Fluence Energy Inc (FLNC) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Fluence Energy Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lexington May, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Fluence Energy's fourth quarter 2022 earnings conference call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; and Rebecca Boll, our Chief Product Officer.

During the course of this call, Fluence management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. Such statements are based upon current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.

Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today.

Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team during this time to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Julian.

Thank you, Lex. I will now post a warm welcome to our investors, analysts and employees who are participating on today's call. Additionally, I would like to welcome Manu Sial, our new CFO. Manu joined us in September and has already made a significant impact on the organization in a short period of time. Welcome.

Today, I will provide a brief update on our business and then review our strategic content as well as some examples of the actions we already take towards (inaudible). Following my remarks, Manu will discuss our financial performance as well as our outlook for fiscal year '22. Starting on Slide 4 with the key highlights of the fourth quarter, I'm pleased to report that our team recognized $442 million of revenue in the quarter, delivering our highest quarterly revenue (inaudible) and deployed more than 1 (inaudible) revenue in storage solutions. More importantly, we achieved positive gross margins for the quarter, both on an adjusted and GAAP basis.

Our demand was strong across all 3 of our business lines and new orders were approximately $550 million. Furthermore, our signed contract backlog as of September 30 was $2.2 billion, a year-to-year increase of around 30%. Lastly, our recurrent revenue is which consists of our services and digital business experienced strong growth in the quarter. Notably, our service attachment rate of 190% for the fourth quarter was in line with our expectations, illustrating the catch of it service, service contract, we anticipated during our previous earnings.

Our digital business added nearly 1 gigawatt of assets under management in the third quarter, providing us this ability to future revenue. Turning to Slide 5. Over the past 90 days, the senior management team and I are (inaudible). During this deep time, we reaffirmed those aspects of the business that are working well and identify several (inaudible) that have significant upside potential funding to. We confirm that Fluence Energy storage solutions business has tremendous top wins across the globe, included from the inflation reduction act in the United States of (inaudible) higher and Europe is growing this higher for increased energy security and independent.

Although our digital business has strong potential, that's determined that the platform and business model will benefit from simplification and tighter integration with our store solutions. For example, our (inaudible) not able to expand into new markets quickly due to its current (inaudible) . This is something that will be addressed.

Going forward, we will concentrate on accelerating the integration of our offerings in digital services with our storages in order to serve customers in an end-to-end [pot] solution. Concentrating on executing and strengthening our risk management capabilities to ensure we monetize an attractive contracted margins is a priority. Additionally, for simplifying our digital platform, our retooling, our go-to-market strategy in order to increase the scale of both (inaudible) and it and to roll out these products more quickly at a lower cost.

Furthermore, we will convert our supply chain into a competitive advantage by leveraging our sign of scale to drive margins for [ether] implementation. I'll provide more color on each of these initiatives in a few minutes. After (inaudible) people in the past 90 days, I am confident in our ability to maintain our line leadership position in the market, deliver multiyear profitable revenue growth price of more than 30% and we adjusted EBITDA breakeven in fiscal year '23.

I believe our team center passion and resilience will set up a set foot for long-term plans, but lock significant value for our customers and our shareholders. Turning to size. Coming out on this process and bearing an even more complete that our strategy of using our ecosystem provide an energy storage solution to our customers is the right one.

Our ecosystem gives us access to a largest any infrastructure providers in the world and important, it provides opportunities for further integrate with our customers at any point of the value chain. Our revised go-to-market approach is to utilize 1 cell channel for our entire ecosystem. This is different from our past, but we will use multiple cell channels across our business.

This turned out to be an ineffective trend when it comes to a passion, our service and digital solution to any storage cell, an integrated cell channel. We give us a better ability to integrate our customers into our ecosystem. And we have seen our digital software is a final period in all P&L contribution as it supports hardware and service creating a file prime wheel sector.

In insurance, we will work to integrate our technology more close to our digital offerings, interface with our storage solutions (inaudible) does increase the attractiveness to our customers (inaudible). Our ability to offer an integrated energy storage solutions, 1 of the 2 reasons are customer selling.

While increasingly recognized as one of the premier energy solution provider in the world by large international developers, or IPPs, many of which are planning to deploy significant amounts of the (inaudible). The integration of this offering is active to retaining customers beyond day 1 cell. So we can address them anywhere along the line.

We are decimated to multiyear high revenue profit. We operate with an asset liabilities model with high returns on expected capital, (inaudible) which helped us to monetize data and help our customers drive return. We also have a rapidly improving construct in high revenue (inaudible). And ultimately, we believe we have a business strategy set out.

Turning to Slide 7. I would like to discuss the 5 strategy objectives that will provide a framework for the action to be taken over the next few years. First, we will deliver profitability. Both profitability and growth and expansion to maximize shareholder value. We focus on those markets that provide some business growth where our contract solutions allow us to maximize profitability.

Second, we will develop the products and solutions that our customers see. Understanding our customer challenges is a driving force behind our continuous technological advancements. We expect to provide customers with the most store active solution ruling in our (inaudible) period. Third, we will convert our supply chain into a competitive advantage.

We're establishing our best-in-class supply chain that is centered around diversifying our suppliers capturing incentives from the inflation [realtime] and improve the delivery time for us, all of which will ultimately increase margins and drive values for our cost.

Fourth, we will use (inaudible) that as a competitive differentiator at a market price. And I see the power of application intent material in our integrated solution, we can uniquely provide our customers with the ability to evolve maximize our revenue and lower the overall cost of solution. This will increase this ability to our growing and profitable core private stream.

