Earnings Call Transcript - FTCI Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the FTC Solar Second Quarter 2021 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 may be recorded. I would now like to turn the conference over to your host today, Bill Michalek, Vice President, Investor Relations. Please go ahead sir.

Bill Michalek, Vice President, Investor Relations

Thank you and welcome everyone to FTC Solar's second quarterly earnings conference call. Prior to today's call, you've likely had the opportunity to review our earnings release and supplemental slide presentation. If you have not yet reviewed these documents, they are available on the Investor Relations section of our website at ftcsolar.com. I'm joined today by FTC Solar's President and Chief Executive Officer, Tony Etnyre, and Patrick Cook, the company's Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date. As such, these forward-looking statements include risks and uncertainties and actual results and events could differ materially from our current expectations. Please refer to our press release and our other SEC filings, including our 10-Q for more information on the specific risk factors. We assume no obligation to update such information except as required by law. As you would expect, we will discuss both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders and our definition for this metric is also included in our press release. With that, let me hand it over to Tony.

Tony Etnyre, CEO

Thanks Bill. Good morning everyone. I'll start with a few highlights from the quarter. First, I'm pleased to report that in spite of continued worsening pressure on global logistics costs and material lead times, our second quarter results came in within or above our guidance range on all metrics. This includes revenue of 50.1 million, which was above the high end of the range. We continue to see strong growth in our executed contracts and awarded orders, which have grown by 385% on a year-to-date basis through August 1, with an additional 203 million added since our last update from June 1. This includes adding a new top five EPC vendor to our customer base of contracted projects. When subtracting the amount of revenue included in reported first half revenue, that brings our new balance to 478 million to be delivered between the remainder of 2021 and 2022. Based on average lead times, we have the opportunity to continue to add to our contracts and award revenue for expected delivery in 2021 into the fourth quarter of this year. This backlog growth is important evidence of the growing appeal of our products in the marketplace, supported by our approach to limiting the impact to customers during this period of cost and supply uncertainty. We recognized our first revenue on the sale of our SunPath performance software. This was the third contract for our new software and the first two which we have recognized revenue. We continue to be excited about the long-term potential of this offering as a revenue and profitability driver for the company. SunPath can essentially provide additional risk-free revenue to our customers with a high margin profile for us as well. During the quarter, we sold our position in a minority investment, Dimension Energy for a net payout of approximately 22 million, with the opportunity to receive an additional earnout of up to approximately 14 million based on that company achieving certain performance milestones. And finally, based on our backlog growth and other progress here, we see significant growth in the second half of the year, driven by Q4 with volume deliveries above one gigawatt in that quarter, with improvement in our profitability. I'll now discuss the current environment in more detail. We discussed last quarter the impacts of the global increases in the cost of logistics and commodities, including key inputs to trackers and solar arrays that were having on the industry. Specifically, we discussed this factor for causing developers to take a closer look at un-contracted projects to reevaluate their construction timelines, and at certain developers are pushing out timelines by a quarter or two. Since our last update in early June, steel pricing has continued to remain elevated. Solar module pricing has remained elevated, and the global logistics environment has continued to deteriorate, with freight increasing another 40% into July and spiking further into August. We believe solar developers remain in a similar posture of reevaluation on those un-contracted pipeline projects. We've seen reports estimating that about 15% or more of projects are being delayed, which seems consistent with what we have observed in the market. In spite of the project delays, as I mentioned earlier, FTC Solar continues to see continued strong long-term demand growth in orders, which will show up much more meaningfully in revenue for us starting in Q4 and into 2022. To update our positioning and the actions we take in this environment. First, we continue to have a strong balance sheet which allows us to withstand the short-term market dislocations while working with our customers to minimize impact on project economics, and develop innovative logistics solutions to provide them with price certainty. In addition to having a debt-free business, we added 181 million in cash as a part of the IPO as well as another 22 million in liquidity from the sale of our stake in Dimension Energy in Q2. Second, we shared some logistics cost increases with our customers, while largely absorbing the impacts in an unprecedented market. The additional impact to us in Q2 was approximately 10 million, with another 12 million to 15 million expected in Q3. Our transition to alternate logistics methods for international shipment will begin to be realized in Q4, providing our customers with price certainty, reducing our overall cost structure, and eliminating unexpected price escalations during project execution. Third, regarding steel, given the tightness of supply in the market we mentioned last quarter that we had contracted for the majority of our anticipated second half steel needs. At this point, our current contracted and awarded projects for 2021 delivery can more utilize this capacity. While steel lead times have extended, the relationships we have with our expanded supplier base have enabled us to secure the entirety of our new project requirements at the time of project contract, as we've done in the past, without the need for additional forward steel contracts. Fourth, we see opportunity for revenue acceleration of our SunPath software product as increased site production is even more important to project economics in today's environment. The software can significantly increase overall project profitability and mitigate upfront cost increases, helping us and our customers improve margin. Finally, we continue to remain on track on our cost reduction roadmap that is expected to yield results in the second half of this year. This roadmap, in addition to procurement and volume manufacturing initiatives includes our design-to-value initiative that identifies opportunities to either reduce materials needed to produce our tracker systems, or optimize the design to reduce manufacturing costs. We believe this initiative can help to further mitigate unfavorable logistics impacts. While commodities and logistics are in the midst of a near-term dislocation, we believe the long-term demand for solar energy and trackers continues to increase supported by many powerful growth drivers, including government policy. In summary, I believe the underlying fundamentals of the business are incredibly strong. We're in a growth market with a differentiated offering and seeing rapid customer adoption of our solutions. Our contracted and awarded orders are increasing at triple-digit rates. We are gaining new customers, and we have an asset-light model with a strong balance sheet. We're really executing as a business with one primary negative driver, the current logistics environment, masking some of that performance. We've developed a solution for that, which has been implemented during the fourth quarter. As Patrick will discuss, we believe we're well positioned to significantly outpace overall market growth again in 2021. With that, I'll turn it over to Patrick.

