Array Technologies, Inc. Q2 FY2024 Earnings Call

Greetings and welcome to Array Technologies' Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sarah Sheppard, Investor Relations at Array. Please go ahead.

Thank you and welcome to Array Technologies' second quarter 2024 financial conference call. On the call with me today are Kevin Hostetler, our CEO; Neil Manning, our President and COO; and James Zhu, our Chief Accounting Officer. Today's call is being webcast from our Investor Relations site at ir.arraytechinc.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website. Today's discussion of financial results includes on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website. We encourage you to visit our website at arraytechinc.com throughout the quarter for the most current information on the company, including information on financial conferences that we may be attending. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, including our most recent Form 10-K for a recent discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements to conform these statements to actual results. I'll now turn the call over to Kevin.

Thank you, Sarah. Good afternoon, everyone. Today's format will be a bit different from the prior quarters. I'll start off with some key industry highlights, then Neil Manning, our President and Chief Operating Officer, will provide some operating highlights for the quarter. I'll then return and cover the second quarter financial highlights and full year financial guidance, and provide a brief update on the progress on our CFO search. Then we'll open the line up for your questions. We are pleased with our performance and execution in the second quarter, along with the continued demand we're seeing in the market. Starting on Slide 3, I'll begin with a summary of our second quarter and then discuss the latest industry environment and near-term market dynamics. We achieved $256 million of revenue, slightly above the high end of the range we provided on our last earnings call. Adjusted gross margin came in at 35%, which included incremental 45X benefits through June 30, 2024, but were not previously factored into our guidance. Excluding these incremental benefits, our adjusted gross margin result was within the low 30s guidance range previously provided for the full year. Compared to the prior year, our adjusted gross margin performance reflected a 540 basis point improvement. As we move through the remainder of the year, we will continue reporting gross margins inclusive of both torque tube and structural fastener benefits derived from 45X, and there is still more work being done around the maximization of those credits. We are actively pursuing multiple initiatives to obtain further clarity regarding the eligibility of additional parts that might qualify under 45X, in conjunction with negotiating the split of the 45X benefits with suppliers for parts we do not manufacture internally. However, as always, we also remain focused on achieving strong core gross margins through disciplined pricing, effective cost takeout initiatives and continued design innovations. Finally, we delivered $55.4 million of adjusted EBITDA, representing 21.7% of revenue, and we generated $1.8 million of free cash flow to end the quarter with a strong cash balance of $282 million. I’m thrilled to report an update for the quarter is the remediation of our material weakness related to a lack of qualified personnel to perform control activities for financial statement preparation. With the hiring of additional talented individuals in accounting and finance and the realignment of our accounting functions to strengthen internal controls, we were able to effectively close out this material weakness. I’m incredibly encouraged by the improved strength of our team moving forward. Additionally, with the implementation of an ERP system in Brazil in May, we are on track to remediate our last remaining material weakness related to control activities within the STI business. This is truly a testament to our commitment to operational excellence, and I couldn't be more proud of the focused investments we've made in people, processes, and systems. Moving to Slide 4, I want to briefly reinforce the positive long-term momentum we’re seeing within the solar industry and the price outlook for the next few years. According to data from the Federal Energy Regulatory Commission, solar represented over 80% of U.S. electric capacity additions through April to kick off the year. Looking over the next three years, FERC continues to expect solar to dominate new capacity additions by a large amount, and we’re optimistic about the incremental demand likely to be spurred by AI data center growth in the coming years. Our high probability pipeline remains robust, and we’re encouraged by our customers’ interest in our portfolio of products and services and the tailwind supporting utility scale solar as one of the lowest-cost options to satisfy growing energy needs in the coming years. Speaking of tailwinds, you may have seen that I recently testified before Congress on the inflation reduction act's positive impacts on solar manufacturing and American job growth. Specifically for Array, the 45X tax credits are helping us increase our domestic production and onshore critical components and good paying jobs through the groundbreaking of our new Albuquerque manufacturing facility. We are also encouraged that the legislation has sweeping bipartisan impacts. So far, over 75% of the benefits from the IRA are impacting Republican-controlled districts. Overall, the IRA is expected to facilitate nearly triple the current U.S. solar capacity by 2028 and we’re incredibly excited about Array’s role in helping develop a sustainable future for renewable energy in America. Regarding the latest IRA domestic content guidance issued in May, we are encouraged by the new elected Safe Harbor table that was introduced and believe it is a positive step forward for our customers pursuing the domestic content matter. Although the table is not yet final, we remain committed to supporting our customers and their domestic content needs. A domestically produced tracker is critical to achieving the 40% domestic content, and it will become increasingly important as this percentage threshold is increased in the coming years for the stipulations in the IRA.

