Fluence Energy, Inc. Q4 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Fluence Energy Inc. Fourth Quarter 2023 Earnings Conference Call. Please be advised that today's call is being recorded. I would now like to turn the call over to Lexington May, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Fluence Energy’s fourth 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; Rebecca Boll, our Chief Products Officer; and Ahmed Pasha, our incoming Chief Financial 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 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 similarly 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 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. Also, note that while Ahmed is participating on today's call, he will not be participating in the Q&A session. Thank you very much. I'll now turn the call over to Julian.

Thank you, Lex. I would like to start by warmly welcoming our investors, analysts, and employees who are participating on today's call. This morning, I'll provide a brief update on our business, and then review our progress and our strategic objectives. Following my remarks, Manu will discuss our financial performance for the fourth quarter, and then I will discuss our outlook for fiscal 2024. Before we begin our discussion on the fourth quarter results, I'd like to spend a few moments addressing the announcement we made a few weeks ago. Manu has decided to step down as CFO of Fluence. He has done a remarkable turnaround job here, and, as a result, he caught the attention of others. He received an offer he could not refuse, and more importantly, one that we could not match. As such, he will be leaving effective December 31st to become CFO of another company in a different industry. On behalf of the board, I would like to send a sincere thank you to Manu for the value he helped create at Fluence over the past 15 months. Additionally, I would like to extend my warm welcome to Ahmed Pasha, our incoming CFO. Ahmed will officially assume this role on January 1, thus ensuring a sufficient transition period. Ahmed comes to us from AES, where he had a 30-year career, most recently serving as the CFO of the Utility Business Unit. I personally have worked with Ahmed for many years and I'm excited to continue that at Fluence. Now, I would like to turn the call over to Ahmed to make a few remarks.

Thank you, Julian, and good morning, everyone. I am excited to be joining Fluence at a time when the energy transition is achieving critical momentum, presenting so many opportunities for the company and for energy storage in general. As some of you may know, I have had some experience working with Fluence during my tenure at AES, including during the IPO process and more recently as CFO of the US Utilities Business, where Fluence is playing a critical role in helping to transform our energy mix. Since the announcement about two weeks ago, I have had the opportunity to meet with some members of Fluence’s team, and I'm very impressed with their experience and commitment to enabling the global energy transition. I look forward to working with them to help Fluence achieve its ambitious growth and profitability goals, increase shareholder value, and deliver on its mission to transform the way we power the world. I would like to express my appreciation to Manu for his invaluable contributions to Fluence, particularly the strong foundation he has established to position us for continued success in the future. In the near term, I will be getting up to speed on things, but I expect to meet with many of our investors and analysts in the coming months. I look forward to hearing their views and sharing how we plan to achieve our key financial and strategic objectives. With that, I will turn the call back to Julian.

