Thank you for standing by and welcome to the Fluence Energy Inc. Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Mr. Lex May, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Fluence Energy’s third quarter 2023 earnings conference call. A copy of our earnings presentation, press release, and supplementary metric sheet 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 website 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 Products Officer. During the course of this call, Fluence’s 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 which we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company’s Investor Relations website. 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 would like to send a warm welcome to our investors, analysts, and employees who are participating on today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the third quarter as well as our outlook for the rest of the fiscal year. Starting on Slide 4 with the key highlights, I'm pleased to report that in the quarter we recognized $536 million of revenue. We continued to experience strong demand as new orders were approximately $565 million highlighted by our Solutions business contracting 1.4 GW hours and our Digital business adding nearly 1 GW of new contracts. Furthermore, our signed contract backlogs as of June 30 increased to $2.9 billion. Turning to adjusted gross profit, we delivered $24 million or a margin of approximately 4.4% for the quarter. This is slightly lower than the Q2 level of 4.6%, primarily because of one project that experienced a delay from a noncore supplier. This was an isolated incident which will not hinder us from our expectation of achieving double-digit gross profit margins in Q4. Lastly, our Services and Digital business, which represented some of our recurring businesses, continue to see traction. Our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains above 90%. And we have noted previously, we typically see a lag between signing Solutions contracts and entering into a Service contract, which is why we believe the cumulative attachment rate is a varied metric. Turning to our Digital business, we had a very strong quarter as we were able to contract nearly 1 GW. However, our digital assets under management at the end of the third quarter was slightly lower than the second quarter level as a result of a customer not renewing its contract with us. This slight decline will be more than offset as the new contracts not yet deployed move from our digital backlog to our digital assets under management. While we don't like losing customers, the nonrenewal is within our expected 5% rate for churn or customer attrition. Our low churn rates highlight the general stickiness of our customer base. Overall, we still have a lot of work to do regarding our digital business, but we are on track to deliver on our commitments. Turning to Slide 5, I'd like to discuss the five strategic objectives that we highlighted previously and provide you with an update on our progress. First, on delivering profitable growth. I'm pleased to report that we are raising our fiscal year 2023 guidance for both revenue and adjusted gross profit. As my note will discuss in more detail, we're able to raise our guidance due to better project execution, thanks in large part to our supply chain improvement. Additionally, we are reaffirming our expectations that we will be close to adjusted EBITDA breakeven in our fiscal fourth quarter. Second, we will continue to develop products and solutions that our customers need. As such I'm pleased to report that we signed a 400 MWh contract that will utilize Northvolt's batteries. This is a significant milestone and this will mark our first major project that will utilize European manufacturer batteries and illustrates our commitment to diversifying our supply chain. Third, we will convert our supply chains into our competitive advantage. I'm pleased to say that we have signed a U.S. cell supply agreement with AESC under which we will procure U.S. manufactured battery cells. This is a tremendous achievement for us as we believe this will position Fluence to be one of the first companies to provide customers with a storage product that qualifies for the 10% investment tax credit bonus under the IRA domestic content rules. This contract provides us access to the limited early U.S. cell supply and gives us a first mover advantage which positions us to potentially increase our existing market share. As I mentioned previously, this agreement supports our domestic module manufacturing for which we expect we will capture the incentive of $10 per kWh, which I will touch on more shortly. Four, we will use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we continue to make progress on our Nispera product road map. This quarter we launched an artificial intelligence-based predictive maintenance tool, our first artificial intelligence tool for battery storage on the Nispera platform. I will also discuss this in more detail momentarily. And finally, our fifth objective is to work better. I'm proud to say that Fluence has increased its total cash position by more than $30 million from the second quarter level, further bolstering our liquidity. Our total cash includes cash, cash equivalents, restricted cash and short-term investments. Turning to Slide 6, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $12.4 billion, which is an increase of more than $1 billion from last quarter. Additionally, as I mentioned, we saw our backlog increase to approximately $2.9 billion. We expect to see some initial project awards in the second half of this calendar year that are directly attributed to the Inflation Reduction Act. As such, we reaffirm our belief that consolidated revenue growth will be between 35% to 40% in fiscal year 2024 relative to our increased revenue guidance for fiscal year 2023. Turning to Slide 7, as I mentioned earlier, we have secured an off-take agreement with AESC for U.S. made battery cells. This agreement strengthens our capacity to offer customers a storage product that we expect to qualify for the additional 10% investment tax credit, a bonus granted to products complying with the prescribed criteria for domestic content under the IRA. We expect the first U.S. sales to be delivered in calendar Q4 of 2024. Additionally, we're still on track to begin manufacturing our battery modules at our facility in Utah in the summer of 2024. We know that the battery modules will produce starting in the summer of 2024 to qualify for the $10 per kWh incentive and we'll support the offering of a product compliant with the IRA domestic content requirements upon the integration of U.S. manufactured cells in Q4 of 2024. In regard to our U.S. module manufacturing, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. Instead, we expect the $10 per kWh incentive will go towards offsetting the cost of reaching economies of scale. From an accounting standpoint, our current expectation is that we will account for the $10 per kWh incentive on our income statement as a reduction to cost of goods and services. Furthermore, we expect to elect direct pay provision for the first five years of the credit. The exact timing of the cash payment is expected to lag our accounted recognition. Thus we expect it to be in conjunction with our federal income tax reform. With respect to the U.S. manufactured product we're exploring whether our first mover advantage will allow us to share some of the benefits our customers will enjoy from our offering and thus provide us with incremental margin. It is too early to define a concrete view, but as the situation evolves, we will provide more color on this potential upside. As you may have seen earlier this summer, the U.S. Treasury Department released its domestic content regulation. Overall, we're pleased to see the regulations. However, there are still outstanding questions that we're hoping the areas will clarify by the end of the calendar year. Turning to Slide 8, I'm pleased to announce we recently launched an artificial intelligence-based predictive maintenance feature for battery and storage as part of our Nispera offering. This is our first Nispera artificial intelligence-based feature following the success of the AI capabilities on our Mosaic bidding application. Nispera AI-based predictive maintenance feature is an advanced solution designed to upgrade the performance and reliability of any storage system. By harnessing the power of artificial intelligence models, this technology prioritizes and acts upon the storage performance issues, thereby significantly reducing downtime and ensuring uninterrupted power supply. From a customer standpoint, the AI-based predictive maintenance feature offered by Nispera will provide numerous benefits including minimized downtime, significant maintenance cost savings, enhanced asset reliability, optimized maintenance scheduling, and improved safety. I'm pleased to say that we've deployed this solution onto its first project in California. More importantly, this feature provides another tangible proof point that we're on track with our digital business commitments, which we say will not be meaningful before 2025. In conclusion, I am pleased with the achievement of the third quarter. Although we're mindful there's still work to be done, we will look to continue this momentum as we progress through the remainder of the year. I will now turn the call over to Manu.

