Bloom Energy Corp (BE) 2019 Q2 法說會逐字稿

Good afternoon and welcome to the Bloom Energy Second 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 at Bloom Energy.

Please go ahead.

Good afternoon all, and thank you for joining us on Bloom Energy's Second Quarter 2019 Earnings Conference Call.

To supplement this conference call, we have filed our Q2 2019 shareholder letter with the SEC and have posted it along with supplemental financial information that we will periodically reference throughout this call to our Investor Relations website.

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 Q2 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 Q2 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. Good afternoon to all of you.

Welcome to the Q2 2019 earnings conference call.

I'll provide you with a brief summary of our Q2 performance and then discuss a few significant Bloom developments, followed by market shifts in our industry that are creating business opportunities for Bloom.

Randy Furr will follow to discuss financial performance.

In Q2, we achieved 271 system acceptances, a 50% year-over-year increase.

We achieved $233.8 million of revenue which is an all-time record for Bloom.

Our gross margin was 17.8% and operating loss was $67.2 million.

Excluding stock-based compensation, our non-GAAP gross margin was 22.3% and non-GAAP operating income was $1.1 million.

Overall, a strong performance.

Now on to company developments.

We continue to make healthy cost reductions of our current platform.

Development of our fourth generation Bloom 7.5 platform is on track.

We financed another 14 megawatts of systems to our partner, Southern Company.

Duke Energy One, a subsidiary of Duke Energy, will acquire 37 megawatts of Bloom Energy Server project to a PPA, a $250 million investment.

Adding in our other partner, Exelon, 3 of the nation's largest power companies have now validated Bloom's unique place in the transforming power market with substantial investments.

Following on our announcements on using landfill biogas for power generation, we announced the capability of Bloom Servers to run on renewable hydrogen.

This breakthrough could enable large-scale storage of intermittent renewable power generated by solar and wind as well as the important asset for the hydrogen infrastructure road map that Asian countries like Korea and Japan are developing.

We are developing landfill, daily waste and wastewater sourced biomethane-powered Bloom projects.

You will hear about them in the coming months.

Also, in the near future, we expect another important announcement from us on decarbonization using the Bloom Energy platform.

Now let us consider the transformational market shifts occurring in the power industry.

In the last few months, climate changes impacted the providers and consumers of electricity at an unprecedented scale.

In the modern era, this is the first time ever that communities and businesses in the most advanced nation on earth are being told that they may lose power for 10 days at a stretch.

Where still in fire-prone areas, there may be no limits to the frequency of these outages if high-wind conditions occur.

Last month, New York City was unable to provide reliable power to its customers during a hot summer weekend.

The common perception is that such events are a new normal.

The reality may be worse.

Such events are expected to become more severe, more frequent, last longer and impact more cities in the months and years ahead.

It is becoming very evident that our aging and brittle electric grid is not capable of providing us with the basic human need, 24/7 reliable electricity.

It is neither built for nor capable of withstanding the consequences of the extreme weather mother nature is doling out as we struggle with climate change.

Current solutions for coping with the power outages are inadequate and antiquated.

Traditional backup generators and batteries are designed to deal with minutes and maybe hours of outage at best, not days.

The smog-related pollution from backup generators create significant health risks.

For example, the city of Lathrop in California Central Valley, an area with the worst air quality in all of the United States, expects to burn 10,000 gallons of diesel every day that it is without power from PG&E.

A study showed that cancer risk increases by 50% in a local population that is exposed to 10 days per year of dirty emissions from diesel backups.

Unfortunately, and ironically, all our attention on climate change is focused on solving the long-term problem of decarbonization.

Almost no attention had been given to creating resilient solutions.

It is imperative that we move at speed and rigor to protect ourselves from the disruption that today's climate change brings, starting with our electric power system.

We need large-scale deployment of resilient solutions that will secure and safeguard human lives, property and economic interests, for now and for decades to come.

Developments of Bloom Energy in this rapidly changing world cannot be overstated.

There is no other commercial technology that can impact both GHG reduction and bring resiliency in 1 unified platform.

