Bloom Energy Corp (BE) 2019 Q1 法說會逐字稿

Good afternoon and welcome to the Bloom Energy First Quarter 2019 Earnings Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mark Mesler, Vice President of Finance and Investor Relations of Bloom Energy.

Please go ahead.

Thank you.

Thanks for joining us on Bloom Energy's First Quarter 2019 Earnings Conference Call.

To supplement this conference call, we have posted to our Investor Relations website our Q1 2019 shareholder letter as well as supplemental financial information that we will periodically reference throughout this call.

The matters we will be discussing today include forward-looking statements regarding future events and the future financial performance of the company.

These statements are subject to risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on forms 10-K and 10-Q which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

We assume no obligation to revise any forward-looking statements made on today's call.

During this call, and in our Q1 2019 shareholder letter, we refer to GAAP and non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation between GAAP and non-GAAP is included as part of our Q1 2019 shareholder letter.

Joining me on the call today are K.R. Sridhar, Principal Co-founder and Chief Executive Officer; and Randy Furr, Chief Financial Officer.

K.R. and Randy will review the operating and financial highlights of the quarter and then we will take questions.

I will now turn the call over to K.R.

Hello.

This is K.R., and good afternoon to all of you and welcome to our Q1 2019 conference call.

Allow me to share my perspectives on our Q1 2019 accomplishments and financial performance.

We are pleased to have delivered another record quarter with a strong diversity of acceptances across industry sectors and international markets.

Our momentum in the core health care, data center and retail sectors continued and the diversification strategy we discussed last quarter also delivered results with more new customers in tech, utility and life sciences sectors.

Overall in Q1 we achieved 235 acceptances, a 41.6% year-over-year increase and slightly higher than the midpoint of our estimates.

We achieved $200.7 million of revenue in Q1 of FY 2019.

Removing the impact of the onetime retroactive ITC benefit for FY '17 that we recognized in Q1 2018, our revenues increased 62% year-over-year.

During Q1, we saw a strong validation of our value proposition and also made progress in further enhancing and strengthening our competitive advantage.

As a reminder, Bloom Energy delivers 3 key benefits to our customers: lower and more predictable cost of power; lower emissions; and higher resiliency including the option for uninterruptible power.

In our previous calls, I have talked at length about our cost reduction programs.

These continue to be a strong focus.

During this call, I will focus on the other 2 value propositions: emissions and resiliency.

Let us start with an update on our lowered emissions profile, our strategy for decarbonization leading to 0 carbon solutions.

Our decarbonization strategy is multifaceted.

To date, all of our customers have reduced carbon footprint when using the Bloom Energy Server fed by natural gas when compared to securing their power from the utility grid.

They also reduced smog-creating pollutants and avoid consumption of water.

Currently, our primary solution for 0 carbon power generation is to offer customers Energy Server solutions running on directed biogas.

Some of our well-known customers, including Apple and the retailer IKEA have selected this path.

In addition to directed biogas, it is our expectation that biogas generated from landfill, wastewater treatment plants and plant and animal wastes will be converted on-site to electricity using our technology.

In the directed biogas case, biomethane produced from biomass is purified to pipe gas standards, injected into the gas pipeline and transported pipe gas is used by Bloom Energy Servers to generate electricity.

In the case of on-site generation, biomethane produced from biomass goes through a relatively inexpensive and minimal cleaning process before it is spread directly to a Bloom Energy Server located on-site.

Then the electricity produced from the biomethane is transported via the electrical grid to our customer.

The on-site biomethane method is more efficient energetically, has lower capital cost and lower carbon footprint than even the directed biogas program.

In California alone, there is sufficient biomass to generate and deliver as much electricity as 4 million solar panels or a nuclear power plant.

This type of on-site biogas-powered electricity generation will play a meaningful role as a source of renewable, always-on power helping to stabilize the grid as penetration of intermittent renewables increases.

