Earnings Call Transcript - FLNC Q2 2024

Operator, Operator

Good day, and thank you for joining us for Fluence Energy, Inc. Q2 2024 Earnings Conference Call. Please note that this conference is being recorded. I will now turn the call over to your speaker today, Lex May, Vice President of Finance and Investor Relations. Please proceed.

Lexington May, Vice President of Finance and Investor Relations

Thank you. Good morning, and welcome to Fluence Energy's Second 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, our Chief Products Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures 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.

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 on today's call. I will provide a brief update on our business and then review progress on our strategic objectives. Starting with Slide 4, I am pleased to report that in the second quarter, we had a strong financial performance as we recognized $623 million of revenue and increased our gross margin and cash flow generation. We delivered our third consecutive quarter of double-digit gross margin. Our adjusted EBITDA for the second quarter was approximately negative $6 million, significantly improved from the same period last year. We ended the quarter with $541 million of cash, an increase of $65 million from December 31. Additionally, we recognized more than $700 million of new orders. Our solutions business contracted 2.2 gigawatt hours, our services business added 900 megawatts and our digital business added 3.1 gigawatts of new orders. Our signed contract backlog as of March 31 was $3.7 billion, which was in line with our December 31 level, as revenue recognized this quarter and a couple of small adjustments offset the additional order intake. The increasing number of opportunities was reflected in the growth of our pipeline, which increased by $2.9 billion to $16.3 billion, thus giving us additional confidence in our revenue growth outlook for fiscal year '25 and beyond. We had a strong quarter in our digital business, adding $3.1 contracted gigawatts to our backlog. Our digital assets under management increased by 200 megawatts to 17.2 gigawatts as of March 31. In summary, our combined services and digital annual recurring revenue, or ARR, improved to approximately $68 million as of March 31. 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 that investors can monitor and measure our performance against. First, on delivering profitable growth. I'm pleased to report that we have generated a record amount of free cash flow of approximately $88 million for the first half of our fiscal year. This is a proof point of the success of our business model and working capital management capabilities that result in a significant amount of cash generation. Second, we will continue to develop products and solutions that our customers need. As such, I am pleased to report that during the quarter, we expanded our Gridstack Pro line to include the 5,000 series. This is a larger and more energy-dense 5-megawatt 20-foot enclosure, which I will discuss in more detail. Additionally, we signed our first domestic content contract that will allow our customers to benefit from incremental incentives on the Inflation Reduction Act, or IRA. We are seeing tremendous interest from customers for U.S. domestic content products. We believe we are well positioned to capitalize on this momentum as we are one of the first companies capable of providing customers with products that we expect to qualify for domestic content under the IRA. Third, we are on track for our U.S. battery module manufacturing to begin initial production at our facility later this year. This battery model is a key piece that will enable us to provide a product that meets the U.S. domestic content requirement for battery and storage. Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. I am pleased to report that our digital contract backlog increased by about 75% on a dollar basis from this time last year. And our fifth objective is to work better. I'm proud to state that in April, Fluence released its second annual sustainability report, which builds upon the sustainability disclosure from an inaugural report published in April '23 and provides updates on Fluence's sustainability strategy, which I will touch on more in a moment. Turning to Slide 6, we continue to see strong growth in demand for utility scale energy storage systems. This is the 10th consecutive quarter of order intake or pacing revenue recognized, showcasing the robust growth in utility scale energy storage. Our backlog of $3.7 billion provides strong visibility to future revenue. As Ahmed will discuss in more detail, we're reaffirming our guidance ranges for both revenue and adjusted EBIT. To that end, we have approximately 90% of the midpoint of our revenue guidance covered by our backlog plus revenue recognized year-to-date. Based on the conversations we're having with our customers and potential customers, we are expecting to see continued strong revenue growth in fiscal '25 of approximately 35% to 40% from fiscal '24 guidance midpoint. Our '25 outlook is underpinned by our pipeline, which sits at approximately $16.3 billion and grew $2.9 billion from last quarter. Our expectations for pipeline conversion is at a 50% probability over the next 24 months. I am increasingly encouraged by the growing number of opportunities we see around the world. As you can see from the chart on this slide, BNEF has forecasted between now and 2030, global new capacity additions for utility scale storage of nearly 670 gigawatt hours including China. This is a major opportunity for us to continue our growth. We have a significant presence in some of the markets outside the United States, where we expect to see the strongest growth, for example, Germany, our third largest market and biggest European market. Battery and storage is gaining increasing significance in Germany as a country accelerates its transition towards renewable energy sources and aims to phase out nuclear power and reduce reliance on fossil fuels. As a result, BNEF sees this market adding nearly 23 gigawatt hours of new capacity between now and 2030. Additionally, Germany is a growing market for Ultrastack, our transmission solution, and we have been very