Thank you, Julian. I will begin by reviewing our financial performance for the third quarter and then discuss our guidance for fiscal year 2023. Please turn to slide 10. Our third quarter revenue was $536 million, a 124% above prior year. We continue to execute well as we work through our legacy backlog, which accounted for more than half of our revenue in the third quarter. As we alluded to on our last call, the third quarter had a larger impact from the roll off of our remaining legacy contracts than we expect to occur in the fourth quarter. We continue to anticipate the majority of our low margin legacy backlog will be turned over by the end of this fiscal year, though, as I've indicated previously, a small portion will bleed into fiscal year 2024. We generated approximately $24 million of adjusted gross profit in the third quarter which was an adjusted gross margin of 4.4%, slightly lower than the second quarter level. As Julian mentioned, the driver of the decline was one specific legacy project that incurred delays driven by a noncore supplier. More importantly for the fourth quarter, we expect our margin to be about 10% which reflects an increased weighting of the higher quality, higher margin orders that we have recently signed relative to prior years and expect this to be a good proxy for the expected margins in fiscal 2024. Third quarter operating expense excluding stock compensation was $54 million or approximately 10% of revenue, which is lower than the prior quarter in absolute terms, though up just slightly as a percentage of revenue. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. This is also reflected in the year-to-date third quarter operating expense as a percentage of revenue which was 10.9%, down from 17.2% in the year-to-date third quarter 2022. Turning to our cash balance, I'm pleased to report we ended the third quarter with $416 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $30 million from the second quarter. Rounding out the balance sheet discussion and in line with previous communication, we saw a decrease in inventory of approximately $250 million in the third quarter relative to the second and continue to see improvements in inventory turns. This coupled with improved collections drove the increase in our cash balance. In addition, we ended the third quarter with $165 million of undrawn revolver capacity and $80 million of unused supply chain financing providing us additional sources of liquidity. Please turn to Slide 11. I'm pleased to report we have increased and narrowed our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit. We now expect our total revenue to be between $2 billion and $2.1 billion, which is up from our previous revenue guidance of $1.85 billion to $2 billion. As Julian indicated, we are maintaining our outlook for 35% to 40% revenue growth in 2024 despite the higher 2023 revenue guide as we continue to benefit from growing demand and strong supply chain assurance, though, we expect roughly 75% of 2024 revenue to be generated in the second half of the fiscal year based on the current contract schedules we are seeing. We have all of 2024 battery supply secured and the continued improvements in our supply chain position also helped support the incremental increase in 2023 revenue guidance compared to the prior estimate. We have also narrowed our guidance for adjusted gross profit to be between $117 million and $132 million, which implies a slight increase at the midpoint from our previous guidance of $110 million to $135 million. As we have indicated on our second quarter conference call, we expect to be close to adjusted EBITDA breakeven in the fourth quarter 2023. As we focus on achieving adjusted EBITDA profitability for fiscal year 2024 and beyond, we intend to provide formal guidance for fiscal 2024 for both revenue and adjusted EBITDA on our next earnings call, while continuing to provide transparency of other key operating and modeling assumptions. From a cash standpoint, we expect our fourth quarter total cash levels to be near breakeven and we believe we have ample liquidity to meet our 2024 revenue targets. Please note that our U.S. battery cell supply agreement currently calls for a down payment of $150 million to reserve this capacity, which will be paid in installments over fiscal year 2024 and fiscal year 2025 and will be funded by our liquidity and customer deposits for these batteries. The first $35 million will be paid in the first quarter of fiscal year 2024 and another $35 million will be paid in the second quarter of fiscal year 2024. Before I turn the call back to Julian for final comments, I would like to reiterate that we continue to see strong demand which is reflected in the significant growth of our pipeline, which gives us confidence that we will be close to adjusted EBITDA breakeven in the fourth quarter and generate positive adjusted EBITDA in 2024.

Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaway from this quarter results. First, we had a solid quarter in terms of our financial performance, clearing out much of our legacy low margin contracts while generating cash and raising our guidance yet again. We have also reiterated our expectations that we will be close to adjusted EBITDA breakeven in our fourth quarter. Second, we have taken steps to secure our future by locking up our fiscal year 2024 battery supply as well as locking up early domestic battery cell production, providing us a clear first mover advantage. Third, we launched our new AI-based feature for Nispera to help provide our customers with additional tools necessary to lower the total cost of ownership. This concludes my prepared remarks. Operator, we're now ready to take questions.

Thank you. Our first question comes from James West of Evercore ISI. Your line is open.

Good morning, I'm doing well. Very happy today. I'm sure you are as well after a good quarter; the outlook looks very strong. I'm curious, as we've had IRA guidance provided now and we obviously know the demand drivers for energy storage. Has there been any net change in that demand either up or down, but probably up with the guidance out there for the U.S.? And then how are you guys thinking about also the European markets as they start to figure out the green industrial plan that they've put out there?

In the U.S., I don't think we have seen a major movement since the guidelines came out. So it's in line with what we said; no that for total demand 35 to 40, and that's what we're guiding revenue for next year, and the U.S. is a little bit higher than that. For Europe, we are seeing a little bit of the markets being more active. First, Germany was a market where it was lagging in shipments. Now we see much more activity, and the Nordic countries are showing more demand. I don't think there's enough today to call for a review in our 35 to 40, but good signs, especially Germany being such a big economy, I'm sure it's going to be a competitive market. So it will be a fun ride for us, but that might be meaningful no, but that's kind of where we are. I think we feel very confident about 35 to 40 for next year and positive that we will see demand getting better. The other one we're seeing that maybe is Canada, which was something that I think I talked about with some of you before. These days we are starting to see demand in Canada, mostly in Ontario, and that has been very meaningful and could be a huge market. That proves a point I think that if I can make maybe a little add, as you know, the kind of electricity has a lot of hydropower and a lot of people when they see hydropower they don't see a need for battery storage. Our view is that reservoirs do their jobs. Our job is completely different. We provide services to the grid to ensure stability, to move capacity faster and provide black starts. These are things that you know not necessarily reservoirs can do. So it really proves a point that even hydro systems or systems that have a lot of hydro capacity need our battery storage to ensure that they can adapt to a new power sector landscape.

