Earnings Call Transcript - FLNC Q2 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Fluence Energy Second Quarter 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President, Investor Relations. Please go ahead.

Lexington May, Vice President, Investor Relations

Thank you. Good morning. And welcome to Fluence Energy’s second 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 Product 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 the 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 on 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 will now turn the call over to Julian.

Julian Nebreda, President and CEO

Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating in 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 second 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 a record $698 million of revenue and $32 million of adjusted gross profit. Our demand was strong across all three of our business lines and new orders were approximately $847 million highlighted by our services business contracted at 1 gigawatt and our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog as of March 31st was $2.8 billion, a quarter-over-quarter increase of approximately $100 million, even after recognizing almost $700 million of revenue during the quarter. I will also note that approximately 81% of our backlog is with unrelated parties. Lastly, our recurrent revenue businesses, which consist of services and digital, experienced strong growth during the quarter. Our service attachment rate was 263% for the second quarter driven by the signing of the service agreement with Austin. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains above 90%. Looking specifically at our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts, which is a 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our digital business, but we are very encouraged by the results thus far. 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 Manu will discuss in more detail, we are able to raise our guidance due to better execution, with some of our projects being ahead of our expected schedule. Additionally, I'm pleased to report that we're pulling forward our profitability timeline. As you may recall, we previously expected to be adjusted EBITDA positive in fiscal year 2024. We do not provide quarterly guidance; however, we're expecting to be close to adjusted EBITDA breakeven in the fourth quarter of fiscal year 2023. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we received a 200-megawatt binding award for our Rooster track product, making this our third award in energy storage and transmission. As I've noted on our previous calls, we are very bullish on the transmission segment and expect this area to grow as transmission congestion becomes a critical issue around the world. Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem as we are one of only a handful of companies in the world that possesses the technology, experience, and performance requirements necessary to use any storage as transmission. Third, we will convert our supply chain into a competitive advantage. I'm pleased to say that we have signed a master supply agreement with AESC under which we will procure battery cells. This partnership adds another high-quality battery supplier to Fluence’s portfolio, enhancing our ability to meet the growing demand for any storage solutions. This agreement supports our domestic manufacturing efforts and strengthens our position as a leader in the energy storage industry. Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. Looking out at our Nispera products, starting this month we will begin including Nispera in our standard hardware solutions offerings. This is an important step as it will provide us with a path to increasing our IRR as we bundle our offerings and execute on our one sales channel approach with this cost last December. Finally, our fifth objective is to work better. I am proud to state that Fluence has published its inaugural sustainability report on our website. In this report, we outline our commitment to a circular economy that includes sustainable end-of-life management for our products as well as our firm stand against forced labor. To publish a sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we power our world for a more sustainable future and demonstrate our leadership within the sector. Turning to Slide 6, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $11.2 billion, which is up from $10.3 billion last quarter. We expect to start seeing some project awards in the second half of this calendar year that are directly attributable to the Inflation Reduction Act. We reaffirm consolidated revenue growth of 35% to 40% year-over-year for fiscal year 2024, irrespective of the issuance of the final IRA guidance. Our 2023 guidance has increased, and the incrementally higher 2024 outlook represents an expected benefit to revenues of nearly $500 million over this two-year period, relative to our expectations in our Q1 earnings call three months ago. It is worth noting that we're seeing success regardless of the IRA. A few examples of recent successes include the binding award in the transmission segment that I previously mentioned. Second, we were recently awarded a 400-megawatt-hour contract in Australia for Shell Energy’s Rangebank project. As you may recall, we signed a 1,200-megawatt-hour contract with Orsted in December, and during Q2, we signed a service agreement for this product. All of these were achieved without consideration of the Inflation Reduction Act. Turning to Slide 7. We are pleased to see that some of the initial IRA regulation has been released by the U.S. Treasury. However, we are still waiting on the domestic content regulations, but we believe the actions we are taking will enable us to meet the domestic content requirement sought by our customers. Regarding our U.S. module manufacturing, we are on schedule and expect production to start in our Utah facility in the summer of 2024. As it relates to Section 45X of the IRA or the production tax credits, we are targeting to be able to record the $10 per kilowatt-hour incentive associated with manufacturing U.S. battery models. Right now, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. We do believe it will be a volume driver for us as many of our U.S. customers have expressed the need for a U.S. made product. Thus, we expect the $10 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 kilowatt-hour incentive on our income statement as a reduction to cost of goods and services. However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the first five years of the credit. The exact timing of the cash payment is unclear at this time as we are still waiting for clarification from the U.S. Treasury. Currently, we're eagerly waiting for the publication of the IRA guideline for any storage and domestic content, as several of our customers want the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, our 2024 growth expectations remain unchanged, irrespective of the final regulations being published. Turning to Slide 8. As I briefly mentioned, we recently published our inaugural Sustainability Report, which highlights our vision to implement digital solutions to further optimize the energy storage supply chain and lifecycle. I'm pleased to state that we are committed to promoting social sustainability by fostering diversity and inclusion within the organization. We believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year 2023, which includes that approximately one-third of our employees hired have identified themselves as minority. In the report, you will also see that end-of-life management is very important to us, and we have committed to developing a circular economy framework for our products. Additionally, we highlighted in the report that we have established a robust supplier code of conduct that is aligned with the international deal of human rights at work. That ensures that our suppliers adhere to ethical sustainable business practices. We summarized our policy on conflict minerals and unethical sourcing, in which we commit to working towards avoiding the use of minerals within our supply chains from conflict-affected areas. Furthermore, in the report, there is a signed commitment letter taking a zero-tolerance stance regarding forced labor. This is an area that is critical to our values. We also included a timeline so our stakeholders can monitor our ESG journey. In the spirit of accountability and transparency, we will provide an update on our sustainability program annually, so our stakeholders can track our year-over-year progress. Overall, Fluence Energy’s sustainability report demonstrates the company's commitment to sustainable practices and its efforts to drive positive environmental and social impact. Through its various initiatives and targets, Fluence Energy is working towards a more sustainable future. In conclusion, I'm very pleased with the achievements of the second quarter. Although we're mindful there's still a lot of 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.

