Earnings Call Transcript - FLNC Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to Fluence Energy, Inc. First Quarter 2024 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 Finance and Investor Relations. Please go ahead.

Lexington May, Vice President Finance and Investor Relations

Thank you. Good morning, and welcome to Fluence Energy’s first quarter 2024 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; Ahmed Pasha, our Chief Financial Officer; and Rebecca Boll, 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 not to place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP 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.

Julian Nebreda, CEO

Thank you, Lex. I would like to send a welcome to our investors, analysts, and employees participating on today's call. I will provide a brief update on our business and then review progress on our strategic objectives. Ahmed will then give more details on our financial performance and outlook. Beginning on Slide 4 with the key highlights. I'm pleased to report that we are off to a good start for fiscal 2024 and continue to benefit from our robust energy storage market. In the first quarter, we recognized $364 million of revenue. Furthermore, we delivered our second consecutive quarter of double-digit gross margin. Our adjusted EBITDA for the first quarter was approximately negative $18 million, in line with our expectations and an improvement from negative $26 million in the first quarter of 2023. Additionally, we recognized a record $1.1 billion of new orders. This is broken down by our solution business contracted 2.7 gigawatt hours, our services business adding 2.3 gigawatt hours, and our digital business adding 400 megawatt hours of new contracts. Furthermore, our signed contract backlog as of December 31st increased by $800 million to $3.7 billion, the highest level in our history. Additionally, our pipeline increased by $400 million to $13.4 billion which gives us confidence to achieve our growth goals in 2024 and beyond. Our service and digital businesses, which together represent our recurring revenue streams, continue to gain traction. We ended the quarter with 3.3 gigawatts of service assets under management. Importantly, our deployed service attachment rate, which is based on our cumulative active services contracts relative to our deployed storage, remains above 90%. We had a strong quarter in our digital business, adding 400 megawatts to our backlog. More importantly, our digital assets under management increased to 17 gigawatts as of December 31st, from 15.5 gigawatts at September 30th. In summary, our combined services and digital annual recurring revenue or ARR was approximately $64 million as of December 31st and is on track for our guidance of approximately $80 million by the end of fiscal year 2024. Turning to Slide 5, I'd like to discuss our progress on the five strategic objectives that guide our decisions and actions. They are also important markers for investors to monitor and measure our performance. First, on delivering profitable growth. This quarter, we continued to grow our backlog as we added $1.1 billion of projects that we expect to yield double-digit gross margins. Our disciplined approach to offer competitive solutions to customers keeps us on track to deliver on our financial objectives. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we're on track for our battery module manufacturing to begin production in the summer of 2024, gradually ramping up over the subsequent quarters. This battery module manufacturing will enable us to provide a product that meets U.S. domestic content requirements for battery and energy storage, which I will touch on more in a moment. Third, regarding our scale and global outreach, we have established a supply chain as one of our key strategic competitive advantages. Our diversity of suppliers is a key component of this and enables us to take advantage of favorable terms and battery prices, which I will discuss in more detail shortly. Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. I am pleased to report that we have strong digital customer retention with 21 digital contracts renewed during the quarter with zero customer attrition. Lastly, our fifth objective is to improve operational efficiency. I'm proud to state that in November, Fluence became an official signatory member of the UN Global Compact, ahead of the expected timeline outlined in our 2023 sustainability report. Turning to Slide 6, we continue to see strong growth in demand for utility-scale energy storage systems. Over the past 12 months, we've seen lithium carbonate prices decline over 80%. This has led to a decrease in battery prices, which has improved customer economics and allowed for more projects to be penciled in. It has been reflected in the growth of our backlog, which now sits at a record level of $3.7 billion, an increase of approximately $800 million from the fourth quarter. This is also the ninth consecutive quarter in which we added more order intake to backlog than revenue that was recognized out of backlog, further illustrating the growth in demand. Additionally, this $3.7 billion does not include some of our upcoming projects of the quarter, such as our 650-megawatt hour Mortlake project in Australia. More importantly, 100% of our backlog is at fixed battery prices with both suppliers and customers, ensuring no commodity price exposure, thus giving us strong visibility into revenue and margin for these projects. Additionally, approximately 80% of our fiscal 2024 revenue guidance midpoint is already covered by our current backlog attributable to fiscal 2024, plus revenue already recognized in the first quarter. These two data points provide us with high confidence that we will be able to achieve our guidance ranges for revenue and adjusted EBITDA for fiscal 2024. Based on the conversations we're having with our customers and potential customers, we're expecting to see continued strong revenue growth in fiscal 2025 of approximately 35% to 40% from fiscal 2024. Our 2025 outlook is supported by our pipeline which sits at approximately $13.4 billion and grew $400 million from the last quarter. As we have communicated in prior calls, our expectations for pipeline conversion is at approximately 50% over the next 24 months. Turning to Slide 7, over the past couple of years, we have taken major steps to diversify and improve the resilience of our supply chain. Our supply chain strategy is centered around four key elements. The first is diversity of battery supplies. Currently, we utilize five battery suppliers located in China, South Korea, Sweden, and the United States. This ensures we have multiple geographies to pull from, which supports our growth while mitigating disruptions. We also note that building a stable and reliable U.S. supply chain is critical for the industry and, as I will discuss, we are taking significant steps to establish a U.S.