Okay, that's very interesting. Thanks for that Julian. And then a question on Nispera, the adoption of Nispera. You've put much more emphasis in the last couple of quarters on that, the adoption rate on the software side of the business, how is that progressing?

We signed around 1 GW, it was mostly Nispera. We have some Mosaic there, and it's doing very well. I think the fact that we have the first integrated portfolio management, asset performance management tool that covers all the renewable technologies, storage, wind, solar, it really makes a difference and has been very helpful. So we're very, very happy for the results. I think this new maintenance tool we just announced is just the beginning. This one is based on temperature readings, but there's a lot more. The batteries are very rich in data. So there's a lot of value we will create by harnessing that data and converting it into information that our customers can use to manage their systems a lot better.

Got it. Thanks, Julian.

Thank you. One moment please. Our next question comes from the line of Brian Lee of Goldman Sachs. Your line is open.

Hey guys, good morning. Thanks for taking the questions. Kudos on the solid execution here again.

Yes, good morning, Brian. How are you?

Hey Brian.

Good, good, thank you. A question I guess on margins, it's high quality from that, but you seem to have gotten through a lot of the backlog that had some of the lower margin, less profitable projects. Q4 guide or I guess the annual guide here for the rest of the year implies Q4 is going to be somewhere in the like 11% range if my math is right. So I know you're talking more about like 10% for 2024 and you're going to give us more of an official view here in the next quarter. But what are kind of some of the puts and takes between the 10% and 15% long-term guide? And then mapping that to 2024, given you are sort of at a good exit rate here for 2023 and it seems like a lot of those legacy projects are now off the books. Thanks a lot.

Yes, so Brian, there's a lot to unpack in your questions, so let me go take it piece by piece. From how to think about the 2024 margins, we are signing contracts in the 10% to 15% margin range and that is still the case. And but the Q4 margin is a good proxy for how to think about 2024 margins, right? And as we have a little bit more contribution from our services business and our digital business, it may take up a little bit, but Q4 is a good proxy for 2024, and that will continue to increase as we go from 2024 to 2025, so that's one. In terms of legacy, you're right, we are done with most of our legacy projects. I think there's about $100 million to $150 million that trickles into 2024, mostly done in the first half of the year. So as you do the quarterly profiling and the calculus of 2024 margins, keep that in mind. And then you're right, the business is performing really well. I would want to point out the fact that, one, we've been fairly disciplined from an overhead perspective, and that's important because as we turn the page to 2024, the focus is going to be a lot on EBITDA dollars, right? And that is a better measure of profitability than gross margin or gross margin percent, and I think that's what we want the investor community to be focused on. That is also reflected in our comments that we get close to EBITDA breakeven in the current quarter or in the fourth quarter. And then I'll round up my comments from a cash perspective. We generated cash in the third quarter. My comments talk about cash breakeven in the fourth quarter, which means we'll generate cash in the back half of the year. So that is another area we are focused on. So EBITDA and cash become much more relevant than gross margin or gross margin percent. My last comment before I pass it on back to you is we've been very pleased with the performance of the business, and what that's got us is it's got us to be WKSI enabled. So WKSI is a well-known seasoned issuer and we intend to file a universal shelf tomorrow after the market for good housekeeping and that's really reflective of the confidence that shareholders have placed in our business that allows us to be WKSI enabled.

My only comment on the filing is that we do not intend to raise capital in any way during 2024. We don't need it, but I think this is just for housekeeping.

And that's consistent with the comment though that we had in my script.

Okay, yes, fair enough, I appreciate all that additional color. I guess the second question shifting to maybe the top line here, I know even with the pull forward it seems like you had here and being able to raise the 2023 guidance, you're comfortable with the 35% to 40% growth trajectory into 2024. Can you maybe give us a sense of how much of that is just additional demand bookings activity you are comfortable with heading into next year and how much of that is maybe conversion timelines? It seems like some of those are maybe pulling in a little bit. If you can provide a little bit more color around that. And then I'll pass it on. Thanks, guys.