Thank you, Ahmed. Beginning on Slide 4 with the key highlights. I'm pleased to report that in the quarter, we recognized $673 million of revenue. We continued to experience strong demand for our products and services, with new orders totaling approximately $737 million, highlighted by our solutions business contracting 2.1 gigawatt hours, our services business adding 1.6 gigawatt hours, and our digital business adding 1.8 gigawatts of new contracts. Furthermore, our signed contract backlog as of September 30 remains at $2.9 billion due to the acceleration of select projects ahead of schedule. Turning to adjusted EBITDA, we delivered approximately $20 million for the quarter. This is a tremendous milestone, as we achieved this level ahead of schedule. As you recall, we expected to be close to adjusted breakeven for the fourth quarter. However, we were able to accelerate select projects that resulted in high revenue and margins for the quarter. One of the areas we're concentrated on is our organizational speed, especially reducing our project cycle times. We see a lot of value in reducing our cycle times from roughly 18 months to closer to 12 months. We believe it will take us at least two years to reduce our cycle times down to 12 months. This quarter’s results are a perfect example of what speed can do to bring increased value to both our customers and our shareholders. Lastly, our services and digital businesses, which together represent our recurrent revenue stream, continued to gain traction. Our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains about 90%. As we have noted previously, we typically see a lag between signing solutions contracts and entering into a service contract, which is why we believe that cumulative attachment rate is important to monitor. Turning to Slide 5, I'd like to highlight some of our accomplishments of the past fiscal year. As you may recall, a year ago we embarked on the transformation of our business. I’m pleased to report that we delivered on our commitments to the market. We grew our annual revenue by 85% and achieved our first profitable quarter. Importantly, we exceeded our original annual revenue guidance by more than $600 million, thanks to improved execution, easing supply chains, and project timeline acceleration. We burned through almost all our legacy lower margin backlog, and we diversified our supply chain, including securing US-made battery cells with AESC. With the rollout of Fluence OS7, we have integrated Nispera into our hardware solutions on a go-forward basis such that now every new storage solution cell has Nispera bundled input. We built out our India technology center, and we published our inaugural sustainability report, reflecting a successful year that sets the tone for the years to come. Turning to Slide 6, I would like to discuss progress on our five strategic objectives. As you recall, at this time last year, we laid out five strategic objectives that will guide our actions and serve as benchmarks for our investors who monitor and measure company performance. As we generated our first profitable quarter, I'm pleased to say the first phase of our transformation is complete. The second phase is just getting started, which will continue the theme of profitable growth, now measured through the growth of our nominal adjusted EBITDA and annual recurring revenue alongside the other strategic objectives that will continue to guide us on the second phase of our journey. First, on delivering profitable growth, I’m pleased to report that we exceeded our fiscal year 2023 guidance for both revenue and adjusted gross profit. Today, we're initiating guidance for fiscal 2024. We expect total revenue for fiscal 2024 to be between $2.7 billion and $3.3 billion. In line with our commitment from our last call, we're initiating guidance for adjusted EBITDA for fiscal 2024 to be between $50 million and $80 million. Second, we'll continue to develop products and solutions that our customers need. As such, I'm pleased to report that in October, we launched Gridstack Pro, our larger enclosure providing higher density, faster installation, enhanced performance, and industry-leading safety. In conjunction with the launch of Gridstack Pro, we also launched Fluence OS7, the latest Fluence operating system designed with enhanced capabilities and fully integrated with the new Fluence Battery Management System, which I will touch on more in a few minutes. Third, I'm pleased to report that we have secured all our battery needs for fiscal 2024 and 2025. Fourth, we'll use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we're initiating guidance for our annual recurring revenue from our combined service and digital businesses. We expect to generate around $80 million of ARR by the end of fiscal 2024. And finally, our fifth objective is to work better. I'm proud to say that we have recently launched a new $400 million asset-backed lending facility or ABL. This credit facility is secured by our US inventory, and we expect it will provide us increased flexibility. More importantly, we believe that the ABL facility provides us additional tools to manage our working capital as we continue to grow. Turning to Slide 7, demand for energy storage continues to accelerate. Our pipeline now sits at $13 billion, which is an increase of approximately $600 million from the third quarter, and a 50% increase compared to this time last year. Additionally, our backlog remained consistent at $2.9 billion, even after recognizing almost $675 million during the quarter. Importantly, we had several contracts that were signed just subsequent to quarter end, amounting to approximately $400 million, which provides us with strong visibility to achieving our 2024 revenue guidance. This is the eighth consecutive quarter we added more backlog than revenue recognized, further illustrating the growing demand for energy storage. Based on the conversations we are having with our customers and potential customers, we're expecting to see year-over-year topline revenue growth from fiscal 2024 to fiscal 2025 of approximately 35% to 40%, showcasing the robust market for utility and energy storage. Turning to Slide 8, as I mentioned earlier, we launched our Gridstack Pro and OS7 in fiscal year 2024. These product launches are something our stakeholders expect periodically from us, as we continue to innovate and identify new ways to serve our customers’ needs. The Gridstack Pro solution integrates six battery racks and is designed for the largest and most complex utility scale projects globally. Gridstack Pro will offer our customers an advanced product with leading safety measures, faster deployments, first-class reliability, and the flexible model of design that defines our product offerings. More importantly, for the US market, the Fluence battery pack will be available with US manufactured battery cells and modules. This positions Gridstack Pro as one of the first energy storage solutions to qualify for the 10% investment tax credit domestic content bonus under the Inflation Reduction Act. In conjunction with Gridstack Pro, we launched OS7, the next generation of our operating system. This iteration is meant to handle bigger and more complex projects and can reliably control more than a gigawatt hour system, and it's fully integrated with the Fluence Battery Management System. The software also provides a foundation for future enhancements to the architecture and enables component commoditization just as DC-DC converters. It provides new tools targeted to reduce our commissioning times, which is key for the company. Interestingly, OS7 comes standard with our Nispera platform already preloaded. This is an important feature as we expect to provide all our product deployments with basic Nispera access for a certain amount of time, after which customers will need to sign a longer-term contract if they wish to continue using the APM platform or wish to upgrade to additional features. Turning to Slide 9, I'm pleased to say that earlier this week, we secured a new $400 million ABL facility. This provides us with an additional tool to help manage our working capital. The new ABL facility features a lower cost of capital relative to our legacy revolving credit facility by approximately 50 basis points and is secured by a US inventory balance, and is expected to provide us with more flexibility. As our US inventory balance increases, so does our borrowing capacity. This ABL facility replaces our smaller $200 million revolving credit facility that required cash collateralization. As we enter fiscal year 2024, we believe we have a very strong balance and ample working capital facility necessary to scale our platform and achieve our 2024 guidance. Shifting to Slide 10, we're introducing guidance for our annual recurring revenue, ARR. For our combined digital and business enterprises, our objective is to reach approximately $80 million in ARR by the conclusion of fiscal year 2024, implying a notable increase of 40% from the preceding year. This target is well supported by a robust service attachment rate exceeding 90% and a full 100% attachment rate for Nispera moving forward. Additionally, our strategic efforts are concentrated on advancing our Mosaic offering currently operational in three markets: Australia, CAISO, and ERCOT. It's essential to note that we're in the process of refining this platform, with substantial contributions not anticipated before 2025, as previously communicated. In conclusion, I'm pleased with the achievements of the fourth quarter, although we're mindful there's still work to be done. We will look to continue this momentum as we progress into a new fiscal year. I will now turn the call over to Manu.