Legacy power generation has not been able to offer a method for biogas-powered electricity generation that is highly efficient, distributed, highly reliable and cost effectively removes moisture, sulfur, siloxanes and other contaminants from biogas prior to utilization.

We believe we have the answers to those problems.

By Q1, we demonstrated the increasing commercial readiness of our biogas solution to a pilot with a utility.

We commenced a pilot at a landfill facility in January of 2019.

We began by conditioning biomethane from the landfill and then feeding it to our on-site biogas-powered system in February.

The 50-kilowatt Bloom Energy Server with integrated biogas cleanup module has since operated and delivered 100% clean and renewable baseload power into the local grid.

We are excited to have delivered this first demonstration and expect to have commercial on-site biogas deployments in the future.

Now let me move to the second topic on our value proposition I wanted to discuss, which is resiliency solutions.

According to the Eaton Blackout Tracker, there were more than 3,500 utility outages in the U.S. in 2017 alone.

A recent study by the EIA highlighted that the duration of electric power outages in the U.S. has doubled in the past 2 years with an increase in extreme weather systems being the main cause.

Estimates suggest that the total annual cost of power interruptions to the U.S. economy is around $200 billion.

With outages increasing in frequency and duration it seems likely that cost will soar in the future.

With the U.S. economy ever more dependent on electricity for its digital and high-tech industry, it should come as no surprise that demand for resilient power solutions is on the rise.

Microgrid projects, in particular, are surging with almost 500 new projects developed in the past 6 months, more of them in North America than anywhere else.

Bloom Energy is a beneficiary of this trend.

Our systems have now been deployed in more than 80 microgrids with 65% of those deployed in the past 3 years.

We define a microgrid as an electrical infrastructure that has sufficient supply and intelligence to operate independently off the utility grid to meet the demand of a specific site or locality.

This electrical infrastructure will operate symbiotically with the larger grid in normal mode.

However, it is also able to isolate from the utility grid and provide always-on power to the site or locality when the larger utility grid is out of service for any duration of time.

During Q1, we announced several microgrid customers.

These wins underscore the important role we play in elevating power resiliency for our customers in a post-climate change world, and how we help them accelerate time to power when the grid is under strain and utilities are unable to meet fast-growing demand.

Let me tell you about 2 customers.

Our microgrid deployment at the headquarters of Extreme Networks aptly describes how we are helping customers solve grid reliability problems.

Extreme experienced 3 separate power outages to its San Jose offices in the summer of 2018.

The outages impacted critical engineering and IT functions.

Thereafter, Extreme deployed a Bloom Energy Server microgrid to provide an electricity supply to its headquarters that will be uninterrupted even if the grid fails.

Additionally, Extreme is reducing its cost of electricity by 25% and reducing carbon dioxide emissions by 20%.

Lower cost, lower emissions and higher reliability, that's a triple win.

Let me talk about another microgrid we deployed in Q1 at a New Jersey manufacturing location of engineered materials and optoelectronics components maker, II-VI.

The II-VI microgrid illustrates how we can help businesses remain agile and responsive to growth opportunities when utilities are unable to meet growing power needs in a timely manner.

II-VI has ramped up production at its Warren facility in the past year to meet demand for its 3D-sensing technology.

However, it hit a roadblock when the local electric utility was unable to supply power quickly enough to keep up with this growth.

This led II-VI to seek an on-site grid-independent power solution.

II-VI selected Bloom to build a 2.5-megawatt microgrid power system.

The microgrid was up and running within 9 months of the 2 companies starting to work together.

II-VI is also reducing CO2 emissions by 15 million pounds per year relative to the power it would have bought from the New Jersey grid.

The Bloom solution enabled timely growth, greener growth and greater reliability for II-VI.

As demand for power from EV adoption and edge data center proliferation increases, the aging grid will become ever more stressed and we anticipate robust demand from microgrid solutions.

Finally, moving on to our overall ability to execute our business plan, I am delighted to share news of 2 appointments to our leadership team.

