Fluence Energy, Inc. (FLNC) Earnings

Management highlights

1. Majority of pipeline is supported by two MSA deals with several data centers in the US. 2. Current pipeline is 12 gigas, expecting deals to convert into orders within a year. 3. Gross margin was 11% in 2Q, reaffirmed guidance of 11%-13% for the year, aiming for around 12%. 4. Pipeline increased 30% from last quarter, concentrated on hyperscalers. 5. Six gigawatt hours is for long duration storage (LDES) projects. 6. Operating cost percentage of revenue is a function of growth, aiming for operating leverage. 7. ASPs move up and down quarter to quarter based on cell mix, not a big driver of financial results. 8. 12 gigawatt pipeline is all data center related, majority supported by two MSAs. 9. Working with all hyperscalers, exploring other MSA opportunities. 10. New customers are developers and utilities not previously contacted, global effort. 11. Margin for data centers in line with 10-15% range, varies by market. 12. Product roadmap includes exploring elements for data centers and ProSolutions, including batteries for 800-volt DCs.

Guidance

1. Reaffirmed gross margin guidance of 11% to 13% for the year, aiming for about 12%. 2. Pipeline expected to convert into orders within a year. 3. Operating leverage expected with revenue growth, costs to increase at less than half the rate of revenue growth.

Analyst Q&A

• Q: Julian, you said that hyperscalers and data center more broadly tends to be more about product quality or power quality. Is the implication then that we're seeing a shorter duration configuration, say, you know, an hour or two as opposed to four? And are you generally being asked to deliver a response time of 10 milliseconds or less?

  A: Yeah. And the first one, they tend to be shorter duration. You're right. So they, they are a, you know, say, we don't provide anything smaller than two hours, so it's two hours is what we do, and that's where the market is trading, but they tend to be shorter than that. Even though our main point to the data centers, and we engage with them, and they develop in hyperscale, is that the great beauty of our technology, compared to other technologies that are trying to resolve this, is that we can stack business models on top, and we can do quality of power, help them with, you know, doing some of the work of resolving some of the deficiencies of interconnection or backup. We can help them on some on voltage. We can help them on many, many fronts. So that's, I think that as they're looking at the asset, they are expanding also their view of what this can do. That was on that point. On the second one, generally I will say that, sorry, the second one, can you repeat? We're not providing the actual number, but it's very short. That's the way I would put it. We're not providing the actual number because it is proprietary to the solution and to the people we're working with, but it is very, very short. significantly shorter than 100 milliseconds we tend to do for transmission systems and European qualifications.

• Q: I was wondering if you could talk about the U.S. storage market continues to grow at a rapid pace. Are you able to provide us sort of where you are on being able in sort of capacity in gigawatt hours to provide over the next 12 months? And then just sort of thoughts on the roadmap to keeping up with the market growth over the next two or three years?

  A: Yeah. Yeah, we see the U.S. market growing, expanding significantly. So that's great. What we have, we have, as you know, we have our domestic products, our flagship solution in the U.S. We have the ASC capacity. We enter with another supplier for additional capacity, and we are looking at additional capacity for the 28 going forward. So we have enough capacity to cover the pipeline we see and the conversion rate we expect. We don't provide specifically the numbers, but it's multi-giga capacity, and we have seen no problems getting the – and we are putting the whole infrastructure that delivers that multi-giga operating in the U.S. with a domestic content offering. We can also import equipment if we need to, but our preference is to do the domestic content solution.

• Q: It looks like ASPs, if we'll get revenue and kind of your revenue recognition megawatts for the quarter, we're up pretty nicely quarter over quarter. And I was just wondering, was there a lot more EPC work this quarter, or is this kind of maybe the level we should be thinking about for the balance of the year for modeling purposes?

  A: Yeah, thanks, Amit. This number, as you said, moves up and down quarter after quarter based on the mix of the cells. So I wouldn't read too much on it. We are designed to meet our financial objectives independent of where the ASPs go up or down. And our planning assumptions are they will continue coming down. And we are designed to make money and make it successful. And I'll say even more, every time we have seen ASPs come down, what happens is that demand expands at a rate that is much bigger than the reduction in revenue that comes out of the lower ASPs. We, you know, I wouldn't rate too much on it. I know that's something that you care about a lot. I mean, the analysts care a lot about, but it is not a big driver of our business financial results.

