FTC Solar, Inc. (NASDAQ:FTCI) Q3 2023 Earnings Call Transcript

FTC Solar, Inc. (NASDAQ:FTCI) Q3 2023 Earnings Call Transcript November 8, 2023

FTC Solar, Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.06.

Operator: Hello and welcome to FTC Solar Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Bill Michalek, Vice President of Investor Relations. You may begin, sir.

Bill Michalek: Thank you, and welcome, everyone, to FTC Solar’s Third Quarter 2023 Earnings Conference Call. Before the call, you may have reviewed our earnings release and supplemental financial information, which are posted earlier today. If you’ve not yet reviewed these documents, they are available on the Investor Relations section of our website at ftcsolar.com. I’m joined today by Shaker Sadasivam, Chairman of the Board; and Patrick Cook, the company’s Chief Commercial Officer; and Cathy Behnen, the company’s Chief Financial 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 speaks only as of the current date.

As such, these forward-looking statements include risks and uncertainties and actual results and events may 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 expect, we’ll discuss 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 Shaker.

Shaker Sadasivam: Thank you, Bill, and good morning, everyone. I felt it was important to speak with you directly on behalf of the Board Of Directors about the leadership transition we have announced today. FTC Solar is a company with a great team of employees and innovative and compelling technology and services that customers enjoy. With the start of AD/CVD and supply chain disruptions, a growth trajectory was interrupted, and much of the last two years has been about repositioning the company to be in the right markets with the right technology and cost structure. We have made progress on that front and improved our positioning. The tracker market is healthy and profitable and FTC Solar now needs to accelerate our progress and achieve and enjoy healthy, profitable growth.

At the Board level, as we evaluated our opportunities and growth plans ahead, the Board agreed that now is the right time to bring new leadership to FTC Solar as we enter our next phase of growth and execution. As you saw from the press release this morning Cathy Behnen, who has served as the company’s Chief Accounting Officer since 2020, has been named our Chief Financial Officer on an interim basis. Cathy has more than 20 years of financial leadership experience, including CFO and accounting partner roles, and has made significant contributions to the company as Chief Accounting Officer and a Member of the executive team. We are excited to have Cathy take on this expanded responsibility. The combination of Cathy and her fellow executive leadership members, Patrick Cook, our Chief Commercial Officer, and Sasan Aminpour, our Chief Operating Officer, will provide steady leadership of the day-to-day management of the company.

To further ensure a smooth transition for the company and its employees and customers. During this transition, the board will provide increased oversight of those leaders and be engaged on a regular basis. In particular, Ahmad Chatila will regularly assist in facilitating communication between management and the board to monitor key activities and initiatives in order to accelerate profitable growth. We are confident that this team and structure has the capability, along with the right blend of organizational history and new perspectives to ensure that not only do we not miss a beat, but that we accelerate toward our long-term goals. While today’s news represents a change, it also represents a tremendous opportunity for us to accelerate our momentum.

With that update, I thank you for your time, and I’ll turn it over to Patrick to discuss the highlights from Q3 and the progress we have made.

Patrick Cook: Thank you, Shaker, and good morning, everyone. As Cathy will discuss our third quarter results largely came in as expected, net of benefits to gross margin and a charged operating expense that were not in our guidance. As we look to the fourth quarter, our slate of projects in aggregate is getting a later start than we previously anticipated as customers continue to experience various project delays. As a result, the guidance we are providing for the fourth quarter is down from Q3. We expect this to be followed by a much more significant revenue growth in the first quarter of 2024 as the delayed projects ramp. We continue to feel good about our future and overall long-term growth prospects. Our confidence is based on our improved competitive positioning and supported by our large and growing backlog.

I’ll briefly review the positioning improvements that we discussed last quarter. First, we believe our manufacturing cost is now in line with our leading competitors. We’re more competitive than we’ve ever been on that front and will continue to prove with scale. Second, our average new project margins put us on track to meet or exceed the targets we provided in the past. As you may recall, we have previously targeted getting to the 10% to 15% gross margin range on $100 million in quarterly revenue. The fact that we were able to approach the low end of that range or about 9.5% on a normalized basis on only $30 million in revenue in Q3 is an additional proof point that the cost reduction actions we’ve taken have borne fruit and position us to achieve profitability as we grow revenue and see additional cost absorption.

Third, we are now in the market with our 1P solution, Pioneer. We believe the 1P market has done better in this time of restricted module availability and we didn’t have a solution until recently. We have had great customer response to Pioneer and our 1P backlog is growing very nicely, including quite a few project additions following RE+ trade show in September. Fourth, we continue to grow our international business. We’re gaining traction in new regions, most recently adding awards in Spain and Italy. We’ve also seen larger awards in existing regions like South Africa and now have awards in a dozen countries outside of the US. Our 1P solution will only enhance our prospects internationally. And fifth and lastly, our backlog has now grown to approximately $1.6 billion, with approximately $60 million added since August 9th.

