Good day, and thank you for standing by. Welcome to the Fluence Energy First 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. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Sam Chong, Treasurer and Head of Investor Relations. Please go ahead.

I would like to welcome everyone to our earnings call for the first quarter of fiscal year 2022. On the call today are Manuel Pérez Dubuc, our Chief Executive Officer; Dennis Fehr, our Chief Financial Officer; Rebecca Boll, our Chief Products Officer; and Seyed Madaeni, our Chief Digital Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are neither promises nor guarantees and based upon our current estimates and various assumptions and are subject to material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. These and other risks are described in our filings made with the Securities and Exchange Commission. We encourage you to review these filings for a discussion of these factors, including our annual report on Form 10-K for the fiscal year ended September 30, 2021, and our other filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today, and the company disclaims any obligation to update such 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 page at ir.fluenceenergy.com. I will now turn the call over to Manuel Pérez Dubuc, our CEO.

Thank you, Sam. I would like to extend a warm welcome to our investors, analysts, and employees who are participating on today's call. Let's start on Slide 4 of the earnings presentation found on our Investor Relations website. This morning, I will provide an update on our market outlook, which remains strong, and demonstrate the significant progress we have made since our last earnings call. During the quarter, we have seen a tremendous increase in demand for our energy storage products as evidenced by our recent contracting activity. The market for energy storage products, service, and digital applications continues to grow at a rapid pace with Fluence solidifying itself as an industry leader. We expect this strong demand to continue, and we are on track to deliver our fiscal year 2022 revenue guidance of $1.1 billion to $1.3 billion despite some recent headwinds. Finally, I'm excited to share some additional details with you regarding our recently announced strategic initiatives, including our India joint venture with ReNew Power, expansion of our digital ecosystem through our partnership with Pexapark, and our collaboration with QuantumScape on solid-state battery technology. Moving on to Slide 5. We continue to contract increasing amounts of megawatts across each of our three business lines. The industry appetite for applications of energy storage remains robust, suggesting continued momentum for orders throughout 2022. As we have seen, energy storage is key to providing clean energy for a sustainable future. I am pleased to report that during the first quarter, we contracted 600 megawatts of energy storage products, which is a 525% increase from a year ago. This amount exceeded our expectations as the first quarter has historically been a seasonally lower one for contracting. We continue to experience very strong demand for energy storage products across the globe as companies and countries seek long-term solutions for grid stability and reliability as more renewables come online, creating challenges for grids around the world. As of December 31, we deployed or contracted more than 4.2 gigawatts of energy storage products. Turning to our Fluence services business. We added 250 megawatts of contracts during the first quarter. We also signed 35 megawatts of contracts for our Fluence IQ bidding application. More importantly, after the end of the quarter, we signed an additional 1.1 gigawatts with AES Clean Energy, which represents our single largest Fluence IQ order ever. This contract highlights the value that Fluence IQ can deliver. With this, we have already achieved our fiscal year '22 annual recurring revenue target for Fluence IQ, seven months ahead of schedule. Turning to Slide 6. I would like to update you on the headwinds that we discussed on our last earnings call and the steps we are taking to mitigate their impact. This mostly stems from supply chain disruption due to COVID-19 as well as some cost overruns in the rollout of our first Generation 6 product installations and commissioning. Our team has acted swiftly to implement corrective actions that provide us the confidence to further execute our plan. Some of these mitigation efforts include securing shipping capacity for our high-volume routes on a 2 to 4-month forward-looking basis, giving us better visibility to deliver our product to our customers on time. Furthermore, we have increased the size of our supply chain and manufacturing teams by 57% to provide us with the resources necessary to meet the robust demand we see. And finally, we are documenting lessons learned from our teams around the world and providing additional training so they can deliver our Gen 6 product installation and commissioning more effectively. During the second quarter, we will continue to catch up on some of the installations that were delayed in the first quarter. As of today, a vast majority of the products required to fulfill our anticipated Q2 deployments have already made landfall in their respective countries and are going through installation, commissioning, and acceptance testing as we speak. I would also like to address another topic that is a concern for many in our industry: inflationary pressures and raw material price increases. Our current backlog is hedged through the fixed price contracts we have signed with our suppliers and customers. Given the substantial volatility in commodity prices, we are introducing raw material indices or RMI-based pricing for future contracts. By implementing RMI on both the supply side and the demand side, we are further minimizing our exposure to future commodity