Bloom offers a clean, reliable and resilient source that is adapted for the post-climate change world.

Let me cite some examples on how Bloom Energy always-on solutions have performed.

Four Home Depot stores equipped with Bloom Energy always-on business continuity solutions, road to hours of power outages multiple times in the New York City area during a hot summer weekend last month.

Bloom has more than 20 deployments located within 100 miles of the epicenter of the 7.1 magnitude earthquake that struck Ridgecrest on July 5. Every single 1 operated normally during and after the event, including 1 right at the epicenter.

For years, our systems have powered customers during and after hurricanes, floods, high winds, earthquakes, fires and other grid outages.

Such practices and heightened customer concern over resiliency, is driving an uptick in interest for our solutions as evidenced by increased web traffic, inbound calls and more deals in the pipeline with the microgrid architecture.

A key point to note is that the geographic areas with some of the greatest exposure to extreme weather-related disasters are also the territories where Bloom operates today: California, New York, New Jersey, Massachusetts and Connecticut.

We expect tailwinds for our business as a result.

Let me now tell you about the headwinds we have faced in the first half of 2019.

The same geographies I just outlined for you are at the forefront of policy discussions about a race to 100% renewables-only power.

Such objectives are well-intentioned but ill-informed.

There is no credible way to achieve 100% renewables goal without compromising public safety, reliability, resiliency and affordability of power.

Nevertheless, the political rhetoric continues.

The confusion it creates in the marketplace in New York and California has slowed down the conversion of opportunity, moving to our otherwise very healthy sales funnel during the first half of the year.

We have historically achieved our highest ASPs in New York and California, with fewer orders from those markets in our anticipated acceptance mix for 2020.

Our revenue growth and margins for next year may not be in line with Street expectations.

We still expect to deliver healthy year-over-year acceptance growth in 2020, generally in line with expectations.

Randy will go into further details shortly.

We have high degree of confidence that this is an anomaly that will correct, and want to emphasize that we are bullish on these markets going forward.

Why?

Let me give you 6 reasons.

One, mother nature waits for no one.

As the number, severity and duration of outages escalates, we expect customers will act to protect their interest.

Two, economics will drive rational business behavior.

Utilities in the markets we discussed have already made grid increase requests to their regulators to pay for disaster-related costs.

This has resulted in higher grid-delivered electricity prices.

Number three, aggressive cost down on our product offering will enable us to lower our delivered price of electricity to customers without impacting our margins.

Number four, businesses are beginning to quantify the commercial cost of power outages and accounting for it when they switch from grid power to alternatives.

Number five, customers are now considering their risk exposure should they be unprepared to deal with long outages after receiving fair warning from their utility providers.

Number six, as I mentioned, traditional diesel-powered backup is not a viable option for days of power outage impacting large contiguous service areas.

We are taking some key steps to expand our U.S. commercial business opportunity.

We are introducing a microgrid solution without compromising our product pricing, where a customer only has to commit to a 5-year contract term.

Such a short-term offer is revolutionary in the baseload power business.

Our new and simple off-the-shelf microgrid offering provides a solution for customers who would not have traditionally needed one, but now do so for safety, risk mitigation and business continuity.

We are very proud to welcome Chris White as our new Chief Sales Officer.

His high energy, passion, talent and prior experience in building sales teams, partners and channels and scaling growth made him a very timely addition.

In summary, with the consequences of climate change ratcheting up at an alarming rate, we believe we have reached the tipping point in the way businesses have to deal with electric power.

Gone are the days that corporate America could signal where it should and mitigate climate change by only buying or acquiring carbon credits from remote renewable farms.

Today, companies must address the consequences of climate change that is impacting their business operations and assets.

The question for business leaders is are we capable of protecting our employees, customers and investment if we experience prolonged and frequent power outages.

Bloom's platform positions us solely and uniquely in the market to offer electricity that meets their needs.

Bloom Energy is affordable, accessible, reliable, resilient, safe and sustainable.

It is the right product in the right market at the right time.

We own this market, and we will execute and deliver on our vision and mission to serve it.

Randy, over to you.

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 271 systems, up approximately 50% from Q2 2018's 181 systems.