On our last call, we outlined a number of projects that were added which include deliveries in 2024, including in Spain, Italy, and South Africa. We also announced the award of a 1 gigawatt project in Idaho. One project we didn’t mention at the time, but was added to our backlog last quarter was another 600 plus megawatt project in the US. Revenue on this project will ramp here in the fourth quarter and continue into next year. The continued growth of our backlog, including the recent additions, allows us to continue to be optimistic about our growth prospects and our goal is now to ensure we’re adding more business and converting to purchase orders to support future growth. So in summary, we were pleased to do well relative to our third quarter targets and demonstrate continuous gross margin improvement.

Some fourth quarter projects are starting later than anticipated, but we expect to improve revenue performance in the first quarter, along with margin improvement. We’re positioned with a product cost structure that will enable our gross margin expansion to continue and reach new highs as revenue grows. We’ll keep a tap on operating expenses while investing for future growth, and we expect to cross profitability in 2024. With that, I’ll turn it over to Cathy.

Cathy Behnen: Thanks, Patrick, and good morning, everyone. I’ll provide some additional color on our third quarter performance and our outlook. Beginning with a discussion of the third quarter, revenue came in at $30.5 million. This revenue level represents a slight decline of 5.6% relative to last quarter and an increase of 84.3% relative to the year-ago quarter. Growth profits benefited from higher project margins, a better mix of materials versus logistics, and a couple of non-recurring benefits. Specifically, our GAAP gross profit was $3.4 million, or 11.1% of revenue, compared to $2.2 million, or 6.8% of revenue in the prior quarter. On a non-GAAP basis, gross profit was $3.9 million or 12.8% of revenue. That does include a couple of non-recurring benefits totaling $1 million that were not contemplated in our guidance and related to better than expected margins on a closed project and lower than expected inventory costs that we don’t expect will reoccur in future periods.

If those benefits were excluded or on the same basis as our guidance, non-GAAP gross margin would have been 9.5%, still above our guidance range of 3% to 9%, supported by mixed and improved cost structure. This represents our fourth consecutive quarter of gross margin improvement and our third quarter of positive margin since our IPO. These figures compare to a non-GAAP gross profit of $2.6 million or 8.2% in the prior quarter and a non-GAAP gross loss of $8.2 million in the year ago quarter with the difference driven primarily by significant improved product direct margin and lower warranty and other indirect costs. Our GAAP operating expenses were $19.7 million on a non- GAAP basis, excluding stock-based compensation and certain other costs, operating expenses were $13.2 million compared to $9.1 million in the year ago quarter.

The operating expenses this quarter included an approximate $4 million credit loss relating to a specific customer account. Excluding this charge, our non-GAAP operating expenses would have been $9.2 million, which would be below or better than our guidance range and at the low end of what we’ve seen over the last two years as we continue to look for efficiencies across the company while continuing to invest strategically in areas that support our growth. Next, GAAP net loss of $16.9 million or $0.14 per share, compared to a $10.4 million or $0.09 per share in the prior quarter and had a net loss of $25.6 million or $0.25 per share in the year ago quarter. Adjusted EBITDA loss, which excludes approximately $7.2 million, including stock-based compensation expense and other non-cash items was $9.7 million, compared to losses of $7.2 million in the prior quarter and $17.7 million in the year ago quarter.

Excluding the $4 million charge as well as the gross margin benefits, adjusted EBITDA would have been at the high end of our guidance range. Finally, regarding liquidity, we had an operational use of cash in the quarter offset by usage of the ATM facility for which we received $13.4 million of cash in the quarter and we ended the quarter with $31.5 million cash on the balance sheet. We continue to hold no debt on the balance sheet, have a largely available credit revolver, as well as $65 million remaining under the ATM program at the end of the quarter. With that, let us turn our focus to the outlook. Based on our current view and including the project delays that Patrick mentioned, we expect fourth quarter revenue to be down sequentially with margin reflecting the lower absorption.

We expect this to be followed in the first quarter by a fairly substantial revenue recovery as projects ramp. As Patrick mentioned, we have a great deal of gross margin runway ahead of us, and we expect the trend, particularly as the revenue grows to largely be up. Specifically, our targets for the fourth quarter call for the following. Revenue between $18 million and $28 million. Non-GAAP gross margins between negative $1.3 million and positive $2 million or between negative 7% and positive 7% of revenue. Non-GAAP operating expenses between $10 million and $11 million and finally adjusted EBITDA loss between $13 million and $2.5 million. For the first quarter of 2024, we expect to see about a 96% sequential revenue growth at the midpoint, with improvements in all categories.

Specifically, revenue between $40 million and $50 million, non-GAAP gross margin between $3.2 million and $6.3 million or between 8% and 13% of revenue. Non-GAAP operating expenses between $9 million and $10 million. And finally adjusted EBITDA loss between $7.3 million and $3 million. Looking forward, we continue to feel good about the opportunity for a strong revenue recovery in 2024 and achieving profitability. With that, we conclude our prepared remarks and I will turn it over to the operator for any questions. Operator?

See also 30 Most Profitable Agricultural Business Ideas for Young Entrepreneurs and 25 Best Selling Items on Facebook Marketplace.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Philip Shen with ROTH. Your line is open.