successful capturing opportunities as they come to market. Australia has quickly become our second largest market. BNEF sees this market adding nearly 25 gigawatt hours of new capacity between now and 2030. As Australia continues to transition towards a more sustainable energy future, the battery storage market is experiencing significant growth. We have been successful in capturing a good portion of these opportunities, and we are committed to expand our presence in this market as we move forward. The United States is our largest market. Battery and storage is playing an increasingly vital role in the U.S. as the nation seeks to modernize its energy infrastructure, enhance grid resilience, and transition towards cleaner and more sustainable sources of power. Furthermore, the IRA has spurred a significant amount of demand. BNEF sees nearly 350 gigawatt hours of new capacity added between now and 2030. This is a tremendous amount and represents a huge opportunity for us to capitalize on with our standard product offering such as the Gridstack Pro line, which includes our U.S. domestic content offer. More importantly, the utility scale battery storage sector in the United States has demonstrated remarkable resilience to political shifts and changes in administration largely due to strong economic foundations and bipartisan support for grid modernization and clean energy infrastructure. The success of utility scale battery storage projects in the United States is driven by economic factors, just as the declining cost of battery technology, its technological advantage against other capacity firming solutions, and the increasing and urgent need for grid flexibility and resilience. The need continues to increase as renewable energy continues to improve its cost and becomes the most economical energy source even for states that traditionally had relied on fossil fuels. Overall, the U.S. energy storage outlook remains very robust, and the intertwining of economic opportunity and technological advancement has positioned the utility-scale battery storage sector as a resilient and driving component of the American energy landscape with support all around the political spectrum. Turning to Slide 7, Fluence has significantly expanded its Gridstack Pro line to serve a wide range of project needs and enhance the versatility of any storage solution. The line comprises three enclosure sizes, namely the 1,000, the 2,000, and the 5,000 series, each sharing core components, certifications, and operating systems to ensure Fluence's consistent domain expertise across the board. This modular approach enables different configurations, allowing for mixing and matching of enclosures to precisely meet the requirements of specific projects while maintaining competitive usage of energy prices. By offering a variety of social capacities, the Gridstack Pro line effectively addresses the issue of system overbuilding and contributes to reducing the cost per kilowatt hour. The highlight of the Gridstack Pro line expansion is our ability to utilize one platform to seamlessly and faster, integrate new cell technology with our modifications to the platform. Additionally, the 5,000 series has remarkable energy density, offering an impressive 5-6 megawatt hours in a single 20-foot enclosure. This high energy density not only optimizes land usage or project size but also enhances overall efficiency, making it an attractive solution for space-constrained installations. Moreover, the Gridstack Pro line prioritizes safety, surpassing industry standards by successfully passing Fluence's internally developed safety test. This commitment to safety ensures peace of mind for customers and stakeholders alike, reinforcing Fluence's reputation as a reliable provider of energy storage solutions. Furthermore, the Gridstack Pro line is built with Fluence modules, battery management systems, electronics, and software, all developed or fully controlled by Fluence to mitigate any concerns related to cybersecurity or policy issues. To better serve U.S. customers, Fluence offers the Fluence battery pack with domestically manufactured cells and modules, making the Gridstack Pro line one of the first storage solutions eligible for the 10% investment tax credit under the IRA. This initiative not only supports the domestic manufacturing sector but also incentivizes the adoption of energy storage technologies in the United States, contributing to the nation's energy security and sustainability goals. Turning to Slide 8. As I mentioned earlier, we recently signed our first contract for a product that qualifies for domestic content, allowing our customers to capture an incremental 10% investment tax credit. We're seeing tremendous interest from customers for our domestic content offering, and we expect to sign additional contracts in the coming quarters as it is competitively priced against non-U.S. alternatives that do not include the additional 10% ITC. Our proprietary battery model is at the heart of our domestic content offering, and it is key to meeting the criteria established by the U.S. treasury department. By manufacturing our own battery modules, we will also qualify for IRS Section 45x benefits, which includes an incentive payment of $10 per kilowatt for battery modules produced in the U.S. We are currently on schedule to begin our initial production later this year, gradually ramping up over the subsequent quarters. Turning to Slide 9. I'm proud to report that in April, Fluence released its second annual sustainability report, which builds upon the sustainability disclosures from an inaugural report published in April '23 and provides updates on Fluence's sustainability strategy. Some of the highlights from the report include: expanded our green gas footprint analysis into Scope 3 and clarified reported boundaries. We offset 60% of our global business travel emissions from flights, and we kicked off Scope 2 emissions reduction efforts for Fluence's facility, including switching our Erlangen facility in Germany to 100% renewable electricity. In conclusion, I'm pleased with the achievements of the second quarter. Although we're mindful there's still work to be done, we will look to continue this momentum as we progress through '24. I will now turn the call over to Ahmed.

