Earnings Call Transcript - SHLS Q3 2025

Operator, Operator

Good morning, and welcome to the Shoals Technologies Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded, and we've allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Thank you, Charlie, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investors section of our website at investors.shoals.com. With that, let me turn the call over to Brandon.

Brandon Moss, CEO

Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the third quarter. I'll then discuss the current demand environment in the U.S. and finally, I will review the progress on our strategic growth initiatives. Dominic will dive deeper into the third quarter results and provide our outlook on the fourth quarter 2025. We'll then finish the call with questions from our analysts. I'm very pleased with our execution during the third quarter. We delivered record revenue of $135.8 million, slightly above the high end of our expected range. Revenue grew 32.9% over the prior year period and was up 22.5% sequentially over second quarter results. Our commercial team continues to drive significant growth in our book of business. We added approximately $185.4 million in new orders in the period, helping to achieve a company record for backlog and awarded orders or BLAO, of $720.9 million, a 21% year-over-year increase. This resulted in a very strong book-to-bill of 1.4 this quarter and supports the continued growth we see as we look ahead toward 2026. As of September 30, 2025, approximately $575 million of our BLAO has shipment dates in the upcoming 4 quarters running through the third quarter of 2026. Next year is shaping up to be another year of strong growth for Shoals. As you are aware, 2025 brought with it some volatility, largely a function of an uncertain and rapidly shifting political environment. However, as you've seen in our results thus far, our business has been resilient. The actions we've taken to attract and retain customers over the past 2 years are paying off. We've improved our relationships with EPCs and developers and signed new MSAs that reflect our shared objectives. Our focus on providing innovative solutions to meet customers' needs has led to new product development and additional opportunities for growth. We continue to improve our operating model to drive out inefficiencies and increase capacity. And we've maintained excellent liquidity and positive free cash flow despite increased capital expenditures and warranty remediation needs over the past year. As a result of our strong Q3 results and the current demand environment, we have slightly increased the range of anticipated revenue for the full year 2025, now representing between 17% and 20% year-over-year growth and above the range presented at our September 2024 Investor Day. Adjusted gross profit percentage remained in the expected range for the quarter, landing at 37%. Gross profit was $50.3 million, the highest quarterly amount since 2023. Dominic will provide more insight into the impact of both product mix and tariffs on our margins in a few moments. The sequential increase in SG&A this quarter was largely a function of increased legal expenses. The ITC hearing during the third quarter was one driver, but we also had elevated legal expenses related to the pending shrink back litigation as we work through fact discovery, depositions and expert analysis. Our third quarter adjusted EBITDA was within our expected range at $32 million or 23.5% of revenue. And finally, the remediation work for known shrinkback issues progressed as expected. The probability that some additional work may be required in the coming quarters still remains, so we are not changing our estimated range of expense this quarter. However, we are pleased with our ability to respond to all customers that express concerns thus far and resolve those issues requiring remediation. Congratulations to our customer support team, and thank you to our customers for their continued trust and patience. Turning to the broader U.S. market. While current headlines remain distracting and somewhat disconnected from the underlying demand for solar energy, our customers remain as busy as ever. Developers have safe harbor projects for several years with many projects confirmed through 2030. While we do not expect a significant number of projects to be pulled forward, it is reassuring to know that the industry is healthy and growing. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers, combined with the potential industrialization and onshoring of manufacturing will result in low growth far in excess of what we've seen in recent decades. Solar is best positioned to meet these rising energy needs today and through the balance of the decade. The U.S. Department of Energy acknowledged that solar will play a notable role in meeting the growing demand given its speed of deployment and favorable cost structure. Following the passage of HR 1 in July and the treasury guidance issued in August, we believe developers will successfully navigate the tax incentive landscape and as a result, have not seen material changes to project calendars. Less uncertainty and the unrelenting focus on bridging the power supply gap is driving continued investment. Turning to our business units. Third quarter was another strong period of growth within our core utility scale solar market. Customer project calendars remain tight with little excess capacity to move things around. Labor availability is a focus for the industry and will likely remain so for the foreseeable future. That said, our quote volume exceeded $900 million in the third quarter, a sequential increase of more than 20%. These are projects that would generate revenue in late 2026 and 2027, further supporting our long-term growth trajectory. Our core utility scale market is resilient, and our commercial strategy continues to drive growth. I'd like to now discuss progress we are making in other strategic areas of our business. Shoals' additional growth opportunities include international, CC&I, OEM and BESS. Our progress in each of these is meeting or exceeding our expectations. The opportunity set across international markets continues to expand. Our pipeline exceeds 20 gigawatts and includes projects in Latin America, EMEA and Asia Pacific. We've hired an experienced commercial leader in Australia, where the government mandate has been expanded to target 40 gigawatts of new capacity, including 14 gigawatts of clean energy capacity by 2027. This is expected to stimulate approximately $73 billion in overall electricity sector investment. It's a very attractive market and one we're aggressively pursuing. We recognized more than $6 million of revenue in Q3 from 2 ongoing projects in LatAm and in Australia. We expect to complete all 3 of these international projects in the fourth quarter. Our team anticipates continued acceleration and diversification across our focus markets through 2026. In addition, our relationships with large global developers with ties to the U.S. Export-Import Bank are opening doors and growing our pipeline in developing markets outside our targets of Australia, Latin America and Europe. Our community, commercial and industrial or CC&I business is performing well. We are engaged with large, well-respected electrical distributors that are driving meaningful quote volume increases. While this market remains small as compared to our core utility scale opportunity, it is one that provides us a path to create lasting relationships and future growth with new customers. Our OEM business is tracking ahead of expectations as our partner continues to see strong demand for their panels. Our deep engineering and manufacturing relationship with the largest domestic module provider is a strategic advantage for Shoals and one we're committed to maintain and expand. The opportunity we've received the most questions about this year is our battery energy storage solutions or BESS offering. So I'd like to provide a little bit more detail today. Last year, we introduced a BESS solution targeting the solar plus storage market, specifically when new solar plants are built with attached storage systems. That opportunity remains exciting for us today since it builds upon our relationships with existing customers and developers. In addition to that opportunity, there are also 2 additional use cases that we are now pursuing, grid firming and data centers. Let's start with grid firming solutions. Utilities are very interested in providing more reliable and consistent power to their customers. One method is to add grid scale battery storage solutions to their existing grids in order to provide real-time balance between supply and demand. Shoals' product offerings can play a part in providing solutions to system integrators in this area, and we are actively quoting opportunities in this space. In addition to grid firming, there are emerging use cases with data centers. Once again, consistent and dependable energy is critical to operations. Battery storage solutions can provide uninterrupted power as well as to help regulate power demand spikes and troughs created by artificial intelligence processing. This is an area that has significant market potential in the coming years, and we are actively engaged with system integrators in this market as well. This is an exciting time in a relatively young market, but one we are investing heavily in. I'm pleased to share with you today that we have already signed 2 MSAs to deliver products in these emerging BESS markets and are in conversation with several others about providing Shoals systems and their unique solutions. At the end of Q3, we had approximately $18 million of BESS in our backlog and awarded orders. In summary, our domestic utility scale market is healthy and growing. We are executing our strategic framework of market diversification as anticipated, and we are leveraging our expertise, engineering and manufacturing capabilities to pursue new opportunities with speed and purpose. It is an exciting time to be at Shoals. With that, I'll now turn it over to Dominic, who will discuss our third quarter financial results in more detail and our outlook for the fourth quarter.