Patrick Cook, CFO

Thank you, Tony and good morning everyone. I'll provide some additional detail on our second quarter performance and outlook. As a reminder, our year-over-year comparisons reflect a significant amount of growth in our personnel and corporate infrastructure ahead of becoming a public company, which occurred in the second quarter. These items make for year-over-year comparisons a bit less meaningful. Beginning with results for the second quarter, total revenue was 50.1 million, which as Tony mentioned, was better than our target range largely due to production timing between quarters as well as additional logistics recovery costs from customers. This represents a decline of approximately 2% compared with the second quarter of 2020 on slightly lower product volume. GAAP gross loss was 16.1 million up from 1.4 million in the prior year, driven primarily by approximately 10 million in increased logistics expense that was not passed along to our customers. A strong ramp-up in employee count and other overhead expenses support the company's strong growth trajectory, and a 7.2 million increase in stock-based compensation associated with the transition to being a public company. GAAP operating expenses were 59.9 million, including 49 million in stock-based compensation as a result of the company's IPO. The size of the stock expense in the quarter was driven primarily by the accelerated nature of how certain performance-based share grants are recognized, including a one-time gift of shares from one of our Directors to employees. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expenses were 8.3 million better than our guidance range due to timing between quarters. This compares to 4.2 million in the year-ago quarter, with the increase driven primarily by necessary growth in staffing and other public company preparations. GAAP net loss was 55.8 million or 0.70 per share compared to a net loss of 6.8 million or 0.09 per share in the year-ago quarter. Non-GAAP net loss, which excludes 20.6 million gain from the sale of a minority investment in Dimension Energy and a 56.2 million impact on stock-based compensation, IPO-related expenses and consulting fees and other non-cash items was 17 million or 0.21 per share. This was also within our guidance range despite absorbing an additional 10 million in logistics spends in the quarter as the global logistics environment worsened and not all of the costs were shared with our customers. During the second quarter, we completed our initial public offering, proceeds to the company net of fees and expenses and after completion of the stock repurchase described in our S-1 were approximately 181 million. Also during the quarter, we sold our minority investment position in Dimension Energy and received an additional 22 million or so in cash. We believe our strong liquidity position continues to differentiate us in the marketplace, gives customers and other stakeholders increased confidence in our ability to invest in our growth, and positions us to weather any short-term uncertainties. With that, let's turn to our outlook. As we look ahead, we expect to see sequential revenue growth for the remainder of the year. The third quarter should see improved revenue. However, as Tony described, a continued worsening of the logistics costs will result in an incremental impact of between 12 million and 15 million in Q3, which will delay improvement in our profitability until the fourth quarter. In the fourth quarter, due to the timing of contracted project deliveries, we are expecting a significant sequential increase in revenue. Since we have implemented alternative shipping in Q4 for the bulk of our deliveries, we also expect corresponding improvement in our profitability. As we put together our outlook, we took several additional factors into consideration including the strong demand for our tracker solutions, even in the face of elevated steel, logistics and other solar project input costs that are causing solar developers to re-evaluate construction timelines for un-contracted projects. The additional logistics charge not passed through to our customers, our use of innovative ways to reduce project logistics costs and using alternative shipping methods, which we believe will help mitigate some of the margin impacts from increased logistics expense, with the benefit beginning during the fourth quarter and continuing into 2022. Continued implementation of our cost reduction roadmap that is expected to yield results in the second half of this year, further mitigating unfavorable commodity and logistics impacts, and the potential for revenue shifts between periods associated with the current size of our company, fast-paced growth and the large size of several projects in the pipeline. Based on these and other factors, including our current backlog and forecasts and accounting for direct cost uncertainty for the third quarter, we expect revenue of 56 million to 62 million, non-GAAP operating expenses between 8.7 million and 9.7 million, and adjusted EBITDA loss between 19.7 million and 14.7 million, assuming approximately 12 million to 15 million in incremental logistics impact. For the fourth quarter, we expect to see a significant increase in revenue related to the third quarter with the partial implementation of our new logistics methods beginning to take effect in the quarter, as well as our cost roadmap reduction initiatives. We expect to make significant progress towards profitability on an adjusted EBITDA basis. For the full year, we expect revenue to exceed 310 million. This outlook results in full year revenue growth in excess of 65%, which is anticipated to be substantially faster than overall market growth expectations.