Ahmed Pasha, CFO

Thank you, Julian, and good morning, everyone. Today, I will review our second quarter financial results and then discuss our 2024 guidance. Beginning with our second quarter 2024 results on Slide 11. We generated $623 million in revenue, which puts us at $1 billion or 33% of the midpoint of our full year guidance of $3 billion. I would like to note that year-to-date revenue is approximately $100 million ahead of prior expectations of 30% or $900 million of annual revenue in the first half as we were able to complete certain projects in the Americas earlier than the third quarter. In terms of profitability, we generated approximately $66 million adjusted gross margin or 10.6%, representing the third consecutive quarter of generating double-digit gross margin. These results also include a modest expense from settling our pending litigation with Siemens Energy. Our continued execution further demonstrates that our legacy backlog issues are behind us, and we are benefiting from our higher-margin backlog. Our operating expenses were $74 million, representing 11.9% of quarterly revenue which is down from 17% in the first quarter. This continued momentum also reflects in our improving EBITDA. More specifically, this quarter, EBITDA materially improved to negative $6 million versus negative $28 million in Q2 '23 and negative $18 million in Q1 '24. 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 4. Before I talk about our liquidity, I would like to share that our continued focus on profitability and proactive working capital management has yielded positive results. This reflects in our positive year-to-date free cash flow performance of $88 million. In terms of cash, I am pleased to report that we ended the second quarter with $541 million of total cash, an increase of approximately $65 million since last quarter and the fourth consecutive quarter that we increased our total cash position. In summary, we have total liquidity of nearly $590 million, which we believe puts us in an excellent position to capitalize on the growing energy storage market. Moving to Slide 13. As Julian noted, based on our year-to-date performance and outlook for the second half, we are reaffirming our guidance ranges for both revenue and adjusted EBITDA for 2024 at a midpoint of $3.65 billion, respectively. At this point in the year, we have approximately 90% of the midpoint of our revenue guidance covered by awarded projects plus actual revenue recognized in the first half. Furthermore, we are on track to achieve ARR of approximately $80 million by the end of fiscal 2024. I would also like to spend a moment on our year-to-go expectations. Specifically, we expect approximately 20% of our second half revenue to be realized in the third quarter and 80% in the fourth quarter. This split reflects two factors: first, the timing of projects in our backlog, which are largely scheduled to be delivered in Q4 this year. As a reminder, our revenue is recognized as we hit certain milestones. For example, the majority of our Q4 project milestones are for production and delivery of cubes, which is within our control. To that end, we have secured the necessary batteries, manufacturing slots, and logistics. These factors provide us confidence in our ability to deliver on our revenue targets. And second, as I previously mentioned, we had approximately $100 million of revenue pulled into Q2 from Q3. Finally, looking ahead to fiscal year '25, we continue to believe that we will achieve approximately 35% to 40% year-over-year revenue growth from the midpoint of our fiscal '24 guidance range. With that, let me turn the call back to Julian for his closing remarks.