Thank you, Julian. I will begin by reviewing our financial performance for the fourth quarter, and then I will pass it back to Julian to discuss our guidance for fiscal year 2024. Please turn to Slide 12. Our fourth quarter revenue was $673 million, an increase of 52% from the prior year same period and 25% above the third quarter. We continued to execute well as we were able to accelerate some of our legacy backlog previously anticipated for fiscal year 2024, resulting in higher-than-expected revenue for the fourth quarter. We continue to expect a small portion of our legacy contracts will be recognized in the first quarter of 2024. Looking at our adjusted gross profit for the quarter, we generated approximately $78 million, or approximately 11.6%, in line with the commitment discussed on our third-quarter call and reflects an increase from our third-quarter margins of approximately 4.4%. More importantly, this is an increase from the previous fiscal year of 2.8%. I'm pleased to say we have demonstrated cost discipline as our operating expenses, excluding stock cost, as a percentage of revenue, continue to decline and ended up around 9% for the quarter. From a year-over-year comparison, our 2023 OpEx percentage of revenue, excluding stock compensation, came in around 10%, which is below our 2022 results of around 15%, further illustrating our cost discipline. As a result of our strong execution in the fourth quarter, we were able to generate $20 million of adjusted EBITDA, and as Julian mentioned, this signals that the first phase of our transformation is complete. We have now become profitable, and our focus will shift to growing our nominal adjusted EBITDA and ARR, which we will discuss further. Turning to our cash balance, I'm pleased to report we ended the fourth quarter with $463 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $45 million from the third quarter. As Julian mentioned, we secured a new $400 million ABL facility. This facility replaces our existing revolving credit facility and upsizes the amount of available borrow and should enable us to better manage the peak-to-trough elements of our working capital. When you look at our total cash balance combined with our new ABL facility and supply chain financing, we have ample liquidity, putting us in an excellent shape to capitalize on the massive time in front of us. Please turn to Slide 13. From a cash standpoint, we increased our total cash position by 11% relative to the third quarter. For 2024, we'll continue to invest in technology, resulting in an expected use of cash of approximately $85 million. From a recurring CapEx assumption, a good run rate is between $20 million and $25 million, as this is the level we expect in a steady-state environment without large non-recurring investment items such as the technology, IT, and systems investments we expect to make in fiscal 2024. As we mentioned on our last call, our US battery cell supply agreement with AESC called for a downpayment 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 liquidity and customer deposits for these batteries. The first $35 million will be paid in Q1 of fiscal year 2024, and another $35 million will be paid in the second quarter of fiscal year 2024. As Julian and I mentioned earlier, we have a strong balance sheet entering 2024 and have ample cash and facilities to support our 2024 guide and investments that will support multi-year industry growth. We also expect to generate free cash flow in fiscal year 2025. Before I turn the call back to Julian, I would like to express my appreciation to the Fluence board, management team, employees, and shareholders for their trust. Serving as the CFO of Fluence has been one of the highlights of my career. If I were to participate in the energy transition space today, this would be my preferred spot. I take comfort in knowing Fluence is in an excellent position from a balance sheet perspective as I pass the baton to Ahmed, who will take Fluence into the next chapter. With that, I will turn the call back to Julian.