Revenue was $233.8 million, up approximately 38% year-over-year.

Non-GAAP gross margin came in at 22.3%.

Our non-GAAP operating income was $1.1 million with adjusted EBITDA coming in at $21.9 million.

Adjusted EPS was a loss of $0.13, and we ended the quarter with $314.4 million in cash and short-term investments, and this excludes $56.6 million of PPA cash.

Now on to some color for the quarter.

However, before I dive into details, there is one housekeeping item I'd like to cover.

In Q2, with respect to the estimates that we provided for Q2 on our Q1 earnings call, the financial statement presentation that we ultimately used for the PPA II upgrade project that we announced during the quarter was different than what we had originally planned for the estimates provided.

And that is this: relative to our Q1 2019 estimates instead of netting certain expenses associated with the upgrade against proceeds received, we are now recognizing incremental revenue and expenses on our profit and loss statement.

So that you can better understand how the incremental revenue and expenses affect our final results, we have provided slide forward to bridge the actual results to a normalized or adjusted actuals that aligns with the methodology for the estimates that we provided.

For example, you can see that the financial statement presentation added approximately $41 million in revenue to our top line relative to our original estimate.

Absent that change, our adjusted actuals show revenue would have been $193.2 million on a normalized basis, translating to a 14.4% year-over-year increase.

I should also point out that all of the approximate $41 million in incremental revenue was offset with incremental expense, so no impact on the bottom line net profit and EPS.

Approximately $34 million ended up in cost of goods sold; approximately $6 million in operating expenses; and $1 million below the line in nonoperating expense.

You can also see that these adjustments are neutral to our EPS.

Given that, and in order to simplify our discussion, I will reference adjusted actuals for the rest of my comments so that the results align with how you were originally estimating the quarter.

With that behind us, on to Slide 5. The 271 acceptances and $193.2 million in revenue were both Q2 records for Bloom.

Acceptances were up 49.7% year-over-year and up 15.3% sequentially.

Adjusted revenue was 14.4% year-over-year.

Sequentially, revenue growth is down 3.8% due to a mix of lower ASPs, this coming from international, which once again, does not have installation revenue, and the PPA II upgrade, which had minimal installation revenue.

Included in Q2's mix of acceptances were health care, technology, data centers, universities, sports venues, utility-scale projects and food and beverage retail.

In total, the 271 systems were spread over 10 different customers in 5 different geographic markets.

The majority of the installations were in it that United States.

On to Slide 6. As I just discussed, we do provide specific quarterly estimates, and in our Q1 shareholder letter, we provided you with a range of Q2 average sale price estimates as well as a range of total installed system cost estimates.

For Q2 '19, our adjusted average selling price, or ASP, come in at $5,704 per kilowatt, a number below our estimated range.

As I have consistently pointed out, ASPs can and will vary depending upon customer mix and the geography mix where generally for international deployments we do not have installation revenue included in the ASP.

Total installed system cost came in at $4,329, down 22.8% year-over-year and down 23.5% sequentially.

As I've previously emphasized, the real key metric is the delta between the ASP and total installed system cost, which represents our margin on the equipment and installation of acceptances during the quarter.

The midpoint of the estimated ASP and TISC yielded a delta or margin estimate of 1-1-7-5 or $1,175 per kilowatt.

As you can see on Slide 6, our actual adjusted margin delta was $1,375 per kilowatt, a number toward the higher end of our estimates.

Turning to Slide 7. Adjusted gross profit, excluding stock-based compensation, was up almost 50% from $30.1 million in Q1 '19 to $45.1 million in Q2.

On a year-over-year basis, adjusted gross profit increased 30%.

Adjusted gross margin come in at 23.4%, a number nicely above last year's 20.6% and Q1 '19's 15%.

Adjusted nonoperating income for Q2 was $114,000.

Again, this number excludes stock-based compensation.

As pointed out on Slide 4, adjusted operating expenses included the onetime incremental expense related to the PPA II upgrade.

You will note that even after excluding this one-time expense, operating expenses are up both sequentially and year-over-year.