Former Sanmina President and Contec Holdings CEO, Hari Pillai, has joined us as Executive Vice President overseeing the Customer Installations Group.

This is the first time we have made a dedicated executive appointment to this position, reflecting our strategic focus to make the installed process even more predictable and scalable while reducing the cycle time.

Hari is an extremely accomplished electronics and logistics industry veteran, and I'm delighted he has joined our team.

We also welcome Sonja Wilkerson to Bloom Energy as Executive Vice President and Chief People Officer this quarter.

David Barber, our previous Chief People Officer, made an indelible mark on Bloom Energy, and it has been incredibly important for us to find the right successor following a sudden passing last year.

Sonja is an incredible talent with an impressive HR leadership track record at Cisco, HP and Infinera, and she is the right cultural fit for us.

Her appointment reflects our continued commitment to recruiting, retaining and developing our talent as we continue to grow.

With that perspective, I would like to invite Randy Furr, our Chief Financial Officer, to walk you through our operating results for Q1 and estimates for Q2 2019.

Over to you, Randy.

Thanks, K.R. Throughout my prepared comments, I'll be referring to the slides in the earnings call presentation that Mark referred to earlier.

First some highlights.

Note that all profit numbers that I reference will exclude stock-based compensation.

So on to Slide 3.

In summary, a very respectable quarter.

Acceptances were 235 systems, up 41% from Q1 '18's 166 systems.

Revenue was $200.7 million, up approximately 62% when excluding the onetime retroactive ITC adjustment from 2017 that flowed into Q1 of last year.

Non-GAAP gross margin come in at 15%.

Our non-GAAP operating income was a loss of $8.8 million with adjusted EBITDA coming in at a slight profit of $2.1 million.

Adjusted EPS was a loss of $0.22 and we ended the quarter with $327.9 million in cash and short-term investments and this excludes $42 million of PPA cash.

Now onto some color for the quarter.

Referring to Slide 4, the 235 acceptances translated to $200.7 million in revenue, both Q1 records for Bloom, in line with Q1 historically being down seasonally on a sequential basis, we saw a revenue decline by 6% from Q4's $213.6 million.

However, on a year-over-year basis, revenue was up by 18.5% from Q1 '18's reported $169.4 million and if you exclude the $45.5 billion (sic) [$45.5 million] of onetime retroactive ITC that related to 2017 revenue that was included in Q1 '18, revenue was up by approximately 62% year-over-year.

Onto Slide 5. Our average selling price or ASP was in line with our estimates coming in at $6,870 per kilowatt.

Once again our ASPs will vary depending upon the mix of international where we generally do not have the installation revenue included in the ASP.

Gross profit, excluding stock-based compensation, was down from $38.7 million in Q4 '18 to $30.1 million in Q1.

This was in line with expectations given the lower volume of acceptances that we were expecting due to the Q1 seasonality.

On a year-over-year basis, and once again excluding the onetime ITC retroactive benefit received in Q1 '18, gross profit increased over 200% from Q1 '18's $9.5 million to $30.1 million this year.

As has been our process since going public, we do provide specific quarterly estimates, and in our Q4 shareholder letter, we provided you with a range of Q1 average sales price estimates as well as a range of total installed system cost estimates.

For Q1 '19, both the ASPs and TISC came in, in line with those estimates.

However, as I've previously emphasized, the real key metric is the delta between the 2, which represents our margin on equipment and installation of acceptances during the quarter.

The midpoint of the estimated ASP and TISC yielded a delta on margin estimate of $1,150 or $1,150 per kilowatt.

As you can see on Slide 5, our actual margin delta was $1,212 per kilowatt, a number better but generally in line with the midpoint of our estimate.

As you can see on Slide 6, non-GAAP operating income in Q1 was a loss of $8.8 million.

Again, this number excludes stock-based compensation but a number in line with expectations.