Dominic Bardos, CFO

Thanks, Brandon, and greetings to everyone on the call. Turning to our third quarter financial results. Revenue increased by 32.9% year-over-year to $135.8 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CC&I and OEM contributed to year-over-year revenue growth in the quarter. Gross profit increased to $50.3 million compared to $25.4 million in the prior year period. Our GAAP gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid- to upper 30s. There are a few dynamics worth mentioning with regards to gross profit percentage. First, I'd like to discuss product mix. Certain EBOS solutions drive more value for customers than others. As such, those custom and engineered solutions typically carry higher margins than other product lines. Some new products such as long-tail BLA drive incremental revenue in our share of wallet, but do not carry the same gross profit percentage as our traditional BLA solution. Long-tail BLA does, however, provide incremental gross profit dollars and has allowed us to capture additional share while meeting customer needs. Second, I'd like to provide some color regarding tariffs. Our supply chain team is constantly working to drive material costs out of our products. Months of work to test new raw materials, negotiate terms and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year. And as a result, some margin-enhancing savings could not be realized as expected. Moving on to general and administrative expenses. G&A was $29.4 million, which is $10.7 million higher than the prior year period. Our legal expenses, which accounted for approximately $5.7 million of the increase, remain elevated while we make our way through ongoing litigation matters. Approximately $6.8 million of legal expense was specifically related to the ongoing wire insulation shrinkback litigation. Income from operations or operating profit was $18.7 million compared to $4.5 million during the prior year period. Operating profit margin was 13.7% compared to 4.4% a year ago. Net income was $11.9 million compared to a net loss of $300,000 during the prior year period. Adjusted net income was $21.0 million compared to $13.9 million in the prior year period. Adjusted EBITDA was $32.0 million compared to $24.5 million in the prior year period, representing 30% growth. Adjusted EBITDA margin was 23.5% compared to 24.0% a year ago, driven primarily by lower gross margin flow-through. Adjusted diluted earnings per share of $0.12 was approximately 50% higher than the prior year period. During the third quarter, we spent $11.9 million on wire insulation shrinkback remediation and had a remaining warranty liability on our balance sheet of $7.2 million as of September 30. The current portion of the remaining liability related to shrinkback is now $4.2 million. Operationally, we generated $19.4 million of cash in the third quarter, driven by higher net income, an increase in accounts payable and higher accrued expenses. These increases were partially offset by a higher accounts receivable balance, driven by strong sales volumes and increased spend on warranty remediation. On a year-to-date basis, we have generated $21.2 million in operating cash flow. Free cash flow was $9.0 million in the third quarter, reflecting both the $11.9 million impact of remediation costs and elevated capital expenditures related to our new facility. These 2 items impacted free cash flow by a total of $22.4 million in the quarter. We received our certificate of occupancy for our new facility in Portland, Tennessee, and we began moving into the new facility in September. We expect to begin consolidating operations from our 3 existing facilities in the fourth quarter and expect to complete the entire consolidation by mid-2026. Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $8.6 million and net debt to adjusted EBITDA of 1.2x. Our net debt was $118.2 million, a slight decrease over the prior quarter. We paid an additional $5.0 million down on our revolver during the period, which had an outstanding balance of $126.8 million at the end of the quarter. With regards to capital allocation, given the number of competing priorities for our cash this year, including shrinkback remediation and factory consolidation, we did not purchase any shares in the third quarter under our share repurchase program. Backlog and awarded orders ended the third quarter at a record $721 million, a sequential increase of $50 million. Backlog constitutes $298 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming period can be achieved. As of September 30, $575 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters with the remaining $146 million beyond that. Turning now to the outlook. Quarterly pacing within the year has continued to follow the strong back half we've been communicating since February. For the quarter ending December 31, 2025, the company expects revenue now to be in the range of $140 million to $150 million, representing 36% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $35 million to $40 million. This will result in full year 2025 revenue between $467 million to $477 million and adjusted EBITDA in the range of $105 million to $110 million. In addition, for the full year, we expect cash flow from operations to remain in the range of $15 million to $25 million, capital expenditures to remain in the range of $30 million to $40 million and interest expense to remain in the range of $8 million to $12. With that, I'll turn it back over to Brandon for closing remarks.

Brandon Moss, CEO

Thank you, Dominic. The demand environment over the last few years has been volatile, driven not only by the macroeconomic and political backdrop, but also labor availability, supply chain disruptions and permitting. That said, 2025 appears to be playing out slightly better than we had anticipated when we provided guidance in February. The changes we've implemented, which span both commercial and operational process improvements and shifts in strategic direction and focus are enabling exciting and visible improvements across the company. The transformation from a company with a narrow customer mix, product offering and geographic footprint to a diversified multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility and scale, through the hiring of seasoned business leaders who can execute with consistency, through the focus on developing new innovative product solutions for customers facing real-world problems and through an unyielding focus on improving the customer experience from start to finish. We are building the next version of Shoals, one that will deliver attractive returns for our shareholders through profitable growth and strong cash flow generation. I'm very encouraged about the progress we've made and how well we're set to continue the journey in 2026 and beyond. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready for questions.

Operator, Operator

Our first question comes from Christine Cho of Barclays.

Christine Cho, Analyst

I just wanted to start with the data center opportunity. Brandon, I think in your prepared remarks, you talked about conversations with system integrators. Is that how you expect the data center opportunity to materialize through integrators? And if that's the case, how should we expect the opportunity will show up in your bookings? Should we think something like this $18 million that you guys talked about this quarter, like more consistently every quarter? Or could we see a lumpy large booking? Also, if you could provide some more information on the MSAs, maybe size, type of counterparty, how we should expect orders from these MSAs to make it into backlog?