And finally, our pace of debt is to work better. This time we'll be disciplined with our capital spend and contract on the right, optimizing the use in our resource efficiently and a strong corporate as manager, controlling our costs and maximizing our financial performance for our children.

We have already taken action towards this object, some of which I would like to highlight. Turning to Slide 8. I'm pleased to announce we're announcing a new storage solution, either towards the [tradition] segment (inaudible). The translation segment is a growing market that currently since a [450-megawatt] which we expect will grow to 70 gigawatts by the year [2000].

We expect demand for this product will be driven by our customers' need to reduce transmission congestion resulted from growth in distributed energy resource. Furthermore, the transmission segment highly (inaudible) requires their best performance and higher sales , thus increase in a barrier to agree to a market. Some of which are profit. More important, higher complexity commands a higher premium for our products and services and after results (inaudible). We will continue to lead the transition segment as we deliver profitable growth and develop new products and solutions for cost.

Turning to Slide 9. I'm pleased to report we previously signed a contract for more than $500 billion close under which we will deliver 1.2 gigawatt hour any storage facility in the United States compared with (inaudible) grid factor. By further increasing our scale, we'll be able to better capture value from our supply chains. We also know that our stats selected us as they were looking for a prospect partner strong spirit, delivering compact solution.

As a comprehensive solution provider, we continue to outpace our competition due to our scale, industry-leading experience and our ability to solve highly competent, but quickly establishing ourselves as a leader among the mega project side. Turning to Slide 10. Including the onset contribution side sequence to our fiscal year-end, our backlog now sees more than $2.5 billion besides like the strong demand we're seeing at the top of our phone, right now providing us great certainty with respect to our multiyear revenue up.

Looking at the chart, you can see that even before any impact from IRA, they have a pipeline that is nearly 3x our current backlog. It is also important to note that we're expanding ourselves to non-related (inaudible). And as a result, a majority of our backlog today is with these costumer.

Turning now to Slide 11. As we mentioned earlier, we experienced to remain (inaudible) inflation (inaudible). BNDES has estimated at a time for any storage increased by more than 100 gigawatt hours or around 35 bps as a result of the IRA. That is a significant (inaudible). The expected ITC puts over operating returns for cost. This benefit is expected to accrue to us to improve price or increase volumes.

Furthermore, the production tax spread provides margin uplift for fruit from capturing benefits associated with manufacturing our old battery volumes in the United States. So it's also important to know that the IRR benefits are not necessary for achieving an adjusted EBITDA breakeven target in fiscal year '24 and those represent upside potential. We don't really see the IRA impacted through it in 3 areas.

The first is the ITC for stack of storage. This benefit accrues to our cost. And we expect we will incentivize more projects to move forward and to bring light to all the products that were previously not economic front. As a result, we anticipate the U.S. market growth to increase from 30% per year to around 40% to 50% per year. Based on our compensation with cost, we expect to enter into the first phase of this contract attributable to IRA about mid-calendar year '23.

We will expect to see the impact on our financial results in the second half of '22. Second, the production tax spread on the Section 45 act of the IRA provides significant opportunities for group, and we're launching our own battery model manufacturing, which I'll disclose further shortly. As a result, we expect to qualify (inaudible) per kilowatt hour incentive from the IRA. It's important to note that this is an on-GAAP and (inaudible) direct payoffs.

As a reminder, we opened our youth for production facility in September, which will have an expected kilo watt of fairly 60-gigawatt hours per year by '23. We expect we'll be able to be impacted model production starting in the summer of 24, cost capture in the $10 per kilo watt hour as I just mentioned. [ITC] further supports our meeting growth margin. Concerned, fetch support (inaudible) provides for the onetime reimbursement for onshore or establishing qualified manufacturing facility in the U.S.

As a result, we're permanently looking at the possibility of expanding our operations in the U.S. with an additional facility. Turning to Slide 12. I'm pleased to announce that we're launching our own battery module and battery pack manufacturing are new Utah facility. This gives us granted control over the global supply chain and allows us to capitalize on the incentive of the IRA.

One other benefit to us battery pack that is to incorporate new cells and diversified our sales supplier based, created competition (inaudible). Our battery pack makes it easier to swap back in and out of new product (inaudible). It also allows us to incorporate our own passive management system with more granular data access and agents and inspires to (inaudible) battery (inaudible).

We expect to see the initial path remove production (inaudible) our Utah facility during the summer of '23. Looking at Slide 13. We further illustrate our supply chain and how our (inaudible) together. Starting on the left-hand side, we will continue to purchase battery cells from multiple battery suppliers. Battery cells (inaudible) are uses and to (inaudible) battery cells are integrated to our faster volumes complete with our own battery management system or BMS. Software taking those commoditized battery cells and turn in these (inaudible) capable of performing the (inaudible) our solutions. These battery modules will qualify for the $10 per kilowatt incentive under the IRA as I mentioned.

We then put several battery modules together to make a battery pack that is combined with our DCPM, which is a (inaudible) of the batteries. The DCPM collects battery data for communication with a (inaudible) operating system and it's a point of contact for a cloud-based digital solutions, providing value-added integration for our customer.

Turning now to (inaudible). As I briefly mentioned earlier, we have assessed our digital risk and have been profitable and go-to-market strategy. Now I'd like to discuss what this mean for digital to where we're going. First, we ensure we're offering an integrated list end-to-end [portal] solution for customers to one sales channel. And as I mentioned, this is a major change from our prior sale cycle.

