Fluence Energy, Inc. (NASDAQ:FLNC) Q4 2023 Earnings Call Transcript

Fluence Energy, Inc. (NASDAQ:FLNC) Q4 2023 Earnings Call Transcript November 29, 2023

Operator: Good day, and thank you for standing by. Welcome to Fluence Energy Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator instructions]. Please be advised that today’s call is being recorded. I would now like to turn the call over to you Lexington May, Vice President, Investor Relations. Please go ahead.

Lexington May: Thank you. Good morning, and welcome to Fluence Energy’s fourth 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; Rebecca Boll, our Chief Products Officer; and Ahmed Pasha, our incoming Chief Financial 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 certain 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 in 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. Also note that while Amed is participating on today’s call, he is not going to be participating in the Q&A session. And thus, please direct your questions to the other members of the team. Thank you very much. I’ll now turn the call over to Julian.

Julian Nebreda: Thank you, Lex. I would like to start my warm welcome to our investors, analysts, and employees who are participating on today’s call. This morning, I’ll provide a brief update on our business, and then review our progress and our strategic objective. Following my remarks, Manu will discuss our financial performance for the fourth quarter, and then I will discuss our outlook for fiscal 2024. Before we begin our discussion on the fourth quarter results, I’d like to spend a few moments addressing the announcement we made a few weeks ago. Manu has decided to step down as CFO of Fluence. He has done a remarkable turnaround job here, and as a result, he caught the attention of others. He received an offer he could not refuse, and more importantly, one that we could not match.

As such, he will be leaving effective December 31st to become CFO of another company in a different industry. On behalf of the board, I would like to send a sincere thank you to Manu for the value he helped create at Fluence the past 15 months. Additionally, I would like to extend my warm welcome to Ahmed Pasha, our incoming CFO. Ahmed will officially assume this role on January 1, thus ensuring a sufficient transition period. Amed comes to us from AES, where he had a 30-year career, most recently serving as the CFO of the Utility Business Unit. I personally have worked with Ahmed for many years and I’m excited to continue that at Fluence. Now, I would like to turn the call over to Ahmed to make a few remarks.

Ahmed Pasha: Thank you, Julian, and good morning, everyone. I am excited to be joining Fluence at a time when energy transition is achieving critical momentum, which presents so much opportunity for the company and for energy storage in general. As some of you may know, I have had some experience working with Fluence during my tenure at AES, including during the IPO process and more currently as CFO of the US Utilities Business, where Fluence is playing a critical role in helping to transform our energy mix. Since the announcement about two weeks ago, I have had the opportunity to meet with some members of Fluence’s team, and I’m very impressed with their experience and commitment to enabling the global energy transition. I look forward to working with them and help Fluence to achieve its ambitious growth and profitability goals, increase shareholders’ value, and deliver on its mission to transform the way we power the world.

I would like to express my appreciation to Manu for his invaluable contributions to Fluence, particularly the strong foundation he has established to position us for continued success in the future. In the near-term, I will be getting up to speed on things, but I expect to meet with many of our investors and analysts in the coming months. I look forward to hearing their views and sharing how we plan to achieve our key financial and strategic objectives. With that, I will turn the call back to Julian.

Julian Nebreda: Thank you, Ahmed. Beginning on Slide 4 with the key highlights. I’m pleased to report that in the quarter, we recognized $673 million of revenue. We continued to experience strong demand for our products and services, with new orders totaling approximately $737 million, highlighted by our solutions business contracting 2.1 gigawatt hours, our services business adding 1.6 gigawatt hours, and our digital business adding 1.8 gigawatts of new contract. Furthermore, our signed contract backlogs as of September 30, remain at $2.9 billion due to acceleration of select projects ahead of schedule. Turning to adjusted EBITDA, we delivered approximately $20 million for the quarter. This is a tremendous milestone, as we achieve this level ahead of schedule.

As you recall, we expected to be close to adjusted breakeven for the fourth quarter. However, we were able to accelerate select projects that resulted in high revenue and margins for the quarter. One of the areas we’re concentrated on is our organizational speed, especially reducing our project cycle times. We see a lot of value in reducing our cycle times from the roughly 18 months to closer to 12 months. We believe it will take us at least two years to reduce our cycle times down to 12 months. This quarter’s results are a perfect example of what speed can do to bring increased value to both our customers and our shareholders. Lastly, our services and digital businesses, which together represent our recurrent revenue stream, continued to see traction.

