Bloom Energy Corp (BE) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to the Bloom Energy First Quarter 2021 Earnings Call.

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

I would now like to turn the conference over to Suzanne with Investor Relations.

Please go ahead.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us on Bloom Energy's First Quarter 2021 Earnings Conference Call.

To supplement this conference call, we have furnished our Q1 2021 earnings press release with the SEC on Form 8-K 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 our future financial performance.

These include statements about the company's business results, products, strategy, financial position, liquidity and outlook.

These statements are subject to risks and uncertainties as discussed in detail in our documents filed with the SEC from time to time, specifically the most recent report on Form 10-K for the year ended December 31, 2020, which identifies 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 2021 earnings press release, we refer to GAAP and non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

A reconciliation between the GAAP and non-GAAP financial measures is included in our Q1 2021 earnings press release available on our Investor Relations website.

Joining me on the call today are KR Sridhar, Founder, Chairman and Chief Executive Officer; Sharelynn Moore, Chief Marketing Officer; and Greg Cameron, Chief Financial Officer.

KR will begin with an overview of business highlights in the quarter.

Sharelynn will then provide an update on Bloom's road map.

And Greg will review the operating and financial highlights of the quarter.

After the prepared remarks, they will take questions.

I would also like to note that we are all dialed in to this call remotely, so we apologize in advance for any audio issues that may occur.

I will now turn the call over to KR.

Good day, and thank you very much for joining us on this call.

Bloom sends our prayers and well wishes to the people of India.

The safety of our employees and supply chain partners in India is a very high priority for us.

And we are delivering equipment that will enable hospitals and medical professionals to provide oxygen to more patients.

I'm proud of the Bloom team, which has continued to exhibit ingenuity and community spirit.

Now to the company results.

We had a strong first quarter and are reaffirming our previously stated annual guidance.

Our revenue is up almost 24% compared to the same period last year.

Our gross margin is approaching 30%, almost a 13 percentage point improvement year-over-year.

You will hear more details on the quarter from Greg shortly.

Our team has proven its operational excellence by executing on the ambitious road map we laid out 3 years ago in the run-up to our IPO.

Here are a few highlights.

We have almost doubled our annual acceptance rate since 2018.

From 2017 to 2020, our revenue has increased at a CAGR of almost 30%.

Since 2018, we have reduced our product cost by over 30%.

During the same period, we have reduced our product price by almost 20% to lower the delivered cost of electricity and enable growth while increasing our non-GAAP product margin from about 28% to 38%.

Our service business, which lost $17 million in 2018, is now profitable.

We achieved these operational milestones while investing in innovation and extending our core platform to address multiple market adjacencies, our levers for additional growth.

Based on our confidence in the growth of our core business alone, we are doubling our manufacturing capacity from 200 megawatts to 400 megawatts per year.

This expansion exemplifies multiple compelling competitive advantages that are unique to Bloom.

One, we can stand up a copy-exact manufacturing line in about a year for a capital investment, which will pay back in less than a year.

Two, our manufacturing lines can build both our current core product and our future growth products, such as hydrogen electrolyzer, marine power and carbon capture-enabled systems.

Three, this enables us to practice flexible manufacturing and dynamically adjust to market demand.

This flexibility is a huge asset in an industry undergoing transformation.

It will enable us to be at the forefront of innovation with the optionality to manufacture 1 gigawatt of hydrogen electrolyzers.

However, we can utilize our expanded factory to build our current product should the hydrogen economy be slow to take hold.

In contrast to companies building factories only capable of producing hydrogen electrolyzers, we at Bloom are not exposed to the downside risk of idle factories and associated expenses.

In order to carry forward our business momentum with utmost focus on our core competencies of technology innovation, operational excellence and customer service, we are actively engaging partners to assume full responsibility for installations.

This quarter provides a good window into how the shift will enable us to deliver better margins.

Greg will discuss this in more detail.

Now let us focus on Bloom's role in the energy industry, which is undergoing a seismic transformation.

Today, customers are demanding that their energy solutions are cost predictable, resilient and clean.

Unlike the power grid, which is growing more expensive and less reliable, Bloom offers companies unprecedented reliability at a predictable price.

Companies are learning that resilience is imperative.

The price of losing power is catastrophic.

And yes, it is very worthwhile to pay for resiliency.

In a digitally reliant world, which cannot operate without electricity, our product is not a luxury; it is a necessity.

Regulators, investors, customers, employees and citizens are demanding that their companies and governments protect the environment.

Bloom's energy solution offers power that is cleaner than any other always-on source of distributed energy.

And we offer a clear path to affordable zero-carbon power generation.

In this ensuing energy transformation, we are both the bridge and the destination.

Indeed, we are the only solution that offers everything that customers are looking for today: cost predictability, resilience and environmental sustainability.

