FTC Solar, Inc. (NASDAQ:FTCI) Q1 2023 Earnings Call Transcript May 10, 2023
Operator: Good day, and thank you for standing by. Welcome to the FTC Solar First 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. [Operator Instructions] I would now like to hand the conference over to your speaker, Bill Michalek, Vice President, Investor Relations.
Bill Michalek: Thank you, and welcome, everyone, to FTC Solar’s first quarter 2023 earnings conference call. Before today’s call, you may have likely reviewed the earnings release, supplemental financial information and slide presentation, which were posted earlier today. If you’ve not yet reviewed these documents are available on the Investor Relations section of our website at ftcsolar.com. I’m joined today by Sean Hunkler, FTC Solar’s President and Chief Executive Officer; Phelps Morris, the company’s Chief Financial Officer; and Patrick Cook, the company’s Chief Commercial Officer. Before we begin, I remind everyone that today’s discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date.
As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law. As you’d expect, we’ll be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we’ll discuss our backlog and our definition of this metric is also included in our press release. With that, I’ll turn the call over to Sean.
Sean Hunkler: Thanks, Bill, and good morning, everyone. I’m very pleased to be speaking with you today, not only because we’re reporting another quarter of results at the high end of our expectations, but because I believe we are at a significant inflection point in our history as a company. As we prepare to emerge from a module supply-driven downturn, we do so with a stronger and broader product offering, a strengthening team and a much lower product cost structure, a cost structure that not only allowed us to post our first positive gross margins since our IPO, but a gross margin that is 14 points higher today than it was in the fourth quarter of 2021 on 2.5x the revenue. I believe we’re much better positioned to win than ever before, and I’m very excited about our opportunity, particularly as we look to the back half of 2023 and into ’24.
So, let’s jump into it. I’ll start today with a brief market update. We’re beginning to see more projects that have modules or visibility to modules show up in our funnel. In fact, I’d say we’re seeing the most traction on that front since the start of the AD/CVD and UFLPA module constraint period, leading us to believe the worst of UFLPA may be behind us. While lead times won’t allow for a Q2 revenue benefit, it’s an encouraging sign as we look ahead to the back half of 2023 and into ’24. We believe the Inflation Reduction Act, or IRA, will also help to increase demand over the long term. We are hearing the guidance from Treasury may be received by the end of Q2. So, while our market outlook is becoming increasingly optimistic, as we’ve discussed over the past couple of quarters, our goal has been to set the company up to improve our financial results in any margin environment.
Let me briefly summarize some of the exciting results the team has achieved. First, and perhaps most significantly, we improved our cost structure, eliminating more than 20% of the steel content from our trackers. This, along with launching a higher-margin distributed generation business has supported the significant gross margin expansion that is underway. I’ll talk more about that in a moment. Second, we expanded our product line, adding a new cost-effective solution to our Voyager line and support first solar modules. First, purchase orders for this solution came in Q4. We also announced a new and differentiated 1P tracker called Pioneer. Pioneer includes features from Voyager and incorporates key customer feedback and our pipeline for this product has grown quickly.
Last quarter, we noted that the first shipments for Pioneer would be in the second half of the year. However, I’m pleased to report that we’ve since received our first POs in the U.S. and Australia and are shipping product in the second quarter ahead of the prior schedule. Collectively, these new products give us more opportunities to win projects, including where there is a preference or benefit for 1P. Customer engagement and excitement are quite high. Third, we have improved our geographic positioning. In the U.S., we announced a joint venture with a leading manufacturer to support customers who would like domestic content as well as allow us and our customers to benefit from IRA incentives. We continue to expect the facility to be online around midyear.
And as a reminder, we have not incorporated any incremental margin benefit from IRA into our internal models at this point, although we believe there is upside potential. We have also improved internationally. As we entered last year ahead of AD/CVD in the U.S. module issues, our sales were essentially all in the U.S. and our pipeline was mostly U.S. To date, we now have been awarded projects in 10 countries outside the U.S. and in 2022, 20% of our revenue was international. And with the addition of our 1P solution, we have seen a notable increase in engagement with customers around pipeline. And finally, as it relates to our positioning and value proposition with customers, I have never felt better. With 1P, 2P and First Solar solutions, along with software, we can now engage with our customers as a truly solutions-oriented and technology-agnostic partner to optimize each individual project site.