This is primarily a result of increased spending in R&D as we invest in our next-generation product.

Our reported adjusted EBITDA, again adjusted to normalize the financial statement presentation with our Q2 estimates, was $12.8 million for the quarter.

Excluding the $1 million referred to earlier associated with the onetime expenses, nonoperating expenses were per plan and adjusted EPS came in at a loss of $0.13.

Turning to the balance sheet on Slide 8. We ended the quarter with $371.1 million of cash and short-term investments.

This includes $56.6 million of PPA cash.

So excluding PPA cash, we ended with $314.4 million of cash and short-term investments.

I would also note that nonrecourse debt decreased by approximately $73 million.

This was related to the PPA II upgrade as we paid off the debt associated with prior financing at closing from the proceeds of the revenue associated with the upgrade.

Our cash balance increased by $1.2 million quarter-over-quarter.

Referencing Slide 9. Days of sales was down by 14 days from Q1 to 24 days.

Our days of inventory outstanding was up by 3 days from Q1 to 73 days, and our payable days was up from Q1 by 2 days to 37 days on normal business cycle variations.

Changing the conversation to our outlook.

In Q3, we expect acceptances to be between 280 and 310; ASPs to be between $6,300 and $6,600; and our total installed system cost to be between $4,125 and $4,425.

Also, we expect operating expenses to be between $44 million and $48 million.

Given the market dynamics that K.R. outlined, we believe we have an opportunity that quickly to take advantage of the marketplace tailwinds to open up additional market opportunities.

We are therefore, accelerating spending in R&D and demand generation for our products that K.R. discussed, or a simpler resiliency offering as well as biogas-fueled solutions, hydrogen-fueled solutions and other products that we will announce in the future.

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 that 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.

Again generally, our international business does not include installation.

The bottom line is the important element is not the trend of the ASP or the TISC but the trend in the delta between the 2. The delta represents our unit-level profit.

Also related to our outlook, during our last earnings call, I highlighted a onetime benefit of approximately $8 million related to our service profitability.

That onetime benefit is reflected in our Q2 results.

I just wanted to point out that we will not see that onetime Q2 benefit going forward.

Therefore, in Q3, we expect service profitability to be a loss in the range of $6 million to $7.5 million.

We do expect to see this loss narrow in Q4.

I would like to turn the conversation to the year 2020, next year.

As we have discussed on past quarterly earnings calls, we will communicate and disclose our backlog once a year, at year-end, and we do not intend to change that practice.

However, we do feel it appropriate at this time to provide some high-level visibility on 2020.

This is based on the first half 2019 quarters.

For our U.S. commercial and industrial business, recall that the time from order booking to revenue ranges in the 9 to 12 months' time frame, translating to the book of 2020 U.S. commercial and industrial revenue will come from orders booked in 2019.

So based on our first half 2019 incoming orders, we do expect to see acceptance volume growth in 2020.

In fact, we anticipate acceptance volume growth to be in the 30% range next year, all positive.

However, given the customer mix, we also expect a drop in our ASPs by a similar percentage, translating to a generally flat top line revenue growth for the year.

Clearly, with a substantial increase in volume and no revenue growth, profitability may be impacted.

That impact can be partially mitigated, and I will now provide some color on volume drivers, ASPs and profitability.

With respect to volume, we previously anticipated sufficient volume growth to offset planned ASP declines.

Our utility-scale and international businesses are performing well and generally in line with our internal plan.

It is our U.S. commercial and industrial business that is somewhat lagging internal expectations, still growing but not at a level initially anticipated.

Why is this?

K.R. pointed this out earlier.

The various U.S. political headwinds around renewables and natural gas policies are creating confusion for our customers and in some cases, delaying purchasing decisions.

With respect to ASPs and profitability, a portion of the decline in ASPs is attributable to an increase in our international business where we did not perform installation.

Thus, no installation revenue nor any installation cost, therefore, no hit to our bottom line.

Any portion of the ASP decline is attributable to the overall mix of our business as our utility-scale and international businesses are growing at a faster rate than U.S. commercial and industrial, where historically our U.S. commercial and industrial realizes higher ASPs given the federal investment tax credit.