Second, we will simplify our suite of digital offers by focusing on our existing 2 applications, Fluence Mosaic and Nispera. We plan to roll out Mosaic to 4 additional U.S. markets over the next 3 years and improve the ability of this parent to integrate with battery made energy storage system. By taking a more focused approach, we expect to reduce the cost, complexity and time to market for (inaudible). We do not plan to build out any additional applications at this time.

Third, we're accelerated the Nispera passes ability to redeploy onto battery energy storage systems by the end of this year. So enabling our new post of solutions to be more integrated with our banks. What do we expect to achieve a result of (inaudible)? Improve our investment rates for services ability to a bundled approach, increased annual recurring revenue per IRR at of our digital and services and a lower rate of cost of insure.

So I would note that our insurance rate is (inaudible) verily. Going forward, started later in this fiscal year '23, we will report our progress with this efficient disclosed the relevant KPIs. We expect that these retooling will have a relative small investment of $5 million to $10 million. As it relates to the financial outlook for our digital business, we do not expect edible contribution from our digital business in '23 or '24.

We expect to have positive gross margin in fiscal year '23 and expect adjusted EBITDA to be at or near breakeven in fiscal year '25. Over to Slide 15, we're enhancing our India Technology segment, increasing utilization to our workforce optimization that will have (inaudible) in India in '23 to the benefit of our onshore operating. This contributes to our operating numbers, with our operating expenses expected to grow at less than half the rate of revenue, which Manu (inaudible) further.

Turning to Slide 16 for a summary of recent action. As a management team, we're committed to deliver an increase shareholder brand and to execute on these 5 strategic objectives that I just (inaudible) the potential of our plan. We will provide you with quarterly updates on our progress towards strategic objective as we transform the way we operate and price (inaudible).

Overall, we continue to see strong demand that is expected to be amplify by the [Korean] IRA bill that will start adding to our backlog in mid '23. We are committed to breakeven on an adjusted EBITDA basis in fiscal year '24 as we enter into higher margin contracts. We're committed to improving our project execution and our overall risk management I'm pleased with the early results of it, but there is still a lot of work to do. As we move forward, we will continue to focus on executing a high growth capitalized solution business model who expect to make of who is the optimal (inaudible), I will now turn the call over to Manu.

Thank you, Julian. Before I begin I would like to express my gratitude to Julian to influence Board for their confidence and trust. The last couple of months have been a period of graphic learning. I continue to believe that Fluence is positioned well to take advantage of a vast untapped dam that was enhanced by the Inflation Reduction Act by more than $35 billion. Our focus is to strengthen the organizational foundation to enable profitable growth, and this includes enhancing our deal underwriting, risk management and execution capabilities.

Let me now review the financial performance for the fourth quarter of 2022. Please turn to Slide 18. In the fourth quarter, we delivered our highest ever quarter with $442 million in revenue, representing an increase of 85% from the third quarter. This record revenue generation was primarily driven by strong project execution as several projects achieved significant milestones.

We also achieved positive gross margins in the fourth quarter, 3% on an adjusted basis and 2% on a GAAP basis, driven by strong revenue performance and improvement in our ability to pass through to the customer increases its certain input and supply chain costs. This is a significant turning point for us.

And while 2022 was a challenging year, we ended the fourth quarter with positive gross profit and believe that issues confronted are well understood and now largely behind us. Compared to 2022, we expect new contract margins in 2023 will be positively impacted improvements in a deal underwriting process, such as implementation of index-based pricing.

We've also improved execution on product rollout, including leveraging our lab to test and debug solutions before we launch them into being. Moving from gross profit to operating expense. We improved our operating leverage in the fourth quarter 2022 by lowering our operating expense as a percentage of revenue compared to prior quarter and prior year.

Our operating expense can be divided into 2 categories: the first is SG&A spend, which is a required amount of overhead spend to operate our business, both at corporate and at the regional level. We do not expect that corporate OpEx to escape the growth of the business. The second area of spend is what we refer to as platform investments, which represents primarily R&D spread, which we view as a type of growth CapEx.

Full year 2022 operating spend was 15.5% of revenue, which we expect will be a high annual bottom up. Looking at 2023 and beyond, although we expect to continue to grow our operating expense in absolute dollar terms, but we expect it to grow at a rate less than half of the rate of our revenue growth. We expect this operating leverage to be one of the drivers of the improvement in adjusted EBITDA we see over the next few years.

In the interest of greater transparency, this quarter, we have begun providing a supplemental quarterly metric sheet on our Investor Relations website that is designed to provide analysts and investors with a deeper understanding of our financial and operating performance.

Please turn to Slide 19. I'm pleased to report that we ended 2022 with total cash of $540 million, which includes our short-term investments and restricted cash and is in line with what we have guided. As shown on this cash bridge, a majority of our cash usage in 2022 was driven by negative adjusted EBITDA. That trend is expected to continue in fiscal year 2023.

Let me also provide some color on the other drivers of our 2023 cash outlook. We expect to incur modest CapEx spend, including for our digital business retooling. In addition, as we did in 2022, we will use some operating cash in 2023 at a rate of roughly 10% of our year-on-year revenue growth. We believe that we have ample liquidity to meet our 2023 cash.

Please turn to Slide 20. We are initiating guidance for fiscal year 2023, a total revenue of between $1.4 billion and $1.7 billion. Additionally, we expect our adjusted gross profit to be between $60 million and $100 million. We are coming into 2023 with approximately 90% of expected revenue at the midpoint of our fiscal year 2023 guidance already in our backlog.