With this solution-oriented mindset, our pipeline and backlog continue to grow. Our overall pipeline has reached a new record high at 134 gigawatts and backlog has grown to $1.4 billion, with another $235 million added since March 1. Collectively, all these actions, along with efforts to strengthen our team, position us very well for the future. In fact, I feel like we are a new and much stronger company as we get closer to what will hopefully be an end to the UFLPA-related module constraints. Some of the benefits of these actions are already showing up in our results now and others will play an increasing role moving forward, like our new products and additional operational leverage as revenue grows. Looking at the graph at the bottom of Page 4, you can see that our gross margin expansion is already well underway, even ahead of full UFLPA resolution.
In the third quarter of last year, which we have continued to describe as the revenue and margin bottom, we reported non-GAAP gross margin of negative 49.8%. In Q4, we improved to negative 3.4%. In our last earnings call, we targeted Q1 to turn positive in the 2% to 8% range, and we were able to come in at the upper end at 7.3%. As we look at that 7.3%, there are a few things I’d call out. One, it represents a 57 point improvement in just two quarters. Two, it’s our first time achieving a positive gross margin since our IPO. And three, it’s 14 points higher now than it was in fourth quarter 2021 when we had 2.5x more revenue. At the same $100 million run rate, we believe that our first quarter gross margin would have been in the 10% to 15% range.
This, as you may recall, is the margin range we outlined for a revenue level of $100 million in this call one year ago. It’s also another proof point that the actions and incredible hard work of the team are paying off and positioning us for strong and profitable growth. And in the last column, as Phelps will discuss, we’re expecting further improvements in second quarter. So, in summary, I feel very good about what we have accomplished and how we strengthened the company during this period of module constraint. As the module environment continues to improve, I believe we’re positioned with more products in more markets, with more customers and more opportunities than ever before and positioned to grow much more profitably. With that, I’ll turn it over to Phelps.
Phelps Morris: Thanks, Sean, and good morning, everyone. I’ll provide some additional color on our performance and our outlook. Beginning with the discussion with the first quarter, I’m happy to say we’ve continued our string of solid execution to deliver results at the high end of our guidance trends on all metrics for the quarter. Revenue actually exceeded our targets coming in just a bit above the high end of our guidance range at $40.9 million. Now, compared to last year, which is a pre-AD/CVD-UFLPA environment, revenue declined 17.5% year-over-year. However, relative to our prior quarter Q4 2022 revenue increased 56%, which filled a 58% sequential growth we reported from Q3 to Q4 as we continue to gain momentum off the Q3 2022 lows as the team continues to execute.
Near-term, the sales team continues to focus on our strategy of identifying and servicing non-UFLPA-impacted projects, which, as Sean mentioned, is continuing to improve. As we move on to gross profit, we are incredibly pleased to deliver our first positive gross profit since we went public in Q2 2021. Specifically, our GAAP gross profit of $2 million or 5% of revenue compared to a loss of $1.9 million or 7.3% of revenue in the prior quarter. On a non-GAAP basis, gross profit was $3 million or 7.3% of revenue coming at the high end of our guidance range and compared to a non-GAAP gross loss of $0.9 million or 3.4% in the prior quarter. To put this into perspective, in the past few quarters, we’ve been able to improve our gross profit as a percentage of revenue by 57 percentage points, flipping from a negative 49.8% at the end of Q3 to a positive 7.3% at the end of this quarter.
This represents a truly incredible effort by our whole team, and we’d like to publicly thank them as they work tireless behind the scenes in our design to value and design manufacturing fronts as well as supply chain optimization as well as the sales team to make this happen. So, thank you, team. Next, on a year-over-year basis, we delivered improvements to non-GAAP gross loss of $11.8 million, even in the face of the lower revenue, which was $40.9 million this year versus $49.6 million last year. The year-over-year improvements were driven primarily by improved tracker and logistics stretch margins, including logistics, which returned to positive as shipping has normalized from the pandemic environment. Our GAAP operating expenses were $14.4 million.