Julian Nebreda, President and 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 set in free cash flow generation of approximately $88 million for the first half of this year. This is a proof point for the success of our business model and the free cash flow it can generate. This cash generation also contributed to our strong liquidity position of nearly $590 million. Second, the outlook for utility scale storage is very robust. And there is a great opportunity for our new products to deliver value to our customers. More importantly, our space is well insulated from the upcoming U.S. elections, and we do not anticipate any significant impacts to demand as a result. So we are on track to begin our U.S. module manufacturing later this year. Together with our customers, we believe we are in a prime position to capture demand for products that qualify for the U.S. domestic content bonus. And finally, this is our third consecutive quarter of double-digit gross margins, which reflects our continuous commitment to deliver attractive returns to our shareholders. This concludes my prepared remarks. Operator, we're now ready to take questions.

Operator, Operator

Our first question comes from George Gianarikas from Canaccord Genuities.

George Gianarikas, Analyst

I was wondering if you can maybe discuss the data center opportunity and how much traction you've seen there and how your conversations have changed, if at all, recently?

Julian Nebreda, President and CEO

Thank you very much, George. So what's happening with data centers? With the rise of GenAI as a common technology, many providers are developing GenAI solutions that rely on GPU graphic processing units for parallel computing. These chips consume much more energy, five times more than older technology. Consequently, data centers are facing energy challenges. They are primarily seeking renewable firm energy sources, not just 24/7 renewable energy from the grid. We've been successful in collaborating with independent power producers like Clearway, AES, and Ørsted to enhance their offerings, and we’ve seen tremendous demand which has been reflected in our recently announced partnerships. However, data centers are now exploring additional solutions, particularly in Europe, as they face difficulties in meeting their energy needs from the grid due to renewable energy constraints. They are looking for off-grid solutions that can provide the additional capacity they require. We are examining how we can assist in this area, especially with off-grid solutions using renewables or thermal energy, based on our successful track record with on-grid solutions. We have identified several needs that our technology is well positioned to address. Our technology offers the fastest method of firming capacity in the power sector. If there's a need for continuous capacity, whether on or off the grid, battery technology is the most effective solution available. We have been engaging with data center developers and other companies to help them address these challenges by identifying their needs and developing solutions. While we do not have products to announce at this moment, we have recognized a significant area where our capacity and speed can offer resolution, along with competitive costs. We are at the beginning stages of this initiative and aim to continue our efforts to bring solutions to market. This presents a substantial opportunity for us, and we are excited about it. Over the past year, we have shifted from working exclusively on 24/7 renewables to exploring a new range of solutions that are both thrilling and transformative for the industry.

George Gianarikas, Analyst

Maybe as a follow-up to that. Are you seeing increased interest for long duration energy storage solutions? Is that something that's on your radar?

Julian Nebreda, President and CEO

Yes, when we consider off-grid solutions, longer duration is certainly a factor. Our technology is capable of exceeding the typical four-hour provision we offer to customers. The four-hour mark has become popular due to its proven economic value in the market, which tends to diminish as we look at six, eight, or twelve-hour systems. Longer duration will indeed be important, and we are examining how much we can invest to effectively support these solutions. Achieving durations beyond twelve hours presents challenges due to economic considerations. However, we believe there is a viable duration that we can pursue to support these technologies. Working on durations longer than four hours will be a key focus for us.

Operator, Operator

And our next question comes from Brian Lee from Goldman Sachs & Company.

Brian Lee, Analyst

Congratulations on the strong execution. I have a question about the revenue timing. You're mentioning the revenue pull forward and the significant shift towards the fourth quarter compared to the third quarter. It seems you have a lot of confidence in the timing of these projects. Could you provide some insight into the visibility? Sometimes the market gets nervous about a heavily back-end loaded revenue schedule, which is what you're describing for the third and fourth quarters. What is your confidence level regarding those projects being completed as planned in that timeframe without the risk of delays? Any additional information you can share would be appreciated.