It is a little wonder then that we see opportunities to unlock many new markets.

To do that, we plan to form strategic alliances, emulating our successful model in South Korea.

Today, we're excited to announce an important collaboration with Baker Hughes.

We will work together to build microgrid for our many clients who demand resilient power.

Baker Hughes will also collaborate with us to develop and deploy integrated carbon capture and hydrogen solutions.

The announcement today with others to soon follow, combined with our market expansion enabled by our cost reduction, should facilitate high growth.

I want to note that our current factory expansion plans are based on the demand we are anticipating through expansion of our core business in the U.S. and internationally.

It is also based on the changing business behavior we see now, influenced by power disruptions, ESG pressures and policy announcements.

But there is a tremendous potential for additional growth.

In Europe and Asia, policymakers are advocating for investments and incentives in clean energy.

The infrastructure bill in the U.S. will catalyze demand for clean and resilient power at a scale never seen before.

Our financial forecasts do not account for potential benefits from these tailwinds.

But we have strong policy and global business development team in place and well positioned to seize these opportunities.

Finally, I'm very encouraged by the progress we are making on our growth levers.

I'd like to invite Sharelynn Moore, our Chief Marketing Officer, to provide more details.

Sharelynn?

Thank you, KR.

And you're right that today's announcement with Baker Hughes is a great example of how Bloom Energy is executing to plan.

With tangible progress and an increasing list of strategic relationships and collaborations, baker Hughes is the most recent strategic announcement.

So stay tuned for more.

As virtual as our products and capabilities are, we know that the energy transformation is a multi-trillion dollar effort that is going to require a large ecosystem that works synergistically over the next few decades.

The multi-faceted energy industry has several players that specialize in industry and customer segments and know the needs of their segment well.

That is why obtaining key strategic partnerships, agreements and collaborations are critical to our strategy.

Baker Hughes stated it perfectly in the joint press release today, "The path to net-zero carbon emissions must include partnerships and collaborations." We couldn't agree more.

Now I would like to take a step back and provide a broader perspective of Bloom Energy's strategic approach and how we are positioned to win now and for the long term.

Bloom Energy has one primary platform with the core being our solid oxide energy server.

This remarkable technology has been proven in the field, and it is commercially successful.

We have been focused on ensuring we meet the needs of our customers with resilient, 24/7, always-on power.

And as we've discussed previously, in light of our ongoing cost reductions, we are now expanding into more U.S. states and have recently announced the appointment of international leadership to strengthen our global expansion efforts.

Couple this expansion was an increase in need for resiliency due to extreme weather events and the fact that we require hardly any water and do not emit any harmful air particulates, we are seeing a market increase in demand.

As KR mentioned earlier, regardless of the end use of our Bloom Energy Servers to engineering, sourcing and manufacturing, all use the same existing infrastructure.

This also means that discoveries or cost-downs in one application can be quickly applied across the platform, benefiting multiple product lines in a cost-efficient manner.

Each of our 5 levers of growth, marine, carbon capture, biogas, hydrogen fuel cells and electrolyzers, are rooted in this breakthrough technological platform, which speeds product development and deployment.

For full appreciation of Bloom Energy's revenue trajectory, we need to view the growth levers, not simply as expansions into different verticals but also as unlocking and related total addressable market of enormous size.

The success of each initiative opens new end uses and perfects our technology by subjecting our solutions to unforgiving real-world conditions.

For every hour, our products are in use, there is knowledge gain that is transferable across the entire platform, thereby, fueling additional growth, growth of experience, expertise, relationships and revenues with corresponding cash flow used to invest in R&D and manufacturing, achieving economies of scale.

We continue to make significant progress on our anticipated business road map, and I would like to now share some important updates on the milestones that have been achieved as well as the applications of each of our growth levers and the sizable total available market each end use unlocks.

For the sake of time, I won't discuss in relation to the technology from each segment now, but we can address that in the Q&A.

Marine.

First, let's discuss marine.

Those cell power ships will help realize our shared vision of a more sustainable, eco-friendly marine shipping industry.

This would virtually eliminate harmful air pollution, including sulfur dioxide, nitrogen dioxide and particulate matter.

This could be achieved with only negligible methane flip and will accomplish sharply reduced CO2 emissions.

Superior energy efficiency will also reduce growth consumption.

The modularity of our fuel cell improves the flexibility of ship design and increases power reliability.

Each design win opens a new addressable market from cargo vessels of all sizes to cruise ships.

And as the underlying technology is the same, we can quickly expand upon prior wins.

As most of you know, we have previously announced a joint development agreement with Samsung Heavy Industries, with whom we're working with to realize the potential of fuel cell-powered shipping.