Yes, we are kind of the way I will maybe phrase it is that when you looked at our backlog and you looked at our 2024 revenue, we're covered right in line with where we were last year. So we feel very, very confident that the backlog that we will convert in 2024 is what we will do in this quarter and next. That we will be more than enough to meet the 35% to 40%. So we feel very, very confident about it. So we will provide you exactly how much of our 2024 revenue is covered by backlog in our next earnings call; we will provide guidance on 2024. So we don't want to get ahead of ourselves, but we are in a similar position to where we were last year, when we were doing this year's planning process.

And our idea was great.

Sounds great. I appreciate it.

One moment please. Our next question comes from the line of Justin Clare of ROTH. Your line is open.

Yes. Hi everyone. Thanks for taking the questions.

Hey, Justin, how are you?

I'm doing well. I wanted to ask you about project timelines. So this quarter you increased the revenue guide again here and so I was wondering if you're seeing project timelines further compressed. I think you were at around 18 months a little while back here, but things have been trending lower. So where are timelines today? And do you see a path to continuing to shorten the timelines potentially to a time frame of 12 months, say?

In general, we don't see timelines compressing. I think that as we looked at our financial planning, we see still projects around the 18 months that we told you. There is work to be done. It clearly, there are two drivers for this: one is supply chain and the lead times we need for our supply chains to deliver the product sometime, and the other one is ensuring that our customers are ready with their infrastructure. So between the two, I think that today I think we can work with the supply chains to accelerate it. There are customers we can also help them to stand, but there's a limit to that. But today what we have is an 18-month plan. I mean I think it hasn't gotten any better.

Got it, okay. And then just want to ask also about your U.S. manufacturing. You signed an agreement here with AESC. How much of that agreement really covers your need for U.S. cells? Does that cover all of your anticipated U.S. cell supply or are you looking for additional suppliers potentially? And then also maybe if you could just speak more broadly about the plan for potentially expanding your capacity footprints in the U.S. I think your plan is 6 GW hours in fiscal 2024. How should we think about potentially moving above that?

Yes, I think that in terms of we believe this deal with AESC will essentially cover a large amount of our U.S. demand. We believe that the U.S. market will see competition between U.S. manufactured sales and imported sales, and we will be working on both sides of that fence. But we believe that what we have is enough for our expected demand for the next years. Sorry your second question if you don't mind repeating. On module manufacturing, we built this plant with the ability to increase the output if we want for the module manufacturing. Most likely depends on how it goes; we can very, very quickly double the production and maybe triple it. So we are, but we will see how it goes and then make the decisions at that time.

Julien Dumoulin-Smith of Bank of America.

Good morning, Julian, how are you?

Hey, Julian. It's actually Alex for Julian. Thanks for taking the question.

Hey Alex, how are you?

I am all right, thank you. Listen, keeping on the theme on sort of the U.S. piece here, congrats on the AESC announcement. Let me ask you this, how sustainable of an advantage do you think that this is? Is there any sort of value wedge that you think you can create there relative to pricing and where you're able to get those batteries? And then I'm not sure if you mentioned it, but are those raw material indexed? I know that you have some sort of indexation on some of the other contracts. Just curious as far as you guys having an early mover advantage, if you could elaborate on that a little bit?

I talk to our customers, and they tell me that we are the only ones offering this solution and engaging with them about it. It's hard to say how long our advantage will last or how far behind other suppliers are. Some believe that U.S. battery manufacturers won't be competitive, but I disagree and feel we'll demonstrate our capability. It will become clear once they see that we can provide a competitive project and showcase a U.S. identity. I expect they may try to replicate our offering, but they could be a few years behind. It’s tough to gauge, especially since announcements are rare. Customers tell me that this topic isn't widely discussed. Regarding your question about capturing higher margins, we believe it's possible. We are starting conversations with our customers about this, but it's a complex plan, making it difficult to provide specific details. However, we anticipate our customers will see significant benefits, and we should share some of those gains with them. We expect to convert to higher volumes by offering both imported and U.S.-compliant sales. We won't focus solely on one market; we'll accommodate customers who prefer either option. We're truly excited about this opportunity and believe it will strengthen our position in the U.S. market.

Yes, no, no, fair enough. Just two quick follow-ups sort of cleanup questions if you will from me, maybe for Manu. Just on the delays in Q2, should we expect any deferred flowback of LDC? I know you guys have seen that in some historical examples? And then on the deposits piece, I mean do you expect that to be entirely fronted by customers or is there some sort of working capital dynamics between cash in from them versus cash from you guys on the deposits piece, you can clarify?