The majority of the decline is attributable to an anticipated ASP decline for our U.S. commercial and industrial business as we move into markets outside our typical California and New York markets where the electricity tariffs are generally lower.

However, in line with historical trends, we expect to mitigate a portion of any ASP decline through continued product cost reductions.

So in summary, our ASPs are declining at a rate generally as anticipated but the volume increase is not fully sufficient to offset the decline.

As I mentioned earlier, we do expect to see another year of low double-digit product cost declines, and we do expect to see the commercial launch of our next-generation product late next year.

Finally, our goal is not to be a consumer of cash in 2020, notwithstanding the timing of any periodic working capital requirements.

Once again, thank you for your time.

And I'd now like to turn the call back to the operator for Q&A.

(Operator Instructions) And your first question comes from the line of Tahira Afzal from KeyBanc Capital Markets.

First question for me is just given the new management team in place on the installation side, just hoping you could speak to some of the changes that have been implemented.

And maybe some examples of how these changes have had an impact on lead times.

This is Randy.

Good question.

So as I pointed out earlier, the challenges that are in this business really have to do with just the number of approvals that we need to get from third parties, such as from our customer, from our landlord, building permits from the local utilities, et cetera.

And often, these folks -- when there's a major fire, we'll get called away to deal with that fire or hurricane or something like that.

So a lot of this stuff, no matter what policies you put in place, and I want to stress the new management team here has done a great job, is just totally out of the control of Bloom.

And the way we've been able to address that is we just take a pool of -- that's a lot bigger than what we guide or what we estimate that we'll yield during the quarter.

And that's why you'll see a difference in the ASPs often is because actual pool that yields might be different than the anticipated pool that we had at the beginning.

I think the new management team is there, led by Hari Pillai, is really focused today on improving the process that we just talked about but also really driving cost down for the future.

And that's the #1 focus I think of that team there and just the way we're going to deal with that uncertainty is to continue to have a bigger pool than we think we'll yield in the quarter and build some, let's just call it, conservatism into estimates that we have.

Your next question comes from the line of Stephen Byrd from Morgan Stanley.

I wanted to touch on the cash flow outlook for the company given this more muted outlook in 2020.

I mean towards the end, you mentioned just a little bit about conserving cash.

But do you still plan on being cash flow positive in the second half of this year?

And what is the cash flow outlook in 2020?

Yes, Stephen.

So to answer the question, yes, we expect to be cash flow positive in the second half of 2019.

And we wanted to put that in the end.

Our expectations is not that we will be losing money in 2020.

In fact, we expect to be profitable in 2020.

We just want to point out that even despite the growth in the company name next year, our expectations is that the profit that we will generate will certainly finance the working capital and any external capital needs that we have in the business.

And we expect to be cash flow neutral to slightly cash flow profitable in 2020.

Your next question comes from the line of Michael Weinstein from Crédit Suisse.

Given that, I guess, the last -- in Q2 and Q3, you've had about 30 -- 40% to 45% increases year-over-year for acceptances.

I'm just wondering given the 30% projection overall next year, what do you think -- how do you think the fourth quarter shapes up?

Is that also going to be similar increases to this year?

Or is it going to be closer to that 30% level that you're going to get next year?

So look our -- from our expectations from Q4 -- first of all, we only guide 1 quarter at a time, so I'm not going to provide guidance on Q4.

But I think if you look at what's out there on the Street today, we're not -- we wouldn't provide guidance that's any significantly different than what's out there today.

And your next question comes from the line of Paul Coster from JPMorgan.

I – there is so many puts and takes there.

I don't know which way to look at the moment, but let me just focus on one thing.

I think what I heard you say is that a number of customers have canceled or postponed purchase, and yet you're pointing for more installations next year from a volume perspective.

So I can't reconcile those 2 statements.

And I'm going to tag on another question for Randy, which is I thought I just heard you say that the OpEx could be 24 to 48, unless I misheard it.

What does that mean?

I don't understand what it would be such a big range?

I don't get it.

So I'll take the first question, Paul.

This is K.R., and then I'll have Randy answer the next question.