Moving on to the latest 2024 market dynamics, we achieved strong new bookings of $429 million within the second quarter. We did have some adjustments to our total order book from commodity price updates, project scope changes, and FX impacts. However, although project cancellations were minimal, there were only four small international project cancellations representing less than 1% of our order book in total, and we've had no domestic project cancellations. However, despite all the positive long-term momentum we're seeing for utilities in our solar, the industry is still struggling with short-term challenges that are causing issues with our customers’ near-term project timing, resulting in a reduction of our 2024 guidance. As we've discussed before, we continue to see a dynamic of elongated timelines between project awards and expected project start dates. However, during our standard recurring check-ins with our customers, we also witnessed a sharp uptick in anticipated project pushouts beginning at the end of the second quarter. Several of our customers' domestic projects are still reporting volatility in timing due to a variety of factors we've outlined in previous quarters. There are also a few newer near-term headwinds presenting timing challenges, which I’ll outline. The first new dynamic we’ve witnessed is related to the recent AD/CVD petitions. As we mentioned on our last earnings call, there was still a lot of uncertainty around potential tariffs, and the situation remains fluid. Within the last couple of months, we've had some customers who opted to preemptively change panel selection, thereby delaying a project or are planning on delays in projects in consideration of a potential panel selection change. Fortunately, a lot of these delays stem from uncertainty regarding the magnitude of potential tariffs. Once the impact of the tariffs is determined, customers can better understand the consequences on panel costs and make relevant decisions for specific projects to move forward. As we've mentioned before, our patented piping solutions are flexible, and we feel very well positioned to accommodate late design changes for module selection as our clamps don't require pre-drilling of the torque tube. Another new dynamic has been related to the domestic content elected safe harbor table. As I previously mentioned, this new clarity is certainly a positive overall for our customers and the industry. However, the guidance is still being vetted and not yet vital. As such, certain customers are taking extra time and delaying projects to navigate this new table and ensure they achieve the necessary amount of domestic content to qualify for the credit. One bright spot in light of these pushouts is that some customers who were not previously considering pursuing the domestic content adder are now reconsidering given the ease of use provided by the prospective table. We remain committed to providing a high level of domestic content to meet our customers' needs, and nearly 15% of our domestic order book is either specifying or evaluating domestic content. We also have a lot of interest in domestic content within our high probability pipeline. Finally, outside of the U.S., there has also been some unexpected macroeconomic delays in Brazil. Within the last couple of months, there has been a rapid devaluation of the Brazilian real in conjunction with existing pricing pressures on energy in the Brazilian market. Due to these dynamics, the economic cases for the power purchase agreements or PPAs for many solar projects have become less attractive. Developers of these projects are now signaling delays as they renegotiate the pricing of these PPAs. We still feel very strongly about our position in the Brazilian market and the optimal performance of our products in the region. However, this short-term challenge will need to be resolved before we see a return to a more normalized project case.

While we are disappointed at the level of customer pushouts being reported in the near-term and its impact on our 2024 guidance, we recognize that there are many industry factors outside of our control. We remain focused on engaging with our customers, increasing our operational vigor, and managing everything we can within our purview. As we look to the future, a significant portion, about 80% of our order book, is currently scheduled for delivery between now and year-end 2025. And to be very clear, we still expect to be receiving orders for 2025 deliveries for several more quarters. We will continue to set ourselves up for success to support the future growth in 2025 and beyond and navigate near-term challenges to the best of our ability. Now I'll turn the call over to Neil to speak about some exciting product and business updates.