-based supply chain this year. Second, to capitalize on growing demand, we have secured multiyear guaranteed battery capacity from these suppliers. This covers our need for fiscal 2024 and fiscal 2025 and provides flexibility for upside in demand. These capacity agreements are subject to market price adjustments. Additionally, we also use a price discovery mechanism involving multiple battery suppliers to ensure we are constantly delivering the most competitive prices to our customers. Lastly, these capacity agreements come with minimal take-or-pay obligations. Third, in order to capture the incentives laid out by the IRA, we will be manufacturing our own battery modules in the U.S., which represents two-thirds of our global business. It also enables us to introduce our proprietary battery management system, the software that runs the controls at the battery cell level, serving as the initial point of control in a battery storage system. Additionally, it enables us to further commoditize our supply chain by facilitating the integration of multiple battery vendors. We're currently on schedule for our battery module manufacturing to begin this summer. In doing so, we expect to qualify for the domestic content tax credit under Section 45X. The fourth element of our strategy is an asset-light regional supply chain. This involves using two major contract manufacturers for system integration, one in Vietnam and one in Utah. We will look to continue to regionalize our asset-light model in other areas such as Europe and India. This strategy provides us with enhanced flexibility and agility, particularly in scaling, and positions Fluence for a high return on invested capital as we do not incur the capital costs associated with building or maintaining our own production facilities. When we look around the world, we are using various shipping routes for our projects. To that end, I would like to make a few comments in relation to the recent disruptions in the Red Sea. Only approximately 50% of our global shipments were expected to use the Red Sea route. The rerouting of these shipments adds around two weeks to our shipping schedule, but we have been able to accommodate this without affecting customer delivery commitments. Finally, the incremental costs we are experiencing in shipping, we are able to transfer to our customers in their entirety in accordance with our contracts. In any case, our logistics team is working diligently to reduce these increases in costs wherever possible. Overall, these four elements are the cornerstone of our supply chain strategy, which provides flexibility, competitiveness, and high certainty for our customers. We will look to build on this as we continue to strengthen our global supply chain. Turning to Slide 8, we're well-positioned to recognize multiple benefits from the IRA, which is already boosting demand for energy storage. This benefit falls into two categories. Under the first category, our customers have the potential to receive up to a 50% tax credit for their projects' capital costs, significantly improving project economics and attractiveness. These incentives to our customers include a base ITC or Investment Tax Credit, as well as bonus incentives for deploying in an energy community and using domestic content. The second category of incentives under the IRA includes those provisions that directly benefit Fluence. By producing battery modules in the U.S., as I just discussed, we expect to qualify for our production tax credit of $10 per kilowatt hour of battery modules produced under Section 45X. These two categories of incentives provide for our products to be more competitive and enable us to benefit from increased scale, more volumes, and operating leverage. Turning to Slide 9, I'm proud to report that in November, Fluence became an official signatory member of the United Nations Global Compact. Being accepted as a signatory member is an important step in our sustainability journey of building a strong ESG program based on a structured framework, data, and active engagement. Fluence has joined more than 20,000 companies and organizations around the world that have signed the UN Global Compact and are committed to responsible corporate citizenship and sustainability. We're excited to collaborate with like-minded companies, non-governmental organizations, and other stakeholders to the global company network to exchange best practices and drive positive change. Now I would like to make a few remarks regarding the article published in late December about the Diablo Project in California that highlighted a contract claim filed against us by the project owner, alleging that we did not have a valid construction license in California. This contract claim was filed in response to our claim for $37 million in non-pay amounts and related damages. As we have said already, we believe these contract claims are without merit. We intend to get paid on the projects. The legal proceedings are ongoing. In the meantime, I wanted to highlight that the Diablo Project is performing very well and has delivered availability or uptime above its contractual requirement during 2023. In conclusion, I'm pleased with the achievements of the first quarter. Although we are mindful there's still a lot of work to be done, we will look to continue this momentum as we progress through 2024. I will now turn the call over to Ahmed.