The certification process of marine fuel cells requires the new technologies be subjected to rigorous testing under a variety of operating scenarios to ensure that the products can withstand harsh sea conditions.

Classification societies, like the American Bureau of Shipping, or ABS, require a series of tests such as tilt and vibration tests to be granted an NTQ, new technology qualification.

We have dedicated engineering and product teams who are readying our fuel cells for use on ships.

And we have pulled in naval architects and learning engineering firm for ship to collaborate on engineering aspects specific to the marine environment.

Following extensive testing on land, simulating the ocean environment, we will complete the final testing phase, which is an on-water demonstration expected to begin in 2022.

Thereafter, we will be able to present our designs to customers.

The testing of marine fuel cells is well underway, and we will update you as additional milestones are achieved.

While we are readying our technology to the sea, we are engaging with other partners as well, with the goal of forging additional relationships that will help accelerate our deployment in shipping as soon as possible.

We see marine as a significant opportunity with an estimated addressable market of $165 billion.

Now on to carbon capture.

Our carbon capture technology is unique.

It splits out hydrogen and carbon dioxide, effectively extracting carbon from the emissions of natural gas-powered fuel cells.

This allows our customers to deliver carbon-neutral generation, utilizing abundant natural gas or even carbon-negative generation with biogas.

This could be helpful during the energy transition.

Carbon capture is a natural complement to our solid oxide technology.

This technology completely changes the profile of industrial organizations with a heavy carbon footprint.

Implementation will save time, money, regulatory compliance and the planet.

Rather than emitting greenhouse gases, outputs will be a near pure stream of CO2, which can be utilized or geologically sequestered.

This additional capability allows us to further differentiate our core microgrid and continuous power offerings.

We are having positive discussions with potential customers and are getting strong feedback on this add-on option.

Next up is biogas.

Our biogas technology is the epitome of the expression, "Turning a negative into a positive." Methane emissions caused from livestock mineral and landfills accounts for 44% of daily carbon released into the atmosphere in the United States.

By working collaboratively with industry partners such as CalBio, our technology harnesses harmful greenhouse gases and converts them to a renewable carbon-neutral baseload with 24/7 availability.

Our platform is designed to utilize any source of biogas, including the dirtiest sources from landfills and wastewater treatment facilities.

We offer an end-to-end solution for gas conditioning, power generation and interconnection services.

The addressable market is estimated at $140 billion and essentially includes every livestock farm, landfill or wastewater treatment facility on the planet.

Of course, no single company would have the production capacity to serve the entire market, but the sheer size should help you gauge the value of the opportunity.

During our 2020 Analyst Day, we provided a slide that showed our anticipated business road map for all of our growth levers and the progression segmented into phases: manufacturing demo, demonstration projects, first commercialization and finally, production ramp.

The progression of biogas follows the same road map, and our work with various partners and customers continue.

Now I'd like to take a moment to discuss our hydrogen fuel cells, which run on pure hydrogen and provide 24/7, always-on power without handful emissions.

Our hydrogen fuel cells offer superior efficiency compared to other fuel cell technologies, and they leverage the same core platform technology that has decades of experience and testing behind it.

Climate experts and governments across the globe increasingly recognize hydrogen as an essential tool for full decarbonization.

Although hydrogen has been identified for decades as a clean alternative, a commercially viable technology did not exist until now.

As you saw in our recent announcement, we have successfully deployed on-schedule 100 kilowatts, a fully operational, solid oxide fuel cells powered solely by hydrogen in South Korea, generating zero carbon on-site electricity.

Our development road map has our first commercial project shipping later this year, 600 kilowatts, followed by an additional 1.2 megawatts that will ship in 2022, in support of South Korea's Changwon RE100, a global renewable energy initiative led by the Climate Group to accelerate the move towards zero-carbon electricity grids.

As announced in November 2020, Bloom Energy and SK E&C won a competitive bid for the Changwon RE100 to supply Bloom Energy's hydrogen-powered fuel cells and electrolyzers to an industrial complex.

Our full commercial ramp will occur in 2023.

Given the progress we've made to date, we remain confident that we are on track.

I opened my comments by stating that all of our growth drivers are rooted in the same breakthrough technological platform.

Our solid oxide electrolyzer is a perfect example.

It is an efficient way to create hydrogen to produce clean fuel for carbon-free power generation, injection into the natural gas pipeline or for use of industrial processes.

Bloom Energy's electrolyzer requires less electricity to create hydrogen than alternative electrolyzer technologies, thereby, offering superior efficiency.

Green hydrogen has tremendous promise as a carbon-neutral energy solution.

We can produce green hydrogen when utilizing electricity from excess renewables.

This technology is highly flexible in its application.

It can be employed to create hydrogen from multiple generation sources, allowing us to adapt to whatever the macro fuel environment is.