Further, DC powered wireless communication simplifies cable management without the need for trenching, making installation easier and more efficient for our customers. Taken together, the combination of these new capabilities allows our customers to realize lower project costs and increase flexibility for more challenging site layouts, which are becoming more common in the industry. We have many customers already interested in SkyLink and it has received a great response during a customer forum just last week. I encourage you to learn more about SkyLink’s value at array.com. Moving to Slide 6, another update that I'm excited to share relates to the insurance forum we hosted in July. We believe that this forum with the solar industry insurance companies was the first of its kind within the tracker industry. We received a lot of engagement and valuable feedback. Around 35 insurance industry participants left the forum with new knowledge and understanding of Array’s technology, its design to withstand extreme weather, and how we’re differentiated in real-world performance from our competition. The importance of educating insurers on our tracking technology's ability to mitigate severe weather risk is paramount, as is ensuring developers always see the value of differentiated tracker performance reflected in their overall project costs. We're very pleased with the insights received from our inaugural events and are planning our next engagement with this audience for the fourth quarter of this year. Following the insurance forum, we posted another customer experience event last week, similar in format to the first quarter event we discussed on our last earnings call. With 40 customers in attendance, we spent a large portion of time discussing the features and benefits of the innovative new SkyLight products. We continued our dialogue on the benefits of our passive versus active stow solution, along with updates to our industry-leading levelized cost of energy performance. We concluded the event with discussions on our operational improvements and gained candid feedback from attendees on additional business improvements that we can make. As I mentioned earlier, we already see many customer inbound inquiries at SkyLink as part of this event and our official launch, and we're quite optimistic on its anticipated growth and positioning within the market. Moving to Slide 7, I'd like to spend a few moments reminding everyone about Array's robust supply chain capabilities. On a global basis, we have secured in excess of 50 gigawatts of capacity from our suppliers with over 30 gigawatts here in the United States. This access brings with it tremendous optionality to respond to unforeseen events and shocks that may occur around the world. Within that framework, I'm immensely proud of our long-standing U.S. focused presence with 31 domestic factories, including our facility in Albuquerque, New Mexico. Of note, the majority of our domestic suppliers have been part of our supply network for over three years, giving customers a great deal of confidence in Array's ability to deliver, as evidenced by our top-tier lead times and on-time delivery performance in excess of 95% in recent quarters. Operational programs supporting our core margin improvement over the past eight quarters include inventory optimization along with focused commodity and cost-out initiatives, and we continue to have programs in-flight that we'll discuss in future periods. The final point of supply chain, I'm excited to report that we'll be able to support our customers' domestic content needs with a 100% domestic Array tracker in the first half of 2025. Moving to ESG, I'm proud that Array has continued to make great progress towards its environmental, social, and governance goals, as highlighted in our recently published 2023 disclosures. Notably, we have increased our renewable source of electricity in operations to 29% and 25% in 2022. Additionally, we have made significant strides in employee safety, emissions reductions, and diversity and inclusion within our workforce. I'm especially pleased with our supply chain team's engagement with our suppliers to accurately track our full greenhouse gas inventory and provide data to further reduce emissions and improve the environmental sustainability of our business. With that, I'll turn it back over to Kevin to give a more detailed update on second quarter financials and full year guidance.