And I can tell you, no, the numbers have not what you just heard and Randy will give you the exact numbers to correct it.

So the first important point to make is there are no cancellation in orders which is what you said in your question.

What we are giving you is an observation as we see of while we have a healthy funnel in our sales pipeline, the flow of the orders of the deals in the funnel is not as it is anticipated base for where we need to be right now, just because the delay in customer is making decisions in light of the confusion being created in our marketplace, especially in New York and California, as it relates to what their policies are going to be 100% renewable, no gas connections and so on and so forth.

So they're trying to understand that.

And while that is going on, there's a delay.

However, I think as we emphasized, we are looking from the policy decisions that are already getting shaped based on the resiliency issues that these states are facing.

That point in the direction of firm understanding.

There has to be a strategy of creating resiliency and fighting climate change through carbon reductions, not just a core strategy.

So that's in our favor.

So we expect this anomaly and the timing to be a onetime thing for those reasons.

Again...

I understand all of that.

What I don't understand is why you are expecting -- you now have such a clear insight into a dramatic drop in ASPs but an increase in -- well, very high -- well, still an elevated unit shipment number.

I'm assuming the unit shipments would be going down if there's this pause.

I just can't quite understand this.

Sorry.

I'll add to it a little bit, Paul, and see if this helps and if not keep pushing our way here.

But if you were to look at 2019, most of the acceptance growth for the company out there is higher than the revenue growth by a fair amount in 2019.

And what we're saying for 2020 is essentially the same thing will happen, except the acceptance growth will not be as great in 2020 as it was in 2019.

And we still anticipate, from what's been booked so far this year with the mix that we're seeing, we anticipate that we'll still get pretty healthy top line acceptance growth, but we expect ASPs to decline in about the same amount translating to a flat revenue at the top.

Okay.

And then the OpEx comment, Randy?

Yes.

So what I pointed out is that we had a onetime thing in Q2 that will go away.

So our operating expenses in Q3 will be $44 million to $48 million.

I think you said 24.

It's $44 million to $48 million.

Your next question comes from the line of Pavel Molchanov from Raymond James.

What percentage of your sales in Q2 went to South Korea?

And what percentage for the second half of the year do you anticipate in Korea?

We don't disclose the breakdown of that.

We talked about that a couple of quarters ago.

And I pointed out on the call here that less than half of our -- well, more than half of our revenues were in the United States.

My opinion quite a bit more, but I don't disclose that percentage.

And unfortunately, we're just not going to continue to do that for competitive reasons.

And your next question comes from the line of Colin Rusch from Oppenheimer.

I've got 2. But let's just start with one.

In terms of bringing these new products to market, can you give us a sense of the total cost to bring them to market and then the rough time frame that you expect to have that elevated spend flowing through the P&L?

Yes, sure.

So if you look at the Bloom, a next-generation platform into the 7.5 platform, that R&D had been occurring for more than 2 years now.

And then this is the phase where the prototyping of those parts will occur, and we are accelerating the pace of that.

And that's where you're looking at the increased spending there.

The other increases that you are seeing in R&D spending, which we think is extremely worthwhile, is happening in our decarbonization strategy.

This is biogas, renewable hydrogen and a couple of other ideas that we are working on that we will announce when we are ready very soon.

That's the next thing.

The third item that we are spending on R&D for which the commercial product we will be selling to the marketplace today is a very simple business continuity solution for customers who have not had these kind of systems installed because they did not have the need today -- days worth of outages potentially protected under certain weather conditions.

And we think that there is going to be a huge need based on inbound calls as well as tracking that we see for potential customers.

And so that's the other product.

All that put together, as Randy explained to you, if you take this quarter as an example, we're adding to our R&D spend by that $44 million to $48 million.

If you're looking at an OpEx increase is contributing to that and is also contributing to beefing up our sales and marketing, which will help translate these great products and ideas into actual orders.

Okay.

And then I guess, the second question is really about the cash flow comments.

I just want to make sure I understand that you're talking about generating positive cash flow in an absolute basis for the balance of this year and next year.

And is there any concern around warranties impacting that?