Yes, so I think let me take the two questions in order. From a margins perspective, I think any potential LDC kind of boxed it in really well in our third quarter actuals and our fourth quarter guidance. So I think that kind of clears that. In terms of how to finance the $70 million of deposits for the first half of '24, I think a good assumption from a modeling perspective is a little over half funded by the customers and the rest funded by our liquidity or any working capital lines that we have.

Got it. I appreciate the clarifications. Thanks, guys.

Thank you. One moment please. Our next question comes from the line of Ben Kallo of Baird. Your line is open.

Great. Good morning, guys. Thanks for taking my questions.

Good morning, Ben. How are you?

Good morning. Good, thank you. So sticking on AESC, could you guys talk a little bit about your due diligence with them and how you chose them? And then I think they have one plant that's operating and one under construction, but where you would begin the cell from with them? And then I have a follow-up on a different topic.

Yes. We don't want to disclose too much, but I'll tell you is one of the main reasons why we picked them and decided to work with them because we believe that in the current environment they were further ahead than anybody else in offering this, and they already have the technology. They have the supply chains working very, very well. So they are very, very good. Additionally, AESC is one of the Tier 1 battery manufacturers. They have been working globally or in the U.S. for some time.

And my follow-up question on a different topic is just market dynamics. And I'm thinking about Tesla talking about having pricing power in the market for their storage business. I just wanted to understand if you guys are seeing that and what's causing that? And just the competitive dynamics and how it's changed, either some of your competitors are not as financially strong as you guys or new competitors or anything like that, but then more so on the pricing power?

I believe that the competitive environment has not shifted in our favor. It's a highly competitive market, with Tesla as a formidable player among others, including many smaller companies that lack our capabilities. However, we are still a long way from a situation where the industry consolidates into a few dominant players. We haven't reached that point yet. For us, competition drives our internal efforts to maintain pricing, but price alone isn’t the key factor in ensuring our customers receive products that satisfy their requirements. While price is important, factors such as performance, financing options for our investments, and the guarantees we offer are crucial to ensure that our clients feel secure about our assets moving forward.

All right, congrats on the results, guys. Thank you.

Thanks, Ben.

Thank you. One moment please. Our next question comes from the line of Pavel Molchanov of Raymond James. Your line is open.

Good morning.

Hey Pavel, good morning. How are you?

Good morning. Recognizing you're going to give kind of more detailed guidance a bit later, but I'm just curious, 2024 has a much more backend weighted revenue picture compared to this year, and I'm just curious why the difference in sequencing?

So I think the way to think about '24 from a first half, second half perspective is as follows: if you look at how the '23 guidance has evolved from our original guidance, which I think the midpoint was 1.55 or 1.6 to where we are, which is closer to 2.05, we've kept the growth rate the same, roughly at 35% to 40%, right? And that adds incremental between $600 million and $700 million of revenue, and given the cycle times of our projects, that's more back-end loaded compared to the first half. So I think the split between first half and second half is largely driven by the strength of our order book. As we've gone through '23, that has resulted in a higher revenue for '24, but it's coming in the back half of the year. We feel really confident, and I'll point to the fact that we have $2.9 billion in backlog as we enter the fourth quarter. More importantly, we have close to $12.5 billion in pipeline. So we feel very good about where we sit for '24.

Okay. Let me follow up on the digital AUM kind of coming down in the quarter. You mentioned there was a nonrenewal by a particular customer. Is there a certain churn rate or some other way to just think about digital AUM more broadly?

Our churn rate is quite low, around 5%. The customer who did not renew was actually transferred to another company that preferred to use their own system along with additional assets. This situation falls within our 5% churn rate, which remains very low. I mentioned it because it showed up in the numbers, but we also secured more than 1 GW, indicating a strong quarter for our digital business overall. These occurrences can happen occasionally, and as long as they remain within the 5% threshold, we have no indications that we will finish the year outside of that rate, which is typical for our business.

Understood. Thanks very much.

Yes, right.

Thank you. One moment please. Our next question comes from the line of Kashy Harrison of Piper Sandler. Your line is open.

Thanks guys. Hello, good morning.

Hey good morning. How are you?

Doing well, thank you. I wanted to revisit the topic of cell sourcing. You mentioned U.S. health capacity from AESC and highlighted Northvolt, but you still have significant exposure to Chinese cells today. Looking ahead a few years, do you expect to secure enough U.S. cell capacity exclusively for U.S. projects, with European sales supporting only European projects? Additionally, how will this impact your Chinese exposure a few years down the line?