price fluctuations. I would also like to provide a brief update on month lending. Although we cannot comment on the press release issued by Vistra in late January regarding these alleged technical findings about the overheating event last September, we can say that we continue to work with Vistra on the repair of the facility. Our own technical investigation is still actively in progress, and we will provide you an update once it has concluded. Turning now to Slide 7. As I noted earlier, we continue to execute our business plan during the quarter to position ourselves for long-term success. I will cover a few examples. Let's start with one of our key wins in the new transmission enhancement segment of the market. As you may have seen last year, we were selected to provide a small 1-megawatt pilot to Litgrid in Lithuania. This pilot program was designed to test the concept of utilizing energy storage to enhance a transmission and distribution network rather than incur the costly expense of installing additional transmission lines. The pilot turned out to be so successful that we were awarded a follow-on 200-megawatt order for virtual transmission lines. This outcome aligns well with our strategic effort to be the leader in this market segment. The transmission and distribution enhancement market requires a highly redundant and resilient technical architecture that supports advanced grid forming applications. This suggests a high-margin potential compared to other segments. We continue to be bullish on this growing market segment as there are numerous areas around the world that can benefit from this technology, and we are proud to be among the first companies to bring it to the market. Additionally, we selected our contract manufacturer for our North American and European locations. We are on track to start seeing initial production for our North American facility in our fourth quarter. For our European facility, we expect to see initial production in the first quarter of our fiscal year 2023. Both of these contract manufacturing facilities will alleviate the burden of a single manufacturing location. On the software development side, we made several key additions that further strengthened our deep talent pool. These additions were part of the 139 full-time employees added during the first quarter, providing us with the knowledge and experience to keep pace with the extraordinary demand we are seeing. Now I would like to provide you with some color on our recently announced strategic partnerships. Turning to Slide 8. In January, we signed a term sheet to enter into a 50-50 joint venture in India with ReNew Power, which is one of the largest pure renewable independent power producers in the country. ReNew Power is a well-respected renewables player, and by establishing a joint venture, we will collectively leverage our first-mover advantage in this significant market. India currently has just 24 megawatts of energy storage deployed. Almost half of that comes from a Fluence pilot that we built in 2019. Even more importantly, the Indian government has stated that we'll need at least 27 gigawatts by 2030, which provides Fluence a tremendous opportunity to be the industry leader in this significant market. The joint venture will serve as our primary sales outlet in India by licensing Fluence products and services. As a leading independent power producer, ReNew Power will also be a significant customer to the joint venture, beginning with our recently announced first contract for 150 megawatt-hours. Now turning to Slide 9. I would like to highlight the recent expansion of our digital ecosystem. As you may recall, we are developing several in-house applications to complement our flagship digital application, the bidding app. We are paving the way for third parties to build their own applications for the Fluence IQ platform. In January, we entered into a long-term strategic partnership with Pexapark, an award-winning provider of software and advisory services for renewable energy sales and risk management. Pexapark has supported 20-gigawatt worth of renewable PPA transactions and are currently in 18 markets with a large presence in the EMEA region. By partnering with Pexapark, we will bring together our unique insights that will help investors, independent power producers, and utilities make better decisions as they navigate merchant markets while trying to maximize revenue. Additionally, their significant EMEA presence will also help to accelerate the coverage for our bidding app in that region. This partnership is a significant milestone for Fluence, and it corroborates our vision for our ecosystem. Through this partnership, we will commercially introduce Pexapark and its four apps to our customer base via our digital platform. In turn, we expect to receive customer referrals for our products and services from Pexapark. And finally, turning to Slide 10. In January, we entered into a collaboration agreement with QuantumScape, a leader in solid-state battery technology. This agreement strengthens the advancement of solid-state battery technology in stationary storage applications. We will test QuantumScape's solid-state technology in Fluence smart energy storage products. This collaboration sets the stage for Fluence and QuantumScape to potentially enter into a large-scale supply agreement once commercialization is still to be defined. We are encouraged by the benefits we see in solid-state batteries, specifically around density and performance. We remain battery technology agnostic and committed to providing our customers with the most economic and efficient product possible. I would like to take the opportunity to send our gratitude and admiration to our people during this pandemic. Thank you for your passion, hard work, and commitment. I will now turn the call over to Dennis to cover our financial performance and fiscal year 2022 revenue guidance.