Thanks Neil. Moving to Slide 9, I'll start off by providing some additional details around the second quarter results. As I previously mentioned, revenue came in slightly above the high end of our guidance range at $255.8 million, which was down 50% from the second quarter of 2023 and up 67% sequentially from the first quarter of 2024. As expected and communicated on prior calls, we experienced declining volume and ASPs year-over-year. Sales in North America represented over 70% of our revenue for the quarter, with the remainder of our revenue coming from international locations. We achieved a second quarter adjusted gross margin of 35%, an improvement of over 500 basis points year-over-year. As mentioned earlier, we were able to recognize some incremental 45X benefits through June 2024 in the second quarter. The team has worked diligently in our assessment of qualifying components and are very pleased with the maximization of these benefits through our recent vendor negotiations. As some elements of 45X are still being clarified, the team will continue to work to validate additional components that may qualify. Operating expenses of $46.4 million were down approximately 8% from $50.2 million during the same period of the previous year. This decline was driven by year-over-year improvement in headcount related expenses, which more than offset the incremental cost incurred through severance and recruiting fees. Adjusted EBITDA was $55.4 million compared to adjusted EBITDA of $115.6 million during the second quarter of 2023. GAAP net income attributable to common shareholders was $12 million compared to GAAP net income of $52.4 million during the same period in the prior year, and basic and diluted income per share was $0.08 compared to basic and diluted income per share of $0.34 during the same period in the prior year. Adjusted net income was $30.6 million compared to adjusted net income of $74.3 million during the second quarter of 2023, and adjusted basic and diluted net income per share was $0.20 compared to adjusted basic and diluted net income per share of $0.49 during the prior year period. Finally, our free cash flow for the period was $1.8 million versus $15 million for the same period in the prior year. Now I’d like to go to Slide 10 and provide a more detailed update to our full year 2024 guidance. Given the pushout dynamics we discussed at the start of the call, we now expect revenue for the year to be in the range of $900 million to $1 billion. Again, this reduction from our previous guidance is a reflection of customers’ continued project timing challenges across issues such as interconnection and permitting, securing long lead-time equipment like high voltage circuit breakers and transformers, financing, labor resource constraints, and more. In addition, ADCVD, new domestic content guidance, and the dynamics we discussed in Brazil are other new near-term headwinds impacting customers and our guidance. But to be clear, all of these issues are only causing project pushouts, not project cancellations, and we remain committed to supporting our customers in any way we can while they work through these dynamics. Moving on to adjusted EBITDA, we now expect our full year range to be between $185 million to $210 million, attributable to the top line reduction from customer project pushouts. However, we have been able to mitigate some of the resulting adjusted EBITDA impact through an increase in our adjusted gross margin guidance from the anticipated recognition of additional 45X benefits. For adjusted EPS, we now expect between $0.64 and $0.74 for the year, again due to the top line reduction. Given our latest anticipated revenue mix, we are now expecting our effective tax rate to decrease to 24% to 26% from our previous guidance of 26% to 28%. On free cash flow, we now expect a range of $60 million to $100 million for the year. This reduction is largely reflective of the changes to our top line and the anticipated impact on our working capital to end the year. We expect our capital expenditures to be approximately $25 million for the year, which is primarily driven by spend related to our new Albuquerque manufacturing facility. Finally, looking ahead to the third quarter specifically, we expect revenue to be in the range of $220 million to $235 million. Before opening the line for questions, I want to provide a brief update on our CFO search process. In June, we engaged a globally recognized CFO search firm. Two weeks ago, we received our first slate of candidates for our review, and we initiated our preliminary interviews shortly thereafter. In addition to the candidates identified initially by our search partner, we've received numerous inbound indications of interest from industry colleagues as well. These have been passed along to our search partner for their additional screening and potential inclusion in our process. We will continue our initial screening interviews to pare down our list of candidates over the next several weeks. It's my expectation that this process will take between three and six months to fully vet our final candidates and move to the operational stage. To quickly wrap up, we have a lot of exciting innovation, customer, and industry initiatives going on at Array. I am proud of our execution within the quarter and I'm confident in the resilience of our team and business as we navigate through near-term customer project delays and look to the bright long-term outlook for utility-scale solar. With that, we will now open the call for questions.

Thank you. The first question we have is from Matthew Strauss of JPMorgan. Please go ahead.

Yes, great. Thank you very much for taking our questions. My one question, I wanted to talk about the fasteners that are now in the 45X guide. What gave you the confidence to do that? You do have some kind of IRS. And then, Kevin, you've talked about kind of a wide range of expectations for what that fastener credit could be. Just where in that range you were landing with your guidance here? Thank you.

Yes, thanks, Matt. I'm sorry you came through a little bit broken up on our end, but I think the crux of your question was around the new addition of some of the structural fastener elements into the quarter. And then I think I heard the second part in terms of where we land on expectations, was it of clamps? Was that the point? Yes, exactly. Thank you. Sorry for the line here. That's okay. So, as we've discussed all along, we have several components that we believe qualify under the structural fasteners as currently defined. What we've done, much like we've done for other elements under 45X, is we go through a pretty extensive process having a third-party company come in and interview and validate how we define something, the engineering parameters of it, how it overlays with the definition provided under the existing definition of structural fasteners. We then have that reviewed by a third-party accounting firm as well, and we then form an opinion that that would qualify. Our sourcing team then immediately engages those particular vendors in the negotiation of those contracts. What you’re seeing now is the beginning, the wash-in of some of those components that we know qualify, for which we now have definitive negotiated agreements and sharing agreements of those benefits with. That's going to continue on. There'll be additional components added as we go throughout the year and as we negotiate those contracts with sub-vendors. The reason we're not as clear as giving a definitive dollar amount is, we don't really think that's going to be helpful in any given quarter because there's this constant wash-in and catch-up. So for example, some of what you'll see in Q2 is the catch-up for Q1 and Q2 on certain components. The way we've approached it has been to very consistently say, we're running a much better business than we have two years ago, for example, with or without 45X. Our core margin performance being in the mid-twenties with no IRA benefits is where we're at. We're very comfortably there now and we're going to communicate that routinely to the market. We felt we would be in the low 30s gross margins with the initial benefits we were receiving from torque tube, and that’s playing out as expected as well. The new conversation now is that we expect to be in the low to mid-thirties with structural fasteners included as we roll. So that’s kind of the approach we’re taking specifically on clamps.

