Good day, and thank you for standing by. Welcome to the Fluence Energy Fourth Quarter 2022 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] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Lexington May, Vice President of Investor Relations. Please go ahead..
Thank you. Good morning, and welcome to Fluence Energy’s fourth quarter 2022 earnings conference call.
A copy of our earnings presentation, press release and supplementary metric 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 Web site 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 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 measures is available in our earnings materials on the company's Investor Relations Web site. 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'll now turn the call over to Julian..
Thank you, Lex. I’d like to extend a warm welcome to our investors, analysts and employees who are participating on today's call. Additionally, I would like to welcome Manu Sial, our new CFO. Manu joined us in September and has already made a significant impact on the organization in a short period of time. Welcome, Manu.
Today, I will provide a brief update on our business and then review our strategic objectives, as well as some examples of the actions we’ve already taken towards these goals. Following my remarks, Manu will discuss our financial performance, as well as our outlook for fiscal year ‘23.
Starting on Slide 4 with the key highlights of the fourth quarter, I'm pleased to report that our team recognized $442 million of revenue during the quarter, delivering our highest quarterly revenue in Fluence’s history and deploying more than 1 gigawatt hour of energy storage solutions.
More importantly, we achieved positive gross margins for the quarter, both on an adjusted and GAAP basis. Our demand was strong across all three of our business lines and new orders were approximately $560 million. Furthermore, our signed contract backlog as of September 30 was $2.2 billion, a year-to-year increase of around 30%.
Lastly, our recurring revenue businesses, which consists of our services and digital businesses experienced strong growth in the quarter. Notably, our services attachment rate of 119% for the fourth quarter was in line with our expectations, illustrating the catch up in service contracting, we anticipated during our previous earnings call.
Our digital business added nearly 1 gigawatt of assets under management since the third quarter, providing us visibility to future revenue. Turning to Slide 5. Over the past 90 days, the senior management team and I have conducted a deep dive of our business.
During this deep dive, we reaffirmed those aspects of the business that are working well and identified several areas that have significant upside potential but need some work.
We confirmed that Fluence’s Energy storage solution business has tremendous tailwinds across the globe, including from the Inflation Reduction Act in the United States, also known as IRA, and Europe is growing desire for increased energy security and independence.
Although, our digital business has strong potential, they have determined that the platform and business model would benefit from simplification and tighter integration with our storage solutions business.
For example, our current Mosaic product is not able to expand into new markets quickly due to its current tech architecture that will be addressed. Going forward, we will concentrate on accelerating the integration of our offerings, including digital and services with our storage in order to serve customers, with an end-to-end bundled solution.
Concentrating on executing and strengthening our risk management capabilities to ensure we monetize our contracting margins. Additionally, we are simplifying our digital platform and retooling our go-to-market strategy in order to increase the scale of both Mosaic and Nispera and to roll out these products more quickly and at a lower cost.
Furthermore, we will convert our supply chain into a competitive advantage by leveraging our size and scale to drive margin and support for easier implementation of solutions. I'll provide more color on each of these initiatives in a few minutes.
After meetings with hundreds of our Fluence people in the past 90 days and I’m confident in our ability to maintain our leadership position in the market, deliver multiyear profitable revenue growth rates of more than 30% and we adjusted EBITDA breakeven in fiscal year '24.
I believe our team’s tenure passion and resilience will set Fluence for long-term success, unlocking significant value for our customers and shareholders. Turning to Slide 6. Coming out on this process, I’m bearing an even more complete that our strategy of using our ecosystem provide energy store solution to our customers is the right one.
Our ecosystem gives us access to the largest energy infrastructure providers in the world and importantly, it provides opportunities to further integrate with our customers at any point of the value chain. Our revised go-to-market approach is simple, we will utilize one sales channel for our entire ecosystem.
This is different from our past, where we will use multiple cell channels across our business organization. This turned out to be an ineffective strategy when it comes to attaching our services and digital solutions to an energy storage sale. An integrated sales channel will give us a better ability to integrate our customers into our ecosystem.
As we have seen our digital software is valuable beyond its own P&L contribution, as it supports hardware and services creating a flywheel effect of value.
Additionally, we will work to integrate our technology more closely, so our digital offerings, interface with our storage solutions, seamlessly thus increasing the attractiveness to our customers of choosing bundle solutions. Our ability to offer an integrated, energy storage solutions, one of the key reasons our customers select us.
We're increasingly recognized as one of the premier energy solutions providers in the world by large multinational developers, or IPPs, many of which are planning on deploying significant amounts of gigawatts. The integration of these offerings is a key tool in retaining customers beyond day one sales.
So we can access them anywhere along the value chain. We have visibility to multiyear high revenue growth rates. We operate with an asset lite business model with high returns on invested capital. We have significant technical dept which helps us to monetize data and help our customers drive returns.
We also have a rapidly improving cost structure with high revenue per employee. And ultimately, we believe we have a business model and strategy set of up for success. Turning to Slide 7. I would like to discuss the five strategic objectives that will provide the framework for the actions we will be taking over the next few years.
First, we will deliver profitable growth. Both profitability and growth are essential to maximizing shareholder value. We will focus on those market segment that provide continuous growth and where our complex solutions allow us to maximize profitability. Second, we will develop the products and solutions that our customers’ needs.
Understanding our customers’ challenges is the driving force behind our continuous technological advancement. We expect to provide customers with the most sought-after solutions rooted in our industry leading experience. Third, we will convert our supply chain into a competitive advantage.