Finally, our announcement with Baker Hughes is yet another example of what a powerful strategic partnership can yield.

By coupling Baker Hughes' compressor technology with Bloom Energy's electrolyzer technology, we can commercialize and deploy integrated power generation and hydrogen solution to decarbonize energy and industrial sectors around the globe.

We are excited about our clean hydrogen offerings and our growing list of strategic relationships, which will enable us to capture a portion of the $300 billion addressable hydrogen market.

Bloom Energy will hold a hydrogen-focused investor event in the near future, which we expect to provide further updates on our progress and discuss details of forthcoming demonstration projects, information from that event will be shared very soon.

In conclusion, we continue to execute successfully against our business road map and expected new applications, and we are well positioned to meet increasing demand for clean renewable energy across industries.

We have created multiple paths to deploy environmentally friendly energy solutions that are commercially viable.

Each development path has its own challenges and opportunities, but they are not entirely independent because they are supported by the same underlying platform.

Research dollars spent and lessons learned on each development path benefit the entire system.

And we are in the market engaging with partners and customers, so that as these markets develop and mature, we are in front of the demand curve and not behind it.

Thank you.

I will now turn it over to Greg for further updates.

Thank you, Sharelynn.

It's great you were able to share the progress that the engineering, product management and commercial teams are making on our growth initiatives.

This work is positioning Bloom for our future growth, and most folks don't have the opportunity to see the advancement the teams are making across these initiatives.

Also, the point you and KR both made about what's unique to the Bloom technology and its flexibility to address multiple market opportunities by leveraging the same platform is important not only in our time to market but also the flexibility of our investments.

Our energy server can support our expansion initiatives with minimal customization.

Sure, our server will be optimized for each application.

But it's the same basic design of a solid oxide fuel cell that will utilize the same supply chain, manufacturing capacity and engineering teams.

This flexibility dramatically changes the economics of new product and market expansion opportunities.

It gives us a cost and time-to-market advantage when entering these high-growth adjacencies like marine, carbon capture and the hydrogen economy.

Within our core, the growing emphasis and awareness on climate issues is accelerating the demand for clean, efficient natural gas fuel cell deployment, a resilient baseload power, and our cost-down efforts continue to open up markets in the U.S. and internationally.

As Sharelynn described, we are building the direct and partnership origination models to access additional states and countries to capture this accelerating demand.

As the world moves forward with hydrogen, we are confident our solutions will be competitive in their inherent efficiency advantages and leveraging our current supply chain and manufacturing scale.

As hydrogen adoption accelerates in markets and applications, we can allocate manufacturing capacity to meet the demand for electrolyzers and hydrogen fuel cells.

And as we made progress on adding our solid oxide fuel cell for marine applications, it will come from the same manufacturing sites and global suppliers for our land-based servers.

This singular platform creates tremendous flexibility.

I'll spend more time on our capacity goals later, but I thought it was important to reinforce how key this is to our investment thesis.

Now let me spend some time reviewing the first quarter financial performance.

We've kept the format for earnings release and supplemental information, some of the last quarter.

And I'll be referring to the slide presentation posted on our website.

We're off to a good start for the year.

We had strong growth versus the prior year, and our mix of accepted deals resulted in attractive margins.

We achieved a record first quarter acceptances of 359, up 40.2% versus the first quarter of 2020.

Revenue totaled $194 million, up 23.8% versus the first quarter of 2020.

Non-GAAP gross margins of 29.7% increased 13.5 points.

And positive non-GAAP operating income of $2.8 million increased $26.2 million both versus prior year.

As you can see from the revenue and margin analysis, Slide 4 of the presentation, there were several factors underlying this performance.

First, based on our strong growth in acceptances, our product revenue was up 38.5% versus the prior year.

Product margin improved 7.9 points as product costs were down 12% versus the prior year.

Overall revenue growth was impacted as many of these acceptances did not have installations.

Either because the inflation was done by our partner in Korea or for a specific customer, the installation will be performed later in the year, thus, reducing our installed revenue 83.7% versus the first quarter 2020.

It's important to remember most installs are targeted at breakeven.

So as we find more installation partners, it will provide the margin improvement that we saw this quarter.

We are having discussions with potential partners that could provide the installation services and earn the revenue on future projects.

While this may reduce our revenue, it should be a benefit to our margins and reduce our operating complexity.

What may be most important in the margin analysis is that the service business reported non-GAAP gross profit in the first quarter of $1 million.

As we discussed during our service business presentation a few months ago, the significant improvements in our power module life, cost reductions and our actions to proactively manage the fleet have accelerated our expectations on profitability for our service business.

I'd like to congratulate Glen Griffiths, Deepak Shukla and Kerry Boucher on achieving profitability in the first quarter and relaying their goal to be profitable each quarter as we work towards our targeted services non-GAAP gross margin of 20% by 2025.