On a non-GAAP basis, excluding stock-based compensation charges, fees associated with the FCX legal settlement and certain other expenses, our operating expenses were $10.1 million compared to $11.2 million in the year ago quarter. This was below or better than the midpoint of our guidance range. This year-over-year improvement was driven primarily by lower related personnel costs and spending on professional services and continue to keep a keen eye on expenses. Next, GAAP net loss was $11.8 million or $0.11 per share compared to a loss of [$24.5] million or $0.20 per share in the prior quarter and compared to a net loss of $27.8 million in the year-ago quarter. Collectively, the results from our improved margins and continued careful management of operating expenses and overhead flow down to our adjusted EBITDA results.
For the quarter, the adjusted EBITDA loss, which excludes approximately $4.5 million of certain charges, including stock-based compensation expense, certain consulting and legal fees, severance and other noncash items was $7.2 million. This was better than the midpoint of our guidance range of $8.5 million. In addition, these results represent an improvement of $3.8 million quarter-over-quarter when compared to an adjusted EBITDA loss of $11 million in the prior quarter and compared to a $20 million loss in the year-ago quarter. Finally, regarding liquidity, we had a small operational use of cash in the quarter, offset by a modest usage of the ATM facility for which we received $5.5 million of cash within the quarter, and we ended the quarter with $41.5 million of cash on the balance sheet.
In terms of the ATM program, while we did not have a direct exposure to Silicon Valley Bank, given the volatility uncertainty in the bank and capital markets, the Board and the management team believe is prudent to tap into this source of liquidity to a small degree, given the landscape. In addition, in terms of our overall liquidity, we continue to hold no debt on the balance sheet, have an undrawn credit revolver as well as $90-plus-million remaining under the ATM program at quarter end. So, with that, let’s turn our focus to the outlook. Based upon our current view, we expect continued albeit miles sequential revenue growth in the second quarter. Importantly, we expect our gross margin to show continued and significant improvement quarter-over-quarter.
Specifically, our targets for the second quarter call for the following: first, revenue between $42.5 million and $52.5 million, our non-GAAP gross margin is between $4 million and $6.5 million or between 9% and 12% of revenue; non-GAAP operating expenses between $10 million and $11 million; and finally, adjusted EBITDA loss between $7 million and $3.5 million. Looking forward, as Sean mentioned earlier, we are anecdotally starting to hear and see analyst reports having increased modules making through the U.S. customers, which is great news. Now, while these improvements were not suit enough to impact our Q2 guidance as these projects move forward to purchase orders, they have the potential to lead to a strong ramp in the back half of the year and into 2024.
In closing, we believe FTC has never been better positioned than it is today and the excitement we are seeing inside the company is culpable. We have a broader product offering, we have refocused our sales efforts, and we have an improved cost structure via our tireless efforts in the design, manufacture and supply chain optimization. These efforts covered with our $1.4 billion in backlog has positioned us to not only grow but grow profitably into the future. With that, we’ll conclude our prepared remarks. I’ll turn it over to the operator for any questions. Operator?
Operator: [Operator Instructions] And it comes from the line of Maheep Mandloi with Credit Suisse. Please go ahead.
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Q&A Session
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Operator: Thank you. One moment for our next question. And it comes from the line of Philip Shen with ROTH MKM. Please proceed.
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Operator: Thanks. One moment for our next question, please. And it comes from the line of Julien Dumoulin-Smith with the Bank of America. Please proceed.
Operator: One moment for our last question in queue. And it comes from the line of Kasope Harrison with Piper Sandler. Please proceed.
Operator: Thank you. And with that, ladies and gentlemen, I will pass it back to management for any final remarks.
Sean Hunkler: Thanks very much for joining our call. We are extremely excited about the business we are a part of, and we are extremely excited about the results that the team has generated. We talked last quarter and the quarter before about Q3 being our low point. And now we have more proof points that, that’s absolutely the case. We are extremely excited about the trajectory moving forward. And so, we look forward to next quarter and sharing our results with you then. Thanks very much.
Operator: And thank you all for participating. You may now disconnect.