Ahmed Pasha, CFO

Thank you, Julian, and good morning, everyone. Before we dive into the results, I am very pleased to be here at Fluence, and I would like to share my perspective on my first month at Fluence. On a macro level, Fluence is well-positioned to capitalize on this once-in-a-lifetime opportunity as energy storage benefits from declining input prices and an ever-increasing focus on grid stability. I have learned much about the company, the people, and the culture. I have been impressed by the team's laser focus on offering competitive solutions to customers while adhering to a disciplined approach to growing our top and bottom lines. I am looking forward to maintaining this financial discipline and stewardship of our strong balance sheet while delivering attractive returns to our shareholders. This morning, I will review our first quarter results and 2024 guidance, which we have reaffirmed across all metrics. Beginning with our first quarter 2024 results on Slide 11. We generated $364 million in revenue, 70% of which was in the U.S., and largely in line with our expectations. This was an increase of 17% from the first quarter last year. As we discussed on our previous quarterly call, we expect to realize 30% of fiscal 2024 revenue in the first half, and our first quarter results reflect this mix. Turning to adjusted gross profit. For the quarter, we generated approximately $38 million or an adjusted gross margin of approximately 10.5% versus 4.2% in the first quarter of last year. It also represents a second consecutive quarter in which we posted double-digit gross margins. Our operating expenses were $62 million in line with expectations and consistent with the first quarter of last year, representing 17% of the quarterly revenue. Adjusted EBITDA for the quarter was negative $18 million, versus negative $26 million in the first quarter of last year. Negative adjusted EBITDA reflects our revenue weighting towards the second half and operating costs that are relatively flat on a quarterly basis, as I just discussed. Overall, we believe these results reflect our disciplined approach to grow our top line and improve our bottom line to deliver on our financial commitments. Turning to Slide 12, I am pleased to report that we ended the first quarter with $477 million of cash. This represents an increase of $14 million from the fourth quarter and is the third consecutive quarter that we increased our total cash position. From a liquidity perspective, we are in an excellent position to capitalize on the growing energy storage market. In addition to our cash position, we have access to approximately $130 million in credit facilities. This includes $75 million available under our recently signed $400 million asset-backed lending facility. Availability in this ABL facility is dependent on the level of collateral available to secure, which is mostly our U.S. inventory. Thus, as our inventory balance increases, so should our borrowing capacity, providing us with another lever to manage our working capital needs. In summary, we have total liquidity of more than $600 million, which is sufficient to meet our current business needs. Moving to Slide 13, as Julian noted, we are reaffirming our guidance for fiscal 2024 of revenue between $2.7 billion and $3.3 billion. To that end, we have approximately 80% of the midpoint of our annual revenue guidance covered by our backlog plus revenue recognized in the first quarter. This provides us confidence that we are on the path to achieving our fiscal 2024 guidance range. From a margin perspective, we continue to anticipate fiscal 2024 adjusted gross margins of between 10% and 12%, which is in line with our first quarter results. Additionally, we are reaffirming adjusted EBITDA guidance of $50 million to $80 million. Furthermore, we are on track to achieving ARR of approximately $80 million by the end of fiscal 2024. I would also remind you that we continue to expect fiscal 2024 revenue split of 30% in the first half and 70% in the second half, which implies fiscal Q2 revenue of approximately $530 million. For Q2, we expect adjusted EBITDA to be negative because annual operating costs have a more even rating by quarter than revenue. Consistent with our full-year guidance, we expect second half 2024 adjusted EBITDA to improve significantly relative to the first half as we realize 70% of annual revenue during that time period. Finally, looking ahead to 2025, we continue to believe that we will achieve 35% to 40% year-over-year top-line revenue growth, driven by our robust pipeline and record backlog of signed contracts. With that, let me turn the call back to Julian for his closing remarks.

Julian Nebreda, CEO

Thank you, Ahmed. Turning to slide 14 and in conclusion, I want to emphasize the key takeaways from this quarter's results. First, we had a record-setting order intake and a record backlog of $3.7 billion. We have locked in battery supply at fixed prices for all our projects in our backlog, thus providing us strong visibility to achieving our guidance. Second, we have a sustainable and resilient supply chain that is a key component of our competitiveness. Third, we are on track to begin our module manufacturing this summer. Together with our customers, we believe we are in a prime position to capitalize on various incentives under the IRA. Fourth, the falling battery price environment serves as a tailwind for us and allows more energy storage projects to be penciled in by our customers. All of these factors provide us confidence in our ability to successfully deliver on our fiscal 2024 and 2025 objectives. This concludes my prepared remarks. Operator, we're now ready to take questions.