Our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains about 90%. As we have noted previously, we typically see a lag between signing solutions contracts and entering into a service contract, which is why we believe that cumulative attachment rate is important to monitor. Turning to our digital business, we had a very strong quarter as we were able to contract 1.8 gigawatts. More importantly, our digital assets under management increased by more than a gigawatt and the total number reached 15.5 gigawatts as of September 30. Turning to Slide 5, I’d like to highlight some of our accomplishments of the past fiscal year. As you may recall, a year ago we embarked on the transformation of our business.

I’m pleased to report that we delivered on our commitments to the market. We grew our annual revenue by 85% and achieved our first profitable quarter. Importantly, we exceeded our original annual revenue guidance by more than $600 million, thanks to improved execution, ease in supply chains, and project timeline acceleration. We burned through almost all our legacy lower margin backlog, and we diversified our supply chain, including securing US-made battery cells with AESC. With the rollout of Fluence OS7, we have integrated Nispera into our hardware solutions on a go forward basis so that now every new store solution cell has Nispera bundle input. We built out our India technology center, and we published our inaugural sustainability report, a successful year that sets the tone for the years to come.

Turning to Slide 6, I would like to discuss progress on our five strategic objectives. As you recall, at this time last year, we laid out five strategic objectives that will guide our actions, and markets that our investors who monitor and measure the company performance against. As we generated our first profitable quarter, I’m pleased to say the first phase of our transformation is complete. The second phase is just getting started, which will continue the theme of profitable growth, now measured through the growth of our nominal adjusted EBITDA and annual recurring revenue, or ARR, alongside the other strategic objectives that will continue to guide us on the second phase of our journey. First, on delivering profitable growth, I’m pleased to report that we exceeded our fiscal year 2023 guidance for both revenue and adjusted gross profit.

Today, we’re initiating guidance for fiscal 2024. We expect total revenue for fiscal 2024 to be between $2.7 billion and $3.3 billion. In line with our commitment from our last call, we’re initiating guidance for adjusted EBITDA for fiscal 2024 to be between $50 million and $80 million. Second, we’ll continue to develop products and solutions that our customers need. As such, I’m pleased to report that in October, we launched Gridstack Pro, our larger enclosure providing higher density, faster installation, enhanced performance, and industry-leading safety. In conjunction with the launch Gridstack Pro, we also launched Fluence OS7, the latest Fluence operating system designed with enhanced capabilities and fully integrated with the new Fluence Battery Management System, which I will touch on more in a few minutes.

Third, I’m pleased to report that we have secured all our battery needs for fiscal 2024 and 2025. Fourth, we’ll use Fluence Digital as a competitive differentiator and a margin driver. I’m pleased to report that we’re initiating guidance for our annual recurring revenue from our combined service and digital businesses. We expect to generate around $80 million of ARR by the end of fiscal 2024. And finally, our fifth objective, which is to work better. I’m proud to say that just recently, we have launched a new $400 million asset-backed lending facility or ABL. This credit facility is secured by our US inventory, and we expect it will provide us increased flexibility. More importantly, we believe that the ABL facility provides us additional tools to manage our working capital as we continue to grow.

Turning to Slide 7, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $13 billion, which is an increase of approximately $600 million from the third quarter, and a 50% increase compared to this time last year. Additionally, as I mentioned, with our backlog remained consistent at $2.9 billion, even after recognizing almost $675 million during the quarter. Importantly, we had several contracts that were signed just subsequent to quarter end, amounting to approximately $400 million, which provides us with strong visibility to achieving our 2024 revenue guidance. This is the eighth consecutive quarter we added more backlog than revenue recognized, further illustrating the growing demand for energy storage. Based on the conversations we are having with our customers and potential customers, we’re expecting to see topline year-over-year revenue growth from fiscal 2024 to fiscal 2025 of approximately 35% to 40%, showcasing the robust market for utility and energy storage.

Turning to Slide 8, as I mentioned earlier, we launched our Gridstack Pro and OS7 in fiscal year 2024. These product launches are something our stakeholders expect periodically from us, as we continue to innovate and identify new ways to serve our customers’ needs. When you look specifically at our Gridstack Pro solution, this is a much larger product that integrates six battery racks and is designed for the largest and most complex utility scale projects globally. Gridstack Pro will offer our customers an (advanced) product with leading safety measures, faster deployments, first class reliability, and the flexible model of design that defines our product offerings. More importantly, for the US market, the Fluence battery pack will be available with US manufacturer battery sales and modules.