We have also secured additional supply chain commitments for 2023. This gives us confidence in our revenue guidance. On the next slide, I will provide additional color on why we are confident of achieving our 2023 adjusted gross profit guidance. Please note that our guidance does not assume any financial benefit from the Inflation Reduction Act as we see -- as we expect to see order growth in 2023 with a benefit to sales [partly] mostly in 2024 and beyond.

In terms of revenue seasonality, we expect to see a split of approximately 40% in the first half and 60% in the second half. Furthermore, we expect operating expense to grow at less than 50% of our revenue growth, providing a significant operating leverage. As Julian mentioned, we'll be utilizing our India technology center more, enabling us to scale at a much lower cost.

Please turn to Slide 21, where I'll walk you through key drivers of our 2023 adjusted gross profit guidance when compared to 2022 actuals. We're confident in our 2023 adjusted gross profit guidance of $60 million to $100 million, driven by improved contract underwriting and execution. This reflects a combination of signing new contracts at margins that are at or close to double digits, an improvement compared to the past, our ability to recoup some of the increase in our supply chain costs and improved execution.

I would note that we expect our exit 2023 gross margin run rate to be higher than the full year 2022 margin rates as our legacy contracts in completion and new deals start to have a larger impact on them.

Before we open the call for questions, I want to reiterate that we have visibility to achieve 2024 breakeven adjusted EBITDA as well as multiyear 30%-plus revenue growth and are positioned to take advantage of the upside from the Inflation Reduction Act. With that, we will open the call for questions.

Good morning. This is Julian. I want to apologize for the way the sound work, it looks like by boys accent did not mix very well with the mic and the biggest (inaudible) . So in order to correct this, (inaudible) who we're sending, we will be posting our strip on the website to ensure that where everybody has access to it unless will be sended by e-mail to his content all of it.

And we will be open if you have any questions on the script later on after this you will -- you can send a contact like (inaudible). Let me tell you this before we start, which I think is important. The quality of the recording was an inverse proportion to the quality of the message. So unfortunately, it did not come through, but it was in direct proportion, just quite the opposite. So going to quick Q&A. And I really apologize for that, it won't happen again. We're testing and that you might that does not fix well when my [boys] accents. So we start, operator, if you want to open it for questions, please, Q&A.

(Operator Instructions) Our first question comes from James West with Evercore ISI.

Clearly, as you've stepped into your leadership role here at Fluence, you're focused much more on profitable growth and profit being, of course, the keen were there. Has your bidding strategy changed? Obviously, there's a huge amount of growth in the business itself, but have you adjusted kind of the way the company bids on projects?

If -- what we have done, just -- this is a question we get all the time came that we segmented the market. It's in more detail to identify where we -- which market segments and geographies we could actually aim for our 10 -- double-digit margins. So every time we engage with a new customer or engage in a new project, we know that customers, business case will allow -- and the value we're creating, we're allowed for our profit objectives to leave rich.

So that's how our work -- we have been working on. We also -- the Manu leadership we have put in place a new contract review process internally to ensure not only that, that we reach our double-digit margins, but also that the risk profile of the projects we entered into a reason, we will allow us to monetize the full margin.

So now we have worked generally. We have -- it means that we have dropped some segments on or at least we're not very active in those but at the end of the day, has allow us to keep our volumes and reach or offset our profit objective as we move forward.

Okay. Okay. Makes sense. And then another key differentiator with your strategy is more focused on the digital aspects the business? And could you maybe highlight, is that a lot of internal kind of R&D and maximizing what you have? Or are you looking at external kind of M&A opportunities as well?

What we want to do now, we're kind of integrated the work that we look at is integration. So while we're integrating the sales channel that is -- that requires training and some investments, some capability book. We are integrating our OAS and our operating systems with our digital offerings. And that's not that there will be one, but they will communicate more effectively.

And so our customers will have a seemless experience when they buy our hardware solutions than they hire our digital solutions as a second. And then we're working, and that's where the R&D comes in is on improving the platform of Mosaic. I guess it's normal in the SaaS business but we really -- we need to invest to ensure that we can actually continue expanding that project at a lower cost point and a lower complexity point so we can do this much cheaper and much faster.

In terms of M&A, we are not planning to M&A. We're going to -- I'll tell you until when. But for now, what we will do will concentrate on our runoff. These are -- we believe these are the 2 territories that are the most attractive today where the business cases are very, very clear and that coincides with our market segments.

And as we move (inaudible), we are able to reach our breakeven point for our digital business in '25, we will then look at well, we should develop other apps. But I think that at the end of the day, we will look at us that are based on our commercial capabilities, that our ag that are current our customers can use and can monitor. But our only problem with some of the apps we had before is that they were connected with customer segments where we're not that active. So we have been put in place a new sales channel and additional fixed cost that we think that is not a good idea this time.

We have a question from Brian Lee with Goldman Sachs.

I had a couple just -- I had a couple around the margins. I guess, first off, maybe more of a clarifying question. At points in time during the script, I think, Julian, you said adjusted EBITDA breakeven target in fiscal '24 but then being at or near breakeven for full year fiscal '25. So I think what you're saying is you'll be adjusted breakeven for the full year in fiscal '24 consolidated, but then at/or near breakeven for the full year fiscal '25 just in the digital business. Is that the right characterization?

Exactly. Exactly right. We will be -- (inaudible) as a whole will be breakeven in '24 or we aim to be break even '24. And digital itself will be breakeven in '24.