Operator, Operator

Thank you. Our first question comes from George Gianarikas with Canaccord Genuity. Your line is open. Please go ahead.

Julian Nebreda, CEO

Good morning, George. How are you?

George Gianarikas, Analyst

Good morning. I'm doing great. How about you?

Julian Nebreda, CEO

I am doing great.

George Gianarikas, Analyst

Thanks for taking my question. So maybe just first, I'd like to ask about the orders, the $1.1 billion in orders. Can you help us understand sort of the geographic profile? And also, are those orders consistent with your gross margin profile of mid-teens over the long term?

Julian Nebreda, CEO

Yes. The geographic profile is in line with what we have said: two-thirds in the U.S. and one-third internationally. They are, you know, at double digit margins for that order intake, so in line with what we have communicated to the market.

George Gianarikas, Analyst

Right. And then, just as a follow-up here, as you look at the M&A landscape, you know, we talked about Wärtsilä in the past, they're still undergoing their strategic review. Do you feel compelled at all to change the profile of Fluence? You have a nice cash balance, and if you look across the landscape, are you looking to potentially expand the footprint for your software profile by making acquisitions? Thank you.

Julian Nebreda, CEO

No. Yeah. So we have said we're very happy with our corporate business position, you know, in terms of a strong sales channel. You can see it not only in our backlog, but also in our pipeline. Our technology, we have a very clear road map that is going well, and we're very happy with. So generally, I don't see any need for acquisitions at this stage, and we're not looking at any. We're clearly in the market to understand how the environment looks, but there's no need for any acquisitions to support any of our business structure at this stage.

Operator, Operator

Our next question is going to come from the line of Brian Lee with Goldman Sachs. Your line is open. Please go ahead.

Brian Lee, Analyst

Good morning, everyone. Thanks for taking the questions. I had two sort of numbers related. First on legacy backlog, I think entering the year, you guys had talked about something like $150 million of still low margin, no margin legacy backlog that you needed to work off this year. And I believe most of it was going to get deployed in Q1. So if that's right, it implies the gross margins on the non-legacy business was mid to the high teens or something in that range, since you reported 10.5% for the quarter. So I'm wondering if that's right, if the backlog of legacy is all gone? And then how should we be thinking about gross margin for the rest of the year given the higher level for the non-legacy stuff? It seems like the 10% to 12% annual guide for gross margin seems a bit conservative.

Julian Nebreda, CEO

All the legacy has now gone. For the actual number for the first quarter or the legacy contracts that we recognized revenue in the first quarter was closer to $50 million, not $150 million. I think that we are in line with our 10% to 12% margins that we communicated for the year. This quarter proves that if you take into account the $50 million of legacy contracts, which were essentially roughly breakeven. So, no more legacy going forward, and the actual number for this quarter was $50 million.

Brian Lee, Analyst

Okay. That's fair. It seems like you're closer to the mid-teens, but still within that range. Understood and then there's been a lot of questions about lower battery prices, as we see what's happening with lithium carbonate. I think you made a comment on slide 12 or 13 that your fiscal 2024 battery supply prices are locked in. Does that mean, I know, there's index-based adjustments for your customers. Is there anything in your fiscal 2024 backlog to be deployed that can still get adjusted on price, or is that all for future, outside of fiscal 2024, backlog that maybe still has some of those index-linked adjustments that could take place? I'm just trying to understand how locked and loaded the backlog dollar value is for this year versus, you know, what potentially could move around next year if battery prices keep going lower?