The next question we have is from Christine Cho of Barclays. Please go ahead.

Hello, thank you for taking my question. I wanted to ask about your backlog. It looks like it was reduced by $300 million, give or take, from the commodity price updates, the project scope changes in FX impacts. I thought you lock in most of your raw materials and your ASP at the time of booking. So can you just remind us why ASPs would be moving around tied to commodity prices? And then, was any of it related to 45X credits? And can you give us a general sense of how much of your backlog is Brazil?

We'll start with the last part. We don't really break out backlog by regions typically, but let me give you some color on the change in backlog. To be clear, in every quarter, we experience ins and outs in the order book due to pricing changes, scope changes. These are just normal events within a large-scale project business. In most quarters, the puts and takes largely offset each other. In some quarters, and certainly this one, the magnitude is greater than in other orders. Given that our order book is elongated. What you saw here is really three factors. The first is rounding, it's really about $200 million. You're solving for not $300 million. About $44 million of that is simply some rounding between the 2.1 and the 2.0. What you're looking at here is three factors below the rounding. The first is the repricing of certain orders in the order book due to commodity changes, and this isn't broad-based. This is largely related to a large customer who places their orders well in advance, meaning we're looking at six quarters worth of orders with that customer. What we've done with this customer, in particular, said, look, we don't expect steel to come back anytime soon. We've proactively gone forward into those orders and repriced those as well. The second contributing factor is really about project scope changes. One significant project scope change where a large customer decided to change the configuration of a project, so that they could utilize Safe Harbor inventory, reduced our portion of the project, it’ll all be in a rate project. However, we’re actually not upset because our margins increase when we don’t provide foundations. Lastly, smaller impacts were really related to the FX impact of the Brazilian backlog. That said, on a megawatt of trackers basis, the order book did not decline. It in fact increased. What you're seeing there is it's purely related to some of the repricing and descoping of non-core elements. That makes sense?

The next question we have is from Jordan Levy of Triust Securities. Please go ahead.

Afternoon, all and thanks for taking my question. Just taking a look at the EBITDA guide, I think, Kevin, you mentioned offsetting some of the impact of the top line reduction through better gross margins. But if I'm just looking at the numbers, I think the new guide implies around a 200 basis point decrease in EBITDA margin. I don't know if I'm thinking about that the right way or if there's some offset from operating leverage or something like that, but could you help me walk through?

Yes, that's exactly what you're seeing. The offset on the operating leverage with the volume decline. Absolutely. That's it.

The next question we have is from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys, this is Tyler Bisset on for Brian. Thank you for taking our questions. You guys have over 50 gigawatts of capacity globally, but are installing a much lower quantity. So how are you guys managing utilization rates? And are you thinking of rationalizing your manufacturing base at all?

So what you imagine is because you don't know in future years the geographic mix of where you will need to build. You need to have far more megawatts of capacity than you plan to ship that given year. Knowing that logistics is about 10% of our bill of materials, having 30 gigawatts domestically allows you to supply any region that may have an increase in work with localized content. That should help you understand why we need to always overdrive on the overall megawatts of capacity we have versus the annual delivery. It's really about being able to satisfy your customers geographically with local steel, which again, is the lowest landed cost.

Next question we have is from Philip Shen of ROTH Capital Partners. Please go ahead.

Hey, guys, thanks for taking my questions. I’d like to see if you can give us a little bit more color on the margins on the current backlog. The guidance implies about $540 million of revenues in the back half of this year at the low to mid-30s gross margins. Is it reasonable to model consistent gross margins on the remaining three quarters of the backlog, or should we assume some kind of ASP headwind as you've been reducing price to touch?

Yes, I guess the quick answer is yes, it’s fair. What we're signaling is those low to mid-30s margins continuing, and that's indicative of what's currently in our backlog. Again, I will say you will have quarter-to-quarter variance as you have some larger orders that you may have taken at a lower ASP, so it won’t be a flat-line number. But I think we're pretty comfortable in our commentary of low to mid-30s margins as we go forward.