Thank you, Manu. Turning to Slide 14. As we previously discussed, we're initiating guidance for fiscal 2024 of revenue between $2.7 billion and $3.3 billion. We expect our fiscal 2024 adjusted EBITDA to be between $50 million and $80 million, and we're targeting our ARR to be around $80 million by the end of fiscal 2024. I'd like to point out that our revenue guidance represents an increase of $300 million when compared to our prior fiscal year 2023 guidance midpoint plus our implied revenue growth of 35% to 40%. We now expect a fiscal 2024 revenue split of 30% in the first half and 70% in the second half, which is an improvement to what we previously communicated to the market. As a result of this, we do expect our first quarter to produce negative adjusted EBITDA due to lower revenue from the execution of the remaining legacy contracts. From a margin perspective, we expect fiscal 2024 adjusted gross margins to be between 10% and 12%, which is an improvement from the fiscal 2023 adjusted gross margin of nearly 7%. From a cash standpoint, we currently expect to use approximately $85 million of cash in fiscal 2024, mostly funding non-recurring incremental investments in systems and IT infrastructure necessary to support our continuous growth. When looking out to 2025, we expect 35% to 40% year-over-year topline revenue growth. Additionally, we expect to begin generating free cash flow in fiscal 2025. Turning to Slide 15, we established ourselves as the preferred choice for utility scale storage solutions. Our competitive advantage is fortified by being able to offer our customers a full breadth of features, including bankability, scale and supply chain management, power electronics engineering, innovative digital software services, safety, and cybersecurity. While some of our competitors may focus on only a couple of these elements, we often win because we aim to excel in all and provide them universally to our customers. This is corroborated by the 2023 S&P Global Battery and Storage Systems Integrator Report, which ranked the top 10 integrators globally based on install and contracted capacity. I’m pleased to say that Fluence was ranked number one both globally and in the US. In conclusion, I want to emphasize the key takeaways from this quarter’s results. Firstly, we had robust financial performance contributing to a record-breaking annual revenue. Attaining profitability for the first time is a significant milestone, and we aim to capitalize on this achievement in fiscal 2024. Second, we proactively secured our future by solidifying our battery supply for fiscal years 2024 and 2025, thus ensuring our ability to meet our growing demand. Finally, the introduction of our new $400 million ABL facility provides us with an additional tool to continue capturing the robust growth of utility scale. As a reminder, while Ahmed is participating on today's call, he will not be answering any questions. This concludes my prepared remarks.

Thank you. Our first question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

Good morning. Thanks for taking my question. So, maybe just to start, a lot has been made of the interest rate environment impacting project timing in the general renewable space and economics. Your results speak for themselves, but what impact, if any, are you seeing on your business from the change in interest rates? Thank you.

Right. Thanks, George. As we have talked in the past, we work with top-tier developers in the US where this happens. When you look at them, they don't really see any problems raising capital, accessing capital, or coordinating their projects. So, we have not seen any delays due to the cost of capital or access to capital in general. And I'll tell you even more, in our case, as you all know, our product costs have come down, with battery prices dropping significantly this year. In a way, when you do the math between our lower costs and the fact that the cost of money has gone up by about 100 basis points, essentially it's a wash or, in fact, you might do even better returns than what you experienced in the past. So, we haven't seen any real effect today in our customer segment. We do get the same information you receive from other parties who we tend not to work with, where they've faced some problems raising money or raising it competitively, but we haven't observed that in our group. We’re segmented with a top-tier group, and that top tier has essentially had no problem accessing capital.