This is down from Q4's $4.7 million profit, again reflecting the general seasonal decline in volume from Q4 to Q1, typical quarter-to-quarter mix of profitability and acceptances and our increased operating expense investments in R&D and demand generation activities.

The $8.8 million operating income loss for Q1 '19 is a substantial improvement from Q1 '18's $22.5 million operating income loss, again adjusted to take out the onetime ITC retroactive benefit.

The year-over-year improvement was driven by the 41.6% volume increase.

Our adjusted EBITDA come in at $2.1 million for the quarter.

Nonoperating expenses were per plan and adjusted EPS come in at a loss of $0.22.

Turning to the balance sheet on Slide 7. We ended the quarter with $369.9 million of cash and short-term investments.

This includes $42 million of PPA cash.

So excluding the PPA cash, we ended with $327.9 million of cash and short-term investments.

Free cash flow, which we define as cash flow from operations less capital expenditures, was a negative $13.6 million.

This is generally in line with expectations when factoring in our approximate $9 million non-GAAP operating loss with our $9.4 million of capital additions offset by favorable net working capital quarter-over-quarter changes.

Referencing Slide 8. Days of sales was up 11 days from Q4 to 38 days.

The actual accounts receivable balance was essentially flat quarter-over-quarter.

The increase in days come as a result of lower sales volume for the quarter.

Our days of inventory outstanding was down 3 days in Q4 to 70 days and our payable days was up from Q4 by 2 days to 35 days on normal business cycle variations.

Changing the conversation to outlook.

In Q2, we expect acceptances to be between 250 and 280; ASPs to be between $6,050 and $6,350 per kilowatt; and our total installed system cost to be between $5,175 and $4,875 per kilowatt.

Also, we expect operating expenses to be between $41.5 million and $43.5 million.

As I mentioned in the past, both ASP and TISC are impacted by a number of factors to include site location and applicable utility tariffs for the location, whether the site includes grid outage protection and/or is mission-critical; the size of the site being installed, generally the larger the installation, the lower the cost on a per kilowatt basis; and as previously mentioned, whether or not the scope of our work includes installation, generally our international business does not include installation.

The bottom line is the important element is not the trend of the ASP or TISC but the trend and the delta between the two.

This delta represents our profit.

One final comment on the outlook.

In Q2, we expect to see a onetime benefit of approximately $8 million in our nonproduct and install profitability.

With the majority coming from some innovative solutions surrounding our field-replaceable units favorably impacting our service profitability.

Once again, thank you for your time, and I will now turn the call back to the operator for Q&A.

(Operator Instructions) Your first question comes from David Katter with Baird.

So I wanted to start on the upfront margin for next quarter.

It looks like it might be down a little bit -- the midpoint of your guide is down a little bit sequentially.

Can you talk about the mix of customers and just kind of some of the dynamics there?

Yes.

Good question, David.

We don't really necessarily expect margin to be down quarter-over-quarter.

I think if you look at last quarter, we -- the midpoint of our margin was about $1,150, and we guided about $1,175 this quarter.

Obviously, we overdelivered a bit in Q1 and there's no reason to think that can't have some upside in Q2 as well.

And I want to stress even at the beginning of the year, we felt like just the general mix of business that we had in first half of the year was not going to be as good as the mix of business that we had in the second half of the year.

And we're just continuing to work through that business that we have.

So we don't expect it to be down.

We expect it to be essentially flat, maybe slightly up a bit, but we wanted to provide some room in the expectations that we set.

Understood.

That's helpful.

And then maybe just shifting gears to the last point you made on kind of the backlog in the business in the second half.

Can you provide a little bit of additional color on kind of the opportunity in Korea, the agreement there?

And what sort of trends you're seeing and kind of the margin business and the backlog there.

Look, as K.R. has pointed out last quarter, our expectation is that we'll diversify the business, and that includes international business, not just in Korea but in other locations internationally.

And we expect that business to continue to grow and be strong for us as well as our domestic business here.

We obviously -- we've reported some wins that we've had in Korea.