Thank you, Manuel, and good morning to everyone on the call. As Manuel stated, we delivered a very strong quarter of new orders for our energy storage products. In addition, we were able to execute on some of our near-term strategic initiatives, which position us for continued growth. Turning to Slide 12. We continue to deploy capital in line with our investment framework with a strong focus on supply chain and talent acquisition. In the first quarter, we prepaid $60 million into our supply chain to support capacity buildup for calendar year 2022 and calendar year 2023 battery supplies. As Manuel already explained in detail, in January, we entered into agreements with ReNew, QuantumScape, and Pexapark, which I would like to financially highlight in more detail. Our 50-50 joint venture agreement with ReNew is projected to be aligned with our capitalized approach as we will be licensing our technology to the joint venture. We anticipate that the joint venture will be mostly self-funded and operational with nominal amounts of parental support. While the terms of the transactions are not yet publicly disclosed, this investment and expected results are in line with our previous expectations. The collaboration agreement with QuantumScape will be accounted for as R&D expense and is consistent with our previous expectations. At this juncture, we expect that it will be a few years until we can have a mass-produced solid-state storage battery. Upon production, we expect that a future solid-state-based energy storage product will contribute to achieving our long-term product margin targets. The Pexapark partnership is a validation of commercial relationships being built on our digital platform. As part of the partnership, we have a revenue share agreement in place for sales of Pexapark applications made through our app store. As our previous expectations did not include any such revenue share income, this partnership will be accretive to our financials from calendar year '23 onwards. Furthermore, we continue to add talent and resources necessary to keep pace with the robust demand we are seeing. As such, during the quarter, we increased our supply chain organization by close to 60%, our service organization by approximately 20%, and acquired key talent to strengthen our software development team. These additions are in line with our model and are important steps for executing our plan. Turning to Slide 13. Before we move on to our Q1 results, I would like to remind everyone of the seasonality of our revenues and order intake. This seasonality is due to customers' desires to have products operational and in time for summer in the Northern Hemisphere. Historically, we recognized approximately 70% of our revenue, mostly in our fiscal second half. This aligns with our patterns for order intake. As a result, fiscal first half results are usually lower compared to our second half. However, as Manuel mentioned, for our current Q2, there is a caveat to the seasonality, and that we expect the portion of the delayed revenue from the fourth quarter of fiscal year '21 and fourth quarter of fiscal year '22 will be recognized during Q2, therefore, leading to a higher revenue contribution than typical in the second quarter. Moving on to Slide 14, starting with the table on the top of the slide. In Q1, we contracted 600 megawatts of energy storage products, which was an increase of 525% from Q1 of fiscal year '21. We are encouraged by the high demand for products in a seasonally slower quarter. Energy storage services added 250 megawatts of contracts, which was a 10% decline from Q1 fiscal year '21. We sold higher levels of products to utility customers, which typically acquire service at a later date, as they did in Q4 of last year. We do expect an attachment rate of at least 70% for the products sold in Q1. Finally, we contracted 335 megawatts for our Fluence IQ bidding applications in Q1, which was a decline of 36% from Q1 of fiscal year '21. However, in January, we entered into a 1.1 gigawatt contract with AES Clean Energy. With this order, we have already achieved our fiscal year '22 Fluence IQ annual recurring revenue target, about seven months ahead of time. Now moving to the second table on this slide. Despite impacts on our supply chain, the number of megawatts that we deployed for our energy storage products grew 6% sequentially due to our strong contracting results. Contract backlog megawatts increased 20% from the fourth quarter. Our product pipeline is being driven by strong tailwinds from the market and demand for our proprietary Gen 6 product. It stood at almost 14,000 megawatts at the end of Q1. Turning to Energy Storage Services. Assets under management grew 8%, and contracted backlog grew 10% from Q4. Similar to our storage products, our services pipeline remains robust, standing at almost 12,000 megawatts at the end of Q1. Moving to our Fluence IQ digital platform. In Q1, digital assets under management grew 25% to almost 3,900 megawatts from Q4, and while contracted backlog declined 26% due to successful transitioning to assets under management. Our digital pipeline achieved a new high of 4,500 megawatts at the end of Q1, which increased by almost 1,200 megawatts from Q4. Turning to Slide 15. Our Q1 fiscal year '22 revenue grew 50% to $175 million versus $160 million for Q1 fiscal year '21. Q1 fiscal year '22 revenue was below expectations, driven by the already discussed headwinds. We view the delays of revenue recognition as temporary, this expectation to largely catch up within Q2 fiscal year '22. On the last 12 months' basis, total revenue grew 9% versus Q4 to $739 million in Q1. Turning to Page 16. In the first quarter, gross profit was negative $53 million versus positive $5 million in Q1 fiscal year '21. This decrease was driven by $41 million of nonrecurring expenses in Q1 fiscal year '22, which included $31.3 million related to project charges and other costs attributable to the compounding effects of the COVID-19 pandemic, $5.6 million related to nonrecurring excess shipping costs and other nonrecurring costs. In our last earnings call, we forecasted nonrecurring expenses related to shipping and other COVID-related items of at least $50 million to $55 million in the first half of fiscal year '22. In Q1, these expenses totaled about $37 million. We continue to forecast an impact of $50 million to $55 million in the first half. Adjusting for these nonrecurring items, we generated an adjusted gross loss of $8 million in Q1 fiscal year '22 versus positive $5 million in Q1 fiscal year '21. Adjusted gross profit was negative in Q1 due to $13 million of costs associated with first-time deploying our Gen 6 product. As Manuel noted, we have taken significant corrective actions. However, we expect to see some trailing costs in Q2. Continuing on to Slide 17. EBITDA in Q1 was impacted largely by the same nonrecurring expenses as the gross profit. Adjusted EBITDA excludes these nonrecurring expenses and an additional $24.9 million of stock-based compensation, which we have started to record in our successful IPO. However, the $24.9 million includes a catch-up entry since April 2021. Therefore, future quarters will see significantly lower stock-based compensation expense. Moving on to Page 18. Our cash and cash equivalents as of December 31 was $632 million. We raised about $940 million in IPO proceeds in October, net of offering costs. Immediately following the IPO, we repaid a total of $100 million in debt. Our short-term working capital in the quarter was negatively affected by the shift in revenue recognition and by the $60 million prepayment to secure battery capacity. However, we expect to catch up on cash flow later in the year. Our strong balance sheet is now enabling us to keep pace with the robust demand we see for our entire ecosystem. Going forward, we will continue to deploy our capital in line with our investment framework of enhancing unit economics, expanding recurring revenues, and developing structured offerings to deliver attractive value for our shareholders. Turning to Slide 19 and our fiscal year '22 outlook. Our contracted backlog as of December 31 was $1.9 billion. Our guidance for fiscal year '22 revenue in the range of $1.1 billion to $1.3 billion takes into consideration risks and uncertainties related to our ability to recognize revenue from our energy storage products on a timely basis in H2 fiscal year '22. Despite a challenging Q1, we expect our H1 fiscal year '22 revenue to be in line with our historic seasonality of 30% of full year revenue, plus the majority of the $125 million delayed revenue from Q4 fiscal year '21. As previously discussed, we also confirm our forecast of $50 million to $55 million of nonrecurring expenses related to shipping and COVID-19 compounding effect. Lastly, we have already achieved our fiscal year '22 Fluence IQ annual recurring revenue objectives ahead of time and have created upside to our digital plan with the Pexapark partnership. At this time, I would like to turn the call back to Manuel.