We're establishing a best-in-class supply chain that is centered around diversifying our suppliers, capturing incentives from the IRA and improving the delivery times for our solutions, all of which will ultimately increase margins and drive value for our customers.
Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. Harnessing is the power of artificial intelligence and machine learning and our integrated solutions, we can uniquely provide our customers with the ability to both maximize their revenues and lower their overall cost ownership.
This will increase visibility into our growing and profitable recurring revenue stream. And finally, our fifth objective is to work better.
This starts with being disciplined with our capital spending and contract underwriting, optimizing and using our resources efficiently and a strong corporate risk management capabilities, controlling our costs and maximizing our financial performance for our shareholders.
We have already taken actions towards these objectives, some of which I would like to highlight. Turning to Slide 8. I'm pleased to announce, we're launching a new energy storage solution, geared towards the transmission segment. We are calling it the Fluence Ultrastack.
The transmission segment is a growing market that currently sits at 450 megawatts, which we expect will grow to 17 gigawatts by 2030.We expect demand for this product will be driven by our customers' need to reduce transmission congestion resulting from growth in distributed energy resources.
Furthermore, the transmission segment is highly complex and requires the bast performance and highest safety features, thus creating a barrier to entry in the market some of which are proprietary. More importantly, higher complexity commands a higher premium for our products and services and often results in higher margins.
We will continue to lean into the transmission segment as we deliver profitable growth and develop new products and solutions that our customer needs. Turning to Slide 9.
I'm pleased to report we’ve recently signed a contract for more than $500 million with Orsted, under which we will deliver 1.2 gigawatt hour energy storage facility in the United States complete with our Gen 6 Gridstack solution. By further increasing our scale, we'll be able to better capture value from our supply chain.
We also note that Orsted selected us as they were looking for a trusted partner with strong experience, delivering complex solutions. As a comprehensive solutions provider, we continue to outpace our competition due to our scale, industry-leading experience and our ability to solve highly complex problems.
We're quickly establishing ourselves as a leader among the mega project segment. Turning to Slide 10. Including the Orsted contract, which was signed to subsequent to our fiscal year-end, our backlog now sits at more than $2.5 billion.
This highlights the strong demand we're seeing at the top of our funnel, that is now providing us greater uncertainty with respect to our multiyear revenue up. Looking at the chart, you can see that even before any impacts from the IRA, we have a pipeline that is nearly 3 times our current backlog.
It is also important to note that we're expanding our sales to non1-related parties and as a result, a majority of our backlog today is with this customer segment. Turning now to Slide 11. As we mentioned earlier, we are experiencing tremendous tailwinds from the Inflation Reduction Act.
BNEF has estimated that the TAM for energy storage increased by more than 100 gigawatt hours or around $35 billion as a result of the IRA. That is a significant. The expected ITC improves overall project returns for customer, this benefit is expected to accrue to us through improved pricing power or increased volumes.
Furthermore, the production tax credit provides margin uplift for Fluence from capturing benefits associated with manufacturing our own battery. It's also important to note that the IRA benefits are not necessary for achieving our adjusted EBITDA breakeven target in fiscal year '24 and thus represent upside potential.
We currently see the IRA impacting Fluence through in three areas. The first is the ITC for standalone storage. This benefit accrues to our customers and we expect it will incentivize more projects to move forward and to green light other projects that were previously not economic for our customers. As a result, we anticipate the U.S.
market growth to increase from 30% per year to around 40% to 50% per year. Based on our conversations with customers, we expect to enter into the first of these contracts attributable to the IRA about mid-calendar year '23. We would expect to see the impact on our financial results in the second half of ’24.
Second, the production tax credit under Section 45X of the IRA provides significant opportunities for Fluence, as we're launching our own battery module manufacturing, which I'll discuss further shortly. As a result, we expect to qualify for the $10 per kilowatt hour incentive from the IRA.
It's important to note that this is an uncapped incentive and carriers a direct pay option. As a reminder, we opened our Utah production facility in September, which will have an expected cube output of nearly 6 gigawatt hours per year by ’24.
We expect we'll be able to begin battery module production starting in the summer of ‘24, thus capturing the $10 per kilowatt hour incentive. The PTC further supports our mid-teens gross margin target. And third, Section 48C provides for the onetime reimbursement for onshoring or establishing qualifying manufacturing facilities in the U.S.
As a result, we're currently looking at the possibility of expanding our operations in the U.S. with an additional facility. Turning to Slide 12. I'm pleased to announce that we're launching our own battery module and battery pack manufacturing at our new Utah facility.
This gives us greater control over the global supply chain and allows us to capitalize on the incentive under the IRA. One of the key benefit to the Fluence Battery Pack that it is easier to incorporate new cells and diversifying our cells supplier base creating competition at a cell level.
Our Battery Pack makes it easier to swap packs in and out of new product variants. It also allows us to incorporate our own battery management system technology with more granular data access and system controls and it expands Fluence’s battery intelligence capabilities.
We expect to see initial battery module production coming out of our Utah facility during the summer of '24. Looking at Slide 13. We further illustrate our supply chain and how our battery module and battery pack fit together. Starting on the left-hand side, we will continue to purchase battery cells from multiple battery manufacturers.
Battery cells by themselves are useless and to a great extent a commodity. We take those battery cells and integrate them into our battery modules complete with our own battery management system or BMS. Thus, we're taking those commoditized battery cells and turning them into smart batteries capable of performing the tasks in our solutions demand.