Julian Nebreda, CEO

Sure. So let me walk you through where we are. So we use RMI, as you know, as an important part of how we manage our risk. The RMI supports our projects from the time we start negotiating with our customers to the point when we issue the purchase order, when we buy the batteries and make a down payment to our battery suppliers and get an actual commitment from them. So what do we have in our backlog today? What we have said is that we have fixed all our battery prices for all our backlog, all of it, the $3.8 million. We already fixed it with our suppliers and with our customers. So our current backlog does not have any commodity risk on either direction or exposure to suppliers moving up or down or customers moving up or down. This means that for 2024, as we have said, 80% of our revenue for 2024 is already in our backlog. So that 80% is very much already fixed. Now, we have 20% to hold that will be subject to contracts that are in very late stages of negotiation that will be coming in the next couple of months and where the current offers we have outside what we are negotiating with our customers, is based on current price. So, you know, we feel very confident that we will meet our guidance. And then that gives us 2025 in front of us. We have roughly $1.5 billion of revenue for 2025 already in our backlog, and that $1.1 billion is roughly 40% of next year's implied guidance, which I have given you, that is already in our backlog and is also fixed. So when you look at it from the upside, 80% is already in the backlog, fixed, 20% for 2024, 20% subject to no contract, which are already very late stage on negotiations. We feel very confident. We have a clear line of sight and discussions with our customers, that those will support our 2024 revenue guidance. And then for 2025, we're still working on the other 60% to go. If you look at our pipeline, we grew our pipeline by $400 million. What that means is that the $1.1 billion we converted from our pipeline to backlog also covers that. So in reality, we brought in $1.5 billion of new contracts into our pipeline. So it gives us very clear insights that the demand we're seeing in the market, and how much investors, customers, and regulators feel comfortable with our technology makes us very confident that we will meet our commitments for 2024 and 2025. I do understand that sometimes the financial markets are concerned about the potential downward pressure on revenue due to battery prices, but this presents a tremendous headwind for this industry. The elasticity of the money is tremendous, providing a significant uptick in demand that significantly covers the potential downside of our revenue prices. So, we feel very confident about 2024; 80% is already fixed with a clear line of sight for the other 20%. For 2025, we have 40% already in the books and have tremendous pipeline coming in that will cover any challenges we may face.

Brian Lee, Analyst

Alright. That's great. I appreciate all that.

Julian Nebreda, CEO

Sorry for the very long answer, Brian.

Brian Lee, Analyst

No, crystal clear. I think I got the message crystal clear. Thanks a lot, guys. I appreciate it.

Operator, Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Christine Cho with Barclays. Your line is open. Please go ahead.

Christine Cho, Analyst

Good morning. Thank you for taking the question. I just wanted a clarification question on the backlog. As I understood it, if the customer had not issued notice to proceed, but had booked, that was still subject to move, and it sounded like you locked everything in as for the backlog that stands today. But as you get incremental bookings, should we think that on a go-forward basis, all of that will be locked in when it enters your backlog as well? Or the same thing, you know, it's subject to move until they issue a notice to proceed?

Julian Nebreda, CEO

Yeah. Very good point. As I said, the RMI covers from the point we start negotiating with the customer to the point that the purchase order is issued, which is usually at the point of notice to proceed. So the new order intake that we will get will be at a point between the moment we sign the contract to the point we issue a notice to proceed where that potential risk is. However, what we have seen is that time frame has collapsed significantly, and we are now issuing notices to proceed very close in most cases, very close to when we sign the contract. So, generally, the referral item in our backlog will continue to be a small number as we move forward. There might be one or two projects that come in where the customer wants to wait a little bit, and maybe that will happen, but in general, I think most of the contracts we are signing have customers looking to secure batteries immediately, taking advantage of the good price to move forward.

Christine Cho, Analyst

Okay, got it. And then can you give us an idea of how much of your backlog has EPC services tied to it, maybe the percentage of the contracted volumes? And as demand goes up, should we think that this number, this percentage number moves up and down consistent with incremental bookings? And sorry, how different are the ASPs and margins today for new orders if you provide the EPC versus not?

Julian Nebreda, CEO

Yeah. The EPCs are roughly around 30%, and it's very much market dependent and project dependent. So just to give you a sense, all our transmission projects, our UltraStack projects, are EPC, complex projects that require significant coordination between all the elements of that. Those are EPCs. Australia is a market for EPC. The U.S. is less so. It depends on where we're working. As we see, we're clearly working on improving and continuing to move forward in our UltraStack projects in Australia, a market we're very excited about. You might see that as we bring more Australia and UltraStack projects, those will be EPC. But generally, if you want to model this going forward, I think 30% is a good proxy. As I said, it depends a little bit on the complexity of the projects and the markets we're working on. In terms of returns, I think it will be within the range of 10% to 15%. The more complex projects where we take more risks are closer to the upper band, as we've always said, and the simpler ones are on the lower side of that band. Most EPC projects are more complex, but it generally keeps us in that range of 10% to 15%.

Operator, Operator

Our next question comes from the line of Justin Clare with Roth MKM. Your line is open. Please go ahead.