Thank you, Dennis. The first quarter proved to be exciting as we continue to execute on our mission to transform the way we power our world for a more sustainable future. We continue to see robust demand for our products, services, and digital solutions as society continues to implement more renewable energy sources and reduce its reliance on fossil fuels, providing unique opportunities for Fluence. We are in a better place now than we were 3 or 6 months ago with improved visibility, more capabilities, and more resources that we can deploy to meet the growing demand we are seeing. We are still in the very early stages of the clean energy transition, and I can say the future looks bright for Fluence as we look to deliver attractive value for our shareholders. Operator, we are now ready to take questions.

Our first question comes from James West with Evercore. Your line is open.

Curious, so looking at the order intake for Q1 down year-over-year. But of course, you had the AES order that came in January. So kind of how should we think about order intake? Should we be looking at that on a quarterly basis? Or should we look at kind of a rolling 12-month basis? Is it lumpy and seasonal? And so I guess it doesn't seem to spark any concern at all from you guys. From your commentary, it sounds like things are very robust, but just curious how we should be thinking about that as we monitor the business on a quarterly basis?

Good morning. Thank you very much for your question. First, I see you're looking more at the Fluence IQ platform and not the overall backlog. First, we are extremely happy and excited that we achieved our goal seven months ahead of our plan, which is fantastic. The best way to see Fluence IQ is on a rolling basis. It's a product that we are expanding to other markets. We are entering the California market. We're making inroads in that market in Australia. We solidified our presence there with 20% market share, incorporating additional projects in Australia and California. It's an open market for us. You will see more coming. It takes a few months until you first test and model the product for the customer. We incorporate the portfolio into the platform. Sometimes we do some modeling in parallel, so they can see the upside and the revenue uplift potential. Then, you sign a contract that usually has a significant number of megawatts. The fact that we are just not using Fluence IQ for energy storage, but also for renewables makes the market more significant, the addressable market more expansive, and the growth is becoming the standard in the market. The more people that start testing us, the more people that see the benefits will keep coming. So I would say that I am extremely happy about the outcome, and we keep moving forward, developing new applications. Seyed, do you want to share anything?