This positions Gridstack Pro as one of the first energy store solutions to qualify for the 10% investment tax credit domestic content bonus under the Inflation Reduction Act. In conjunction with Gridstack Pro, we launched OS7, the next generation of our operating system. This iteration is meant to handle bigger and more complex projects, and can reliably control more than one gigawatt hour system, and it’s fully integrated with the Fluence Battery Management System. The software also provides a foundation for future enhancements to the architecture and enables component commoditization just as DC-DC converters. It provides new tools targeted to reduce our commissioning times, which as I mentioned earlier, is a key area for the company. And importantly, OS7 comes standard with our Nispera platform already preloaded.

This an important feature as we expect to provide all our product deployments with basic Nispera access for a certain amount of time, after which customers will be required to sign a longer term contract if they wish to continue using the APM platform for the best facility or which to upgrade to additional features. Turning to Slide 9, I’m pleased to say that earlier this week, we secured a new $400 million ABL facility. This provides us with an additional tool to help manage our working capital. The new ABL facility features a lower cost of capital relative to our legacy revolving credit facility by approximately 50 basis points, and is secured by a US inventory balance, and is expected to provide us with more flexibility. As our US inventory balance increases, so does our borrowing capacity.

This ABL facility replaces our smaller $200 million revolving credit facility that require cash collateralization. As we enter fiscal year 2024, we believe we have a very strong balance and an ample working capital facility necessary to scale our platform and achieve our 2024 guidance. Shifting to Slide 10, we’re introducing guidance for our annual recurring revenue, ARR. For our combined digital and business enterprises, our objective is to reach approximately $80 million in ARR by the conclusion of fiscal year 2024, implying a notable increase of 40% from the preceding year. This target is well supported by a robust service attachment rate exceeding 90% and a full 100% attachment rate for Nispera moving forward. Additionally, our strategic efforts are concentrated on advancing our Mosaic offering currently operational in three markets, Australia, CAISO and ERCOT.

It’s essential to note that we’re in the process of refining this platform, with substantial contributions not anticipated before 2025, as previously communicated. In conclusion, I’m pleased with the achievements of the fourth quarter, although we’re mindful there’s still work to be done. We’ll look to continue this momentum as we progress into a new fiscal year. I will now turn the call over to Manu.

Manu Sial: Thank you, Julian. I will begin by reviewing our financial performance for the fourth quarter, and then I will pass it back to Julian to discuss our guidance for fiscal year 2024. Please turn to Slide 12. Our fourth quarter revenue was $673 million, an increase of 52% from the prior year same period, and 25% above the third quarter. We continued to execute well as we were able to accelerate some of our legacy backlog previously anticipated for fiscal year 2024, resulting in higher-than-expected revenue for the fourth quarter. We continue to expect a small portion of our legacy contracts will be recognized in the first quarter of 2024. Looking at our adjusted gross profit for the quarter, we generated approximately $78 million, or approximately 11.6%, in line with the commitment discussed on our third quarter call, and reflects an increase from our third quarter margins of approximately 4.4%.

More importantly, this is an increase from the previous fiscal year of 2.8%. I’m pleased to say we have demonstrated cost discipline as our operating expenses, excluding stock cost, as a percentage of revenue, continue to decline and ended up around 9% for the quarter. From a year-over-year comparison, our 2023 OpEx percentage of revenue, excluding stock compensation, came in around 10%, which is below our 2022 results of around 15%, further illustrating our cost discipline. As a result of our strong execution in the fourth quarter, we were able to generate $20 million of adjusted EBITDA, and as Julian mentioned, this signals the first phase of our transformation is complete. As we have now become profitable, our focus will shift to growing our nominal adjusted EBITDA and ARR, which we will discuss further.

Turning to our cash balance, I’m pleased to report we ended the fourth quarter with $463 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $45 million from the third quarter. As Julian mentioned, we secured a new $400 million ABL facility. This facility replaces our existing revolving credit facility and upsizes the amount of available borrow, and should enable us to better manage the peak to trough elements of our working capital. When you look at our total cash balance combined with our new ABL facility and supply chain financing, we have ample liquidity, putting us in an excellent shape to capitalize on the massive time in front of us. Please turn to Slide 13. From a cash standpoint, we increased our total cash position by 11% relative to the third quarter.