Julian Nebreda, President and CEO

Let's discuss revenue recognition, as it's important to understand. Our revenue recognition process starts with recognition when we sign the contract to engineer and order the equipment. The majority of our revenue recognition occurs when we transfer the title of the equipment to the customer, followed by additional recognition at substantial completion and final completion. Most revenue comes from transferring the title of the equipment once it's manufactured to the customer. Regarding the fourth quarter, while it involves significant revenue, a large portion, though I can't provide an exact percentage, mostly revolves around the transfer of equipment title. We need to manufacture and transfer the title to our customers. We have the necessary supply and manufacturing capacity, and we've been successfully manufacturing with very little risk of delays. Our logistics are also functioning well, which minimizes the risk for delivering that revenue in the fourth quarter. While manufacturing and logistics are under control, we should also consider that we have a limited number of customers involved, which amounts to around 20 to 25 projects that we can manage seamlessly with our prototype solutions. We are very confident in our ability to deliver as our customers require their projects on specific sites. We are working with them to accelerate this process, especially around site preparation for the equipment. Our customers’ timelines for receiving their products and transferring ownership significantly influence our schedule. Some have inquired about the potential for seasonality to repeat, but our historical trends show that revenue distribution varies each year. This year is more back-ended, while last year was evenly split across the quarters, and the year prior saw a concentration in the middle. These fluctuations stem from our customers' project timelines, which are influenced by their Power Purchase Agreements. Our focus remains on delivering manufactured units to our clients, and we have a limited number of projects, around 20 to 25, which we have handled exceptionally well, achieving close to 100% delivery capability. Unless there’s a significant global disruption to trade, we anticipate success in Q4, which is why we have reaffirmed our guidance. We remain highly confident in our objectives.

Ahmed Pasha, CFO

A fair question. And I think the only thing I would add to what Julian has just mentioned is if you look at our last 12 months' performance, we have been executing on every project on time and on budget. I think that gives us additional confidence in our ability to deliver particularly when we have all those cubes and equipment and logistics lined up for delivery in Q4.

Brian Lee, Analyst

Okay. I appreciate all that additional color, guys. Maybe one more, if I could squeeze in a gross margin one. You also have the high end of the range, you're talking about of the 10% to 12% gross margins in 4Q. I know you're not big fans of speaking to all the gross margin targets, it's more about EBITDA. But if you've got that sort of momentum exiting the year, you still have this 35% to 40% revenue growth outlook for fiscal '25. Can you give us a sense of should we be starting off kind of in that range, call it, high end of the 10% to 12% as we look into fiscal '25, just the longer-term margin targets are to the mid-teens? Just wondering if you start to approach those even into fiscal '25 given the year-end momentum plus the revenue growth additional that you're expecting for next year?

Julian Nebreda, President and CEO

Let me start by saying that for this year, we expect a growth of 10% to 12%. I understand there are concerns about gross margin, but we are clear on our targets. The midpoint of this guidance is 11%, and I am confident we will reach it. Looking ahead to 2025, while we haven't provided specific guidance yet, I mentioned that we anticipate top line growth of 35% to 40% based on this year's midpoint guidance. This translates to about $4 billion in revenue for 2024. Additionally, we expect gross margins to be between 10% and 15%, with a midpoint of 12.5%. As of now, I can't confirm any factors that would significantly alter our outlook for next year, as our projections are largely driven by order intake. We will strive to provide you with better options if possible. Currently, our outlook for 2025 is a gross margin of 10% to 15%, averaging at 12.5%. Regarding adjusted EBITDA, we expect our operating expenses to grow by no more than 50% of our top line growth. This sets our expectations for 2025. As the year progresses and we have more revenue secured for 2025, we will confirm these figures and provide updates. If there are opportunities for improvement, we will inform you. For now, we stand by our projected gross margin of 10% to 15% for 2025.

Operator, Operator

And our next question comes from Dylan Nassano from Wolfe Research.

Dylan Nassano, Analyst

So just wanted to check, there's been a lot of talk recently about solar projects getting delayed, interconnection issues, equipment shortages, etc. Is this something you guys are exposed to at all? Is there any read-through to your answer to Brian's question about the back-end weighting of the year?

Julian Nebreda, President and CEO

Not really. As I mentioned, much of our back-end involves the delivery of manufactured products and the transfer of title. This typically occurs on-site when everything is ready. We have a contract rule that requires customers to take title if there are delays, which are usually tied to EPC-related issues that are typically weeks rather than months. When delays do occur, our contracts specify that customers must take title at a predetermined time. This is the standard process. Looking ahead to 2024, particularly in the fourth quarter, we have projects still in civil works that we are preparing. We are closely coordinating with our customers and do not anticipate any delays in related projects or elements that could affect our delivery schedule.

Ahmed Pasha, CFO

No, I think the only thing I would add is that we signed these contracts 12 to 18 months ago. Generally, when we sign a contract or start construction, the customers have already obtained all necessary permits, which is when they issue a notice to proceed. We feel confident about our execution because there are no pending issues that could derail the projects, especially regarding the interconnection challenges.