Thanks. Maybe I can ask one follow-up. Recently, one of your competitors, Wärtsilä, announced that they're exploring strategic alternatives for their energy storage business. Any thoughts on that and any impact it could have on your strategy going forward? Thank you.

I was surprised by it because in the prior quarter, they stated that this was going to be the growth engine. In this quarter, they state that it's difficult to know. We've been trying to understand their reasoning. I prefer not to speculate at this stage, but I was surprised because this market offers tremendous growth. It presents an incredible opportunity to create value for shareholders in the new energy space. So, why they are revising their view on the market, I have no idea. From what I've been reading from their investors' call, the rationale wasn't clear to me. However, we're on the other side of that spectrum and doubling down on this opportunity. This is a once-in-a-lifetime opportunity; it doesn't get any better than what this market offers today.

One moment for our next question, please. Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Good morning. Thanks for taking the questions. First off, Manu, congrats and best of luck in your new role, and Ahmed, I'm looking forward to working more closely with you moving forward. A couple of questions I had was, I appreciate the ARR breakout of $80 million at the end of this year or the end of the fiscal year, and it seems like 40% growth versus last year's number. If I look at your bookings, though, in services and digital, it's growing a lot faster. So, can you provide some sense of how fast you can grow that ARR balance off of the $80 million, considering your bookings volume is growing at a much faster rate across services and digital? Also, what margins are implied in that ARR balance? I presume it's pretty high, but can you give us a sense of what the range is?

On the growth rate, our view is that our ARR should grow at a higher rate than our solutions business. The concept is straightforward. We have Nispera and Mosaic in our service business, with Nispera roughly around 100% growth and the services growing at a comparatively lower rate. Thus, I do think we will see the ARR growth exceeded. Our services business is anticipated to grow faster than 35% to 40% that we've set for last year. Regarding margins, they differ: for our digital business, they're more around 70%, while our service business is between 20% and 30%, depending on the type of service deal agreed upon. Hence, there's not a singular combined margin, but you should conceptualize growth occurring primarily in the services now with digital becoming increasingly relevant.

That's great. I appreciate that clarification. Secondly, looking at that kind of preliminary fiscal 2025 revenue guidance of 35% to 40%, if you hit the midpoint, that's quite robust, putting you in the $4 billion topline range. It sounded like you were mostly growing off of customer conversations and feedback, but can you share any insights into the contractual agreements or other indicators you're relying on to feel comfortable with that growth?

Brian, I lost you there for a moment. You were discussing the 2025 robust growth and then got cut off. Can you repeat that?

Yes, hopefully that's clearer now. I'm just curious beyond customer conversations: do you have MSAs, contracted backlog, or other key indicators that provide assurance of the 35% to 40% additional growth into fiscal 2025? Also, regarding battery supply for 2025, is it fixed pricing, or are you exposed to any kind of cost volatility?

On growth, we see our pipeline as the best measure of our capacity for growth. We added $600 million to our pipeline this last quarter while converting $735 million to our backlog. Essentially, we added about $1.3 billion to the pipeline this quarter. We also have leads and projects we’re working on with a good probability of materializing within the next two years. Our strong customer interactions give us confidence in the 35% to 40% growth forecast for 2025. As for pricing, we base our planning on our current cost view; as long as prices stay around where we think, we should be fine. Lower prices should increase project volumes without negatively impacting our growth projections.

Thank you, I appreciate that insight. Regarding the operating cost absorption and its implications for EBITDA growth, do you envision that it'll lead to greater margin expansions?

Our projected gross margins can fluctuate, but we envision an improvement. Should the US domestic content offering prove advantageous, it might push us toward the higher end of the 10% to 15% gross margin range. In summary, strong execution capabilities and the potential for margin expansion through domestic content will contribute positively. Thank you, Brian. This concludes the prepared remarks. Operator, we’re now ready to take questions.