These battery modules will qualify for the $10 per kilowatt incentive under the IRA. We then put several battery modules together to make a battery pack that is combined with our DCPM, which is a the brain of the pack system.
This DCPM collects battery data for communication with the Fluence operating system and it's a point of contact for a cloud-based digital solutions, providing value-added integration for our customer. Turning now to Slide 14. As I briefly mentioned earlier, we have assessed our digital business and have refocused the model and go-to-market strategy.
Now I'd like to discuss what this means for Fluence Digital and where we're going. First, we ensure we're offering an integrated and holistic end-to-end bundled solution to our customers through one sales channel. As I mentioned, this is a major change for our prior sales efforts.
Second, we will simplify our suite of digital offerings by focusing on our existing two applications, Fluence Mosaic and Nispera. We plan to roll out Mosaic to four additional U.S. markets over the next three years and improve the ability of Nispera to integrate with battery based energy storage system.
By taking a more focused approach, we expect to reduce the cost complexity and time to market for these application. We do not plan to build out any additional applications at this time. Third, we're accelerating the Nispera platforms ability to be deployed onto battery energy storage systems by the end of this year.
Thus enabling our new bundled solutions to be more integrated with our batteries.
What do we expect to achieve a result of these actions? Improved attachment rates for services and digital through a bundled approach, increased annual recurring revenue or ARR of our digital and services business; a low rate of customer churn though I would note that our churn rate is already very low.
Going forward, starting later in this fiscal year 2023, we will report our progress these initiatives by disclosing the relevant KPIs. We expect that this retooling will have a relative small investment of $5 million to $10 million.
As it relates to the financial outlook for our digital business, we do not expect meaningful contributions from our digital business in '23 or '24. We expect to have positive gross margin in fiscal year '23 and onwards and expect adjusted EBITDA to be at/or near breakeven in fiscal year '25.
Moving to Slide 15, we're enhancing our India Technology segment, increasing utilization through a workforce optimization that will augment roles in India in 2023 to the benefit of our onshore overhead.
This contributes to our operating numbers, with our operating expenses expected to grow at less than half the rate of revenue growth which Manu will explain further. Turning to Slide 16 for a summary of recent action.
As a management team, we're committed to delivering and increased shareholder value and to executing the five strategic objectives that I have discussed as the foundation of our plan. We will provide you with quarterly updates on our progress towards strategic objectives as we transform the way we operate and price drive our sustainable returns.
Overall, we continue to see strong demand that is expected to be amplifying by the core IRA build that will start adding to our backlog in mid-‘23. We are committed to breaking even on an adjusted EBITDA basis in fiscal year '24 as we enter into higher margin contracts.
We're committed to improving our project execution and our overall risk management. I'm pleased with the early results of our efforts, but there is still work to be done.
As we move forward, we will continue to focus on executing a high growth, capital-light solution business model and expect to make Fluence the optimal investment vehicle in our sector. That being said, I will now turn the call over to Manu..
the first is SG&A spend, which is a required amount of overhead spend to operate our business, both at corporate and at the regional level. We do not expect that corporate OpEx will scale with the growth of the business.
The second area of spend is what we refer to as platform investments, which represents primarily R&D spend, which we view as a type of growth CapEx. Full year 2022 operating spend was 15.5% of revenue, which we expect will be a high annual watermark.
Looking at 2023 and beyond, although we expect to continue to grow our operating expense in absolute dollar terms, but we expect it to grow at a rate less than half of the rate of our revenue growth. We expect this operating leverage to be one of the drivers of the improvement in adjusted EBITDA we see over the next few years.
In the interest of greater transparency, this quarter, we have begun providing a supplemental quarterly metric sheet on our Investor Relations website that is designed to provide analysts and investors with a deeper understanding of our financial and operating performance. Please turn to Slide 19.
I'm pleased to report that we ended 2022 with total cash of $540 million, which includes our short-term investments and restricted cash and is in line with what we have guided. As shown on this cash bridge, a majority of our cash usage in 2022 was driven by negative adjusted EBITDA, that trend is expected to continue in fiscal year 2023.
Let me also provide some color on the other drivers of our 2023 cash outlook. We expect to incur modest CapEx spend, including for our digital business retooling. In addition, as we did in 2022, we will use some operating cash in 2023 at a rate of roughly 10% of our year-on-year revenue growth.
We believe that we have ample liquidity to meet our 2023 cash needs. Please turn to Slide 20. We are initiating guidance for fiscal year 2023, a total revenue of between $1.4 billion and $1.7 billion. Additionally, we expect our adjusted gross profit to be between $60 million and $100 million.
We are coming into 2023 with approximately 90% of expected revenue at the midpoint of our fiscal year 2023 guidance already in our backlog. We have also secured additional supply chain commitments for 2023. This gives us confidence in our revenue guidance.
On the next slide, I will provide additional color on why we are confident of achieving our 2023 adjusted gross profit guidance. Please note that our guidance does not assume any financial benefit from the Inflation Reduction Act as we see -- as we expect to see order growth in 2023 with a benefit to sales partly mostly in 2024 and beyond.
In terms of revenue seasonality, we expect to see a split of approximately 40% in the first half and 60% in the second half. Furthermore, we expect operating expense to grow at less than 50% of our revenue growth, providing a significant operating leverage.
As Julian mentioned, we'll be utilizing our India Technology Center more, enabling us to scale at a much lower cost. Please turn to Slide 21, where I'll walk you through key drivers of our 2023 adjusted gross profit guidance when compared to 2022 actuals.