Okay. I guess that kind of prompts the follow-up question, which is a lot of investors we speak to assume that kind of the digital software applications piece of your business model would be more profitable than the hardware-centric side. So why, I guess, is digital taking so long to get to profitability? It seems like some of your peers in the energy storage vertical, they're well ahead in moving toward profitability and already positive gross margin on kind of the software digital platform segments of the business. So just trying to kind of understand where you guys are coming from and why that's a little bit of a different dynamic for you.

A very good question. I think that just look at Mosaic our bidding strategy. The ability to gain economies of scale requires expanding into a new market going from Australia to California and our core (inaudible). But we realize that it has it was very, very complicated and expensive tool as I mentioned. And that has made it a little bit more difficult to meet our growth. So what we're doing now here is concentrating on grid platform in that solution to ensure that we can get into a higher speed growth. So that's the rationale. That's the reason for -- or the Mosaic being further down the road what we expected to be at this stage, no they're really not.

This pair our APM, our asset management tool is going to in line with our portal. And that way, that just essentially, we bought them. But late last year -- late last fiscal year, we are integrated into our system, into a sales channel and it's going to along the -- just in line with our portal book, so we're very confident. So I think those are the 2 -- I'll say that today, the main driver for our delay has been the need to the platform Mosaic.

And just one clarification on your first comment is we are positive or we expect to be positive gross margin in digital 2023 as well. And then the only other thing I'd say is we've talked about margin rates between 80% to 90% in the digital business, that's still hold true over the next several years. Julian's comment was much more around EBITDA. That's why.

Okay -- No, that's super helpful. I appreciate the color. I guess last question for me, and I'll pass it on is the EBITDA breakeven target for fiscal '24, I think in the past, you had said, I think, 2 quarters ago, there's a path to growth gross margin sort of in the 10% range in fiscal '24. Is that what's embedded in the view to get to EBITDA breakeven in fiscal '24? Just maybe any thoughts around the 24% gross margin trajectory?

So Brian, you said it right. That is the part in fact. If you look at Slide 21, we are signing these then near at double-digit margins. So we feel very confident about getting adjusted EBITDA breakeven for 2024 on the backs of double-digit gross margins. And then from an operating leverage perspective, we believe that 2022 and with a high watermark as a percentage of revenue, and we expect to reduce that as a percentage of revenue given our OpEx will grow at less than half of the revenue growth.

Our next question comes from George Gianarikas with Canaccord Genuity.

So maybe I could start around your decision to manufacture packs in the U.S. Can you just talk about the incremental CapEx required to do that? The incremental hires you need to make, whether or not this will be a global move and whether or not this moves you away from an asset-light strategy?

Well, it's the same strategic position we have today. We will use contracted manufacturing. So we will not be owning the manufacturing facility. We had invested in the design and the IP and the software but not -- we will still be a capital-light business. This will be manufactured by our contract manufacturer provider. This is directed at the U.S. market. So we are this -- our current approach and the decisions that we will build the Fluence make for the U.S. market at this stage.

We're not selling from the U.S. to third parties. We might, as we grow in other regions, we might also build it for Asia and Europe. As of today, it is only for the U.S. And we are -- we believe that our capital-light business model is -- will continue. We're committed to it. We believe it's a right way to do it. And one of the things that always surprised me is that the quality of the contract manufacturing that is available in the U.S. what these people can do for you, how do you do and how much the value they can create out of it and we are very happy with our contractor manufacture.

And maybe as a follow-up, could you discuss the cell supply situation and whether or not it's improved incrementally over the last few months. And what, if any, other equipment may be causing bottlenecks still for deployments?

Yes. The battery situation is improving. We haven't had any delays. I know the market is tight generally. But our relationship with our suppliers, our ability to engage with them and our scale allows us to ensure we are ensure that we no issue on the delivery of batteries on time and with the -- on the terms that we agree.

I will say that -- that's generally clearly a major part of our supply chain. I don't see any other market where is tied that we're concerned about. Clearly, we are confident. This is one of the reasons why we believe scale so important in order to manage our supply chains effectively our scale and our close relationship with suppliers are huge.

Our next question comes from Maheep Mandloi with Credit Suisse.

Just maybe on the previous question. Could you understand like the difference between the flex -- Fluence stack and the Fluence cube? Just trying to understand the core difference here. And part of that is just to get the domestic content adders in -- under the IRA, would the new systems qualify just with the battery pack manufacturing in the U.S.? Or would you have to procure the batteries from the U.S. market as well?

Good. Our (inaudible) before we start I think is important. The regulations of (inaudible) will be considered a U.S. may battery module system has not been issued. So it is still unclear how down -- how upstream they will go, whether they will go only for the assembly, I think that will be more than that whether they will require still to it from the U.S., where the cells need to be from the U.S. or further down, whether the high needs to happen. What we're doing is we're building a strategy of -- not rebuild. Since that we believe that in any event will be included and try to go upstream (inaudible) to ensure that we can meet the qualification.

But the reality is that today, we are in a way, flying is (inaudible) the regulations are not common. There is some that you buy by American type of rules, the US issue a guidance what you introduced, but there's no -- they do not asset, just to let you know. So we're working on it, how we're working on moving as much value add has been coming to the U.S. to ensure that we are that we are (inaudible) we do qualify and make it efficient at the influence make that are not regret decision, no matter we believe that no matter what happens.