No, I think that answers the question. As Manuel mentioned, we had great momentum over the past twelve months. So if you want to think about it as a rolling basis, we are super excited about the progress of the application. As Manuel mentioned, we're very well penetrated in Australia and continue to grow in California. You'll see us growing into adjacent markets here in the U.S. The landscape has been great for us. So if there are any further questions, happy to take them, but I think, Manuel, you covered it.

Manuel, the momentum in the business seems exceptionally strong right now. It feels like every time we talk, you're either on an airplane or about to board one, which indicates closeness to our customers. Can you describe how the market is evolving? Where do we stand in the competition for storage, and how has customer acceptance and understanding of this necessity changed compared to three, six, or twelve months ago?

Thank you very much for the question. Yes, I mean, the market is exceptionally strong. Even if you consider all the headwinds that we see in supply chain and some of the concerns in some markets about the capacity to deliver. But the market is there. The more they test the technology, the more they like it. We see a lot of recurring customers coming back to us, repeating their orders, and looking at additional applications. This is a compound effect on growth. First, the sites are becoming bigger because the technology has been understood and they really see the benefit. You see more and more companies, independent power producers, and utilities combining renewables with energy storage, but also replacing traditional fossil fuel generation with energy storage. The sites are getting bigger in megawatts in capacity, and the sites are also getting bigger in hours. The total megawatt-hours is a compound of this combination. Additionally, consider the Belton transmission line concept. We developed a complex architecture that's difficult to execute. We tested a pilot of 1 megawatt, and once they saw that operational, they came back and said, 'Well, we need 200 megawatts.' That is 200 times the pilot. Many transmission line bottlenecks exist globally—Germany, Chile, Vietnam—there are many places where offshore and onshore wind cannot be delivered to load centers due to transmission constraints. If we can solve that equation without the complication of building new transmission lines, that is a whole segment with higher margins, and we are uniquely positioned to seize that opportunity. I don't know if Rebecca wants to add something?

Sure, Manuel. Thanks. Again, I think you covered a lot of it. I would summarize that the market continues to grow, and the buckets of growth are in segments. The transmission opportunity is an example of that segment. Another segment is data centers. More segments lead to upward movement of that total available market. We also see growth in new geographic regions, regions that did not previously adopt energy storage and the associated services and digital solutions. They are now ready to adopt that. So clearly, in our story, we're positioned to capitalize on that with India and other countries. Something about the regions is that they move from short duration to long-duration solutions, which helps us grow that total available market as well. To summarize, as Manuel said, just the penetration of renewables is crucial—pairs of renewables with battery energy storage will make the renewable story work.

Allow me just to make a very short sample because we are so happy and proud to be part of this story. Last weekend, in Ireland, they broke the all-time record of renewable generation at 89% of renewables in the system. Our ultrafast response energy storage solutions made a significant contribution in that market. We are the only ones in that market. If you see the performance of our site with ultrafast technology, which is the only one available, we absorbed the ups and downs of wind generation to keep the lights on reliably. Around 20% of the load in Ireland or close to that is data centers, and you know the need for five nines of reliability and availability. We supported that market. If you look at the statistics, the way the system operated, we are truly enabling high penetration of renewables in a sustainable and reliable manner.

Our next question comes from Maheep Mandloi with Credit Suisse. Your line is open.

This is Maheep Mandloi from Credit Suisse. Can you discuss the near-term headwinds you mentioned? Could you help us understand the impact on margin and cash flow for the remainder of the year?

Yes, absolutely. Let me take this. This is Dennis speaking. First of all, when we consider especially the second half of the financial year, we look ahead with confidence. When we say confidence, it stems from two parts. First, it's about the measures and actions which Manuel outlined that we are seeing to take traction. Second, we are seeing that the Omicron wave is going down. So that means while we have seen stronger headwinds from the pandemic before, that's declining. So, in that regard, we're looking ahead with confidence. Now in terms of margin development and cash flow, we are seeing gross profit margins improving on a quarter-by-quarter basis, getting back to the level of our previous expectations by year-end on a rolling basis. However, on a full-year basis, considering all twelve months, we won't be able to recover what we have debated in the first half. On the cash flow side, in the first quarter, we made the prepayment to secure battery capacities, which is important to secure our backlog and the demand until the end of calendar year 2023. Cash flow has also been impacted by delays in revenue recognition from the first quarter into the second quarter. As we catch up and look forward with confidence on that, we will also catch up on the cash side and working capital in the later part of this year.