In our planning scenario, we don't anticipate a situation where the U.S. will be completely supplied by domestically manufactured cells, nor will Europe. This process is going to take some time. Chinese manufacturers have indeed invested significantly in technology. It will require a considerable amount of time for European and U.S. manufacturers to reach that level of capability. This is our perspective based on our collaboration with Chinese suppliers, and we aim to maintain that relationship for the foreseeable future. They provide us with excellent products, have a solid product roadmap, and we collaborate effectively with them. Therefore, we wish to continue this partnership. Regarding trade, I envision a world with free trade, where we can source batteries from various locations, as I believe that would be advantageous for everyone involved.

Thank you for your insights, Julian. I have a follow-up question for Manu. I appreciate your comments on cash for Q4. On a multi-year or target basis, could you help us understand what you anticipate the cash conversion for this business will be? Once you achieve your long-term margin goals, do you see this as a 50% EBITDA to free cash flow business? Or do you think it will be 60% or 70%? I would like some insights on your expectations for EBITDA conversion to free cash flow in the long term.

So Koshi, I think we laid out a cash model maybe two earnings calls back. And I think that's a good way to think about the model going forward. And the model goes something like this: we have our EBITDA. We have some amount of CapEx. And in the last few years, it's been high single digit, low double digit. That will opiate a little bit depending on specific needs of the business. And then from a working capital piece, which is the heart of your question, I think what we've said is take the revenue growth year-on-year and take 10% of that as a proxy for the working capital usage. And I think that's a pretty good model to think about as you plot out the next couple of years when we get to positive EBITDA territory and beyond.

Thank you.

Thank you. One moment please. Our last question comes from the line of Tom Curran of Seaport Research. Your line is open.

Good morning.

Good morning, Tom. How are you?

Good, Julian, good. Over in the EU, when it comes to this churn in SKU of policy proposals, initiatives, regulatory changes that the European Commission has been cooking up in Brussels, whether it's the green industrial plan, repower EU or this just past renewable energy directive, is there anything in there that's specifically targeted towards the storage transmission market and expect it to expand and/or accelerate your set of storage as transmission opportunities?

The transformation rules are highly localized, requiring us to take a market-by-market approach. While Europe has transmission systems in place, our current efforts are focused on individual markets, like Germany and Lithuania. We have not engaged in a comprehensive pan-European strategy, and that will take time. It's important to recognize that European regulations typically allow free access to transmission systems. One of the regulatory challenges we face when entering this sector is that many regulatory frameworks prevent transmission operators from dispatching assets. However, once a battery is integrated into the transmission line, the system operator or transmission owner must actively manage the battery storage for demand or dispatch. This presents a legal issue we’ve successfully navigated in Lithuania and Germany, and we’re working to address it in the U.K. and Ireland. It poses a challenge to some regulators because it blurs the lines between the various segments of our industry—demand, distribution, transmission, and generation—where traditionally, these segments have been regarded as separate and independent. As our technology becomes more integrated into the grid, those distinctions are starting to fade.

That's very helpful clarification, thank you for that. And then Manu, in the quarter, you incurred CapEx of $7.3 million related to software investments. Would you expound upon the nature of that spending and provide us with an estimate of software CapEx for fiscal '24?

Yes. So let me help start with your '24 question first and then kind of bring it back, because I think it goes to our long-term view on how we think about software as a key driver of the business. Right? I think we've talked about, call it, double digits, low double digits type of CapEx spend. That includes capitalized software as well. And it covers both our operating system projects that we are doing as well as the digital initiatives to advance both Nispera and Mosaic and that adds more capabilities to our current functionality. So that kind of encapsulates where we've been spending money for this quarter and going forward.

Yes, this is Rebecca. Leading the technology team, we have a large group of people working on the operating system software platform, and we are currently revitalizing that platform. This is a significant aspect of our financial outlook, particularly in terms of capitalization. We are following our product development plans to enhance the software with new features for various markets, primarily driven by labor, which creates opportunities for capitalization. As Manu mentioned, this is also linked to our investments in cloud-based software. Again, this primarily involves labor and the delivery of new features, including those based on artificial intelligence.

Got it. Thanks Manu, thanks for that additional color, Rebecca.

Thank you. This concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.