We will have to build our modules in the U.S. in a take that on. We're also looking to -- we're talking to battery cell manufacturers to buy sales in the U.S. or look into still in the U.S. to try to create as much value. So that's where we are. I'll let Rebecca answer the first part of the question.

Sure. Thank you, Maheep. So to clarify your question back to it's just that you're looking to understand the difference between the Fluence cube and what we might call Ultrastack or Gridstack. So you can think about the way we design products as we build a platform first, and in the platform we have this thing called cube, which is the enclosure with the batteries inside of it.

But our platform also includes inverters, control systems, fire safety systems. And we put all of those pieces together in well-defined units that create our stack. So Gridstack, for example, is a product on top of that platform that is inclusive of inverters, control systems, cubes, et cetera.

And we send out Gridstack units as what we sell. We announced today Ultrastack, which is another version of that product that sits on that same platform. We didn't recreate the platform. It's a platform that's been out of the world and well test, et cetera. But the product that we announced today, the Ultra stack, where its differentiation really lies control system. So it's a highly redundant system because of the work that it needs to do with the transmission operators.

It responds to the grid very quickly in 150 milliseconds now that we'll be down to 100 milliseconds to the future. And it does all kinds of cool things like it has a really high reliability feature. It has a very high effort of power oscillation stamping, which helps just the grid become more stable. So it's a different product and the real differentiation of that product for that Ultrastack compare to Gridstack is in the control system.

And I would mention just to connect back to something earlier, that's where we can also start to look at higher margin deals because when we create such a set of differentiation with our technology, we -- it makes us makes us -- it easier for us to look for that double-digit or more margin.

And if you can say (inaudible) the effect but they do very, very different the way you think is our own once you see that they say you look to the same or they doing (inaudible) and to our customers to offer them services, which are very, very different with different levels of response time, quality security depending on what our cost is supporting.

We have our next question -- looks like comes from Mark Strouse with JPMorgan.

I wanted to go back to the IRA. The $10 per kilowatt hour that you're calling out for the modules, is there a good rule of thumb that we should be assuming as far as how much of that you keep versus what you share with your contract manufacturer or kind of pass on to your customers?

Yes. We will keep it. From our point of view, I think that's important. This is part of our whole product side strategy. So you should not look at it something that will add 2% of additional margin. It will be part of our 10% to 15% margin as we go forward. But it will be part of our pricing position or our cost position.

And that's how our terms with our contract manufacturers, but we believe we can keep most of 10%.

Okay. And then just a real quick follow-up, Manu. It looks like the pipeline metrics that you're providing, you're taking a bit more conservative view of what was reported previously. Just can you give some more color on what's going on there? Is that just kind of the likelihood of that pipeline, kind of the timing of that pipeline, anything else to call out?

I think the 2 things, the one you raised the bar on both the likelihood and the lens of profitability, which kind of course in line with our general team around focusing on profitable growth. So that's kind of a little bit of color on how we thought about pipeline for year-end reporting. I would point out the fact that we have close to $8.5 billion of pipeline, which I would imagine with the higher bar and the lens of profitability.

I think it also lends itself to a tad bit higher conversion than what we have previously said. So good about not just the backlog position we are in, but also the pipeline that sits behind our backlog and frankly, the top of the funnel that sits behind the pipeline.

Our next question comes from Julien Dumoulin-Smith with Bank of America.

It's pleasure to chat here. My name (inaudible) and congrats again. If I can, just to come back to the cash conversation quickly here. How are you thinking about '23 here and a little bit of '24? And obviously, adjusted EBITDA pressures what drove the cash burn here past tense, how are you thinking of that prospectively here, if you will, a little bit on '23 and the totality until you get to a cash positive, EBITDA-positive world?

Sure, Julian. I get a chat with you set. So just from a cash perspective, let me start with how we think about it. First of all, our model is asset-light and an operating cash action model, which means as you bridge from EBITDA down to cash, you have very low CapEx and operating cash usage that we have dimensioned for '22 and '23 at 10% of it, right?

So with most of the cash usage in '23 being driven by our EBITDA performance with a little bit of cash in use for CapEx and then 10% of our revenue growth kind of taking to bridge all the way to the bottom line.

That starts to turn 20% particularly in 2024, where we believe we'll be close to breakeven for cash, not all the way there, we break even EBITDA. And then as we get to 2025, we start -- we expect to start generating cash. What I'll close with in terms of my comments is, one, there's a little bit of cash timing between first half and second half. And the second thing is we feel very comfortable with the cash in the books plus our unused revolver in terms of our ability to meet our cash needs till the time we get the cash positive.

(inaudible).

Glen, you to repeat that again could.

Working capital, clearly, there was the -- if you look at the balance sheet here, there was some consumption, some pieces. Can you talk about that?

Yes. So it's referring to 2022 fourth quarter working capital usage. So if you start with -- you put the total year in context and then I'll bring to close what happened in the fourth quarter. If you put the total year in context, we put a bridge out there as well. The operating cash, which is principally working capital as well as some money that we collect from our customers' prepayments, which is also part of the expanded definition of working capital.

It was about a 10% usage in terms of our revenue increase year-on-year. So that's -- that was our total consumption for the total year. As you pass the quarters, most of the cash usage in the fourth quarter was effectively us making good in terms of buying inventory and paying off our suppliers.

That was in execution of our projects, that was already funded in the most part at the beginning of the year from a customer prepayment perspective, which is why you see that phenomenon in the fourth quarter. But as you zoom out and look at the total year, you don't see that as much. That model will continue, which we really like because it is a very working capitalization model.

Our next question comes from Ben Kallo with Baird.