We delivered adjusted EBITDA of $16.1 million for the first quarter, an improvement of $25.9 million versus the same period prior year and our adjusted EPS improvement of $0.27 versus the prior year.

With respect to our cash flow and debt analysis on Slide 5 our usage of $89 million in operating cash, or CFOA, reflects an increase in working capital to support shipments later this year without the benefits of receiving deposits from our customer financing vehicles.

At the end of last year, we did not renew our 2020 PPA financing providers as they were tax equity-constrained.

We had already engaged with several new and former financiers to support conversion of our backlog and growth.

Our first quarter did not require these new financing vehicles to be in place to facilitate acceptances, but not having them did reduce our CFOA just over $20 million as we were not collecting the milestone payments we generally receive prior to acceptance.

In the second quarter, we expect to close these financings to support the second quarter in nearly all of our 2021 U.S. C&I acceptances.

Before I leave the debt analysis, I want to note we adopted new accounting guidance for our 2.5% green convertible notes due August 2025.

Under prior guidance, we were required to allocate the principle between debt and equity because of the embedded conversion features.

Beginning in the first quarter, we'll be accounting for the entire unamortized balances debt.

While this increases the debt balance on our balance sheet, it does not change the amount we owe in the notes, and we feel it more closely aligns with our capital structure.

There is an impact to interest expense as we are no longer amortizing the debt discount.

And the first quarter results best reflect our current quarterly interest expense run rate.

Non-GAAP operating expenses of $54.8 million have increased $6 million versus the first quarter of last year.

The increase was driven by investments in our front-end originations capability, both in the United States and, as we announced a few weeks ago, by building our international resources under Azeez Mohammed.

We also continue to invest in R&D capabilities to support the technology road map.

I would expect, as we continue to invest in these areas, there will be increasing operating expenses in the coming quarters.

While we only provide booking and backlog annually, in our early-stage pipeline, we are seeing an increase in commercial momentum for our current product offering: our always-on energy server offering 24/7 resilient baseload power with a greater percentage of large megawatt opportunities in that pipeline.

The pipeline reflects the changes we've made to include new states, international and focus on larger transactions.

We are encouraged by this progress and look forward to moving these and additional opportunities through the pipeline and into bookings.

Our supply chain team continues to execute in a challenging environment.

Even with the significant impacts of COVID, especially in India, and the logistic disruptions from the Suez Canal blockage, the team has successfully secured the inventories we need to run our factories.

We are working with our suppliers and logistics providers to proactively identify potential disruptions and mitigants.

We're experiencing some increased cost for expediting airfreight and safety stock.

We are mitigating most of these increases through logistics optimization, but we still expect cost increases in the range of 1% to 2% of material costs.

We expect these costs to be temporary but necessary to meet our customer commitments.

Overall, we are pleased with our performance in the first quarter.

As I said at the end of last year, we believe these financial and operating accomplishments provide meaningful proof points on our growth journey.

Now let me turn to manufacturing capacity investments.

It's important for me to point out that we currently manufacture our fuel cell stacks in California and do the remaining manufacturing and final assembly in our plant in Newark, Delaware.

Our facilities in Delaware were constructed to support over 1 gigawatt of annual production, and we can scale quickly by adding additional manufacturing employees in that attractive market.

In fact, with minimal capital investment and the right labor planning, we can increase our capacity to nearly 2 gigawatts of annual production there.

In addition to Delaware, as our Korean volumes continue to grow, we are building capability in our joint venture with SK E&C to support not only that market but also help us enter additional markets across Asia.

Our pressing constraint with unlocking additional capacity is production in our fuel cell stacks at our Sunnyvale, California facility.

We currently have about 200 megawatts of Bloom 5.0 revenue stack manufacturing capacity there with no remaining additional space to increase capacity at this site.

To support our growth expectations and with the introduction of Bloom 7.5, this quarter, we secured 154,000 square foot facility for additional stack manufacturing capacity.

The facility is in Fremont, California, close to our engineering team, which we think is important.

Since this coincides with our introduction of the next generation of technology, Bloom 7.5, we are ordering the tooling required to build this platform.

As I discussed previously, we're investing $50 million to $75 million to bring additional 200 megawatts of capacity online over the course of the next year as we operationalize manufacturing of Bloom 7.5.

The facility we've secured is large enough that for a total investment of $200 million, we can increase the capacity roughly to around 1 gigawatt of Bloom 7.5 fuel stacks.

Our introduction of Bloom 7.5 remains on track.

We are seeing the performance that we expected and will continue to introduce that product into additional field sites.

We will cadence Bloom 7.5 manufacturing investment with the demand for additional capacity.

We believe this could be an attractive return profile to allocate capital, and we have the additional confidence given that stack capacity to be utilized across applications.