Or are you assuming that no warranty delta?

Or is that already planned into that cash flow metric?

Certainly, anything to do with warranties -- I'm not sure where that question's coming from because...

That's baked into the...

They're just baked in.

I just want to make sure it was baked in there.

I can follow up afterwards.

Your next question comes from the line of Julien Dumoulin-Smith from Bank of America.

Just wanted to follow up on a few quick items if you don't mind.

First with respect to expectations on -- if you can elaborate a little bit on the backlog for next year and what you're seeing.

What is the composition of the sales just like -- if you think about like end market or geography.

Can you elaborate a little bit on, both the ASP fees as well as how you're thinking about the volumetric composition of where those sales are, just so we can get a sense as to why the ASPs are coming down so much.

Like what is it about those sales?

And then separately, if I can just dump in on the last question, very briefly you talked about service margins by quarter here, obviously there are some nuances to each one of them in the current year.

How are you thinking about that flipping to a net positive position?

At what point in time do you think about the services margins turning positive, given everything this year, et cetera?

So the 2-part answer is the following.

On the services, again, there will be quarterly shifts back and forth depending on when we do some large-scale updates or we don't do some large-scale upgrades.

But overall, from a profitability perspective, what we have told you before is the units we ship today, the service revenue we charge, will break even for the service that we do and will give us the margins that we have talked about as our long-term goal.

That's what we are doing with our current shipments.

There is a fleet of units out there that we have the upgrade from various different generations, and that's the forecast we give you and guidance we give you on a quarterly basis on what that service revenue will be.

And you're seeing that last.

But anything we are shipping with our 5.0 systems today and what we will be shipping with our 7.5 units, will get us to the profitability that we are looking for with a 7.5 on the service that we have talked to you about.

On the ASP...

K.R., just to jump in if I can to clarify that, so it's not necessarily expressing a flip in the near term, given the need to blend in and switch into those newer generation sales, right?

Yes.

Okay.

And the second part?

The second question was in ASPs, what we said is our -- currently, when we look at the deals that have closed, the fraction of the deals from our high-margin states, California and New York, is delayed.

Not canceled, delayed because of the confusion created in the marketplace.

And we have every reason, and I gave you 6 reasons by numbers, of why we believe that, that's an anomaly that will shift given that you cannot simply deal with the long-term causes of climate change on not -- and not deal with today's current reality of keeping the lights on, which is like resiliency.

So we expect this to shift.

But while this is delayed, in the mix, we have less of the California, New York orders that typically command the higher margins, and hence, the statement from Randy on what that may translate to as we sit here as an observation.

However, don't forget, we still have 6 months left in the year, so this is a heads up of what we see so you understand what's going on in the marketplace in full transparency.

That's what we did.

Just to understand, is there a pivot point or something specific that you think will help drive that confusion argument because I assume, in aggregate, is there a specific customer channel or why is there is so much pervasive confusion in these 2 large geographies.

Just trying to understand that a little bit more if you can.

Sorry.

Well, there are multiple things that we think will shift it.

First one is when we provide a 5-year product offer, like we talked about that we are so excited about, that's going to give resiliency, a 5-year contract, lower carbon and reliability all in 1 package.

We think that, that's going to help the customer make those decisions faster because they can clearly see that in that time period what's going on.

The second one really is they are, for the first time, trying to figure out the impact to their businesses and their customers and their own risk exposure when they don't have extended days of not having power against the backdrop of their power prices going up because the utilities tend to increase their rates to pay for all the disaster-related costs.

So these are the -- these are clear bullet points that we see as we sit here happening in the marketplace.

Your next question comes from the line of Jeff Osborne from Cowen and Company.

Just a follow-up in the prior question.

So are you assuming that confusion, K.R., is resolved to hit the 30% target?

Or is this going to be a lingering issue next year?

And then I also had a question on the gas moratoriums that we've seen in cities like Berkeley as well as some delays in continents -- territory and Massachusetts area as well.

Are those impacting the 2020 funnel at all as well?