Brandon Moss, CEO

Thank you, Christine. As you noted, we are enthusiastic about the two new MSAs and the $18 million in backlog and awarded orders. Regarding our market approach and partnerships with system integrators and EPCs, these may vary by project. It's essential that we engage with these projects in some capacity and assist customers in engineering solutions, particularly for data centers. I understand your interest in the specifics of the MSAs and their size, but we typically maintain a level of confidentiality regarding the locations and identities involved. Additionally, our partners might be using proprietary system architecture, which restricts what we can disclose about these opportunities. This business is relatively new for us, and due to the size and scale of some projects, our backlog and awarded orders may fluctuate. Therefore, while we have booked $18 million, we may not see consistent bookings at that level in every quarter. We could experience some variability in bookings. That being said, once we start recognizing revenue, it should stabilize as customers receive deliveries. I expect revenue to begin materializing in the second quarter. This is a developing market with a new product line for us, and we are dedicated to allocating about 15% of our operating space in our new facility to our BESS product offering, with the build-out progressing ahead of schedule.

Christine Cho, Analyst

Okay. Great. And then just moving on to gross margins. They were soft this quarter despite system solutions being a bigger part of the business than it has been for a while. Can you just help us parse out how much of this is due to tariffs? Is it lower pricing to get back some share? You talked about the lower margin BLA. Is there a margin drag from the expansion of the new manufacturing? Just kind of help us parse it out and if you can give us some idea of how we should expect it to trend over the next year?

Dominic Bardos, CFO

Sure, Christine, it's Dominic here. The margins have been stable this year and are within our expected range of the mid-30s to upper 30s percent. Coming in at 37% was in line with our expectations. In my earlier comments, I mentioned that the new long-tail BLA will lead to a percentage decline in margins. A significant part of that increases our share in the solar field for the feeder cable, but it doesn't involve the same value engineering as other revenue sections. The tariff situation is also noteworthy for us; while we're mostly protected from increases when quoting jobs, we can pass those costs along during the final purchase order. We are implementing measures to reduce costs, as I discussed in my earlier remarks, including efforts by our supply chain team to collaborate with our engineers on testing new products and preparing raw materials. However, we did not see the margin improvement we anticipated because of changes to tariffs during our process. We initially forecasted a 100 to 200 basis point increase in margin from tariffs, which did not materialize this year. Although our margins remain stable, it's important to note that projects completed so far in 2025 were priced in 2024 and still include the new incentives we've introduced to attract customers back to Shoals. I believe our gross profit margin stability is acceptable. We are focusing on cash generation, strong cash flows, and operating profit, and we will continue to emphasize this moving forward.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Charlie, next question, please.

Operator, Operator

Our next question comes from Julien Dumoulin-Smith of Jefferies.

Julien Dumoulin-Smith, Analyst

I'm going to try this from a slightly different perspective. You alluded here in your prepared remarks that you're doing slightly better than planned for 2025. But I'd love to hear how you're doing against the longer-term metrics you articulated from September '24's Analyst Day, right? You've got this 20% plus year-over-year increase in backlog, the $900 million quoted here in the quarter. How are you looking at the beyond '25 period at this point versus the targets and ranges that you implied at the time here?

Dominic Bardos, CFO

Sure. So I'll start and ask Brandon to join in because as he said in his prepared remarks, all of these areas are exceeding our expectations that we laid out at Analyst Day. Of the metrics that we've talked about, I certainly want to focus a little bit on the revenue growth. As we've also said, it's exceeded the expectations and the range that we laid out a year ago. And keeping in mind that a year ago, we also thought that we were victorious in our voltage case with the ITC. So as we look ahead, we're not guiding to 2026 and '27. We certainly are very encouraged at the growth in our book of business. I couldn't be more positive about our backlog and awarded orders. And on our end, I think there was a bit of a glitch when I was talking about the $298 million of backlog, which is approaching records again. So I believe that the metrics that we've laid out remain very strong. Of those the metrics that we talked about in terms of the various strategic pillars, the BESS opportunity is the one that we believe has the opportunity to significantly exceed what we laid out a year ago. And so I will pause on that because Brandon will talk more about that.