Manavendra Sial, Chief Financial Officer

Thank you, Julian. I will begin by reviewing our financial performance for the second quarter and then discuss our guidance for fiscal year 2023. Please turn to Slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue, or roughly $600 million, came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second-quarter operating expenses, excluding stock compensation, were $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. 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. Turning to our cash balance, we ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call. Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300 million in the second quarter of 2023 from the first quarter 2023 level. Our decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment and as communicated in our last earnings call, we should expect improvement in the inventory turns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to Slide 11. As Julian indicated, we have increased our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit and narrowed the ranges. We now expect our total revenue to be between $1.85 billion and $2 billion, which is up from our previous revenue guidance of $1.6 billion to $1.8 billion. This is an increase of $225 million based on the guidance midpoint, driven by our overall project timeline acceleration. While we expect that most of our projects will be executed within the 15 to 18-month timeframe that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024. This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects. We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog. Turning to our 2024 revenue outlook, we continue to expect 35% to 40% growth in revenue from 2023 to 2024, notwithstanding the higher revenue base we now see for 2023. This implies an incremental $300 million of revenue for 2024 relative to our previous outlook. Thus, for the two-year period 2023 and 2024, we now see revenues of more than $500 million higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110 million and $135 million, which is up from our previous guidance of $85 million to $115 million. It is important to note that this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint. Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter. With that, I will turn the call back over to Julian.

Julian Nebreda, President and CEO

Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter's results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluence history. Second, we continue to make significant progress on our risk management, most notably in reducing our supply chain risk as reflected in diversifying our battery sales suppliers. Third, we continue to expand our offerings, concentrating our efforts in developing new products and solutions that create value for our customers, as shown in our third transmission segment award. Fourth, we are positioned in Fluence for increased IRR by including Nispera in our standard offer starting this month. Fifth, the financial results and accomplishments covering today's call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 2023 and to pull forward our timeline to profitability. This concludes my prepared remarks. Operator, we are now ready to take questions.

Operator, Operator

Our first question comes from the line of James West with Evercore.

Julian Nebreda, President and CEO

Good morning James. How are you?

James West, Analyst

Good morning, Julian. I have a quick question regarding your customer base and their current storage needs. Looking back at last year, there was a rush to secure assets, equipment, and batteries. With the IRA in play, there's been some delay in fully grasping its implications in the U.S. Are customers approaching you now mainly asking about costs, or are they more concerned with timelines and when you can fulfill their needs? We know you're not solely focused on expansion but also on profitability, which is evident this quarter, so congratulations again on your results.