All of that was certainly not shipped in 2018.

We had a backlog going into this year.

We have booked, and we expect to continue to book business in Korea throughout this year and to continue to grow that business.

The -- I'll just kind of leave it at that.

Anything you want to add?

No, I think you answered that.

So we are not changing our guidance.

I think the key points that's he's making is we have given you guidance on what to expect in terms of mix between U.S. and international.

And as we sit here today, we expect to track that trend and see no changes.

Your next question comes from Michael Weinstein with Crédit Suisse.

Can you -- I guess on that same topic just talk a little bit about how -- factors of why the second half will be a little stronger than this first half.

And then also maybe an update on the Gen 7.5 status.

Yes.

So I think what we stated to you is for all the reasons that Randy gave you depending on where the geography is, what the utility rates are, the complexity of the install, the size of the install, whether we have mission-critical, non-mission-critical, they all affect whether we are entering into a new business territory, how much of Korea we have in a particular quarter depending on where things are.

All those things ultimately affect the mix and affect the TISC and the ASP and the deltas what we see because we have fairly good visibility based on our bookings, and we know where we slotted these bookings through the various different quarters, understand that our installation process is 9 to 12 months.

So we have good visibility into it.

Coming into the year, we knew that the first half will be lighter and margin at the second half will be better in margin.

And that is what formed the basis for it in terms of market segments, in terms of where we see the growth, in terms of geographies where we see the growth and in terms of the mix of what we see between domestic and international.

We have already provided you that color fairly clearly during the last call, and we're just telling you that we're tracking to that at this point.

And we're tracking to what we put up the plan and that was the reason I have stated that we expect our growth and margin to be in the 20s in the second half but expect it to be lighter in the first half.

And sorry, I understand that you couldn't hear me.

I moved a little closer to the microphone, but I think also you asked about a little discussion on 7.5?

Yes.

So 7.5 is on track.

Sorry, I didn't mean to ignore that the first time.

So thanks for reminding me.

And yes, 7.5 is on track.

It is going through the design process and the design automation process, as we speak.

And at this point, all that we can tell you is it's on track.

And can you -- just one last question, can you provide maybe some kind of time frame when you think it will be in service and then up to full ramp or full production?

Maybe kind of an estimate on that.

Yes, the current time line calls for some additional production shipments of the 7.5 in the fourth quarter of next year.

We'll clearly ramp over time.

Obviously, the current generation of product is a very good product.

It's out in the market.

We certainly want to deplete all the inventory and everything we have with that.

So it will be more like -- at least a 3 and probably a 4-quarter kind of transition to ramp up.

So with that said, you can kind of expect the full ramp up by the end of 2021.

Your next question comes from Paul Coster with JPMorgan.

Can you talk to us a little bit about the health of the bookings and pipeline?

I know you don't share bookings numbers, but anything that kind of gives us a sense of the momentum would be helpful.

And I'm particularly interested in whether the PG&E plan to potentially curtail electricity to 5 million customers in California is having any impacts on your pipeline.

Paul, that's a very good question.

So I can give you a gut feel as opposed to where we see it in the business because, as you know, even when we start with a customer, that cycle of acquiring customer is a relatively long cycle.

Clearly the reports that came out last week, I think and reported in the Wall Street Journal about potentially 5 days of continuous outage once the events peak get beyond a point.

Fundamentally breaks the contract that exist between a utility and a customer of providing safe and reliable power to your service territory.

And does a pretty significant swath to their service territory they said they would do this.

We would expect that to translate to people figuring out how to take better control.

And we are definitely an always-on microgrid solution for that kind of solution.

However, the uncertainty that exists today is still there is no clarity on whether the taxpayer or the investor or the ratepayer is going to bear the burden and how is it all going to be passed on and what is it going to mean to economics, what is the state going to do or not do.

So those things need to shake out for our corporate customers to make their decision on what they're going to do next.