Given the inherent advantages that we have in our platform, we believe that our investment strategy, which is to focus on technology innovation of the platform, manufacturing excellence and the distribution of our product in our core and adjacent markets with meaningful partnerships, is the most efficient value-maximizing approach.

From an investment thesis, the diversification across end markets provides us with significant opportunity to derisk our investments.

That's what gives us such strong confidence to make the investments in technology and additional manufacturing capacity.

On Slide 7, we highlight our 2021 outlook, and we're reaffirming all of our 2021 targets.

For revenue, after a strong start, we maintain our expectation to be between $950 million to $1 billion.

Based on our mix of expected acceptances and increases in installations over the next several quarters, we expect total year non-GAAP gross margins to be around 25% and positive non-GAAP operating income of roughly 3% of revenue.

As I previously mentioned, we expect to continue to invest in our sales and marketing and our research and development, increasing each quarter, and I would expect operating expenses as a percentage of revenue for 2021 to be similar to 2020.

We are also maintaining our outlook on CFOA as approaching positive.

While we do not provide quarterly guidance, there are a few aspects of the second quarter that I wanted to highlight.

All of these are accounted for in our 2021 framework and do not change our yearly targets.

On revenue, I would expect second quarter revenue growth to be similar to our annually targeted revenue growth, with inflation revenue more in line with the 2020 as a percentage of revenue.

Gross margins may be sequentially lower due to 1 large transaction in the quarter that was booked 18 months ago and has lower product margin than our norm, as well as the dilution from increased installations.

It's likely that when incorporating second quarter into the first half 2021 results, non-GAAP gross margin percentages will be in line with our total year expectations.

These factors, combined with an increase in operating expense, will result in sequentially lower operating income in the second quarter that are all factored into our full year targets.

In summary, we had a strong operating performance in the first quarter and are very confident in our future.

We're gaining momentum in our commercial operations, and we're seeing opportunities with new customers in new geographies.

We are investing in our technology, manufacturing and front-end originations teams.

Our service business has improved and it's demonstrating in its results.

And we are reaffirming our 2021 framework.

We feel Bloom Energy is well positioned and has the product team to be the leader in distributed generation, and we're doing this with real focus on disciplined financial management and operational excellence, which creates value for our shareholders.

With that, operator, let's open up the line for questions.

(Operator Instructions) We have your first question from Noel Parks with Tuohy Brothers.

I wanted to touch on the Baker Hughes, the new agreement.

I'm more familiar with the company's sort of legacy oilfield service business than I am with their gas turbine business.

And so is it an expectation that they would ultimately have direct involvement in manufacturing?

And is the gas turbine business sort of like the main thrust of the opportunity sort of utility-scale projects?

No.

So this is KR.

There are 3 ways to think about this potential collaboration that we are looking together that can be very strategic to both companies.

First is, if you look at the -- if you look at Bloom's hydrogen electrolyzer project and if you look at the compressor line that Baker Hughes has, they can take that electrolyzer, use the Baker Hughes compressors and inject the hydrogen into the pipeline, and they're very big in the gas pipeline compression business.

And therefore, thereby, offer a blended fuel to reduce the carbon footprint because, as you know, this is a journey and not a switch going from natural gas to hydrogen, right?

So then that blended fuel can be used both by Bloom's fuel cells as well as by Baker Hughes' advanced gas turbine to provide baseload and peak load and, therefore, provide both our end customers with tremendous opportunities for microgrid that offer the 3 things: cost predictability, the resiliency and the reliability using a microgrid and the path to decarbonization that starts right away rather than waiting for some future.

Great.

That clarifies a lot.

And I guess, I want to turn to the marine business.

It sounds like it's -- at least what you presented today was more sort of front and center.

And I guess, could you just talk a little bit in the market about sort of the replacement cycle?

I guess I'm thinking of the ships that it might be longer than, for example, commercial vehicle, heavy-duty ground transportation applications.

So I just -- I was trying to get a sense of maybe where things stand in the business.

And you did, of course, have the joint development agreement, so -- with Samsung, so any updates on that over the last quarter or so would be great.

Yes.

It's Sharelynn.

Thanks for the question.

We are in the midst of working with Samsung.

We are going through the testing and the certification processes.

We are talking to other shipbuilders and customers and potential partners as well.

So there is quite a bit of activity.

As I mentioned in my remarks, we'll go through the testing phases, and we'll be in the position to start showing designs to customers in 2022.

And ramp-up would likely be in the 2023 time line.

It's not an industry that is going to be extraordinarily rapid.

And we think by putting the time into it to really work with the right players early, we're really ready to start meeting their demand, really the 2023 time line from the commercial standpoint and beyond.

We have your next question from Michael Blum with Wells Fargo.