Julian Nebreda, President and CEO

Thank you, James. A significant part of our ability to improve margins is due to a detailed segmentation of our customer base. To answer your question, we seek customers who appreciate the value of our offerings; those who value clearly defined products that we ensure will be delivered effectively and perform as promised. We provide services that keep these solutions updated and operational when needed. Customers who prioritize these aspects are our focus. Some place more emphasis on price, while others prioritize performance. In areas where regulations are changing, they require an understanding of how to adjust. This quarter presents some unique challenges. The decline in lithium prices and a more dynamic battery market create additional options for us. The RMI we provide, which was unsettling for customers during price increases, now reassures them when signing contracts because it aligns with current market conditions. This is beneficial on a global scale. In the U.S., the Inflation Reduction Act has prompted some customers to discuss timelines with their offtakers, asking if products are needed by specific dates, or if they’re willing to wait for a potential 10% upside that could lead to better pricing for any services offered. The responses we get vary; some customers need projects completed promptly, while others can afford to delay. Our outlook for next year remains strong irrespective of the IRA, driven by robust international demand. Our backlog reflects what we have already secured and our expectations for meeting this strong global demand.

James West, Analyst

Okay, okay. That's very helpful Julian, and thanks for that. And then maybe a quick follow-up from me on margins and maybe for Manu. But getting to EBITDA breakeven by the end of this fiscal year, obviously, a good target and making good progress there. But how should we think about EBITDA margins as we go through fiscal 2024 and getting to a level of profitability and sustainable profitability on EBITDA?

Manavendra Sial, Chief Financial Officer

Yes. Consistent with what we mentioned in our last call, we anticipate achieving EBITDA positivity in fiscal year 2024. We expect to see margins gradually improve throughout the quarters in fiscal year 2024 as well. Analyzing our trajectory based on a trailing 12-month revenue average, our revenue continues to grow. As we've indicated, our operating expenses will increase at a rate less than half that of our revenue growth. Coupled with signing new contracts in the 10% to 15% margin range, this suggests that our EBITDA profile will progressively enhance in the upcoming quarters.

James West, Analyst

Okay, got it. Thanks guys.

Operator, Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Julian Nebreda, President and CEO

Hey, good morning Brian.

Unidentified Analyst, Analyst

Hey everyone, this is Miguel on for Brian. Maybe just the first question here on the $500 million incremental for fiscal 2023 and 2024. You're talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples, is it just a function of getting more visibility on batteries, is it being able to pull in projects faster than expected, just hoping to get a bit more color there on the execution front? Thanks.

Julian Nebreda, President and CEO

Yes. Brian, the way I'll say it is that our system is working better. We had the right manufacturing that did a great job this quarter, and we have been able to de-risk our deliveries and our contracts with our customers. The collective efforts from our supply chain, sales team, and manufacturing team have allowed us to de-risk our deliveries in a way that enables us to recognize revenue, even if some of our customers are not fully ready to install the equipment. It's important to think about it this way. The combination of these elements is essential for our current position. If the supply chain had not aligned, we wouldn't be here. If the manufacturers hadn't increased production, we wouldn't be here. If we had not de-risked implementation, we wouldn't be here. Therefore, everything is working better, and we have identified the projects where we believe we can do this. These are the foundations for our $500 million improved revenue over the next two years.

Unidentified Analyst, Analyst

I appreciate that. Regarding the updated guidance, I'm curious about the ongoing marginal constraints in the U.S. that are still affecting solar projects. Can you provide an update on the status of solar plus storage projects in your backlog? How much have these projects been delayed due to module constraints? Thank you.

Julian Nebreda, President and CEO

Yes. As far as I understand, we haven't heard anything specific from our customers. As you know, we sell to larger customers who are better positioned to manage these issues. However, this has also been a reason we took into consideration when we reviewed our enterprise risk management. One of the changes we made in our contracts was that if our solutions are ready for delivery, the customer needs to take them no matter where they are with their solar components or any other elements. Our customers haven't reported any specific issues to us, though the general caution seems connected to the IRA regarding the availability of U.S. made modules.