The next question we have is from Jon Windham of UBS. Please go ahead.

Great. Hey, thanks for taking the questions. I’d love to get your thoughts on what you're doing internally to manage the process of scaling back in volume shipped, in terms of scaling back work hours, keeping production up and storing inventory. Could you touch a little bit on how the management of the internals is going on with dealing with delays?

Yes, I think that's a great question. First, I'll remind you that 80% of what arrives at our customers we don't touch. A lot of our internal processes relative to engineering design quoting and what have you. Again, as we continue to have strong incoming order rates and win rates, we don’t need to flex down at all, that’s really positive. Our overall pipeline continues to remain very strong and robust. So what we're really focused on is ensuring that two things. First is that we reduce the cycle time. We talked about on these calls many quarters is our in-depth process at the end of every quarter, looking at every order in our order book and working on that with our customers. When we did that exercise beginning in June, we saw a lot of customers changing and pushing out. We’re just going to shrink that. The second thing we’re ensuring is we have a very robust process here internally, looking between sales and operations almost weekly. We are ensuring that the dynamics of demand week to week are being communicated to the operations so that we ensure that we don’t negatively impact working capital and inventory. You’re continuing to see really strong management of inventory in our balance sheet. We're minimizing. When we typically go out and work with our vendors on capacity commitments, we minimize those, and we’ve done that for a couple of years, so our vendors are offering much more flexibility and volumes without penalties. All of this is coming to play in a time like this.

The next question we have is from Kashy Harrison of Piper Sandler. Please go ahead.

Good evening and thank you for taking my question. Kevin, in the prepared remarks, you said 80% of the backlog is expected to come online prior to year end 2025. Have you taken a look at what proportion of that backlog you would say is fully de-risked from a bottleneck perspective, that is not winning on interconnects or financing or high voltage equipment, et cetera? Given the longer cycle times you’re currently seeing, can you give us a rule of thumb on the lag between bookings and shipments? If you booked in 3Q of this year, when would you expect that to ship?

When we consider the lag and the average delays, if I think about the top 50 projects that are active in U.S. utility-scale solar projects, to date they are delayed from their original start date on average. Only 19% of the projects are still on track as of now to hit their original date. The rest are delayed, on average, by five to seven months. As we do our reviews, we’re asking customers a series of questions that include whether they are confident that they’ll have their long lead-time electrical equipment done or if they have the financing locked up. We are doing this to put it in our schedule. If a customer says they're ready to go but say no to those questions, we won’t project it to go. We're mindful of this batch of pushouts.

The next question we have is from Joe Osha of Guggenheim partners. Please go ahead.

Thank you. Just thinking about the outlook in the next year. I'm not going to ask for guidance, but would it be fair to assume that you're going to run the business to try to recapture some of this operating leverage that you’re giving up in the back half of this year? Thank you.

Yes, clearly we're at a size of business that we don't need to scale up internally a whole lot. We did some scaling down primarily in our international locations. The headcount we are remaining with is quite strong. We’ve been spending a lot of money automating so we will have great operational gearing. We feel really good about that without having to scale up a whole lot of headcount.

The next question we have is from Colin Rusch of Oppenheimer. Please go ahead.

Hi there. This is Andre Adams on for Colin. I was just hoping you could speak to the impact of pricing on the domestic content adders and when you would expect to start realizing some of those benefits.

When we look at the domestic content, we spend a lot of time talking with our suppliers and customers about getting to their percentage of credit. If a customer has 100% domestic panels, they will primarily need to work on the percentage for components. We’ll work with our customers on what that needs. There may be an incremental cost for domestic components. We’ll work on their sensitivities.

The next question we have is from Vikram Bagri of Citi. Please go ahead.

Good afternoon, everyone. Kevin, you touched on high win rates that you’re witnessing recently. Can you put the current win rate into perspective, maybe compare it to historical win rates? Given the higher win rate, shouldn't you exceed the bookings in 2022 this year? Are you seeing increased quoting but slower bookings due to the delays that you talked about?

We won’t give a numerical answer for the win rate, but we’re satisfied that the win rates that we saw creeping up stayed high through Q1 and Q2. The win rate percentage is much higher than our historical market share rate. Our pipeline remains incredibly robust, and we’re still at roughly three times the pipeline we saw at this time last year. The incoming order rates are strong and we feel good about what we’re winning.

The next question we have is from Michael Blum of Wells Fargo. Please go ahead.