For 2024, we’ll continue to invest in technology, resulting in an expected use of cash of approximately $85 million. From a recurring CapEx assumption, a good run rate is between $20 million and $25 million, as this is the level we expect in a steady state environment without large non-recurring investment items such as the technology, IT and systems investments we expect to make in fiscal 2024. As Julian will expand, we expect to generate around $65 million of adjusted EBITDA in fiscal 2024, and we expect to see approximately $65 million to $70 million change in operating cash due to increase in working capital requirements, and includes our deposits for a US manufactured battery cell from AESC. As we mentioned on our last call, our US battery cell supply agreement with AESC called for a downpayment of $150 million to reserve this capacity, which will be paid in installments over fiscal year 2024 and fiscal year 2025, and will be funded by liquidity and customer deposits for these batteries.

The first $35 million will be paid in Q1 of fiscal year 2024, and another $35 million will be paid in the second quarter of fiscal year 2024. As Julian and I mentioned earlier, we have a strong balance sheet entering 2024 and have ample cash and facilities to support our 2024 guide and investments that will support multi-year industry growth. We also expect to generate free cash flow in fiscal year 2025. Before I turn the call back to Julian, I would like to express my appreciation to the Fluence board, management team, employees, and shareholders, for their trust. Serving as the CFO of Fluence has been one of the highlights of my career. If I were to participate in the energy transition space today, this would be my preferred spot. I take comfort in knowing Fluence is in an excellent position from a balance sheet perspective as I pass the baton to Ahmed, who will take Fluence into the next chapter.

With that, I will turn the call back to Julian.

Julian Nebreda: Thank you, Manu. Turning to Slide 14. As we previously discussed, we’re initiating guidance for fiscal 2024 of revenue between $2.7 billion and $3.3 billion. We expect our fiscal 2024 adjusted EBITDA to be between $50 million and $80 million, and we’re targeting our ARR to be around $80 million by the end of the fiscal 2024. I’d like to point out that our revenue guidance represents an increase of $300 million when compared to our prior fiscal year 2023 guidance midpoint plus our implied revenue growth of 35% to 40%. We now expect a fiscal 2024 revenue split of 30% in the first half, and 70% in the second half, which is an improvement to what we previously communicated to the market. As a result of this, we do expect our first quarter to produce negative adjusted EBITDA due to lower revenue on the execution of the remaining legacy contracts.

From a margin perspective, we expect fiscal 2024 adjusted gross margins to be between 10% and 12%, which is an improvement from the fiscal 2023 adjusted gross margin of nearly 7%. From a cash standpoint, we currently expect to use approximately $85 million of cash in fiscal 2024, mostly funding non-recurring incremental investments in systems and IT infrastructure necessary to support our continuous growth. When looking out to 2025, we expect 35% to 40% year-over-year topline revenue growth. Additionally, we expect to begin generating free cash flow in fiscal 2025. Turning to Slide 15, we established ourselves as the preferred choice for utility scale storage solutions. Our competitive advantage is fortified by being able to offer our customers a full breadth of features, including bankability scale and supply chain management, power electronic engineering, and innovation digital software services, safety and cybersecurity.

While some of our competitors may focus on only a couple of these elements, we often win because we aim to excel in all and provide them universally to our customers. This is corroborated by the 2023 S&P Global Battery and Storage Systems Integrator Report, which ranked the top 10 integrators globally based on install and contracted capacity. I’m pleased to say that Fluence was ranked number one both globally and in the US. In conclusion, I want to emphasize the key takeaways from this quarter’s results. Firstly, we had a robust financial performance contributing to a record-breaking annual revenue. Attaining profitability for the first time is a significant milestone, and we aim to capitalize on this achievement in fiscal 2024. Second, we proactively secured our future by solidifying our battery supply for fiscal years 2024 and 2025, thus ensuring our ability to meet our growing demand.

Finally, the introduction of our new $400 million ABL facility provides us an additional tool to continue capturing the robust growth of the utility scale. As a reminder, while Ahmed is participating on today’s call, he will not be answering any question. This concludes my prepared remarks. Operator, we’re now ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

George Gianarikas: Good morning. Thanks for taking my question. So, maybe just to start, a lot has been made of the interest rate environment having an impact on project timing in the general renewable space and economics. Your results sort of speak of themselves for themselves, but what impact, if any, are you seeing on your business from the change in interest rates? Thank you.

Julian Nebreda: Right. Thanks, George. I mean, as we have talked in the past, we work with the top tier developers in the US where this happens. And when you looked at them, they don’t really see any problems raising capital, accessing capital, or putting their projects together. So, we have not seen any delays due to cost of capital or access to capital in general. And I’ll tell you even more, in our case, because as you all know, our product costs have come down, with battery prices coming down significantly this year. In a way, when you do the math between what our costs, our lower costs compared with the higher, the 100 basis points generally that prices have gone – the cost of money has gone up during the year, essentially it’s a wash or maybe actually, you actually can do even better returns than what you do in the past.