Operator, Operator

Thank you. Our first question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.

Pavel Molchanov, Analyst

Thank you for taking the question. A lot of your supply chain is in East Asia, which is currently experiencing the worst COVID metrics in that part of the world that we've seen throughout the pandemic. Can you talk about any manufacturing or supply disruptions, beyond the logistics constraints that any of your Asia Pacific suppliers are currently experiencing?

Tony Etnyre, CEO

Hi, Pavel. Thank you for the question. I appreciate that. Our supply chain is global. We do in fact have operations in Asia and in East Asia. We also have supply chain locations in India, as well as in Europe, and in the United States. What we always look to do is to consider the manufacturing capacity implications, the timing of projects, and then associate our supply chain requirements to those. We certainly throughout all of 2021 had to deal with short-term factory disruptions in our factories and our contract manufacturing partners. And we've been able to mitigate those and continue to deliver to customers because of the flexibility of that supply chain and our ability to move material from location to location. So certainly, that is something we have to plan and prepare for. And something that we've demonstrated the ability throughout the last two quarters to deliver to expectations, in spite of those short-term disruptions in factories.

Pavel Molchanov, Analyst

That's helpful. Let me follow up on steel specifically, when we look at benchmark, Shanghai, for example, Steel Futures pricing, it looks like you peaked sometime in May, June timeframe and came off about 10% since then. Are those benchmark prices indicative of your feel of materials in terms of steel sourcing?

Tony Etnyre, CEO

Those are good high-level guides for the trends for overall steel costs and the input cost to the system. There are of course, always going to be market dynamics that will drive that as well, capacity limitations in factories that can drive specific market dynamics. So I think Pavel those are good high-level guides for us. They are with the same metrics that we use in order to prepare our forward-looking view.

Pavel Molchanov, Analyst

Thank you very much.

Operator, Operator

Thank you. Our next question comes from a line of Philip Shen with Roth Capital Partners. Your line is now open.

Philip Shen, Analyst

Hi guys, thanks for taking my questions. First one is you guys referenced innovative logistics solutions that you're embracing and implementing coming up. Can you talk through what they are? And what kind of financial benefits do you see? Can you quantify that benefit in any way?

Tony Etnyre, CEO

Thanks for the question, Phil. Sure. What we're doing in the logistics front and as we mentioned during the comments at the start of the call, we will begin to see those take meaningful effect in the fourth quarter, and then more fully into 2022. Fundamentally, containerized freight is where the tightness in the market exists, and where the escalations of pricing exist. What we have done is using alternate shipping methods like breakbulk shipping methods, we've taken full shipped contracts. Our team is managing the execution of those with our contract manufacturing suppliers to align deliveries to projects forward-looking forecast. What that does is allow us to take greater control over the logistics time and greater control of uncertainty over logistics costs, based on our higher control of that ship's capacity. With respect to the impact to the financials and the impact to costs relative to today we see that to be a significant improvement. But still in the long-term as you compare it to more historical logistics cost rates, we would see it still to be a higher cost structure than what we would have expected as a baseline in 2019 or early 2020.

Philip Shen, Analyst

Okay, thanks, Tony. And then as a follow up here, with your Q3 guidance I was wondering if you might be able to split out the ratio between service and product revenue. We saw, I think in Q2, that ratio is close to service to the product revenue, and I was wondering if you expect to see a similar ratio there and then for that to - as you were just mentioning, improve in Q4. So and then - in addition to that ratio, how much of that do you think you can pass along? Can you pass along the full amount of logistics impact in Q3? Or if not, do you think you might be able to pass the full amount along by Q4? Thanks?