So you announced a series of new hires globally.

So I wonder if you could talk about some expansion plans in these new geographic regions.

And what these global initiatives include, all the different applications you're developing?

Or are there specific applications that you're targeting for different markets?

Yes.

Thank you.

We have made a series of announcements regarding our international expansion.

We have our office open in Dubai, our leader appointed was Azeez Mohammed, and a series of what we believe are the industry-best leaders in key markets.

And we have leaders established end markets that we've announced in Germany, U.K., France, Australia and clearly, the middle East as well as appointments in Southeast Asia.

So that gives you an idea of where we see particularly interesting market inroads.

While we're assessing those markets, our goal is really -- we have really viable, strong core business today that we will start both solid oxide fuel cells for resiliency to help with time to power and to really chart a path to clean energy solutions in the future.

So that's where we start.

Certainly, longer term, all of the growth levers that I talked about today, we see widely applicable in most of the markets in which we serve.

So to wrap up, the markets that are most interesting to us are the ones that have viability for our core fuel cell offering today and inroads into the growth levers for tomorrow.

Great.

I guess, my other question I wanted to ask was just about the average selling price, obviously, down year-over-year.

And I just want to get a sense for how we should think about how that should trend over time maybe throughout this year or just any kind of time frame you're willing to talk about.

Yes.

Hey, Michael, it's Greg.

So when you look at the slide that we've got in there, you got to take the selling price and take it apart 2 ways, right?

Because one, we include both there the product cost and the install.

So knowing that we didn't do the installs this quarter, you take that revenue as well as the cost out.

So when you take it down year-over-year and you can extract the install out of there, there really wasn't a lot of difference in our ASPs, given the mix of deals we had this quarter, year-over-year.

And you can deconstruct that just taking the total numbers and dividing that by the acceptances that are in there.

Listen, over time, I would expect, the easiest way I can think about it is in order to get to that 25% to 30% revenue growth numbers that we talk about, you're looking at about 10 points more in volume growth in order to get there.

So we're always targeting about 10% to 15% down on cost.

So that gives us a bit of an expanding margin if we hold that.

But over time, we should be pretty well close to our cost-down targets in our ASP because that's a way to open up more markets for us, which we think is important now that we've got our product margins where they are, where we want them to be.

We had your next question from Michael Weinstein with Crédit Suisse.

Greg, you mentioned that you were seeing some traction in some of the new markets that you guys are targeting this year.

Obviously, you're not going to play -- update the backlog in the middle of the year.

But if you can give some more color on what you're seeing in the degree of improvement or degree of excitement that you're seeing in these new markets.

Yes.

We are seeing some interesting momentum commercially, right?

In the first place, you begin to see that in the numbers that I look at is really around the pipeline.

We think now that we have the opportunity to expand our sales force, both in the U.S. and international, as we start to talk to more and more companies, we find them to be excited about the product that we're bringing, which is really around the resiliency and the cost predictability and all the benefits in our machine.

So we're not surprised by the fact that we're seeing a lot of commercial momentum there.

It's exciting every Monday when we get together and we go through it.

And the trick here, right, is to stay focused as a team and move those opportunities through the pipeline with discipline, which Sharelynn has built out, and take those in the bookings.

And I'm looking forward to sharing that strong backlog with you guys when we report at the end of the year.

Great.

And could you talk a little bit about any potential for other JVs as additional partners as you move forward past some of these new products?

Yes.

I'll kick that one over to Sharelynn.

Yes.

So we do see that Baker Hughes is a great example of the type of partnerships that we wish to pursue.

Having a partner that is -- really has the depth of expertise in their segment and vertical and potential geography, along with value-added components of a full solution, make those types of partners really a great fit for us and a great win for them.

So we do have a variety of partnerships we're pursuing.

And as soon as both parties are ready, we'll be putting out more announcements.

Michael, Mike, let me add to that here, the following, right.

If you think about the multi-trillion dollar opportunity and if you look at the scale of what is going to happen, companies that believe that they can vertically integrate and grow are just not going to make it.

It is going to take a variety of technologies, and each one is going to fit in certain areas.

And this energy market is so diverse.

And there are so many players in this field that understand their particular customers very well and their needs very well.

So Bloom's strategy for growth is finding win-win collaboration, win-win partnership to; a, serve the customer extremely well; b, to create that synergies between the 2 companies such that 1 plus 1 is greater than 2.

So what -- the reason we are excited about Baker Hughes is it brings that kind of an opportunity to the table, very similar to what we did in Korea.

And yes, you are going to hear more in the near term, and they will be very similar to the principles that I just laid out to you because that is our strategy.

We have your next question from Stephen Byrd with Morgan Stanley.

It's Dave Arcaro on for Stephen.