Unidentified Analyst, Analyst

Okay, got it. Thanks everyone. I will pass it on.

Operator, Operator

Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Julian Nebreda, President and CEO

Hey Maheep, how are you?

Maheep Mandloi, Analyst

Hey, good morning. Thanks for taking the questions here. Sorry, I was hopping between calls here, so I might have missed this. The $500 million over the two-year period, is that higher revenues versus the prior run rate or is that just looking at FY 2024 versus FY 2023?

Manavendra Sial, Chief Financial Officer

Yes. Hey Maheep, so the way to think about the $500 million is as follows: we've increased the guidance for 2023, and at the midpoint, it's $225 million. We've kept the same run rate. So you have a higher 2024 implied outlook based on a higher 2023. That gives you an increment of $300 million for 2024. So you add the $225 million with the $300 million, and you get to over $500 million in revenue. And that's a result of great project execution, with a read-through for the remaining 2023 and 2024 as well. I would be remiss if I don't reiterate that we have very strong demand signals with over a $1 billion increase in our pipeline.

Maheep Mandloi, Analyst

Got it. I appreciate that clarification. And then could you kind of talk about which regions are driving that and is this customers accelerating the projects or are we seeing more benefits from manufacturing or procurement on your end? Thanks.

Manavendra Sial, Chief Financial Officer

Yes. In terms of the demand signals, if you look at our order book for the second quarter, as Julian mentioned, we are winning globally. We are succeeding in both solutions and services. The Americas account for two-thirds of our overall business, which will be the larger dollar driver. However, we are winning globally. What's driving the revenue upside in the second quarter is our typical project execution timeframe of 15 to 18 months; however, due to better execution and how we are writing our contracts, we have pulled forward some select contracts into the lower end of that range, which carries over to the back half of this year and next year.

Maheep Mandloi, Analyst

Appreciate it, thanks. I will take the rest offline. Thank you.

Operator, Operator

Our next question comes from Tom Curran with Seaport Research Partners.

Julian Nebreda, President and CEO

Hey Tom, good morning.

Thomas Curran, Analyst

Good morning. For the growth you've had in services assets under management for fiscal 2023 year-to-date, could you share with us for the contracts you've added, the split between those with augmentation and those without?

Julian Nebreda, President and CEO

Let Manu take that one.

Manavendra Sial, Chief Financial Officer

Yes, I don't think we give that split, but a significant portion of our contracts have the ability to augment the site if the customer so chooses.

Julian Nebreda, President and CEO

Yes, it gives them an option. So that's the way to think about it. Most of our customers do have the option in their contracts, if they so choose to augment.

Thomas Curran, Analyst

And so you are seeing evidence to support the expectation of a trend towards ever more augmentation opt-in?

Julian Nebreda, President and CEO

Yes. The issue is that it is an option that the customer can take, but we cannot put it as a backlog value. It's an option that they have; however, we believe in most cases, they will take it. We have worked from a product perspective to ensure that we can provide our augmentation offering with different technologies. That will make us much more competitive when the time comes. While we believe that many will opt for augmentation, I don't want to boast about something that hasn't yet occurred.

Thomas Curran, Analyst

I appreciate that, Julian. And then for the consolidated pipeline, can you give us a sense of how much visibility you had on the portions of that that are mega projects or storage as transmission awards that could be doled out over the next 12 to 18 months? And for storages transmission, would you expect your next award to most likely come from the U.S., Australia, Germany, or Chile?

Julian Nebreda, President and CEO

Yes, I'd prefer not to go into the details about our pipeline as we believe it makes things more complicated. As for storage as transmission, we are working in both Europe and Chile, as well as the U.S. However, I believe most likely we will have our next win in Europe. This is my view. Let me add that the Chile regulation for transmission is inadequate in its current form. The design is ineffective and won’t yield good results.

Thomas Curran, Analyst

Got it, thanks for taking my questions.

Operator, Operator

Our next question comes from Julien Dumoulin-Smith with Bank of America.

Julian Nebreda, President and CEO

Hey Julien.

Julien Dumoulin-Smith, Analyst

Hey, good morning guys. Hey Julian, glad you are a namesake. Thank you very much for the time. Appreciate it. So listen, I just wanted to first come back to the $500 million revenue commentary that Manu provided. Can you elaborate a little bit on what this says about getting to kind of the target gross margins, especially as you think about what that says for next year here? Obviously, you have that improvement through the course of this year, but what does that say on the incremental margin that you're getting for next year now that you're really accelerating the revenue side of this?