Dylan Nassano, Analyst

Got it. And then just a quick follow-up. Any recent developments with any of the outstanding litigation expect kind of settle any time soon? Anything you can say there would be helpful.

Julian Nebreda, President and CEO

Thanks, Dylan. I believe Ahmed mentioned earlier that we reached a settlement in the Siemens Energy litigation. Just to clarify for anyone listening, Siemens Energy is not Siemens AG or its shareholders. Siemens Energy is a customer linked to our shareholder but is not one itself. The litigation we settled was not material and was a typical part of our business operations. The terms of the settlement are even less significant than the original litigation and represent only a small portion of the claims made by the customer. As I’ve stated previously, Siemens Energy is not a major customer for us, so our interactions with them have been minimal. When the litigation began, it was part of the normal business process to resolve issues. Ultimately, we reached a resolution that was satisfactory for both Siemens Energy and us. Regarding the other two litigations, there is nothing significant to share at this point, including the outlook litigation, where not much has changed. The most crucial incident we've discussed before does not have any pending litigation at the moment, and there's nothing major to report. Again, Siemens Energy’s situation is settled in a way that benefits both parties, and both the litigation and the settlement are immaterial.

Dylan Nassano, Analyst

And congrats on putting that Siemens issue behind you.

Operator, Operator

And our next question comes from Mark Strouse from JPMorgan. Mark.

Mark W. Strouse, Analyst

So following up on Dylan there. So I appreciate you're not seeing delays in your backlog projects. But I guess my question would be just when you're looking at your pipeline, is there anything that you're seeing there as far as kind of maybe an elongation of the timing between when you're issuing a quote and when you're getting a final order? Any kind of qualitative conversations you're having with folks about the next several years, projects potentially getting delayed?

Julian Nebreda, President and CEO

What comes into our pipeline are projects that are very mature in the interconnection queue because these are projects that we see can deliver and we can convert into backlog within the next 24 months. Generally, you don't see delays in these projects because they have already spent about three years in the queue. They know how to connect and what they need to do. It becomes more about execution than anything else. We have leads which are all the projects we've reviewed with our customers that are not necessarily ready for the pipeline, but we believe we will work on them as we consider our customers' long-term plans. Those leads are relatively mature, and we take a conservative view of them. I don't know if there's been any deterioration in timing compared to what we observed a year ago; it seems consistent. We are seeing a lot more projects entering that group and more players involved. If you examine the pipeline in the U.S., there is nearly a terawatt of battery storage projects entering the queue, which is a significant amount. Not all of these will move forward. However, I can say that we are witnessing a substantial increase in the number of projects early in the queue, which gives us great confidence that this business is positioned for strong growth ahead. Our focus remains on more mature projects that have been in the queue for almost 2 to 3 years and have clear timelines. Over the past year, I have not observed any decline in those timelines. It's also important to note that these challenges are primarily a U.S. concern; other countries, despite having their own delays, manage their processes differently, allowing for more predictability in project timelines. Therefore, they do not experience the prolonged queues seen in the U.S. The most exciting news this quarter is the nearly 1,000 gigawatts of capacity in the U.S. queue, which represents a remarkable opportunity.

Mark W. Strouse, Analyst

Yes. That's great to hear. Julian, a quick follow-up. Congrats on signing your first domestic content contract. Not necessarily looking for specifics on that contract, but I imagine you're having quite a few conversations with other folks there. You've said in the past that the 45x manufacturing tax credits would still kind of put you in your target gross margin range. Just curious now that we're getting closer to more and more of these contracts hitting, if you can provide an update on that commentary about gross margin impact.

Julian Nebreda, President and CEO

As I mentioned, with the 45x $10 per module manufacturing in the U.S., we expect this to remain within our 10% to 15% target range. It shouldn't change our position. We've previously stated that our domestic content gives us a first-mover advantage, allowing us to secure contracts more effectively than competitors. We can offer significantly lower risk compared to others in the market. Therefore, we see potential for margin expansion, although it's still early to share specific updates. I want to avoid making statements that could come back to haunt us. Our first-mover advantage has been highlighted many times, and after closely examining what our competitors are offering, we believe we are the most secure and least risky option available. I feel confident we will keep you informed.