Justin Clare, Analyst

Good morning. Thanks for taking our questions here. So first, I wanted to ask about the demand that you're seeing for batteries that would meet the domestic content requirements. Have you signed contracts at this point for those domestic batteries? And then is it possible to give us a sense of what the uplift in pricing might be? And do you see potential for a margin uplift given that you're going to be one of the first to supply domestically produced batteries. Could you get out of that 10% to 15% range?

Julian Nebreda, CEO

Yes, strong demand. I'll say that not only are our current customers interested, but we are also attracting new customers who are talking to John, our Americas CEO or President. We see a lot of interest and understanding in this area. So that's the first thing: very strong demand. In terms of margins, we believe we have a first mover advantage, and that allows us to capture some additional margin. However, it's still early in the game, and we're negotiating with our customers. If I tell you a number here, my customers will use it against me. So we are working with our customers to ensure they can meet the higher returns, and we can capture some additional margin because they're doing much better than anybody else on those projects. As these things settle down, and we see those projects and contracts coming in, and our customers feel secure about the returns they're getting, I think we will communicate to you what potential upside we might get. But for now, I prefer not to talk about it. To date, we have not signed any domestic content contracts, even though they are very, very late stage. Just to give you a point, domestic content projects are 2025 revenue, and they won't support 2024 revenue. Our supply module manufacturer starts in the summer, picks up during that quarter, and we will start receiving domestically manufactured batteries in the last quarter of this year. But we will need to integrate them and then move them to deliver to our customer, so we won't see any revenue this year from domestic content.

Justin Clare, Analyst

Got it. Okay. And then, just following up on that, just wondering how much of your Utah manufacturing capacity could be supplied with domestically produced cells given your agreement with AESC. Could you fully utilize that facility to produce, you know, domestic content or domestic cells that meet the requirements? How are you thinking about that?

Julian Nebreda, CEO

That's the idea that we could utilize our current capacity. I think we've communicated that capacity could be easily doubled if we need it.

Operator, Operator

Our next question is going to come from the line of Andrew Crocco with Morgan Stanley. Your line is open. Please go ahead.

Andrew Crocco, Analyst

Good morning. Thanks so much for taking the question. I did just want to go back to some of your commentary on the Red Sea. It sounds like you haven't seen an impact on margins from the freight rates yet, but I'm just curious: do all of your contracts, kind of exposed to the Red Sea have freight adjusters or could there be some potential margin risk if freight rates don't come back down?

Julian Nebreda, CEO

All our contracts, irrespective of them going through the Red Sea or any other route, have freight adjustments. Logistic adjustments, and all these costs are passed on. So, we should not see any effect on our margins coming out of the Red Sea issues.

Andrew Crocco, Analyst

Okay. That's super helpful. And then my second question is a little bit more semantic, but there's been a lot of attention paid to AI data center power needs, and it's a big theme right now. The view is energy storage is a pretty critical component when thinking about powering that load with reliable clean electricity. So can you maybe just provide some insights into your conversations that you're having with some of these customers and what the timeline might look like for Fluence for this opportunity?

Julian Nebreda, CEO

I mean, yes, this is something we have looked at. We worked with Google on a project. However, to be very sincere, today, we're so busy with utility-scale projects that we haven't really worked a lot on it recently. But we did have a project to test it with them, and it went well. But it's something we've not worked on in recent quarters. One of those opportunities will come to a point on battery cost reductions where these lowering of prices will start making these projects very attractive. It will make it a lot more attractive than they were when we looked at it roughly a year ago. So I think this is the type of thing that when we talk about on-demand elasticity, we see it come in when you put the price at a point and turn the lights on. There's demand coming in. Those exist. And that's a kind of my point to all of you about the tremendous tailwind of battery prices in our technology and how business cases start getting penciled in becoming very attractive.

Andrew Crocco, Analyst

Got it. That's helpful. And I guess maybe just one more follow-up on that. When you had that pilot project or did that demonstration with Google, was there anything on the software side or battery chemistry side that they were looking for to be changed versus your traditional utility customer?

Rebecca Boll, Chief Products Officer

On the battery side, no, the chemistry is the same; the physical delivery of the product was the same based on the size of what we're delivering for Google. There were some changes on the software side for the application space that was working.

Operator, Operator

Our next question is going to come from the line of Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.

Julien Dumoulin-Smith, Analyst

Good morning, Julian. Team, good. Congrats again. I'm just coming back to the top of the Q&A roster here on the gross margin piece. I just want to come back to this a little bit. I mean, you guys obviously have this 10% to 15% and then 10% to 12% here in the near term. Starting off the year the way that you did with revenues really poised to scale through the year, again, I get there's not an OpEx operating leverage piece here. But I mean, to what extent can we expand to expect those gross margins to scale as revenues and the size of these projects conceivably continue to expand into the bulk of the year here? I mean, is there an argument to be trending higher within even that 10% to 12% range?