Manavendra Sial, Chief Financial Officer

Yes, thank you for the question, Julien. The way to think about our gross margin can be seen through our guidance updates. We are signing new contracts in the 10% to 15% margin rate, and more importantly, we are maintaining those margin rates. The increase in guidance from the last call to the current one reflects an increase in gross margin of approximately 50 basis points. The new contracts are signed at the 10% to 15% margin rate. As we roll forward into 2024, that remains a good assumption for margin perspective. Translating this gross margin into EBITDA gets even better, boosting our confidence for an EBITDA-positive outlook for 2024 due to better operating leverage and our approach to overhead expenses, which we've disciplined to keep below 50% of our top-line growth. If you project 2023 into 2024, with revenue growing at 35% to 40% on a higher revenue base, along with signing contracts with better margins, you can expect robust EBITDA improvement.

Julien Dumoulin-Smith, Analyst

Excellent. Alright. Great. And then just going back to the commentary on the call on Nispera, where you talked about this new strategy this month about including it as standard in your hardware offerings. What does that say vis-a-vis Fluence Q outlook and the revenue contribution and its level of meaningfulness? I think earlier you guys had said it wasn't really that meaningful until 2025; now that you're including it as 'standard', does that change that expectation?

Julian Nebreda, President and CEO

No. Julien, this was always part of the plan. Remember, when we looked at this, we planned for this. This was part of our December plan, and integrating Nispera as standard in our offerings is right on schedule. Our perspective on when this business will be material has not changed. We talked about the single sales channel and are pleased that replatforming our Mosaic business is going well. We are already offering Nispera to our customers as part of our standard offer.

Julien Dumoulin-Smith, Analyst

Excellent, okay, perfect. We will leave it there. Thank you guys very much. Excellent.

Julian Nebreda, President and CEO

Right, thank you Julien.

Operator, Operator

Our next question comes from Ben Kallo with Baird.

Julian Nebreda, President and CEO

Hey, good morning Ben.

Benjamin Kallo, Analyst

Hey guys, good results and good progress. Thank you for taking my questions. I just wanted to follow-up just on margin. I'm sorry to keep going on this question. But I just wanted to think about the different levers and cost improvements versus legacy contracts. I think Julien asked something similar to this. But as we go into attachment rates of other services and software as we go into 2024 and beyond and how you guys think about that? And then just my follow-up is kind of housekeeping, but just the IRA benefits and profitability. And I'm sorry, Manu, if you said this, but have you baked any of that into your profitability change going forward, so the production tax credits or anything like that? Thank you.

Manavendra Sial, Chief Financial Officer

Yes, sure. Ben, lots to unpack there. To bridge gross margins from legacy contracts to new deals being signed in the 10% to 15% margin range, it's driven by better execution, better pricing, and improved risk management. Our margin expectations have risen to the 10% to 15% range from much lower previous expectations. Consequently, when we execute legacy contracts, we tend to do so at low single-digit margins. In contrast, newer projects are executed at those 10% to 15% margin rates, depending on various factors. This trend informs the gross margin guidance. If we compare our first-half actuals gross margin rate with the guidance for the full year, it suggests a high single-digit gross margin rate for the second half of the year, reflecting positive implications for 2024 as well. In regard to the IRA PTC benefit, we foresee it contributing to greater volume rather than driving margins above the set 10% to 15% range. It may push certain contracts to the top end of the range. However, we still expect margins to stay within the predicted bands. We also note high attach rates for services on deployed assets, showing slightly better results than last quarter. This will be increasingly significant for margins in 2024, becoming even more so in 2025.

Benjamin Kallo, Analyst

Great, thank you very much.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Julian Nebreda for closing remarks.

Julian Nebreda, President and CEO

Great. Well, I want to thank everybody for participating and joining us and your questions. We are really proud of our team's work, and our success is clearly exceeding our expectations, which is great news. This reaffirms our commitment to work hard as we make a difference at the end of the day. Thank you again for participating, and we'll talk to all of you during the quarter. Hopefully, see you soon. Bye-bye.

Operator, Operator

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