So, we haven’t seen any real effect of today in our customers’ segment. We do get the same information you get from other parties who we tend not to work with, where they had some problems raising money or raising money at competitive rates, well, but we haven’t seen it in our group. We’re segmented with a top tier group and that top tier group essentially had no problem of accessing capital. No

George Gianarikas: Thanks. Maybe if I can ask one follow-up. Recently, one of your competitors, Wärtsilä, announced that they’re exploring strategic alternatives for their energy storage business. Any thoughts on that and any impact that it could have on your strategy going forward? Thank you.

Julian Nebreda: I was surprised by it because the prior quarter, they say that this was going to be the growth engine. In this quarter, they say that – it’s difficult to know. We’ve been trying to understand where they come from. I prefer not to speculate, no, or at this stage, but I was surprised by this is a market that has offering tremendous growth. It’s a tremendous opportunity to create value for shareholders to play in the new energy space. So, why are they revising their view on the market? I have no idea, but I’ve been reading the investors they call and the rationale, at least it wasn’t clear to me, but we’ll continue looking at it. We’re on the other side of that spectrum and doubling down on this. This is a once in a life opportunity. It doesn’t get any better than what this market offers today.

George Gianarikas: Thank you.

Operator: One moment for our next question, please. Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Brian Lee: Good morning. Thanks for taking the questions. First off, Manu, congrats and best of luck on your new role, and Ahmed, looking forward to working with you more closely going forward. A couple of questions I had was, I guess, appreciate the ARR breakout, $80 million end of this year or end of the fiscal year, 40% growth it seems like versus last year’s number. If I look at your bookings, though, in services and digital, it’s growing a lot faster. So, can you give us a sense of – I know there’s a little bit of a delay, but as we think about your initial 2025 revenue guidance consolidated, like how fast can you grow that ARR balance off of the $80 million, when I kind of look at your bookings volume growing at a much faster rate across services and digital. And then also what’s sort of the margins implied in that ARR balance? I suppose it’s – I would presume it’s pretty high, but can you give us a sense of what the range is?

Julian Nebreda: I mean, on the growth rate, I do think that our view is that our ARR should grow at a higher rate than our solutions business. No, just the way it works, and the concept is very simple. We will = we have Nispera and Mosaic and our services business. Our services business, 90% of our growth rate of our sale base, Nispera roughly around 100%, and then Mosaic is on top of that. So – not on top of that, but we can add to it. So, I do think that we will see that growth being ahead of it. So, that’s conceptually where we are, and you can – we are growing 40% compared to what the 35 to 40 that we have set from last year. In terms of margins, the margins differ. No, I think that for their digital business, they’re more on the around 70%, while our service business is between 20% and 30%, depending on the type of service deal that we agree.

So, the combined – there’s not a combined service = there’s not a combined margin, but you just think about it this way. And then in terms of the – today, I think that the grade or the majority of it is services, but I’ll see the – our view is that digital will grow at a higher rate than our services business, that you’ll see digital becoming a much more relevant part of our ARR as we move forward. So, that’s kind of the – that you should think about all of this.

Brian Lee: That’s great. Yes, no, appreciate that color. That’s super helpful. Second question for me, and I’ll pass it on is, looking at that kind of preliminary fiscal 2025 revenue guidance, 35% to 40%, that’s quite robust. It puts you in kind of the $4 billion topline range, assuming you kind of get to the midpoint. Can you – it sounded, Julian, like you were mostly growing off of customer conversations and feedback, but can you give us a sense of beyond that, are there some background?

Julian Nebreda: Brian, I lost you – we’re losing you a little bit. I don’t know. You mentioned the – you were talking about 2025 robust growth and then somehow you got – can you repeat that?

Brian Lee: Yes, hopefully – maybe that’s clear. Sorry, I turned off the Bluetooth. I’m just wondering, what, beyond customer conversations, do you have any MSAs, contracted backlog? Like what else are you able to sort of key off on to get comfortable with the 35% to 40% additional growth into fiscal 2025? And then when you talk about batteries being secured for 2025, I mean, I would assume that is matching up to that revenue growth potential you’re looking at. Is it fixed pricing or is it indexed? Are you subject to any kind of cost volatility on the battery side, just having locked in the volume? Maybe, could you remind us where you are on the pricing side of things as well? Thank you.