We're confident in our 2023 adjusted gross profit guidance of $60 million to $100 million, driven by improved contract underwriting and execution.
This reflects a combination of signing new contracts at margins that are at or close to double-digit, an improvement compared to the past, our ability to recoup some of the increase in our supply chain costs and improved execution.
I would note that we expect our exit 2023 gross margin run rate to be higher than the full year 2022 margin rates as our legacy contracts as completion and new deals start to have a larger impact on them.
Before we open the call for questions, I want to reiterate that we have visibility to achieve 2024 breakeven adjusted EBITDA as well as multiyear 30% plus revenue growth and are positioned to take advantage of the upside from the Inflation Reduction Act. With that, we will open the call for questions..
Good morning. This is Julian. I want to apologize for the way the sound work, it looks like my voice accent did not mix very well with the mic and the biggest [indiscernible].
So in order to correct this, Lex will be sending -- we will be posting our script on the website to ensure that we already have access to it, and Lex will sent it by e-mail to his content all of it. And we will be open, if you have any questions on the script later on after this you will -- you can send -- contact Lex directly.
Let me tell you this before we start, which I think is important. The quality of the requirement was an inverse proportion to the quality of the message. So unfortunately, it did not come through, but it was in direct -- or indirect proportion just quite the opposite. So going to quick Q&A. And I’m really apologize for that, it won't happen again.
We're testing and you might that does not fix well when my voice and accents. So we start, operator, if you want to open it for questions, please, Q&A..
Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is open..
Hey. Good morning, Julian and Manu..
Good morning, James..
Julian, as you've stepped into your leadership role here at Fluence, you're focused much more on profitable growth and profit being, of course, the keen were there.
Has your bidding strategy changed? Obviously, there's a huge amount of growth in the business itself, but have you adjusted kind of the way the company bids on projects?.
What we have done, James, this is a question we get all the time, James that we segmented the market. It's in more detail to identify where we -- which market segments and geographies we could actually aim for our 10 or double-digit margins.
So every time we engage with a new customer or engage in a new project, we know that customers, business case will allow and the value we're creating, we're allowed for our profit objectives to read which, so that's how our work -- we have been working on.
We also -- the addition of Manavendra leadership we have put in place a new contract review process internally to ensure not only that, that we reach our double-digit margins, but also that the risk profile of the projects we entered into a reason, we will allow us to monetize the full margin.
So now we have worked generally, we have -- it means that we have dropped some segments on or at least we're not very active in those segment or at the end of the day, has allow us to keep our volumes and reach or offset our profit objective as we move forward..
Okay. Makes sense.
And then another key differentiator with your strategy is more focused on the digital aspects of the business? And could you maybe highlight is that a lot of internal kind of R&D and maximizing what you have or are you looking at external kind of M&A opportunities as well?.
What we want to do now we're kind of integrated, I think the work that we looked at is integration. So while we're integrating the sales channel that is -- that requires training and some investments, some capability impact. We are integrating our OAS and our operating systems with our digital offerings.
And that's not that there will be one, but they will communicate more effectively. And so our customers will have a seem less experience when they buy our hardware solutions than they may hire our digital solution as a second. And then we're working, and that's where the R&D comes in, is on improving the platform of Mosaic.
I guess it's normal in the SaaS business but we really -- we need to invest to ensure that we can actually continue expanding that project at a lower cost point and a lower complexity point, so we can do this much cheaper and much faster. In terms of M&A, we are not planning to do M&A. We're going to on constant -- not plan, I'll tell you until when.
But for now, what we will do, we will concentrate on our runoff. These are -- we believe these are the two territories that are the most attractive today where the business cases are very, very clear and that coincides with our market segments.
And as we move over, we are able to reach our breakeven point for our digital business in '25, we will then look at well, we should develop other apps. But I think that at the end of the day, we will look at us that are based on our commercial capabilities, that our ag that are our customers can use and can monitor.
Part of the problem is some of the apps we had before is that they were connected with customer segments where we're not there. So we have been put in place a new sales channel and additional fixed cost that we think that is not a good idea at this time..
Okay. Yes. Thanks, Julian.
Right. Thank you, James..
One moment. We have a question from Brian Lee with Goldman Sachs. Your line is open..
Hey, guys. Good morning. Thanks for taking the questions..
Good morning, Brian..
Good morning. I had a couple around the margins. I guess, first off, maybe more of a clarifying question. At points in time during the script, I think, Julian, you said adjusted EBITDA breakeven target in fiscal '24 but then being at or near breakeven for full year fiscal '25.
So I think what you're saying is you'll be adjusted breakeven for the full year in fiscal '24 consolidated, but then at/or near breakeven for the full year fiscal '25 just in the digital business.
Is that the right characterization?.
Exactly. Exactly, right. We will be -- [indiscernible] will be breakeven in '24 -- [indiscernible] to be break even '24 and digital itself will be breakeven in '25..
Okay. I guess that kind of prompts the follow-up question, which is a lot of investors we speak to assume that kind of the digital software applications piece of your business model would be more profitable than the hardware-centric side.
So why, I guess, is digital taking so long to get to profitability? It seems like some of your peers in the energy storage vertical, they're well ahead in moving toward profitability and already positive gross margin on kind of the software digital platform segments of the business.
So just trying to kind of understand where you guys are coming from and why that's a little bit of a different dynamic for you..