Brandon Moss, CEO

Yes, Julien, that's a great question. Let me provide an overall view and then go over some of the growth areas. Overall, our revenue generation is surpassing our plans and expectations set during our Investor Day, nearly a year ahead of what we anticipated. We are very pleased with this progress. Our main focus has been to protect and expand our core market and to return it to growth. The utility-scale solar business is performing at record levels, with a backlog of awarded orders impressive at $720 million. I'm particularly thrilled about achieving a record revenue quarter with a book-to-bill ratio of 1.4x, reflecting excellent execution by our commercial team. I have strong confidence in our core business. Regarding our growth pillars and diversification strategy, all are performing at or above the expected levels. Our CC&I business has seen a 36% increase year-over-year, demonstrating solid growth. Our OEM business is also expanding significantly as we strengthen partnerships with our key customers. In our international business, successfully shipping three projects in a quarter is a noteworthy milestone for us, including two projects in Latin America and one in Australia, where we are building a dedicated team to focus on this market and New Zealand. We're thrilled about the potential there. As Dominic noted, we are very excited about our battery energy storage program, with two significant master service agreements this quarter that are paving the way for opportunities in data centers and grid-scale applications. Our commercial and operations teams are driving a significant amount of new product development this year, which is contributing to our international growth. The three projects we shipped internationally this past quarter incorporated new products, which is very encouraging. From an operations perspective, our consolidation is in progress, and we are currently in our new facility. For the first time in our company’s history, our SG&A team and salaried staff are all together in one building, which fosters community and culture within the organization. I want to commend our operations team for their hard work. We began our planned consolidation in Q3 and successfully moved out of one of our facilities. Earlier, we sold a building, and for context, our team moved 540 truckloads of materials from that facility while still achieving record production levels in Q3. This is a fantastic accomplishment that boosts our confidence as we complete this consolidation, enabling us to relocate while maintaining high production. I'm excited about how the company is positioning itself for the future.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Julien, did you have a follow-up?

Julien Dumoulin-Smith, Analyst

It's excellent to hear. Can you quantify any of these? Yes. Can you just quantify real quickly just within the backlog addition, some of these MSAs? And/or any of the BESS or data center wins with system integrators?

Brandon Moss, CEO

Yes. So in our awarded orders for the quarter, we had $18 million. A vast majority of that is driven by the MSAs. I can say probably since quarter close, we have moved a significant portion of that $18 million to backlog and have signed purchase orders. I would think of it maybe in the range of 3/4 of that $18 million. So we do have now signed purchase orders, which we're excited about. And again, we'll begin production in Q2.

Dominic Bardos, CFO

I can provide some clarification on the Master Service Agreements. Unlike the previously announced MSAs that have specific volume targets, these agreements do not specify a volume target. They establish a partnership with all the necessary terms and conditions that allow us to act quickly when purchase orders are ready. I want to emphasize that there is no additional backlog or awarded orders beyond what has already been mentioned. Therefore, nothing related to these MSAs will affect our record backlog.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Thank you, Julien. Charlie?

Operator, Operator

Our next question comes from Philip Shen of ROTH Capital Partners.

Philip Shen, Analyst

I wanted to dig into the margin topic a little bit more. Can you give us a little more color on the tariffs? Were they the Section 232 inclusion for aluminum on electric cabling that adversely impacted you? I think that came out in August. And as a result, would you expect that to be relieved? Or would you expect to be able to pass that along? Because that was a very sudden kind of inclusion, right, of electric cabling. And so do you think that tariff can be passed along in the near term to your customers? And then as a result, that 100 to 200 basis point operational improvement that, Dominic, you highlighted can then be realized perhaps partially in Q4? Or is it more in first half of next year? So I wanted to see if you could map out how that might play out.

Brandon Moss, CEO

So Phil, that's a great question. The aluminum tariffs have clearly affected us and others in the industry. It's important to consider this impact alongside the country-specific tariffs. We have a diverse supply chain, and the way these tariffs are applied to wire is quite interesting. You can separate the aluminum component of the 232 tariffs from the country-specific ones. I won’t delve into the specifics here, but as Dominic pointed out, we have the ability to pass these tariffs onto many of our customers, which involves providing the necessary tariff documentation. We are currently doing this and will continue to do so in the future. The 100 to 200 basis points that Dominic mentioned are part of our cost-saving initiatives outlined in our annual operating plan. Managing material costs is crucial for us as it significantly affects our profitability. We have identified effective cost-saving projects. However, if we switch suppliers and that supplier faces tariffs, it could negate any savings we anticipated in our business plan. If the tariff situation changes or if these tariffs are found unlawful and we receive reimbursement for them, it could positively impact our income statement.