Switching gears a bit, we're expecting to perhaps see changes in the net metering policy in California, which could potentially drive significant demand for residential batteries. As that market potentially grows at a much faster pace, would it be prudent for Fluence to bring your capabilities of manufacturing and modular batteries to the residential market?

We see the same thing in the market that there is potential for residential. I would say shortly that we're evaluating it. We are not in the market today, but we're evaluating it.

Thank you. Our next question comes from Mark Strouse with JPMorgan. Your line is open.

When thinking about the India market, are there any local manufacturing requirements that we need to be aware of? And how are you planning for that, if so? And how does that impact the potential ramp that we might see in orders in that market?

Yes. Thank you. We are very excited about India. We established our first pilot of 10 megawatts in India in 2019. We waited for several months, or even a few years, to find the right time, the right partner, and be ready for such a big market. Because it's not just that we have the technology; it's also that we have the capacity to ramp up production and fulfill the demand that we see. We found the right partner and are very happy with the joint venture with ReNew Power, the leaders in pure renewable projects in India. Initially, there are no requirements for localization, but you know how competitive that market is. Eventually, we will look to start using local suppliers to complement our technology when the time is right. The target is to fully localize production. We have this tremendous first-mover advantage. The actual amount of energy storage in India is very small, and we represent currently around 50% of what is operating in India. We anticipate a multi-gigawatt demand ahead. The government has already issued a local tender for battery manufacturing, providing a price subsidy for energy for those who wish to establish up to 50 gigawatts of energy battery manufacturing. The government is proactively supporting this. In the short term, most of the equipment will come from abroad. There are some inverter manufacturers in India with whom we're already exchanging technical specifications. I don't know if Rebecca wants to add anything. We have the right partner at the right time, and there is political and economic support in India.

And then you touched on this earlier about the opportunity for more transmission upgrades over time. Just curious, do you have any similar-sized projects in your late-stage pipeline?

Yes. I cannot disclose exactly who we’re working with, but yes, we are working with world-class developers and energy companies actively participating in bidding processes already taking place in Europe and America. There are substantial opportunities for us here, and we are leading the way. We have developed many applications in the past, and we will continue to innovate.

Again, I think you summarized it well. There are certainly opportunities that currently exist, particularly in Europe, and we have bids going on right now.

Our next question comes from Brian Dred with Goldman Sachs. Your line is open.

Maybe the first one, just going back to the margins. I know there's some pressures here near term. It sounds like they should ease moving through the back of the fiscal year. But it sounds like we should expect steady-state margins by year-end. So Dennis, based on your prior model, that would imply positive mid-single-digit adjusted gross margins by call it fiscal Q4. First, is that fair? And then maybe can you give us a bit of the bridge here; that's about a 1,500 basis point expansion from today's level over just the next couple of quarters? And then I have a follow-up.

Brian, thanks for the question. In that regard, I think you like where we started in Q1. Q1 has been impacted by the nonrecurring expenses as well as by the cost overruns we disclosed on the call. So if you're thinking ahead to the second quarter, we will still encounter some portion of the nonrecurring expenses where we have reconfirmed our outlook of $50 million to $55 million. We anticipate reduced nonrecurring expenses in the second quarter. In the third and fourth quarters of the year, we expect to move back towards the previous expectation levels of mid-single digits.

But it's all the nonrecurring going away? Or it seems like there's a bit more to the bridge than just that.

On the nonrecurring side, let's say like this, we have high confidence in the measures we have put out. Nevertheless, we had stated a $50 million to $55 million guidance for the first half. So, we will give you an update on potential nonrecurring expenses in our next earnings call.

And then just a second question around this Fluence IQ contract with AES. Congrats on the scale of that. Just wondering, it sounds like, clearly, this is a big deal—the biggest one you guys have ever done, over 1 gigawatt. I recall you had a $3 million or $4 million revenue target for the digital business this year. If I back into this 1 gigawatt deal, it might be worth $1 million or $2 million annually since it adds about 25% to your assets under management for that piece of the business. Is that the right way to think about the scale of the revenue opportunity every time you’re getting a gigawatt into the IQ business segment?