Thank you. One moment for our next question, please. Our next question comes from Andrew Crocco with Morgan Stanley. Your line is now open.

Great. Thanks so much for taking the question. Just a follow-up on Brian's query; regarding the 2025 battery supply, have you locked in pricing with your suppliers? If battery prices continue to fall and you have locked in pricing for 2025, could it complicate signing contracts with a projected 10% to 15% gross margin?

We hold contracts with suppliers aligned with the current market environment, where prices drop. Thus, we are not committing to significant volumes or fixed prices. Regarding margins, we are confident that prices dropping will not negatively impact our margin forecasts. In fact, lower pricing is an opportunity, not a risk. As prices decrease, more projects will meet investors' return criteria, thus increasing volume instead of diminishing it.

The margins have held up; battery prices are materially different today compared to a year back.

Understood, appreciate the context. One last follow-up: can you share how much of your backlog is new renewable energy projects versus retrofit opportunities?

Presently, more than 50% of our backlog is comprised mostly of new projects. Retrofits are in earlier phases. However, client discussions about retrofits or replacements are ongoing but not the majority of our current offerings, which lean heavily towards greenfield projects.

Thank you for your questions. One moment for our next question please. Our next question comes from Joseph Osha with Guggenheim Partners. Your line is now open.

Hello. Congratulations on the great outcome. I'm curious about gross margins and how operating cost absorption impacts growth. Also, can you clarify if you anticipate receiving material benefits from 45x credits in FY 2025?

Yes, I can confirm we do anticipate benefits from 45x credits, but from a modeling perspective, I’d urge budget considerations to stay within the lanes previously discussed.

Regarding 45x, we think it'll be within our guided range, thereby not altering our expected implications. It's important to remember we are in the process of establishing new production lines, and capitalizing on these financial incentives might assist with associated costs.

Understood. And lastly, how's the business mix looking between storage-only freestanding products and those linked to wind and solar?

We see that most installations outside the US operate with standalone energy storage. In the US, we’re witnessing more projects involving battery storage only becoming commonplace. The transition will take time as these projects must navigate through permitting and planning processes.

Thank you. One moment for our next question, please. Our next question comes from Dylan Nassano with Wolfe Research. Your line is now open.

Good morning. Thank you for taking my questions. Welcome, Ahmed, and best wishes to Manu. Regarding the domestic content offering: how are customer conversations evolving around it? How much volume are you seeing it drive, if any, within the pipeline?

Our volume growth is based on our perspective of domestic content. We note that there's potential for margin expansion, and we are currently engaged but find it's too early to estimate our margin benefits. Customer discussions are going well, but determining volume benefits will depend on future developments. We anticipate modest revenue increases post-2024.

Thank you. Can you provide insight into the geographic breakdown of your current backlog? Where are the incremental opportunities surfacing?

Our geographic distribution mirrors our revenue—two-thirds from the US, one-third from other markets. We see new growth emerging in Canada, along with ongoing strong engagement in Australia and Germany due to recent projects there. Overall, the US remains our leading market.

Thank you for your questions. One moment for our next question, please. Our next question comes from Ben Kallo with R.W. Baird. Your line is now open.

Just following up on the last question. Can you help us understand how your cell supply aligns with your geographic opportunities? How do you foresee balancing US cell supply with domestic content and contracts?

We manage the supply of batteries globally. Our US supply agreement is structured to provide flexibility and ensure that supply is reliable across our markets. Both domestic and imported contents will coexist as we grow. In the early stages, a mix of domestic and imported batteries will serve the US market but it will take time to stabilize.

You've made acquisitions in the past; are there specifics areas where you see future opportunities in technology? Are you looking to pursue any acquisitions soon?

We've stated our intention to avoid M&A until we achieve consistent profitability. My view on acquisitions includes potential opportunities to enhance our product development. However, currently, we are fully focused on leveraging our organic growth.

Thank you. One moment for our next question, please. Our next question comes from Kashy Harrison with Piper Sandler. Your line is now open.

Good morning. Thank you for taking my questions. I'd like some clarity on the gross margin guidance. You mentioned fiscal 2024 guidance at 10% to 12%, but Manu discussed a range of 10% to 15% for fiscal 2025. What could possibly push you to the high end of this range?