We see the fundamentals favoring solutions like Bloom.

Immediately, I can tell you that, unlike a consumer product where if there is going to be a hurricane, then suddenly all the consumables in the grocery stores are off the shelves.

You don't expect that kind of a quick turnaround for what we do.

Anything you can share regarding bookings momentum at the moment?

And then my follow-up question is any business outside -- India, Japan, U.K. have been site to this potential growth opportunities previously.

When are we going to see some stuff coming from those countries?

Look, on the backlog, I've stayed pretty consistent that we will update that once a year, again, the orders tend to be lumpy.

One thing I would add on the backlog here is that often the international business, we do not have the installation.

If you could kind of contrast that to the domestic business that we have where we do have the installation, the time between the bookings and the acceptance or the recognition of revenue.

Given all that, design time, all the planning, all that permit that we have to do, it tends to be in that 9- to 12-month range.

When we do book business that's international, all that upfront effort has already occurred and by the time they place the order for the systems, it's down to just the lead time it takes us to build the systems.

So often, you'll see where it's even possible, I think we have had this, that we're in the international business, we will actually book and ship in the same quarter, if the order comes in early enough in the quarter and certainly, most of it has been where we've booked one quarter and shipped the next quarter.

So I just want to stress that there is a different profile or time between the bookings and the actual acceptance or shipment when it comes to domestic versus international business.

But hopefully, that will input -- take the same part...

And on the international markets, Paul, as you identified a couple, and let me address them in particular.

We are doing a lot of groundwork in India.

Part of the biogas that I talked to you, I think will lead to some really interesting opportunities down the line.

But in terms of the positive momentum and where things are, I'll tell you India recently opened up the gas market to not just the gas authority of India but to a few other players.

And they have come in and now the Indian Oil Corporation has said it is going to create a very large gas facility for the city of Chennai where a lot of IT companies and other companies are located.

So the trends are pointing in the right direction there.

In the short term, we have a robust pipeline that we are building, but I don't think there's going to be any action -- any business action in India until the impending election that you are very familiar with are completed.

People will not make decisions.

And again, we know India to be a slow market in terms of entry and then a very fast growth.

That is the nature of that market.

We are aware of that.

We are prepared for that.

U.K., I think from a policy and a regulatory perspective, until Brexit is figured out, I don't think people will be putting our energy in it.

At this point, it's a wait-and-see.

Your next question comes from Stephen Byrd with Morgan Stanley.

I wanted to -- just a couple a bit further about the biogas development, it seems like a very positive development.

And this obviously ties into India, but I think it's just more broad.

I wanted to make sure I understood from a technical perspective, the work you've done with Southern Company.

It sounds like you have really encouraging operational results.

Would that imply that you'd be essentially prepared operationally to start to deploying your product in the very near future using biogas?

Or do you feel like you need more time to operationally prove out that approach?

Steve, that's a good question.

Definitely, we have been working in the lab on this for a long time.

What we demonstrated is a field prototype with the Southern Company in a real -- the client felt there were no surprises.

By that, I mean there were no unpleasant surprises and our systems operated the way we expect it to operate from that gas which doesn't have to be purified to the levels that it has to be purified if it went into our pipeline.

That is a very big deal.

And the fact that our systems operate that way, and not put out SOx, NOx, particulates, means that in a way it's not just 0 carbon, it's negative carbon because in the absence of a market for that, that methane is going to go into the atmosphere which is 25x more harmful from a greenhouse perspective than a CO2 molecule.

Even if it were used in a conventional method, the SOx, NOx, the particulates and other things that go out, and the energy required to clean it up to make it fully amenable for that technology, all adds to the carbon footprint.

So we are potentially one of the best solutions out there to take this into on-site generation.

Having proven this, we are now signing up pilot customers, and we expect in the next few quarters to be able to tell you about those customers and what we have done.

This year is about pilot customers, and we expect to go -- and it will be closed systems with pilot customers, and we expect to go into a later backlog and funnel with our customers of this starting next year.