Dominic Bardos, CFO

Yes. And the point, Phil, about are they passed along? If it's something that comes along and there was an unexpected tariff, we do work with the customers. But we typically look at our market-based pricing for the products as we're quoting going forward. And if we know that something is going to be tariff, it is going to be baked into the prices that we're quoting. So ultimately, our material costs will drive our profitability there, and that's why the material cost out savings are so important to us. It's probably 70% of our cost of goods sold. So it is a very important initiative for the team. We'll continue to focus on that.

Philip Shen, Analyst

Got it. So looking ahead, can we expect an improvement in the first half of next year on margins? And then can you share what the margins in your recent bookings might be as a comparison to the Q3 levels?

Dominic Bardos, CFO

Yes, Phil, if you want to join a staff meeting here, that would be great. We'll discuss these matters internally. I can't go into detail about that. It's too early for us to provide guidance for 2026. Our margins have remained steady within the mid- to upper 30s range. Regarding the question Christine asked about new facility expenses, yes, we did incur rent in September—the last month of the quarter—for our new facility, and depreciation is starting to affect us. We are not fully operational yet and haven't realized the cost-saving benefits from labor. We will provide guidance on 2026 margins if that's necessary, but I prefer to focus on the growth of our business segments, our enthusiasm for new growth opportunities, our strategic pillars, and our ongoing efforts to drive operating cash, which is our main goal. We will provide more guidance next quarter.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Thank you, Phil. Charlie, next question, please.

Operator, Operator

Our next question comes from Brian Lee of Goldman Sachs.

Brian Lee, Analyst

I guess just on the BESS opportunity again, you guys obviously are sounding more bullish, have said that of all the different growth verticals here, that's probably the one that's tracking ahead of expectation more so than others. So can you guys maybe provide a bit of an updated TAM for us in terms of the BESS opportunity with the products that you have? And then how much of that is data center tied? Are you able to kind of quantify for every 100-megawatt data center opportunity amounts to x dollars worth of revenue potential for Shoals given the product set? And then maybe any thoughts around margin implications as well? And I had a follow-up.

Brandon Moss, CEO

Sure, Ron. I'll take that. I think when we when we initially launched the BESS opportunity at Investor Day last year, we had approximately $360 million as an available market to us in the solar plus storage space. We've since added data centers and grid firming as 2 market opportunities. We have internal estimates. These markets are changing rapidly, as you can imagine, particularly driven by the data center AI space. And the applications of our products within some of these system architectures is proprietary. And so a 100-megawatt data center in a specific situation may result in one use of our product, which drives significantly higher ASPs up to maybe $100,000 a unit. And in other architectures, we may use a smaller product, a 1,200 amp product that may carry a $25,000 ASP. So it's going to vary architecture to architecture. What is exciting for us is specifically our engineering team is engaged with customers to design specific products for their architecture, and we are building prototype products, shipping prototype products to be vetted by these customers. So we are excited about the potential opportunity. As everybody knows, if you watch the news or read a newspaper, the size and scale of these data centers is changing almost on a daily basis as is our total available market. So more to come in coming quarters about the actual size of the market.

Brian Lee, Analyst

Okay. Fair enough. We'll look forward to hearing more. Maybe just a follow-up on that. You mentioned the $18 million of BESS bookings this quarter and then starting to monetize that in Q2 of '26. It's about 3% of backlog today. Is that sort of the sales cycle and sort of the rev rec cycle we should be thinking about on these projects? And if that's the case, are we talking sort of like a mid-single-digit type of revenue mix from this opportunity next year? Because presumably, all the MSAs aren't going to ship in Q2. They just start to ship in Q2. So assuming more bookings coming in, maybe you get to like mid-single-digit percent of mix next year and then it grows beyond that? Just trying to understand where we should be budgeting expectations on this.

Dominic Bardos, CFO

While we haven't given specific guidance for 2026 and it's still too early for that, we are increasing our efforts. These use cases are just beginning to emerge. It's important to note that we've been selling battery energy storage solutions throughout the year, though not at the scale that these two new use cases are expected to provide. That's why we're excited to share the $18 million figure, which comes from the MSAs signed with these alternative use cases. While we haven't provided guidance yet, we will continue to sell cabinetry and recombiners through our traditional channels all year. As we progress, we will ramp up the new opportunities. We aim to provide more clarity next year and are currently discussing how much we can disclose, as we believe this area will generate interest and want to maintain transparency.