Factors that could impact margins positively include our operational execution and success with US content offerings, which may enable us to capture higher margins. Excellent execution could take us to the higher end of our guidance.

If Fluence begins generating free cash flow in fiscal 2025, how will you prioritize capital allocation? Are you looking at M&A, returning capital to shareholders, or other growth initiatives?

I envision our cash flow being reassigned towards supporting growth initiatives, especially technology development. I don't foresee any cash distribution or dividends as we will need the resources to meet growth demands. Our priority is to leverage these resources for growth over time.

Thank you. One moment for our next question, please. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open.

Hey, guys, Alex Vrabel on for Julien. Congratulations to you all. Manu, we will miss you but great results here. We see a lot of growth planned. Could you discuss the booking cadence? Historically, you've seen significant first-quarter booking spikes, but does that remain unchanged?

It can be hard to predict seasonality around order intake, and I don't want to mislead you. What stands out is our comfort with our guidance for 2024 and 2025. We won't manage by a quarterly metric; instead, we will prioritize capturing the right deals as they come.

Can you clarify how customer project sizes have evolved? Is the increase in demand coming from new customers or just larger contracts from existing ones?

Our customer-base projects are scaling up, but we are also entering new markets such as Canada. In the US, sizes are expanding, while internationally we onboarded new customers. Thus, we see growth in larger ongoing projects and onboarding new clients.

Customers are pursuing bigger projects across both US and international markets. We have a select group of providers that can offer versatility among various attributes and functionalities.

Thank you for your questions. One moment for our next question, please. Our next question comes from Chris Ellinghaus with Siebert Williams Shank. Your line is now open.

Good morning! Congrats to Manu and Ahmed. Is 11.6% adjusted gross margin indicative of fiscal 2024 performance relative to guidance?

Our guidance maintains a 10% to 12% range, influenced by certain change orders accounting for margin fluctuations in the fourth quarter. Those fluctuations can be unpredictable.

Given the slowdown in EV sales, do you expect any tailwinds for battery costs in 2024?

My current perspective leads me to believe battery prices will stabilize around current levels. While they likely won't appreciate, I don't see further reductions. However, predicting exact trends is not within the scope of our roles.

Thank you. One moment for our next question, please. Our final question comes from Pavel Molchanov with Raymond James. Your line is now open.

I would like to confirm: would you entertain the notion of placing battery assets on the balance sheet for the purpose of enhancing virtual power plants or other services?

Not really. It’s our customer's responsibility to handle energy management. If I began doing what our clients do, it would lead to complications. Therefore, we are not entering the storage-as-a-service domain.

Understood. A quick follow-up on M&A: are valuation multiples for software acquisitions declining?

While I can't confirm specifics, I've heard from banks hinting at valuable M&A opportunities. However, we are currently focused on internal growth.

Thank you. One moment for our next question, please. Our next question comes from Ameet Thakkar with BMO Capital Markets. Your line is now open.

Thanks for taking my question. For the current quarter, adjusted gross margins were up significantly; should we expect adjusted margins to flatten out in 2024?

That's correct. The increase was due to project mix and change orders, so anticipate slight moderation as we transition out of legacy projects.

Lastly, can you specify the magnitude of cash from deposits for U.S. battery cells and when that cash is anticipated to be returned?

Certainly. We have a $150 million commitment spanning two years, divided mainly between fiscal 2024 and 2025, with returns beginning by the end of fiscal 2024.

Thank you. One moment for the next question. Our next question comes from Thomas Curran with Seaport Research Partners. Your line is now open.

Thanks for taking my question. I have questions pertaining to the evolution in storage project duration. Are you expecting the trend toward longer duration systems to continue? What specific preparations are being made to adapt?

Hi, Thomas. Currently, we are focused on developing two-, four-, and six-hour duration systems. We are exploring emerging battery chemistries to accommodate longer duration solutions. In preparation, we are initiating preliminary engagements with suppliers.

On the backlog, non-related parties are currently approximately 75%. We'd like to bring that around 20%. The related-party portion, based on revenue, is around 29%, with our aim of reducing that figure.

Thank you! That's what's on my mind. Appreciate your responses.

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