That's extremely helpful.

I just wanted to shift over to your large customers.

Obviously, you have a great success with converting existing customers into follow-on customers.

At a high level in terms of that cycle to move from relatively small purchases to very large purchases, I think Randy touched on this a little bit, but I'm just curious, are there any high-level trends you're seeing with respect to that sort of the cycle that moved from, I'll call it, small to very large with some of your existing customers?

There are a couple of trends that are noteworthy.

The cycle time to transaction with a repeat customer is shorter than the cycle time to transaction with a brand-new customer typically on average.

That is something that we see very clearly.

And also as a rule, the repeat orders tend to be larger than the single purchase order than a first order.

But it is those first orders that become repeat customers.

So we focus on, from a numbers perspective, as much on the getting initial customers signed up.

But from a volume perspective and repeatability perspective, we focus heavily on existing customers who scale with us.

Your next question comes from Tahira Afzal with KeyBanc.

K.R., first question for me is it seems that you guys are back on track in predicting the installed base as you're meeting your acceptance rate.

As this cleared up into the back half of the year and see more growth into next year, are there any other initiatives you think you need to put in plan?

I think the team we're building now in addition to a very strong team that existed before but we are really by putting in dedicated leadership and adding more people, we are looking to the second half ramp and getting ready for it.

As we sit here, we feel like we are taking all the necessary adequate steps to be able to step up to that trend.

And second question may be more for Randy.

Randy, we got a glimmer of positive free cash flow in one quarter last year.

Any line of sight when we could see free cash flow maybe breakeven and move back up to the positive territory?

Yes.

Look, I -- we -- the good news is our free cash flow is tracking pretty well to where it makes sense.

We lost roughly $8 million, $9 million in Q1.

We had $9 million roughly in capital expenditures.

And we had favorable contribution from working capital, which we expect to continue into the future.

Obviously, if you look at the midpoint of our guidance, we're certainly expecting something a lot more favorable or less loss than roughly $8 million, $9 million that we had in Q1.

So we think that we could see neutral free cash flow this coming quarter, Q2.

And then obviously, with expected profits in the second half of the year, we expect that to go to free cash flow positive.

So I think I'll stop there.

I think that answers your question.

Your next question comes from Colin Rusch with Oppenheimer.

Guys, could you break down the revenue and the guidance, 1Q revenue and 2Q guidance.

And the acceptances between how many are stack replacements and how many are new builds.

Is there a material delta there?

No.

So when you say stock replacements, though, what do you mean by that?

I mean if you're replacing the stack and then the existing installation.

Yes, yes.

So again, if you look at our financials as we have reported in the shareholder letter, the stuff that's included in acceptances, that isn't out front in product, that is all new equipment, new installations for which we either sell directly to the customer on the CapEx or it's financed through either our PPA or our leasing managed services transactions.

There's a part of our reported revenue and P&L there that we refer to as service.

And when we shift these field replaceable units to the field, they end up as an expense in that service P&L, and that's offset by the service revenue that we get.

So the guidance that we're providing for Q2, that midpoint of the guidance is all new systems, new revenue and stuff we're shipping out there and anything that ends up in the expense part of the service, that's all the FRUs, as we call it, or the field replaceable units, that we ship back out to the field that we do when the systems deteriorate to a point of about a 45% efficiency.

So hopefully that answers your question.

Your next question comes from Shereen Undavia with Raymond James.

So I had a question regarding the microgrid opportunity.

Traditionally, the core of the microgrid solution has been battery storage.

Are you essentially aiming to display storage in these systems with the Bloom Servers?

So in microgrid and in the real definition of a microgrid never operates with battery storage because battery storage gives you minutes and hours of operation without the grid operating.

A microgrid should operate for days, weeks and months without the grid operating.

And you would never be able to put that amount of storage in a single place.

So that is the distinction.

So the UPS, the availability of uninterruptible power service can be done with a battery.