I was hoping that you might be able to give just an update on your latest thinking for the carbon capture prospects here.

Any updated sense of when we should think about timing of when you might be able to find a strategic partner or announce something commercially?

And then also kind of early aspirations or thinking on the cost of that technology solution.

Yes.

Great.

Thanks.

We are in demonstration of our carbon capture technology now, and we look forward to talking about that more publicly towards the back half of this year.

We really see this year as being a demonstration phase and looking at continued customers and projects into 2020.

And we'd be ramping in the 2022, likely back half of that year, as we see things really ramp up.

So we are in that demonstration phase.

And we are getting really great input in that we great -- give a great option for where the fuel cell is already a fit, but the ability to separate and actually pull the carbon out of that solution is really additive to the value proposition.

So that's -- we can see continued interest, and we'll see what next year brings.

And I'm going to also ask KR to weigh in.

So Stephen, if you just look at our a joint press release between Baker Hughes and Bloom today, we are talking about that as one of the potential areas of collaboration.

Why is that relevant, right?

Baker Hughes is in the business of serving the gas industry with their compressors for compressions.

They are in the business of serving the oil and gas industry with what they need.

And if they can help that industry decarbonize using carbon sequestration, that will be fantastic.

So using the same technology and the same customer base they have, combining that with our carbon capture technology and doing what they need to do, that combination to a customer that needs it in a very big way, as we move forward in this world, would be an example for you in terms of how we are thinking about doing this.

Going back again to my point, it is going to take significant large collaboration to make things like this happen.

And what we are doing now is a validation in our own facilities and perfecting this technology such that it can be then plugged and integrated with these other things to serve the customer.

We have your next question from Colin Rusch with Oppenheimer.

This is Brendan Keevan on for Colin.

Just first, for a North American customer, can you give us a sense of how the sales cycle is trending from a timing perspective and where you are in terms of lease conversions as well?

Yes.

Thank you.

We are a -- we have a sales cycle that is roughly 9 to 12 months, which I think we've mentioned in the past.

It is a consultative sale, and we really partner with our customers.

What I can say is that as we look at where we are this year, typically, our business has a seasonality to it.

It is typically a larger back half of the year where we see the larger uptick.

But when we look at the back half this year with what we have in our pipeline, it has never been healthier than it is today.

And we're really seeing the consolidation of factors of increased interest and actually wanting to protect themselves for resiliency.

It's less of a nice to have and more of a need to have.

We are seeing a lot of great upside in expanding in traditional U.S. states.

In that area, we can now work with customers to expand current customers in those states as well as we're actually talking to customers in these states that we haven't talked to before.

So the results of all of those 3 things are really additive, and we are directly seeing the impact of that in our pipeline, and we're really excited about this year.

We have your next question from Paul Coster with JPMorgan.

I think, KR, the Baker Hughes partnership sounds very exciting, but it also sort of marks the departure from a prior strategy, at least it sounds like it, which is that the one size fits all type of solution set that you'd have, the beautiful Bloom Energy service outside in parking lots and so on or wherever, very modular, very scalable business.

And it sounds with Baker Hughes, you're going to start to go the more sort of installation-specific route.

Is that correct?

And if it is correct, is it scalable?

On the number of projects, finite number, isn't each one a very complex sales and lengthy sales process?

So Paul, thank you for that question.

We clearly -- I think your question illustrates that we clearly have not articulated our vision of what the product looks like well to you all.

It couldn't be farther from what you said.

What I've always said is that the core product is modular, copy exact, always-on.

And I've used the example of the computer chip.

If you just remember the chart of the computer chip, it's the same chip, but that gets integrated to so many applications.

The input/output, we have talked about us being the Swiss-Army knife, being able to adapt to any input on the inside and any output on the outside, right?

So what we are thinking here, Paul, is our core product does not change when we integrate something with what we do with Baker Hughes.

But imagine our core product and a variation of that being hydrogen.

When that hydrogen comes out, how is that going to get compressed?

How is that going to get liquified?

How is that going to go into a pipeline?

Is that core to us?

Or is that context to us?

It is context to us.

It is core to Baker Hughes.

Why would you not marry core and core and provide the customer what they need?

And we are not changing anything in what we do.

And again, in this particular case, it will not change the models because we will ship the core product.

They will integrate what it needs to get integrated in this particular example.

So it is a reaffirmation of we are a platform on to which you can stick on so many different apps.

If you want to think about your iPhone, the iPhone and you can pick a lot of apps on that.

And there are so many apps Baker Hughes brings in, and we are delighted.

Okay.

With that, I just want to say we are running out of time.

We are 3 minutes past.

We apologize.

We believe on starting on time and ending on time.

Thank you, all.

We appreciate your support of Bloom Energy, and we can't tell you how excited we are for the future.

Good evening.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.