Ahmed Pasha, CFO

Julian, thanks for your compliments. I think in terms of the gross margin, our guidance was 10% to 12%. I think we feel pretty good about that range going through the rest of the year. So I think it will be north of where we had realized in the first quarter, but I think we feel pretty good about where we will end up in terms of our range for the full year.

Julien Dumoulin-Smith, Analyst

Got it. Excellent. And then, Julian, you mentioned this earlier on domestic content. Your ability to potentially, I think you said something like double AESC contributions here if need be. I mean, just looking at the trade backdrop here, can you comment a little bit about your ability to pivot depending on any future shift in trade policy landscape here? I'm really curious about your ability to shift even more so back to domestic product, especially if the ESS market demands it, what is your ability to bring that to market as you think about providing further disclosures for this year in scaling up, if you will.

Julian Nebreda, CEO

Yeah. I mean, this is a 2025 issue more than 2024. This line will come back. These cells are coming online. We're working with our suppliers to ensure that we have access to their additional production capabilities and have a first right of refusal on the production that we move forward. This is a multi-year contract. We haven't really disclosed the volumes and stuff that we're working with. But the way we envision this project is a long-term relationship where we are able to take advantage of their increasing production as it continues moving forward. That's the way I will put it. So, in case, I guess your question indirectly, maybe I'm sorry that I'm implying is that what happens is that trade issues and this production becomes even more valuable. We believe that we are taking that into consideration in the way that at least for a period of time we are able to scale up if this becomes a lot more attractive than what it is today due to potential trade disruptions.

Julien Dumoulin-Smith, Analyst

Right. And your point is the 10% to 15%, as it stands today, there's fundamentally sort of upside as you disclose what that domestic content sort of ASP is.

Julian Nebreda, CEO

That's right. That's our current view. We'll talk more as we move forward and we sign these contracts and the competitive environment settles. But essentially, just going back, our customers need to feel comfortable with their business cases, so they can capture more than what they usually capture, and that we will capture a part of that upside that we're giving them. That's how all this works out, and we're working with them on that process. As soon as that settles down in a way that we're comfortable, we will communicate to the financial markets what it is.

Operator, Operator

Our next question comes from the line of Kashy Harrison with Piper Sandler. Your line is open. Please go ahead.

Kashy Harrison, Analyst

First question is for 2024 guidance. You indicated that you have 80% already locked in and you should be able to 100% shortly, but I was just wondering if you could give a sense of where you were at this point last year. Were you 80% booked last year as well, or were you 100% booked at this point for the prior year? And then just in general, how should we conceptually think about the amount of revenues that can be booked and captured within a year?

Julian Nebreda, CEO

Yeah. So last year, if you looked at our order, what we had in the backlog at the end of the first quarter compared to where we ended in revenue—not where we were guiding. We were roughly at 90%. So 90% of our revenue for 2023 was in our backlog at this stage. So we're a little bit behind compared to last year from that point of view. However, looking at the late stage of development of our contracts and how we're going to meet our guidance, I have very high confidence that we will be able to secure the contracts we need to meet our guidance. That's the way it is, and that's it. We feel very good. There are several contracts, and we're positive about all of them. This should allow us to be at a point that we will meet our guidance for the year.

Ahmed Pasha, CFO

Yes, Kashy, this is Ahmed. I think your second part of your question was on the profile for the rest of the year. I think, as I discussed in my comments, 70% of our annual revenue is in the second half. It's more back-end loaded, driven by the timing of the projects we have in our pipeline or backlog.

Kashy Harrison, Analyst

Thanks for both of those responses. And my follow-up question is just around the order intake. $1.1 billion is clearly very impressive. If we look at last year in the prior year, it seems like there was some type of order seasonality where the second quarter orders looked about the same as the first quarter, then you have a dip into Q3 and then somewhat of a recovery into Q4. Is that directionally how we should think about seasonality for orders in your business moving forward?

Julian Nebreda, CEO

I mean, if you look back every year, it is very different. So I don't think there is a strong seasonality in our order intake. It moves around. It's more about how things worked out, and something can be signed on December 15 or January 15 with nothing to do with season. It's more of whether people want to take vacation, to give you a sense this quarter. We cannot give you a view on seasonality for orders.

Operator, Operator

Our next question comes from the line of Mark Strouse with JP Morgan. Your line is open. Please go ahead.