A very good question. I think that this is a capital sake, our bidding strategy. The ability to gain economies of scale requires expanding into a new market from -- going from Australia to California [indiscernible]. But we realize that it has it was very, very complicated and expensive tool and expansion.
And that has made it a little bit more difficult to meet our growth objective. So what we're doing now here is concentrating on grid platform in that solution to ensure that we can get into a higher speed growth. So that's the rationale.
That's the reason for -- or they will say be further down the road that what we expected to be at this stage, [indiscernible]. This pair our APM, our asset management tool is going to [indiscernible] in line with our portal.
And that way, that just essentially, we bought them but late last year, late last fiscal year, we are integrated into our system, into a sales channel and it's going along to testing line with our [indiscernible], so we're very confident.
So I think those are two, -- I'll say that today, the main driver for our delay has been the need to pre-platform..
And just one clarification on your first comment is we are positive or we expect to be positive gross margin in digital team 2023 as well. And then the only other thing I'd say is we've talked about margin rates between 80% to 90% in the digital business, that's still hold true over the next several years.
Julian's comment was much more around the EBITDA..
That's right..
Okay. No, that's super helpful. I appreciate the color. I guess last question for me, and I'll pass it on is, the EBITDA breakeven target for fiscal '24, I think in the past, you had said, I think, two quarters ago, there's a path to growth -- gross margin sort of in the 10% range in fiscal '24.
Is that what's embedded in the view to get to EBITDA breakeven in fiscal '24? Just maybe any thoughts around the 24% gross margin trajectory?.
So Brian, you said it right. That is the thought in fact. If you look at our Slide 21, we are signing these then near at double-digit margins. So we feel very confident about getting to adjusted EBITDA breakeven for 2024 on the back of double-digit gross margins.
And then from an operating leverage perspective, we believe that 2022 and with a high water mark as a percentage of revenue, and we expect to reduce that as a percentage of revenue given our OpEx will grow at less than half of the revenue growth..
Okay. Great. Thanks, guys. I’ll pass it on..
Thank you..
Our next question comes from George Gianarikas with Canaccord Genuity. Your line is open..
Hey. Good morning, everyone. Thanks for taking my questions. So maybe I could start around your decision to manufacture packs in the U.S. Can you just talk about the incremental CapEx required to do that? The incremental hires you need to make, whether or not this will be a global move and whether or not this moves you away from an asset-light strategy.
Thank you..
Well, it's the same strategic position we have today. We will use contracted manufacturing. So we will not be owning the manufacturing facility. We had invested in the design and the IP and the software but not – we will still be a capital-light business. This will be manufactured by our contract manufacturer provider. This is directed at the U.S. market.
So we are -- this -- our current approach and the decisions that we will build, the Fluence make for the U.S. market at this stage, we're not selling from the U.S. to third parties. We might, as we grow in other regions, we might also build it for Asia and Europe. As of today, it is only for the U.S.
And we are -- we believe that our capital light business model is -- will continue. We're committed to it. We believe it's a right way to do it. And one of the things that always surprised me is that the quality of the contracted manufacturing that is available in the U.S.
what these people can do for you, how do you do and how much the value they can create out of it and we are very happy with our contracted manufacture..
Thank you. And maybe as a follow-up, could you discuss the cell supply situation and whether or not it's improved incrementally over the last few months and what, if any, other equipment may be causing bottlenecks still for deployments? Thank you..
Yeah. Thanks. The matter situation is improving. We haven't had any delays. I know the market is tight generally. But our relationship with our suppliers, our ability to engage with them and our scale allows us to ensure we are ensure that we have no issue on the delivery of batteries on time and with the -- on the terms that we are in.
I will say that -- that's generally clearly a major part of our supply chain. I don't see any other market where is tied that we're concerned about. Clearly, we are confident.
This is one of the reasons why we believe this scale is so important, in order to manage our supply chains effectively our scale and our close relationship with suppliers are huge..
Thanks..
Thank you..
Our next question comes from Maheep Mandloi with Credit Suisse. Your line is open..
Hey. Good morning and thanks for taking our questions. Just maybe on the previous question. Could you understand like the difference between the Fluence stack and the fluids cube? Just trying to understand the core difference here.
And part of that is just to get the domestic content added under the IRA, would the new systems qualify just with the battery pack manufacturing in the U.S. or would you have to procure the batteries from the U.S. market as well? Thanks..
Good. Maybe later or couple forward start I think is important. The regulations of [indiscernible] will be considered on a U.S. basis battery model system has not been issued.
So it is still unclear how down, how upstream they will go, whether they will go only for the assembly, I think that will be more that whether they will require still to it from the U.S., where the sales need to be from the U.S. or further down, whether the high needs to happen.
What we're doing is we're building a strategy of not [indiscernible] since that we believe that in any event will be included and try to go of [indiscernible] much as we can to ensure that we can meet the qualification.
But the reality is that today, we are in a way, flying is not the [indiscernible] regulations are not [indiscernible] there is some that you buy by American type of rules, the U.S. [indiscernible] guidance what you introduced, but there's no -- they do not asset, just to let you know.
So we're working on it, how we're working on moving as much value add has been coming to the U.S. to ensure that we are we do qualify and make it efficient at the influence make that are not regret decision, no matter we believe that no matter what happens. We will have to build our modules in the U.S. in order to make that one.
We're also looking to -- we're talking to battery cell manufacturers to buy sales in the U.S. or look into still in the U.S. to try to create a spot value. So that's where we are. I'll let Rebecca answer the first part of the question..