Justin Clare, Analyst

So just a follow-up on the domestic content here. It sounds like you're seeing very strong demand for products that will qualify for the domestic content adder. So just wondering, as we head into 2025 and then even into 2026, how much of your total sales in the U.S. do you think will include domestically produced battery cells and battery modules? Could this be a considerable portion of your sales in the U.S. market?

Julian Nebreda, President and CEO

Over time, we expect that domestic content will become essential in the U.S., as players will require it. This change won't happen right away. In 2025, there will be a mix, and by 2026, we anticipate further progress. It's challenging to predict the exact revenue distribution for 2025, including how much will come from domestic content due to the lengthy timelines of some projects. However, our strategy indicates that eventually, domestic content will account for the majority of the U.S. market. Yes, we are still operating at our facility in Utah. We have considered plans to potentially move closer to battery cell production, but as of now, no dates have been established for that. Therefore, our current plans remain in Utah. Most of our largest markets are located on the western side of the U.S., and our facility has the capacity for significant expansion, which could happen rapidly. Though we haven't set any dates for possible expansion in the eastern U.S., we are actively exploring opportunities in Europe as well. We recognize that developing an ecosystem is necessary, and that's what we are focusing on. For the Asia-Pacific region, we manufacture in Vietnam and are examining opportunities in India more closely. We believe that not only can we serve the Indian market, but India also has the potential to be an excellent manufacturing hub for our products. There are strong manufacturing companies there that could help us establish an ecosystem more rapidly than we could in Europe. Therefore, it is likely that our next announcements regarding manufacturing capabilities will come from India rather than the Eastern U.S. or Western Europe.

Operator, Operator

And one moment for our final question. And our final question comes from Kashy Harrison from Piper Sandler.

Kashy Harrison, Analyst

Just a clarifying question for you, Julian. Were you saying that even if your customers have issues securing critical equipment that the contracts still require them to take title? And then just outside of force majeure events, is there any scenario in which there could be a delay in them taking title from you?

Julian Nebreda, President and CEO

What I mentioned is that our contracts mandate that customers take ownership if there are significant delays. This serves as a safeguard at the end of the process. If, by a specified date, I believe the customer isn't prepared with the site or requires equipment, they take ownership of our equipment, typically stored in a nearby warehouse. However, this safeguard is rarely utilized; it doesn’t occur regularly, but it helps me feel more assured that our fourth-quarter revenue for '24 is secure. Even if our customers face challenges with site preparation, we can still accommodate at least one customer. Over the past few years, we've had a strong track record, and our customers have performed admirably. We haven't encountered significant delays, maybe just a week here or there, but nothing major. This is how our contracts function. As I mentioned, it's not a provisional contract that we frequently enforce, but if complications arise, it's available. Generally, we handle this in a very amicable manner with our customers, with no major issues. I wanted to communicate this to instill confidence since I recognize the importance of the revenue in the fourth quarter. As Ahmed noted, we've been managing this exceptionally well for the past year or year and a half.

Kashy Harrison, Analyst

Yes. That's all very, very helpful. As you pointed out, the 80% is a big number. And just maybe for my follow-up question, more so about comments in the slide deck. You highlight demand is growing, specifically in ERCOT, CAISO, and MISO. Just wondering if you have a sense of what proportion of your customers are signing PPAs versus just selling merchant and whether in your discussions with your customers, there's any difference in their ability to secure financing depending on which approach they take.

Julian Nebreda, President and CEO

Yes. Regarding financing, we have generally partnered with Tier 1 companies in the U.S., so it hasn't been a challenge. I don't have specific insights on the ratio of PPAs to merchant in the U.S., but from my discussions, it appears that most are PPAs. However, I don't know the exact numbers at this moment. It's a pertinent question to consider when assessing how much of our order intake is secured with PPAs compared to merchant sales. I can say that the majority is likely under PPAs, but I can't provide the specific figure right now.

Operator, Operator

Thank you. And I would now like to turn the call back over to Lex May for closing comments.

Lexington May, Vice President of Finance and Investor Relations

Thank you, Justin, and thank you, everyone, for participating in today's call. If you have any questions, please feel free to reach out to me. We look forward to speaking with you again when we report our third quarter results. Have a good day.

Operator, Operator

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