So this is, by no means, a replacement for the battery.

It is truly a combination of any generation technologies with which we can provide adequate supply to meet all the demands that have been predetermined by the customer that needs to stay on no matter how long the grid is out of service.

So in the past, for large industrial customers, for large commercial customers, such a solution did not exist other than a diesel genset that could potentially run for few days at a time without needing interruption as long as the fuel supply was available.

Here, our systems don't even know when the grid goes out because they've already been in operation.

There is no need for transition from going from idle to on.

So it's one of the most reliable ways of getting the power and understand that our systems depend on a gas grid that is independent of the electric grid and the customers are only out of power if these 2 different infrastructures that are not coupled to each other both fail at the same time, which is highly, highly unlikely.

So this is one of the best always-on solution a customer can have.

That's the definition of our microgrid.

It's a unique offering and our customers love it.

Your final question will come from Julien Dumoulin-Smith from Bank of America.

This is actually [Eric] on for Julien.

So we just wanted to touch upon, first and foremost, are there any updates on the intention to pursue an ITC safe harbor particularly as the ITC for fuel subs step down into 2020.

And one follow-up question after that.

Look, the ITC that was extended was good for 5 years.

And the way it works, even with the step down from 30% to 26%, even with that, we have the opportunity to continue to use 30% for all the projects that we've identified and we started that will go into the future, start construction -- where we commence construction.

In the same will occur even on the step down as it goes forward.

So as we've been pretty consistent in saying is that -- with the change from the old rules to these new rules that we're operating under today really extends the ITC for us well into year 6 and maybe even into year 7 as we have going forward.

And there's already been some talks in Washington of possibly looking at this even in the future.

So hopefully that's a good on the ITC.

What's the follow-up or the second question, [Eric]?

The second question was on expansion, but sorry, just to touch on the ITC.

So I understand that nuance.

I'm just wondering is there any plan to, say, procure 5% of expected fair market value ahead of year-end '19, such as through steel boxes or whatnot, that would allow you to extend the ITC for the projects you haven't identified.

That's mainly what I'm wondering...

Obviously, we have plans in place and we'll talk more about that when we get nearer the end of this year.

But the answer is yes.

Okay.

Got it.

Just wanted to make sure.

And then lastly on the expansions identified with the last call particularly into the Northeast.

Could you discuss how that's been progressing so far with first quarter?

Primarily I know you talked about the upfront margin being different depending on the geographical mix.

Is Northeast expansion something that you guys are driving pretty heavily with first half?

Yes.

So the answer is yes.

Look, a way to think about Bloom is that we operate today in probably 10 states, 11 states where the tariff or the utility rates that are being charged to commercial industrial customers are some of the highest in the U.S. And why?

It's because that lets us achieve our targeted margin or better and give a customer the savings that -- their hurdle rate of savings it takes to transact with the business.

As our costs come down that lets us enter more and more of these tariff areas.

Even in the state like California, the utility rates charge the C&I customers, as you know, very significantly, that doesn't mean that Bloom is in every single utility in the state of California or in the other states that we operate.

However, over time as our costs come down, we'd be able to move into those regions and territories as well as other states moving forward.

So clearly, we're in the Northeast today.

Back to that comment on margins can differ.

Margins can differ not just from East Coast to West Coast.

It can differ even within the West Coast and even within the East Coast depending upon which tariff or which utility that we're operating in.

Again, on our land and expand strategy, we really focus on a portfolio approach with our customers, so it's not uncommon.

In fact, it's the most common when we book an order from one of our customers that they will have sites both in the West Coast, both in the East Coast, some in some very, very high utility tariff rates, some in some lower ones.

We look at this all on a blended portfolio approach to give the customers that target hurdle.

So obviously, with that, there could be mix for us from time to time from region to region depending upon the acceptances that are accepted within that period.

And that's really where we're headed with that earlier comment, [Eric].

This concludes today's conference call.

You may now disconnect.