Yes. I'll pass it to Dennis for more details about our targets. All I can tell you is this has been a great deal for us. It's energizing to see the rate of adoption of Fluence IQ in California. As Dennis mentioned, we've already achieved our expected ARR targets for this year, way ahead of schedule. I'm also really proud of the diversity of our customer base. The deal with AES is exciting, and over a gigawatt. But if you look at the 6 gigawatts we've contracted and the diversity of our customer base, we have utilities, community choice aggregators, and we help communities with Fluence IQ. We have independent power producers, renewable developers, and renewable asset managers. The diversity is beneficial. I would like to pass it to Dennis, if you want to speak more about the revenue targets?

What makes this deal so attractive for us are two things. First, this has a high share of battery storage. So that means typically we go out with Fluence IQ to also pursue the renewables side. This year also includes renewables, but it has a high share of energy storage, which translates into a higher average selling price. Second, it also has a highly attractive performance-sharing revenue component, which, as you may recall from previous discussions, we have been very conservative about how we have articulated that in our model. Therefore, we are seeing an upside on our digital side.

I would like to add something important because we think it is vital. Every market is different. I mean, even if the same proportion by percentage of the portfolio increases, there are markets with higher volatility and higher price points. We are in contracts including renewables, and remember that the revenue uplift potential for just renewables is between 10% to 15%. When you have energy storage, that number goes up to 50%. Our revenue sharing can result in exponential uplift when you have higher revenue capacity for the AI system or software, driven by the dynamics of the market.

And our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.

I'll make it quick here. Just two follow-up questions, if I can. First, on AES, how do you think about the future backlog from AES? And you think about the percent exposure to AES as a counterparty both in the quarter? And then, in terms of your future backlog—both in the context of IQ, but also overall in your business—how do you see that evolving here? Things were fairly elevated, and we've talked a lot about it on this call, particularly with IQ. But how would you frame that '22 onwards from what you know already with your backlog and otherwise?

Yes. Julien, thanks for your question. We noted this morning in our call that we had a high concentration in Fluence IQ regarding AES. We are extremely happy with AES as one of our sponsors and main shareholders, but also as a very important customer expanding their renewable targets rapidly. We are pleased with our collaboration. Second, we have customers all over the world. The significance of California being such an essential market for AES means we will certainly capture market share. They have a huge portfolio in California. So that will be there. We expect that customer proportion to return to traditional long-term numbers we've maintained over the last 3 to 4 years regarding AES's contribution to our overall ecosystem platform expansion and populating process.

Yes, clearly always good to run on the strengths of the company expanding like AES. All right. No doubt about that. So if I can, I'm curious, as you think about the balance of this year, you talked about some delays from 4Q from last year. Can you speak to when you feel you will recover some of the $130 million?

Yes. Let me take this high level. I want to send a message to you and the rest of our investors and customers out there. First, the demand is very strong. We're working closely with each one of our customers to overcome those delays and close the gaps. We've seen that happening in many projects. We developed our technology for the first time, the Gen 6. We expect some adjustments, but we are progressing positively. We haven't had any cancellations, which is a very good sign. Dennis, do you want to add anything?

Yes, Julien, to your question. We expect to recognize the majority of the $125 million of revenue shifted over from Q4 '21 in our first half, plus being back in line with our historic seasonality of 30% of our annual guidance.

And our next question comes from George Gianarikas with Baird. Your line is open.

First, can you talk about your service attach rate at 69%? Some of the dynamics that went into that and your confidence of that improving over time?

Yes. First, we are confident that the attachment rate we have seen in the past is stable and going forward, it will remain that way. As you know, Fluence services typically lag a bit after the signing of systems and products for energy storage and smart solutions. And it will take some time to get those contracts signed and incorporated into our metrics. You saw that in our last earnings call that we had an increase of 750%. Hopefully, you will also see that coming. We believe an attachment rate of around 70% to 75% will stay at those levels.

And just one follow-up, to clarify your guidance for the year and the context around it: Are you assuming that the world continues to improve from a COVID perspective, that supply chain disruptions get better, and that's how you'll hit your guidance? Or do you assume continued disruption? I just want to make sure we all understand the context and what to look for to understand it.

Yes. My first reaction, and thank you for your question, is that we are cautiously optimistic as we see the Omicron variant declining, and we see less port congestion, for example, on the West Coast of the United States. A vast majority of our products are already in various locations for installation and commissioning for Q2. We are cautiously optimistic and see improvements for the second half of the year. However, we recognize that there might still be some delays in certain areas.

Right. So you might call this a new normal. This means pandemic/post-pandemic level of supply chain reliability— not as good as pre-pandemic, but not as bad as we experienced, especially at the end of last calendar year with the high levels of Omicron.