Sure. Thank you, Maheep. So to clarify your question back to, it's just that you're looking to understand the difference between the Fluence and cube and what we might call the Ultrastack or Gridstack. So you can think about the way we design products as we build a platform first.
In the platform, we have this thing called queue, which is the enclosure with the batteries inside of it. But our platform also includes inverters, control systems, fire safety systems and we put all of those pieces together in well-defined units that create our stack.
So Gridstack, for example, is a product on top of that platform that is inclusive of inverters, control systems, cubes, et cetera. And we send out Gridstack units as we sell. We announced today Ultrastack, which is another version of that product that sits on that same platform. We didn't recreate the platform.
It's a platform that's been out of the world and well test, et cetera. But the product that we announced today, the Ultrastack, where its differentiation really lies control system. So it's a highly redundant system because of the work that it needs to do with the transmission operators.
It responds to the grid very quickly in 150 milliseconds now that we'll be down to 100 milliseconds to the future. And it does all kinds of cool things like it has a really high reliability feature. It has a very high effort of power oscillation stamping, which helps just the grid become more stable.
So it's a different product and the real differentiation of that product for that Ultrastack pair to Gridstack is in the control system.
And I would mention just to connect back to something earlier, that's where we can also start to look at higher margin deals because when we create such a set of differentiation with our technology, we -- it makes us it easier for us to look for that double-digit or more margin..
And if you can say, [indiscernible] effect -- but they do very, very different the way you think is our own once you see that they say you look to the same or they doing [indiscernible] and to our customers to offer them services, which are very, very different with different levels of response time, quality security depending on what our cost is supporting.
Hello..
Maheep, you still there?.
Maheep, you still there?.
We have our next question -- looks like comes from Mark Strouse with JPMorgan. Your line is open..
Yes. Excuse me. Good morning. Thanks for taking our questions. I wanted to go back to the IRA.
The $10 per kilowatt hour that you're calling out for the modules, is there a good rule of thumb that we should be assuming as far as how much of that you keep versus what you share with your contract manufacturer or kind of pass on to your customers?.
Yeah. We will keep it. From our point of view, I think that's important. This is part of our whole product side strategy. So you should not look at these or something that will add 2% of additional margin. It will be part of our 10% to 15% margin as we go forward. But it will be part of our pricing position or our cost position.
And that's how our terms with our contract manufacturers, but we believe we can keep most of $10 (ph)..
Okay. Thank you. And then just a real quick follow-up, Manu. It looks like the pipeline metrics that you're providing, you're taking a bit more conservative view of what was reported previously.
Just can you give some more color on what's going on there? Is that just kind of the likelihood of that pipeline, kind of the timing of that pipeline, anything else to call out?.
I think the two things, the one you raised the bar on both the likelihood and the lens of profitability, which kind, of course, in line with our general team around focusing on profitable growth. So that's kind of a little bit of color on how we thought about pipeline for year-end reporting.
I would point out the fact that we have close to $8.5 billion of pipeline, which I would imagine with the higher part and the lens of profitability. I think it also lends itself to a tad bit higher conversion than what we have previously said.
So good about not just the backlog position we are in, but also the pipeline that sits behind our backlog and frankly, the top of the funnel that gets behind the pipeline..
Okay. Very helpful. Thank you..
Thank you, Mark..
Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open..
Hey. Good morning. It's pleasure to chat here. My name is [indiscernible] and congrats again. If I can, just to come back to the cash conversation quickly here.
How are you thinking about '23 here and a little bit of '24? And obviously, adjusted EBITDA pressures what drove the cash burn here past tense, how are you thinking of that prospectively here, if you will, a little bit on '23 and the totality until you get to a cash positive EBITDA-positive world?.
Sure, Julian. I get a chat with you as well. So just from a cash perspective, let me start with how we think about it.
First of all, our model is asset-light and an operating cash edition model, which means as you bridge from EBITDA down to cash, you have very low CapEx and operating cash usage that we have dimensioned for '22 and '23 at 10% of it, right? So with most of the cash usage in '23 being driven by our EBITDA performance with a little bit of cash in use for CapEx and then 10% of our revenue growth kind of taking to bridge all the way to the bottom line.
That starts to turn [indiscernible] in 2024, where we believe we'll be close to breakeven for cash, not all the way there, we break even EBITDA. And then as we get to 2025, we start -- we expect to start generating cash. What I'll close with in terms of my comments is, one, there's a little bit of cash timing between first half and second half.
And the second thing is, we feel very comfortable with the cash in the books, plus our unused revolver in terms of our ability to meet our cash needs to the line we get to cash cost..
[Technical Difficulty] the number you can see that a little bit..
Julian, could you repeat that again, we couldn’t….
Working capital, clearly, there was the -- if you look at the balance sheet here, there was some consumption, some pieces.
Can you talk about that?.
Yes. So it's referring to 2020 to fourth quarter working capital usage. So if you start with -- you put the total year in context and then I'll bring to close what happened in the fourth quarter. If you put the total year in context, we put a bridge out there as well.
The operating cash, which is principally working capital as well as some money that we collect from our customers as prepayments, which is also part of the expanded definition of working capital. It was about a 10% usage in terms of our revenue increase year-on-year. So that's -- that was our total consumption for the total year.
As you pass the quarters, most of the cash usage in the fourth quarter was effectively us making good in terms of buying inventory and paying off our suppliers.