Mark Strouse, Analyst

Good morning, everybody. Thanks for taking our questions. I appreciate the color that you were giving earlier about no margin risk from changes in pricing because your contracts with your suppliers and your customers are locked in. Can you talk about the ability, though, of our customers to potentially cancel an order? I mean, especially if pricing goes lower enough. And if so, can you kind of give us what your average deposits that you're collecting on those contracts? And then on the other side, do you then have the ability to turn around and cancel any orders with suppliers?

Julian Nebreda, CEO

Yeah, what we bring in our backlog are binding contracts that the customer cannot get out of without significant penalties that ensure they meet our obligations. To this day, we have never seen a cancellation of our contracts in our backlog. There's a reason for it. We are very strict about what comes in. Even though we have contracts signed, they're not in our backlog until they meet the conditions to ensure if there's a cancellation, we are covered. So, we haven't seen cancellations. Nobody has turned down. That has never been a risk, and the contract makes it difficult for the customer to get out, incurring significant penalties to ensure they make us whole. But as I said, that has never happened.

Mark Strouse, Analyst

Yeah. That makes sense. Okay, thank you both. One quick follow-up, Ahmed. On the last call, Manu gave some color about the timing of down payments to AESC. Was there any update there? I'm sorry if I just?

Ahmed Pasha, CFO

No, nothing changed. I think we basically are on track. No, nothing to report beyond what we discussed.

Operator, Operator

Our last question is going to come from the line of Thomas Curran with Seaport Research Partners. Your line is open. Please go ahead.

Thomas Curran, Analyst

Good morning. So under the EU climate law, the European Commission is working on an updated version of its National Energy and Climate Plan that will establish decarbonization targets for 2040. Between an early draft that leaked into the media and then a subsequent official communication, the commission has proposed a target for the power generation mix of 90% renewables complemented by nuclear and referred to grid-scale energy storage as a key element in their words for achieving that. This news following last year's adoption of accelerated permitting for standalone storage suggests the EU really is placing increasing emphasis on storage support when it comes to policy. What are you guys most excited about that either is gestating and it seems to have good odds of becoming part of law or a new rule or incentive? What are you most excited about that you have visibility on over either this year or by the end of fiscal 2025?

Julian Nebreda, CEO

I'll tell you what, the things we have seen in the last quarters clearly show demand is very strong. Also, I don't know if you saw the announcements, supply chain moving into Germany or Europe, with Northwell announcing a big factory in Germany and other players announcing factories all around Europe. Our localization of supply chain is showing a better environment, which is great. And then our pipeline is moving very strongly, especially Germany becoming a market that is very active. The UK has always been a market, but there are new markets that have not been as active now kicking off, like Italy, which has come out with a six-hour capacity. There are a few things happening that make us excited. If you ask me what I'm excited about, all of the above—everything. I'm excited about the fact that we have the supply chain starting to see good progress, the realization of supply chain, so that's great. A lot more players and regulators are supporting it. We see changes in Italy and some of the Nordic countries, and a lot of customers in Germany and the UK have been contacting us to move forward. So all of the above, I would say Europe is a fertile ground for battery storage.

Ahmed Pasha, CFO

In terms of yes, you're right. I think our inventory balance has increased by a couple of hundred million. I think this quarter, and that is primarily driven by us ramping up our growth in revenue, because as I discussed, our revenue next quarter—second quarter—will be about $550 million. So that inventory balance will largely be deployed to serve our or recognize our revenue in Q2. In terms of where capital needs, I think we discussed on our Q4 call, there will be about $100 million or so of additional capital needs. But that is part of the plan, and we will be funding through our existing liquidity. Nothing changed from that perspective; we feel pretty good given our liquidity is north of $600 million, so we can manage any short-term working capital needs if we have to.

Operator, Operator

Thank you. And I would now like to hand the conference back over to Julian for any further remarks.

Julian Nebreda, CEO

Great. Thank you so much, everybody, for your interest and questions. We had a great quarter, great order intake, and revenue we knew from, you know, that was in line with what we expected. This is what we were aiming for. An important point and something that you all brought to me last year that was a main point is the double-digit gross margins. This was the main discussion during 2023, whether we were going to be able to do it. Now we have two quarters of bringing double-digit gross margins; this is the basis on which as we ramp up revenue, will be able to reach profitability for this quarter again. So we're very confident in our 2024 guidance and our ability to meet our $3 billion midpoint revenue guidance, and an adjusted EBITDA of $50 million to $80 million. Very happy for what's going on. Thank you so much, and talk to you.

Operator, Operator

Thank you.