Philip Shen: Yeah, thanks for taking my questions. First one here is on the guidance for Q4 and Q1. I think it came in lighter than what the street was looking for in a meaningful way. You talked about in your prepared remarks that you’ll see a ramp up and it’s been impacted by module delays. Is it fair to say that you guys have been more exposed to the LONGi detentions as opposed to Jinko, because Jinko has been flowing pretty smoothly for some time now. And then recently only LONGi was able to get their OCI poly module release. And so as that starts to ramp, would you expect much better kind of expectations ahead as a result of that detention release from LONGi. Thanks.

Bill Michalek: Hey, Phil, so I’ll start and then let Patrick continue. So historically in our backlog we did have a fair amount of modules from that supplier that were associated with our projects. Many of those have, during the AD/CVD process, found different modules to move forward with. So it’s fair historically, but I think that’s been changing. Patrick, I don’t know, if you’d add anything there.

Patrick Cook: Yeah. And Phil, I’d say the other thing, too, when you think about kind of Q4, Q1, we’ve had some projects kind of move to the right in terms of the overall revenue ramp. The 1 gigawatt project that we’ll be delivering here and then the 700 megawatt project that we signed last quarter and are in process of delivering. So you’re going to see a lot of that base load revenue get shifted into 2024, which is why we’re so optimistic about kind of the future prospects, is because we’ve got that 1.7 gigawatts plus already kind of in the hopper and delivering. So we’re very excited about that.

Philip Shen: Great. So we’ve made a fair amount recently about the challenges with some project delays as a result of, you know, elevated rates for a long period of time and so forth. Can you walk through the rationale for each of those project pushouts? If you touched on it earlier, sorry if I missed it, but just curious if you can give a little more color as to why the gigawatt and the 700 megawatt projects were pushed to the right.

Patrick Cook: I think from just an overarching perspective, what we’re seeing is a rise in financing costs obviously is creating a little bit longer duration as projects reach kind of FNTP or LNTP. And you’re seeing, you know, those types of projects move. Interconnection has also been a little bit of a challenge. You’re seeing kind of a little bit of grid issues, grid congestion, and that’s having those projects ultimately pushed to the right more than what we’ve traditionally seen in the past. Obviously module availability is getting better, but we’re seeing increased rates in financing and interconnection is kind of the current challenges in the market.

Philip Shen: Okay. Great. Thanks Patrick. One last one from me and I’ll pass it on. As it relates to working capital, you know, you have a healthy amount of cash, 30 million, but you have a bunch of cash tied up in accounts receivables at 71 million and a pretty high data account. Just wondering if you can talk us through balance sheets, working capital, how you expect to manage through. Thanks.

Cathy Behnen: Yeah, so this is Cathy. We feel very confident. Our cash position will be flat to a little improved by the end of Q4. We have some chunky receivables we expect to be coming in Q4. And with the ramp that we’re seeing and the move to profitability, we’re confident in kind of where that stands on our balance sheet.

Philip Shen: Great. Thanks, Cathy. And then in terms of why are the receivables so chunky at this point? I mean or why are they so high? Are there some other kind of reflection of what’s going on in the market where some of your customers might be trying to preserve cash?

Cathy Behnen: Yeah, I think that’s exactly what we’ve seen. And some financing changes on our customer side also making the — has pushed out some of the receivables. So we have some that are a large receivable that we’re expecting to see come in Q4.

Bill Michalek: The receivable that we mentioned a lot that we expected to come in last quarter. It actually looks like it’s going to come in now this quarter, so that’s the bigger chunk of it.

Cathy Behnen: It moved to the right.

Philip Shen: Got it. And do you have a credit facility? And can you talk about the capacity available?

Patrick Cook: Yeah. We have a revolving credit facility right now. It’s $100 million. We’ve got about one and a half to 2 — pretty de minimis amount that’s ultimately utilized. It’s traditionally used for letters of credit to support projects. As we’ve gotten more credibility within the market, we haven’t had to tap in and ultimately utilize it. So it’s remained undrawn and untapped so we’ve got you know more than $95 million available under the line.

Bill Michalek: But as of quarter end.

Philip Shen: Great. Thanks for all the detail. Sorry, go ahead.

Bill Michalek: I can say — throughout the quarter we can utilize the full amount and then as of quarter end there’s 5 million available left on the revolver.

Philip Shen: Okay, thanks, guys. I’ll pass it on.

Bill Michalek: Thanks, Phil.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is open.

Donovan Schafer: Hey, guys. So thanks for taking the questions. I first want to ask you know with the transition of the CEO and the CFO kind of wondering Shaker is still on, maybe we can get a response from him on this. But if the issue here is kind of the way everything, the way you guys are describing it and all these dynamics that are out of your control, it seems, or at least being framed that way, but also lined up for acceleration. I think the word acceleration was used a lot in the prepared remarks. If all that is lined up that way and unfolding as best as possible within what you can control, then why replace the CEO and CFO? Or otherwise, more candidly, what is the board’s view of what’s going on here? And tied to that, why should we continue to put faith in, you know, Q1 guidance, you know, the Q1 guidance, Q4 guidance, and even the backlog at this point?