Patrick Cook, CFO

Yeah, in terms of the product and services revenue, Phil, this is Patrick. I think we would expect to see the same ratio, at least in the near term on a go forward basis based on how we recognize revenue. In terms of kind of passing off the overall logistics costs, we continue to work with our customers in Q3 in order to maintain and pass those costs off to the extent possible, but again, as Tony mentioned, the breakbulk shipping allows us for a lot more certainty in pricing and takes out a lot of the degrees of variability out of the process.

Philip Shen, Analyst

Great. Okay. Thanks, Patrick. And one more, if I may, here, I was wondering if you might be able to give an update on the Samson project. Specifically, has the next tranche of opportunity been put out to bid? Or do you think that might have been delayed as a result of the elevated costs? And what's the potential for that project to be delayed as well? Thanks.

Tony Etnyre, CEO

I don't think we should speak to the timing of our customers' projects, Phil. We will continue to execute on the orders we have relative to that particular project and look forward to more opportunities with that particular customer.

Philip Shen, Analyst

Great, Tony and as relates to the next tranche of megawatts there, was that ever put out to bid or has that - or is that - can you comment on that? Thanks.

Tony Etnyre, CEO

Yeah, I don't think we can comment at this time on that too.

Philip Shen, Analyst

Got it, thanks for the questions, and I'll pass it on. Thanks.

Tony Etnyre, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Maheep Mandloi with Credit Suisse. Your line is now open.

Maheep Mandloi, Analyst

Hey, morning, thanks for the questions. Maybe just on will high level on that 15% remark on projects being delayed, could you just talk about if you're seeing those delays in your orders and for the US customers or is that's international, just want to understand the geographic mix here. And also, are you seeing any cancellations or hearing about them either for this year or for next year?

Tony Etnyre, CEO

Thanks for the question, Maheep. What I'd say is within those comments we made were really around those projects that have not been contracted. So projects we see in our pipeline that are un-contracted, both in the US and internationally, where developers are making decisions to delay those projects by a quarter or two. Within our contracted and awarded pipeline, we're not seeing a material movement in those project timing. It's more in the projects where a decision has not been made to execute and in those projects, we're seeing some movement as those developers optimize the timing infrastructure.

Maheep Mandloi, Analyst

Alright, and how should we think about the first half of 2022 or second half assuming your current backlog, current awarded backlog extends for the next 12 to 18 months, right? Does that imply like you could see a slowdown in the second half of next year or it's maybe too early just given all the moving pieces with the supply chain?

Tony Etnyre, CEO

So we're not providing specific guidance in those periods to be clear. What we have communicated is a continued increase in our contracts and the awarded revenue, added over 200 million in contracts and awarded revenue just in the last two months and the figures that we quoted were for deliveries both in the remainder of 2021 and into 2022. So at this point not providing any further guidance on 2022, just beyond what we've done for full year 2021.

Maheep Mandloi, Analyst

Alright, I'd appreciate that and just one last one and I'll just jump back in the queue. The adjusted EBITDA guidance for Q4, could you just probably talk about, does this imply like a breakeven EBITDA basis with a margin recovery in Q4 or how should we think about that?

Tony Etnyre, CEO

Thanks for the question, Maheep. From our perspective, we're not providing Q4 guidance as it relates to EBITDA. But based on the increased volume, the improvement in the cost roadmap and the design-to-value initiatives that are on plan, as well as implementing partially the breakbulk shipping container logistics methodology, we expect to make substantial improvements towards profitability in moving in that direction, but we have not given a specific guidance.

Maheep Mandloi, Analyst

Alright, thanks for taking the questions.

Operator, Operator

Thank you. There are no further questions. I will now turn the call back to Bill Michalek for closing remarks.

Tony Etnyre, CEO

Yeah, thank you. This is Tony. As I think about the business, just to summarize our call, we believe the underlying fundamentals are very strong. Q2 came in from a revenue standpoint above our guidance and in a very difficult environment we're able to manage the rest within the guidance that we've provided. We've added 200 million in contracts and awarded revenue just in the last two months. We're guiding to a 65% revenue growth this year. Our orders are growing at a triple-digit rate. We're adding new customers and we're adding leaders in those new customers. We have a strong balance sheet and the cost roadmap, which is fundamental to the profitability improvement of our businesses on track. The global logistics environment has been very difficult, and really pushed our plan for profitability out by a quarter. The good news is we have solutions in place. Those solutions begin in Q4 and into 2022. We're excited about where the business is going. I want to thank you all for joining us today and your interest in FTC. Look forward to speaking with each of you again next quarter if we don't get the chance to do that before that. Thank you very much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.