I also would like to add that we already selected our contract manufacturers for Europe and the U.S. That will also help us on the supply chain and logistics.

Our next question comes from Graham Price with Raymond James. Your line is open.

Just on the newly announced Pexapark partnership. I was wondering if you could talk a little bit about how that expands coverage for the IQ platform and what that does for the addressable market for the bid app side?

Yes. Thank you. Great question. Let me take you all back to what we shared during our roadshow and Analyst Day conversation. With Fluence IQ, our flagship application is the bidding application. We've been contemplating and developing new applications, but we've also noted an upside for us is to create opportunities for third parties to integrate or get into partnerships for additional applications. None of that was built into our financial models in terms of revenue upside. The announcement of this partnership gives us positive momentum around third-party applications. Pexapark with their presence in Europe gives us a greater insight into the European market and allows us to build deeper customer relationships. So all great, ahead of schedule. Let me pause there for follow-ups. But it's very positive momentum in the right direction.

And then quickly on the cost overruns we saw for the Gen 6 product installations—are those largely due to commodity price inflation or typical logistics issues? Is there one thing you can point to, or is it a combination?

Sure, I'll take that. We have separated the cost overruns from some of the logistics issues. On the cost overruns, they are temporary and associated with installation and commissioning. We have conducted root cause analyses of various operational or technical issues we could optimize to ensure those cost overruns get closer to zero by the end of this quarter. We've implemented fixes in our field installation manuals and factory, and those are in play now. We have identified the issues and implemented the fixes. We brought in significantly more personnel to handle installation and commissioning. This was one of the lessons learned, as we needed more workforce, and we have trained them in the updated installation procedures.

Our next question comes from Ryan Levine with Citi. Your line is open.

Has the AES-Fluence IQ contract duration compared to the existing portfolio? Are there any material term differences in that agreement versus other contracts that you sign?

It's actually on the longer duration side, which is more exciting. That gives us further momentum to adapt IQ to the dynamics of the California market. It is more on the longer duration side.

And then in terms of your ability to hire new people—both on the engineering and sales force side throughout the organization—can you update us on that?

Yes. We are very pleased that in such a difficult market, we see how tight the labor market is, especially for highly qualified engineers and professionals. We were pleasantly surprised by the number of individuals wanting to join Fluence and partake in our story. They appreciate our mission, objectives, and global presence—supporting more renewables around the world. We increased our teams in supply chain, manufacturing, logistics by 57%. We hired a substantial number of engineers, control engineers, and commissioning engineers. The demand has been tremendous. We've experienced significant volume and simultaneous installations across sites, which posed a challenge. However, the recruitment of almost 150 people during a tight market is remarkable. We are grateful to welcome them and appreciate their hard work.

And then just to clarify a comment around fourth quarter achieving single-digit margin— is that on a GAAP basis or on an incremental basis concerning contracts signed or incremental sales recognition throughout your organization?

That's referring to the in-quarter numbers on an adjusted gross profit level.

When do you think you'll be able to achieve single-digit on a GAAP basis?

We will see that same trend on the GAAP basis as on an adjusted basis. As mentioned, we are early in the year, so we will provide a more concrete answer on that in the next earnings call.

And our last question comes from Steven Fleishman with Wolfe Research. Your line is open.

Just I guess on the shipping costs and how you're thinking about these, as we move on, what to consider onetime versus ongoing to the degree that we stay in kind of a higher inflation environment?

In general, we think that we are seeing stabilized shipping costs on a high level in the shipping market. Since Q4 fiscal year '21, we have included this higher logistics cost into our customer prices. Overall, we believe we can see light at the end of the tunnel. These nonrecurring expenses should subside throughout this fiscal year.

Okay. So we should assume those costs—we shouldn't have nonrecurring shipping costs pulled out as we get later in the year?

That is correct.

Could you clarify the comments that you made about Moss Landing? Are you implying that you may disagree with the report that was issued on Moss Landing? Are you planning to build more storage there? Like are you in the running for that or not? I would like more clarity on what's going on there.

Yes. I want to repeat what I stated in my initial remarks: We are conducting our investigation and are assisting Vistra in putting that facility back in operation. We're also conducting our investigation. I would say it's too early to say precisely what it is. We will inform the market once we have conclusive results.

And that's all the questions we have for today. I'd like to turn the call back to Sam Chong for any closing remarks.

Thank you. We would like to thank everybody for listening to our earnings call today. If you have any further questions, please contact us at [email protected]. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.