Brandon Moss, CEO

Brian, I can provide some insights into the sales cycle. As Dominic pointed out, we have recognized some revenue on BESS throughout the year, although not significantly. A commercial and industrial solar and storage project typically has a quick sales cycle, allowing us to book and activate an order within six months. In contrast, larger projects like grid firming or data centers tend to follow a more traditional sales cycle, similar to utility-scale solar projects. We might be involved for a year or even 18 months before shipping the first unit for inspection and validation. In summary, smaller sites have a shorter sales cycle, while larger opportunities require a longer one.

Dominic Bardos, CFO

Once we finalize the designs for specific customers, the sales cycle will be quicker. We have been focusing on these projects for most of the year, and we are excited to announce in November that we have secured purchase orders, with revenue expected to begin next year. If we continue to secure more business, those designs will have been approved, vetted, and tested, which will further shorten the sales cycle.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Thank you, Brian. Charlie?

Operator, Operator

Our next question comes from Jon Windham of UBS.

Jonathan Windham, Analyst

You made some comments earlier about LatAm and Australia. I was wondering if you could just give a little bit more color on how the international business is progressing in terms of specific products being sold, margins, long-term growth? Just any color you have on that. Appreciate your time today.

Brandon Moss, CEO

Thanks, John. We're excited about our international business, as around 13% of our backlog and awarded orders are associated with it. Currently, we estimate that about 10% to 11% of our business is linked to this area. We're particularly eager to ship our first three projects. I view our international operations in two categories: organic growth in targeted regions, with two of the three projects entering Latin America and Australia, and an export segment that includes the rest of the business. The margin profiles for these categories will differ slightly. In our organically developed markets, where we are active, we might manufacture products outside of the U.S., which we've done for these three projects, leading to slightly lower margins than our standards. On the other hand, our export business, which is the largest part of our backlog and awarded orders, is expected to see project releases starting next year, and we have a very robust backlog in this area. Most of these projects are funded by the U.S. EXIM Bank, requiring manufacturing in the U.S., and their margin profiles will largely resemble those of domestic utility-scale solar jobs, with minor shipping cost variations. We're enthusiastic about the growth in our international business. As I noted earlier, we are focused on Australia, which has a goal of adding 40 gigawatts of new solar capacity this decade. We've brought on an experienced leader and are assembling a team there to take advantage of this opportunity. Australia also represents a very strong market for battery energy storage systems, potentially even stronger than the United States at this moment. We see opportunities for our BESS product line in this context. Everything is progressing as planned, and we are thrilled that some of these export projects are set to materialize in 2026, alongside a growing pipeline.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Charlie?

Dimple Gosai, Analyst

As electrical balance of system players and inverter OEMs move into the battery energy storage system opportunity, could you discuss what sets Shoals' architecture and go-to-market model apart? What advantages do you have as the market expands? Additionally, who are you primarily engaging with at this time? Are you focusing more on alternative chemistry players and similar entities given the current challenges?

Brandon Moss, CEO

Yes, that's a great question. There are inverter companies that are actively involved in data center architectures. I believe that, alongside the products we offer, they may help develop alternative architectures that work more efficiently for data centers, especially in AI applications to balance and smooth power frequencies in larger facilities. We don't view the inverter companies as competitors; rather, we consider them partners in the system architecture. I hope that answers your first question. Dominic, can you…

Dominic Bardos, CFO

Yes. I was just going to say that in some of these cases, Dimple, what we're doing is we're actually engineering the solutions in partnership with these innovations out there. So part of that is something that some of the larger electrical companies are not going to be interested in doing. So when we're working with these integrators, it's very important that our engineers can go work back and forth and come up with custom solutions. So being first in and driving that value for them is very important to us. And the chemistry, we are agnostic to the chemistry. So yes, if lithium is challenging and someone uses alternative long-form battery discharge power, that's fine because we're agnostic to that. We are still focusing on the DC coupled side of things with our solutions.

Brandon Moss, CEO

Yes, that's a great add on, Dominic. And to be more specific about your questions, are we talking to folks that use alternative chemistry technologies? Yes. I mean, we certainly are. So we've got a wide opportunity and quote funnel for this particular end market, and we are very excited about the growth potential.