That was in execution of our projects, that was already funded in the most part at the beginning of the year from a customer prepayment perspective, which is why you see that phenomenon in the fourth quarter. But as you zoom out and look at the total year, you don't see that as much.
That model will continue, which we really like because it is a very working capitalization model..
Got it. Thank you, guys..
Thank you..
One moment. Our next question comes from Ben Kallo with Baird. Your line is open..
Hey. Good day, guys. Just first, just maybe backing up to the competitive environment. I know you guys have only been there 90 days. But how are you seeing bids change just in terms of the number of competitors and why someone like an Orsted would pick you.
How crowded is competition terms? And then my second question, just in terms of tight labor supply, how do you guys think about that the IRA rolls out into next year, and there's going to be a boom in projects, we think. So how do you think about labor and environment? Thank you..
complexity, both on product and project; safety, and they are -- they see us as a partner that will offer them -- will continue with them and then move on, that's the driver..
Thank you. One moment for our next question. Our next question comes from Sean McLoughlin with HSBC. Your line is open..
Good morning.. Thank you for taking my questions. Firstly, just on the IRA, you've talked about your expectation for the first orders in June '23.
I mean will there be a lag into that? Are customers waiting until they understand the full complexities and details of the IRA -- from the IRAs over the next quarter or so? And also then, I mean, how should we think about the actual volume of orders? Are we going to see a real explosion in June or is it a kind of a gradual ramp up over the 12 months from June? Any color there would be helpful.
The second question, just on Ultrastack. Your first success has been in Europe. I mean is this a product targeted at the European market under the margins in Europe actually better than in the U.S. market? Thank you..
In terms of the IRA, what we have in our conversation with our customers, they are working on the stand-alone storage projects as working on the -- looking for the sites and electrify the connection points.
I think this will be a gradual increase, I will say, they will come as, all of them started in June will get to the full amount and then going forward, I think they will start coming in. The way I've seen these projects develop.
The ones we'll see firms are the ones that are connected closer to transmission lines where they can connect is the substation [indiscernible] capacity. And as we move along, they will continue to move forward.
So that’s way we see it, it takes a little while for these projects to be -- for our customers to be ready to have these projects at a point where they can sign. They need to develop the project, find the off take it and then work with us. In terms of our transformation rate, we seen this as a global product.
We started in Europe, we started [indiscernible] where we had a 200 megawatt hour plus with [indiscernible]. Now we are expiring Germany. Clearly, in Europe, there's a lot on for these because they're looking to integrate a strengthened. But the U.S. has a major, major challenge.
In order to make this work, we have also [indiscernible] or where we have talked to work with the regulators there to ensure they understand the value. So we have been success there, and we hope to see tenders coming out for these type of solutions in Chile in very soon. And then we're working in the U.S.
with our sales team, talking to regulators, to customers. And so we can create a regulatory base for these two joints. And we are confident that it will happen. So this is a global product that the 17 gigawatts by the year 2030 that we talked about, it is a global [indiscernible] demand..
Thank you..
Thanks, Sean..
Our next question comes from Pavel Molchanov with Raymond James. Your line is open..
Thanks for taking the question. We talked a lot about the U.S. and Europe. Historically, you've had a strong presence in the Australian market where there is more and more talk about storage as part of the new labor party climate policy.
Can we get an update on what's happening in Australia in demand?.
Yeah. We have a very, very strong pipeline in Australia. We're working with good clients, customers who have there are a few projects that are coming along. And I think that you will see some projects of significant projects, which you see some significant projects called signing -- coming into our backlog for the year.
We don't disclose numbers by market by not too far. But we're confident this is one of clearly a market that is promising to me. It appears to be very, very promising for '23 for our fiscal year..
Okay. Sounds good. Given that you're vertically integrating, but you'll still be in-sourcing battery cells.
Is there any appetite to look at chemistries beyond lithium, ion, so nickel, zinc, vanadium, iron flow, any of these new battery models that are starting to scale up?.
Yes. I'll let Rebecca answer that one..
Sure. So in the short term, we, of course, look beyond a single type of battery and currently reduce both LFP and NFC batteries in our solutions. We work very closely with our battery OEMs to look beyond that as well. Our platform is designed such that it's agnostic.
So we can -- folks who work whatever kind of battery solution is out there that needs to be sort of customer ROI requirements. And the next thing that I would say that we would look at would be solid state batteries and sodium with sodium being the one that we see the nearest term right outside of what we're doing currently with LFP and NFC..
Understood. Thank you very much..
Thanks, Pavel..
Our next question comes from Ryan Levine with Citi. Your line is open..
Good morning.
With the focus on profitability, has the company slowed its hiring or can you provide color on your views on the tools to manage the cost structure?.
So what we're doing in terms of people, we're looking at our India Technology Centre. It has been a very, very successful division, already have like around 100 people there. And we have been attracted [indiscernible].
We're very happy with the contributions that have done the duals in our product development [indiscernible] so we are looking at expanding that facility to support some of our other areas. Our back office of digital development continue helping us on product development and supply chain.
So that's what I think will be the main driver of our improvements in efficiency. We will [indiscernible] as Manu mention we believe our SG&A will grow at a price that we have our revenue growth. So we will continue to become much more efficient in terms of revenue production with our current cost structure as we go forward..
Thanks.
And then on that vein, can you provide color on the pace of adjusted gross margin recovery you're seeing for '23 from the 3.4% in the recent quarter towards the double-digit target that you highlighted by the end of next year?.
