and joining us and your questions. And what — we are really, really proud of the work of the team here, and the success is clearly working better than what we were expecting, so that’s great news. And this only will, I think, in a way, it reaffirms our commitment to continue working hard because really makes a difference at the end of the day. So really happy, and thank you again for participating. And we’ll talk to all of you during the quarter and hopefully, see you soon. Bye-bye.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.