Thanks. Good afternoon everyone. You cited ADCVD and the new domestic content guidance as causing some of the near-term slowdown for customers. I'm wondering if you're seeing any change in customer behavior, deferral of projects due to the upcoming election. Do you think that's playing any role in customers’ decision making?

When we did our analysis of every pushout, yes, the interconnection and financing issues remain in the top three reasons for pushouts. ADCVD also showed up in the top three this quarter. There were no specific mentions of projects being pushed due to concerns with the elections. However, I do think across the industry, there is some holdup waiting to see potential election impacts. Our internal view is that we feel there's some stickiness to the IRA, given the number of congressmen who signed on to a letter requesting that the IRA not be defunded in recent news. This is about new jobs, factory openings, and high-paying jobs in the solar industry. So, for us, there are no specific mentions in the pushouts due to elections.

The next question we have is from Dylan Nassano of Wolfe Research. Please go ahead.

Yes, hi. Thanks for taking my question. I was hoping you could provide a little bit more color on the expected timing of the delays, specifically even within the pipeline and the backlog. Are you seeing things maybe even slip further from 2025 to even 2026?

Not at this point. What we've seen in these pushouts, in particular this, the disproportionate amount of them have gone into the first half of next year. We need to be mindful as we adapt to this batch of pushouts. While we've seen it slow down over the last couple of weeks, we don't know if it were to reaccelerate towards the end of the year. We’re feeling strongly that 80% of the backlog is due to shift between the end of Q2 and the end of 2025.

The next question we have is from Maheep Mandloi of Mizuho. Please go ahead.

Thanks for taking the question. You mentioned that STI gross margins were pretty low, around 13%, and you’re making around north of 40% in the U.S. Is that reflective of how you kind of see the split and margins for Q3 and the backlog? And the second part would be pushouts you’re seeing seems more structured. Does that call for any cost cuts as we readjust to this new environment or new normal of slower volumes in the market? Thanks.

The STI gross margins that you've seen year-to-date are more a function of us having to shift our supply source from Asia to local sources due to some increased transit times. We believe that’s transitory and that our margins will recover a bit in STI in the back half as we've begun receiving those shipments from Asia now on a more timely manner and rely less on local, more expensive sources. As for cost-cutting initiatives, anytime you have a change in business to this degree, you’re going to be mindful of pulling back expenses in the business, reduction of new hires, and reallocation of resources. This is within management's control, and we feel really good about our ability to execute on that.

The next question we have is from Donovan Schafer of Northland Capital Markets. Please go ahead.

Hey guys, thanks for taking the questions. I apologize if any of this has been asked already. I was a little late in joining the call. For the SkyLink tracker, could you zero in on the specific attributes that make this more attractive or attractive in certain situations versus the other models that you have available? It seems to connect up to eight rows, whereas DuraTrack can go up to 30 or 32. What’s the appeal?

In SkyLink, we’re excited because it allows us to take the attributes that made DuraTrack and Array trackers successful and allow us to get targeted in certain areas of the market where we can make a difference. The eight-link row allows us to optimize smaller parcels and configurations. Over recent deployments, most of the nice square rectangular sites have already been taken. So now we’re catering to more irregular locations. Also, with the new technology, we can manage the system during storms without grid power, which allows us to be especially optimized in areas where storms are a concern.

One comment I'll make on that is many of us read the notes from Phil Shen of Roth. One recent note was a voice of customer commentary. It was good to see that feedback aligning with what we had been working on internally, and we’re very pleased to say we’ve solved this with the recent positive reactions we received.

The next question we have is from Moses Sutton of BNP Paribas. Please go ahead.

Thanks for squeezing me in. What's the reasoning developers are giving you for delaying projects on the domestic content rule? Are they just waiting for domestic sales? What's the thought there? And similarly for the ADCVD, how do you think about all the panel imports that came into date? Are some of these customers not getting their imports? How do you think about that?

The delays related to domestic content are really in terms of maximizing the number of domestically manufactured panels. Customers want to maximize domestic content to achieve the necessary percentage for projects. As for ADCVD, when customers decide to change panels due to availability or threat of tariffs, it creates delays. While we can quickly redesign layouts for different panels, those changes can take longer to implement from a customer's perspective due to the additional elements that need to be retimed.

Ladies and gentlemen, we have reached the end of the question-and-answer session and with that we conclude today's conference. Thank you for joining us. You may now disconnect your lines.