Just first, just maybe backing up to the competitive environment. I know you guys only been there 90 days. But how are you seeing bids change just in terms of the number of competitors and why someone like an Orsted would pick you. How crowded is it in competition terms? And then my second question, just in terms of tight labor supply, how do you guys think about that the IRA rolls out into next year, and there's going to be a boom in projects, we think. So how do you think about labor and environment?

Thank you, Ben. No kind of maybe the rule of thumb is a part of it. Okay. As you go up with the complexity scale, competition gets less -- gets softer. So if you go to a simpler solution where you see a lot of these stars, there's a lot of competition as you go up the scale either because the projects are very big or they need specific characteristics or features that we can only deliver then the competition kind of windows a little bit and (inaudible) you always need to find. And I think that why do people pay cost, which is a little bit -- why do they select us.

I guess the reasons that we have -- we talk to our customers as our ability to manage complexity, both in terms of project or product. Our safety features. We have a product which is very -- it has proven to be very, very safe. We have gone through burn tests, we have done all the testing on the safety that people are really present.

And then our end-to-end solution, the fact that when people hire, they know they will have a partner for the next one year that will deliver, and we have seen it today with new regulations coming in place in Europe, in the U.K. this year, we were out there, it released the app and helping our customers, ensuring that they will be meet with regulations and take advantage of these opportunities.

So I would say those are the 3 things: complexity, both on product and project; safety; and they are -- they see us as a partner that will offer them -- will compete with them and that's the driver.

One moment for our next question. Our next question comes from Sean McLoughlin with HSBC.

Firstly, just on the IRA, you've talked about your expectation for the first orders in June '23. I mean will there be a lag into that? Are customers waiting until they understand the full complexities and details of the IRA -- from the IRS over the next quarter or so? And also then, I mean, how should we think about the actual volume of orders? Are we going to see a real explosion in June? Or is it a kind of a gradual ramp up over the 12 months from June? Any color there would be helpful.

The second question, just on Ultrastack. Your first success has been in Europe. I mean is this a product targeted at the European market and the margins in Europe actually better than in the U.S. market?

In terms of the , what we have in our conversation with our customers, they are working on the stand-alone storage projects, working on the -- looking for the sites and identify the connection point. I think this will be a gradual increase, they will comb us up, all of them started in will get to the full amount and then going forward, I think they will start coming in. The way I've seen these projects develop.

The ones we'll see firsts are the ones that are connected closer to transmission line where they can connect (inaudible) the substation (inaudible) capacity. And as we move along, they will continue to move forward. So the way we see it, it takes a little while for these projects to be ready for our customers, to be ready to have these projects at a point where they can sign. They need to even of the project, find the offtake and then work with us. In terms of our transformation rate, we see this as a global product.

We started in Europe, we started in between where we had a 200-megawatt hour plus with (inaudible). Now we are exploring Germany. Clearly, in Europe, there's a lot on for these because they're looking to integrate a strengthened. But the U.S. has a major, major challenge. In order to make this work, we have also (inaudible) where we have talked to work with the regulators there to ensure they understand the value. So we have been success there, and we hope to see tenders coming out for these type of solutions in Chile in very soon.

And then we're working in the U.S. with our sales team, talking to regulators, to customers. And so we can create a regulatory base for these 2 joints. And we are confident that it will happen. So this is a global product that the 17 gigawatts by the year 2030 that we talked about, it is a global demand.

Our next question comes from Pavel Molchanov with Raymond James.

We talked a lot about the U.S. and Europe. Historically, you've had a strong presence in the Australian market where there is more and more talk about storage as part of the new labor party climate policy. Can we get an update on what's happening in Australia in demand?

Yes. We have a very, very strong pipeline in Australia. We're working with good clients and customers who have there are a few projects that are coming along. And I think that you will see some projects -- of significant projects, which you see some significant projects called signing -- coming into our backlog for the year. We don't disclose numbers by market by (inaudible). But we're confident this is one of clearly a market that is promising to me. It appears to be very, very promising for '23, for our fiscal year.

Okay. Sounds good. Given that you're vertically integrating, but you'll still be in-sourcing battery cells. Is there any appetite to look at chemistries beyond lithium, ion, so nickel, zinc, vanadium, iron flow, any of these new battery models that are starting to scale up?

Yes. I'll let Rebecca answer that.

Sure. So in the short term, we, of course, look beyond a single type of battery and currently use both LFP and NMC batteries in our solutions. We work very closely with our battery OEMs to look beyond that as well. Our platform is designed such that it's agnostic. So we can -- folks who work whatever kind of battery solution is out there that needs to be sort of customer ROI requirements.

And the next thing that I would say that we would look at would be solid-state batteries and sodium with sodium being the one that we see the nearest term right outside of what we're doing currently with LFP and NMC.

Our next question comes from Ryan Levine with Citi.

With the focus on profitability, has the company slowed its hiring? Or can you provide color on your views on the tools to manage the cost structure?

So what we're doing in terms of people. We're looking at our (inaudible) sector. It has been a very, very successful division already have like around 100 people there. And we have been attracted trend cards. We're very happy with the contributions that have done the duals in our product development. So we are looking at expanding that facility to support some of our other areas.

Our back office of digital development continue helping us on product development and supply chain. So that's what I think will be the main driver of our improvements in efficiency. We will (inaudible) as Manu mentioned, we believe our SG&A will grow at a price that we have our revenue growth. So we will continue to become much more efficient in terms of revenue production with our current cost structure as we go forward.