Matthew Tractenberg, Vice President of Finance and Investor Relations

Charlie, next question, please.

Praneeth Satish, Analyst

Maybe just sticking on the data center BESS opportunity, just kind of 3 quick ones here. First, maybe if you could help us understand how the sizing is trending on some of the quotes that you're looking at? Is it kind of in that 50 to 100-megawatt range? Or are you seeing potential for some larger installations? You did mention hyperscaler as well. So I assume that's kind of in the gigawatt range. And then maybe as a follow-up to that, are there meaningful differences in terms of the competitive landscape at each of those different size tiers? And is there kind of a sweet spot for you where there's less competition? And then finally, the third one here is in addition to kind of the TAM for data center, new data centers, is there an opportunity maybe to displace some of the diesel generators and drive kind of an expanded TAM from that perspective as well?

Brandon Moss, CEO

Absolutely, and a great line of questions. I think the simple answer to probably those 3 questions are yes, yes and yes. So there is a difference. I think you're talking about float size, what are we seeing? Do we see 50, 100-megawatt scale opportunities? We do. Do we see significantly larger opportunities in that? We do. So we've got a product set, one that is standard and configurable that lends well to maybe the smaller data center opportunities that, as I mentioned, I think it was Brian's question, you think of that as more quick turn C&I business. And then the larger opportunities where we're partnering and designing a specific product for their proprietary architecture is also an opportunity for us. So the competitive landscape varies. As Dominic mentioned, we've got experience here with DC power. I think that plays well. We've got experience in really building engineered-to-order highly configurable solutions at scale. That is probably our core competency if you really boil down what Shoals does well, we are able to build engineered-to-order products at scale. That's what we do every single day in the solar market, and that lends well into this BESS data center opportunity. So we can provide both product sets. As it relates to can these architectures potentially at some point eliminate or reduce diesel backup, yes, potentially. I think there's probably a lot of information out there, white papers, for instance, that talk about different data center architectures, and that's certainly something we've got our eye on.

Matthew Tractenberg, Vice President of Finance and Investor Relations

So Charlie, I believe that's the last question that we have time for today. But Brandon, you had some final comments before we close out, and I'll finish this off.

Brandon Moss, CEO

Yes, absolutely, Matt. I think, look, at the end of the year and even the end of the quarter, it's always important to reflect a bit, and I'm very proud of what this company has delivered and the transformation it is making over the past couple of years. Big picture, we have navigated a complex warranty issue. And during that warranty issue, we've maintained customer relationships along the way, potentially strengthen customer relationships throughout that. During that period, we have self-funded that $70 million remediation project, self-funded that project and the legal costs associated with the ongoing Prysmian litigation. And while that's a great accomplishment on its own, we've also invested heavily in our business during that time. If you think about this year alone, we'll invest probably 3x on a normal CapEx rate. And while, hey, it's great to spend that money, we also have to implement that CapEx. And so we are creating a sustainable operations platform for the future, and I'm very, very proud of what we're building. Additionally, during the period, a $25 million share repurchase, and we've paid down $50 million of our debt. So I believe this company is very well positioned for the future. We've got a leading market position with a blue-chip customer base. We've got a very strong balance sheet and the ability to generate strong free cash flow. Our diversification strategy, as we mentioned on this call, is meeting or exceeding plans, and we're excited about the new end markets we're entering. We've built a fantastic, fantastic management team here that's going to guide this company into the future. And very exciting for both our salaried and hourly staff. We've got one heck of a nice new facility to support our growth for the future. So it's a fantastic time to be with this organization. I'm excited about the market backdrop we have. We look forward to fantastic results in the future. So I want to thank everybody that has joined our call today and supports this company. Thank you.

Matthew Tractenberg, Vice President of Finance and Investor Relations

And I just want to remind our audience that before we let them go, that we have a very active IR calendar throughout the end of the year. We announced those events a few weeks back via press release. They're listed on the Investors section of our website. So if you're attending any conferences through November and December and you'd like to meet with us, please let us know. We'd love to speak with you. If we can help you further, please reach out to investors@shoals.com with any questions. Have a good day, everyone.

Brandon Moss, CEO

Thanks all.

Dominic Bardos, CFO

Thank you.

Operator, Operator

Thank you all for joining today's call. You may now disconnect your lines.