Well, based on our conversations in both California and New York with the policymakers, they are beginning to understand very clearly, as we're educating them, that the solutions to resiliency has to be treated as an add to their goals for decarbonization.

They also understand that our resiliency solution has a very clear road map to decarbonization that other resiliency solutions don't offer.

They also understand that the existing backup systems cannot possibly operate for days on hand on an entire city, even if you had all the diesel gen sets, even if you had diesel for a day, you cannot provide that for long periods of time and provide safety for your customers.

So this is -- this was educating customers and educating policy to make the right decisions.

Mother nature is helping us enormously.

At the end of the day, when you are without lights for a couple of days, you begin to realize why this is important and why it's not about just the end of the world.

It's about end of the day and end of the week.

Anything on the gas moratoriums side?

Same thing.

If -- there will be no expert who will say, today, legitimately without having any other solution just with intermittent renewables and storage, they can power a city like Berkeley.

So it is wishful thinking, it is well-intentioned, it is ill-informed, it's impractical.

Your next question comes the line of Paul Coster from JPMorgan.

And your final question comes the line of Pavel Molchanov from Raymond James.

On the New York and California, given that those fossil fuels phased outs in the electricity mix are not until 2040, so it 21 years from now.

Why would they be impacting sales that far ahead given that your fuel-cell product is probably not even designed to run for an entire 20-year period?

Exactly.

So that's a great question and you actually answered your question in your earlier question.

We will not say that it's going to be an impediment.

We will -- we don't believe that.

In fact, we believe to the contrary.

We believe that our demand in these states are going to go up and not down is the way that I see it.

Sitting where I sit here, our fire seasons are getting worse, your hurricane seasons are getting worse.

So I expect exactly that to happen.

The issue is one of confusion in the marketplace that is simply causing a delay, think about it as somebody hitting the pause button not the end button, okay.

It is a pause button that's going to get restarted extremely soon.

That's why we called it a one-time anomaly.

The second thing is even through that period, if you're going to use a fuel that's not the fuel of your choice, you want to use it where you can get the maximum power with the lowest amount of carbon.

That is today's Bloom system.

You want to use a system that can take that fuel and combine it with renewable biomethane and be able to operate it from landfills, from wastewater treatment plants from excess food, that's the Bloom system.

You want to use it in such a way that you can build a microgrid and provide resiliency in a national disaster situation because climate change is upon us.

It's not happening sometime in the future.

It has started and it's going to get worse with time.

And if you want that safety and resiliency, that's the Bloom system.

And you pointed out correctly, our systems -- we are a technology player as opposed to a 50-year utility player in order to make our money.

Every 5 years with our new product, we can upgrade it with better and better systems to meet the future needs of where you need to go, so lawmakers, when they allow our systems to be implemented, customers when they buy our systems to use, do not have to wait for 40 to 50 years, starts with the system that they purchased.

They are backward compatible and upgradable to the latest systems.

So Pavel, what I would say is people are happy driving their cars that had no rearview mirrors, that had no seatbelts, that had no airbags.

But now that we have all of those in the system and you can provide that as 1 combined product, nobody other than for -- if we can drive in a safe road, then we want to get into one of those cars.

The Bloom system gives you electricity system with the seatbelts, with the airbags, the rearview mirrors, and the most safety and comfort you're going to get.

That's why we are bullish about this market.

We are unique in this scale.

And that is all the time we have for questions today.

I will turn the call back over to Mr. K.R. Sridhar for our closing remarks.

Well, thank you very much.

We appreciate you all joining the call.

As you can see, climate change is not just about mitigating the cost.

It's also about mitigating the cost in the future.

Climate change is about dealing with the consequences as it happens today in a digitized world, making sure a fundamental human need, electricity, is always on.

Bloom, as an always-on solution, offers that hope to mitigate the fear that, that people have about today and tomorrow and gives them hope of how we can decarbonize that same solution for the future.

So we are extremely bullish on where our product is going to go in the future, and we understand that this is an indication.

We are building this company for the long term, with exactly the right attributes, with the right set of tools that the customers are going to need today, tomorrow and for a long time to come.

We greatly appreciate you being a part of this journey and being a part of the investor base.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.