And then on that vein, can you provide color on the pace of adjusted gross margin recovery you're seeing for '23 from the 3.4% in the recent quarter towards the double-digit target that you highlighted by the end of next year?

For sure. And I'll also point your attention to Slide 21, we have we mentioned it. So there are 2 principal drivers of our confidence level in getting to a much higher gross margin compared to '22 when you look at the guidance for '23. One is, I think a lot of port well, our execution issues brought pretty (inaudible) are largely behind this, right? You saw early signs of that in our fourth quarter performance. We think that's a big driver, and we've mentioned that on Slide 21 in the range of 23% to 33%.

And then we are signing new deals that at/or close to double-digit margins that is already in our backlog, and that starts to bear fruit in '23 when you think in terms of gross margin delivery. I will point out that we do have, let's call it, our legacy contracts that will have growth through the fiscal year '23. So by the time we exit '23, which for us is September 30, you will start to see the double-digit run rate start to show up and it does and definitely a pretty pure play going into '24. That does drive our confidence level in getting to adjusted EBITDA beginning '24 given the operating leverage comment we just made.

Just want to make sure we're hearing that right. So are you saying that the step-up is really going to come towards the last quarter of the year and then we won't see a more ratable recovery of the gross margin?

I think you'd see improving gross margins quarter-on-quarter as the new deals kick in into revenue and we go through the old deals. And fourth quarter of fiscal year '23 will be a closer approximation of how you will expect to see '24 fiscal year as you were pretty much work through most of our legacy (inaudible).

Or next question comes from Tom Curran with Seaport Research Partners.

I appreciate it. Just one topic left for me. I know we've run over, so I'll try to keep it short. About 2 weeks ago, the California Public Utilities Commission approved PG&E's request to amend for its midterm reliability contracts for storage. Apparently, all 4 storage contracts have had their pricing rates, 3 have had their scheduled to lead and one has had its size cut in half. Could you speak to the implications of these changes, especially the approved increase in pricing for your current backlog and expected future awards for California?

Very, very sorry to say, we are not aware of decisions that you're just raising. So I'll go to a back, talk to my sales team. I guess there hasn't been an issue materially (inaudible) up to my attention. But we'll take a look at it and (inaudible) a view.

I think in general, we are seeing it price (inaudible). I'll Probably not attribute in one single phenomena that let's get follow up on the question.

Great. And then could you just give us an idea of what California represents as a percentage of your current backlog?

We're not providing numbers per market because then we'll get into this. But I'll tell you, California is clearly one of our most attractive markets. And in the U.S., it's a market that where we're seeing a lot of demand and we see a lot of opportunity for creation. So that's what I will say....

Maybe when I think about it is our revenue is at 2/3, if you look at our historical revenue and the backlog is evolved that I think 2/3 of our revenue comes from the Americas, within the 2/3 that comes in the Americas, California is meaningful proportion, do not break it down by state for the (inaudible).

Very attractive margin.

Right. I figured it was worth to try to dig a bit deeper. But I appreciate the help.

Our last question comes from Craig Shere with Tuohy Brothers.

I've got a quick near term and then a longer-term focus question. Near term, people seem positive about China opening up in the end of zero COVID, but perhaps for some quarters, people might actually be getting COVID, and we might have disruptions that won't last forever. But I wanted to inquire about your contingencies and thoughts about those risks into next year on the supply chain. And then longer term, I was truly amazed that the AES Air Products announcement for their Texas hydrogen JV. And I wonder if you can comment on the degree to which -- obviously, you work heavily with AES. But the degree to which [Best] has a huge opportunity in the nexus of clean supporting dedicated intermittent renewables that then produce steady-state green hydrogen production.

I mean, on the hydrogen, clearly, battery storage will play a role in hydrogen production. In order to ensure that your electrolyzer more efficiently with renewable sources for us (inaudible). It will depend a little bit on the (inaudible) plays a much more important role whether you are producing ammonia with producing hydrogen because electrolyzer are easier to allow to changes while the ammonia production systems require more stable.

So it depends on what -- how you organize your hazard and production whether you going to went down to ammonia when you say we hire more and need more or less at that what we are. We're working with some of our customers that are looking at these options to -- offering them solutions that will help them improve their -- the trade value to either people who are using our technology for producing both operating and electrolyzing. So that's what I will tell you (inaudible).

And on the 2023 -- yes.

Well, we continue to be as positive shy. We are -- I think the fecal portion of our matches come from China, not all of it, but a difficult portion of it. And clearly, this is an additional concern for -- how concerns -- something that we care about is that we're looking to work towards diversifying out of China as much as possible. The flowback will allow us to move more, to make it easier to move production.

But we continue working with producers in Europe and in other Southeast Asian countries. And we're looking to continue to diversify. But I will say that today, China is still a major supplier. We haven't seen any issues. There are no problems in production in any of our suppliers. There have been no problems in chip installments and logistics.

We have no signs of any interruption at this stage that we -- but clearly solving that our risk manage. When we wrote our risk management capabilities of that we spend time on to ensure that we can manage any potential (inaudible).

Thanks everybody for participating. And as I said at the beginning, the, I could not understand what I was saying when I was really discreet. So clearly, my voice and mic and the speakers in my room by accidentally did not work very well. So we have this script on our website. Please take a look at it if you have any question, contact Lex, and we will gladly answer that we'll assure you that next quarter this won't happen. So thank you very, very much for your time, and we also...

This concludes today's conference call. Thank you for participating. You may now disconnect.