Yeah. For sure. And I'll also point your attention to Slide 21, we have we mentioned it. So there are two principal drivers of our confidence level in getting to a much higher gross margin compared to '22 when you look at the guidance for ‘23.
One is, I think a lot of port well, our execution issues brought pretty basalt? You saw early signs of that in our fourth quarter performance. So we think that's a big driver, and we've mentioned that on Slide 21 in the range of 23% to 33%.
And then we are signing new deals that at/or close to double-digit margins that is already in our backlog, and that starts to bear fruit in '23 when you think in terms of gross margin delivery. I will point out that we do have, let's call it, our legacy contracts that will have growth through the fiscal year '23.
So by the time we exit '23, which for us is September 30, you will start to see the double-digit run rate start to show up and it does and definitely a pretty pure play going into '24. That does drive our confidence level in getting to adjusted EBITDA beginning '24 forward given the operating leverage comment..
Just want to make sure we're hearing that right.
So are you saying that the step-up is really going to come towards the last quarter of the year and then we won't see a more ratable recovery of the gross margin?.
I think you'd see improving gross margins quarter-on-quarter as we -- the new deals kick in into revenue and we go through the old deals. And fourth quarter of fiscal year '23 will be a close the approximation of how you will expect to see '24 fiscal year as you were pretty much booked in most of our legacy..
Appreciate the color. Thank you..
Thank you. Our next question comes from Tom Curran with Seaport Research Partners. Your line is open..
Hi. Thanks for squeezing me in. I appreciate it. Just one topic left for me. I know we've run over, so I'll try to keep it short. About two weeks ago, the California Public Utilities Commission approved PG&E's request to amend for its midterm reliability contracts for storage.
Apparently, all four storage contracts have had their pricing rates, three have had their scheduled to lead and one has had its size cut in half.
Could you speak to the implications of these changes, especially the approved increase in pricing for your current backlog and expected future awards for California?.
Very, very [indiscernible] we are not aware of deficiencies that you're just raising. So I'll have to go back to my sales team. I guess there hasn't been an issue material on top of my attention. But we'll take a look at it and [indiscernible] a view..
I think in general, we are seeing it price [indiscernible]. I'll probably not attribute in one single phenomena and rest can follow up on the question..
Great. I appreciate that.
And then could you just give us an idea of what California represents as a percentage of your current backlog?.
We're not providing numbers per market because then we'll get into this. But I'll tell you, California is clearly one of our most attractive markets. And in the U.S., it's a market that where we're seeing a lot of demand and we see a lot of opportunity for creation. So that's what I will say for '23..
Maybe when I think about it is our revenue is two-thirds, if you look at our historical revenue and the backlog percentage of all that, I think two-thirds of our revenue comes from the Americas, within the two-thirds that comes in the Americas, California is leading [indiscernible] do not break it down states with America..
Very attractive market..
Right. I figured it was worth to try to dig a bit deeper. But I appreciate the help. Thank you..
Thank you. One moment for our next question. Our last question comes from Craig Shere with Tuohy Brothers. Your line is open..
Good morning. Thank you for squeezing me in. I've got a quick near term and then a longer-term focus question. Near term, people seem positive about China opening up in the end of zero COVID, but perhaps for some quarters, people might actually be getting COVID, and we might have disruptions that won't last forever.
But I wanted to inquire about your contingencies and thoughts about those risks into next year on the supply chain. And then longer term, I was truly amazed that the AES, Air Products announcement for their Texas hydrogen JV. And I wonder if you can comment on the degree to which -- obviously, you work heavily with AES.
But the degree to which BESS has a huge opportunity in the nexus (ph) of clean supporting dedicated intermittent renewables that then produce steady state green hydrogen production..
I mean, on the hydrogen, clearly, battery storage will play a role in hydrogen production in order to ensure that your electrolyzer will more efficiently with renewable sources for us [indiscernible].
It will depend a little bit on the -- plays a much more important role as you are producing ammonia with protein because electrolyzer are easier to allow to changes while the ammonia production systems require more stable.
So it depends on what -- how you organize your hydrogen production or they went down to ammonia when you say we hire more and need more or less at that what we are.
We're working with some of our customers that are looking at these options to offering them solutions that will help them improve their -- the trade value to either people were using our technology for producing both operating electronic. So that's what I tell you what we work with..
And on the 2023 -- yes..
Well, we continue to be as positive shy. We are -- I think the fecal portion of our bases come from China, not all of it, but a difficult portion of it. And clearly, this is an addition of concern for how concerns something that we care about is that we're looking to work towards diversifying out of China as much as possible.
The flowback will allow us to move more to make it easier to move production. But we continue working with producers in Europe and in other Southeast Asian countries. And we're looking to continue to diversify. But I will say that today, China is still a major supplier. We haven't seen any issues.
There are no problems in production in any of our suppliers. There have been no problems in chip installments and logistics. We have no signs of any interruption at this stage that we -- but clearly solving that our risk manage. When we wrote our risk management capabilities of that we spend time on to ensure that we can manage any potential option..
Thank you..
Thanks everybody for participating. And as I said at the beginning, the, I could not understand what I was saying when I was really discreet. So clearly, my voice and mic and the speakers in my room, and my accent did not work very well. So we have the script in the IR website.
Please take a look at it, if you have any questions, contact Lex, and we will gladly answer that we'll assure you that next quarter this won't happen. So thank you very, very much for your time, and we also....
This concludes today's conference call. Thank you for participating. You may now disconnect..