• Q: Are there other MSA opportunities that you're currently working on? Is that something that you would expect most hyperscalers to be pursuing on the storage front?

  A: Yeah, we're looking at it. These are the two that had more urgent needs, but we're looking to work with all of them. So we believe their problems are similar and that we can meet their needs with our capabilities. So we hope to work with all of them.

• Q: could you give any characteristics of kind of who those customers are? What type of customers they are? Is it the traditional profile of developers and utilities that you would see or any specific locations?

  A: This is a result of the great work that Jeff Monday, who joined us as our VP of Growth, has done since he arrived. He really had invested significantly in business development, identified all these customers, which are, you know, I'll say, were not the typical we used to work with before, but are the developers or utilities that we have not contacted in the past, and now we have made significant progress. And this is a global effort that we're doing, not only in the U.S., but outside of the U.S. But I will say that, as we said during the call, these are customers that are within our normal or our core customer segments, you know, utilities and developers globally. But great kudos to our sales organization that has really invested into developing and bringing these new customers into the mix.

• Q: Could you just talk a little bit, you know, because of the specific product they're looking for and the size, if you could talk about just pricing and margin, how we should think about that on these bigger deals? And then also, my second question, just outside of the U.S. where you see pockets of demand, and then just remind us how margin compares internationally versus the U.S.?

  A: In terms of data centers, I would say, as we said, duration shorter. And I'll say the margin is in line with our guidance of 10 to 15. That's what we'll say. So generally, that's what it is. And both of their needs are quality of power, which we do this for grids globally. We're doing it for them here, and I think it works well. So in terms of margins, margins change market for market. It depends on the competitive environment. We go within our 10 to 15 range, but there are markets that are a little bit more or that go through. more competition than others. I will say that, you know, markets like the U.S. and the U.S. is probably a little bit on the high side, the U.K. on the lower side, you know, and then, so it changes a little bit on, no, it changes market per market, but our 10 to 15 range works for all these markets.

• Q: for the uh best industry or is it high c rate discurances on the supply side if you uh need to make any changes on the cell sourcing for that right we we make any battery great you know as well we make any battery great so you know we the batteries is a commodity whatever they need i think the main driver is ncd ensure and that comes out our package our capability so no real need on on clearly LFP, nobody goes to the MNC for many reasons, but brand or supplier is not relevant for them. Whatever battery we put in our systems, we can make it do great things. And then separately, like, we saw some battery suppliers proposing high-seeded batteries which go inside the data center for 800-volt DCs. Is that something of interest? Are you exploring or looking at outside the data center?

  A: Yeah, yeah. We're looking at the, you know, our product roadmap includes not only this, many other elements that we're looking at to continue improving our offering to data centers and to ProSolutions. One option is this. I see rates, batteries that will go into that. I think there's some limitations, but it's part of our roadmap that we have for whether it will happen or not. We'll see. But it's not anytime soon.

• Q: As these data center opportunities convert into reality, how do we think about the ratio watt for watt, meaning the watts of load to the watts of storage? We've seen examples out there of, you know, a gigawatt data center might need 800 megawatts of batteries and examples that could be a fifth of that, right, depending on their need. So what do these projects start to look like right now as we're connecting sort of a data center TAM in gigawatt terms to the storage opportunity view that you're converting against?

  A: Too early to give you a rule of thumb that we can calculate. We clearly have some views, but it's too early to give you, too premature to give you a rule of thumb. How do you think a gigawatt will take this amount of water? So we will, over time, I think that we'll be able to develop that as it becomes more clear. But today, that we cannot do. But we have, as I said, a 12 giga. pipeline ahead of us, which we want to convert into orders, a good portion of it, within the next 12 months. So that's what, you know, that's what we're concentrating on.

• Q: What's the nature of the exclusivity from what you've won? Are there multiple vendors?

  A: One of a few players. One of a very, very limited number of players. But this is a competitive process. These are not directed, at least not yet. Maybe we'll be able to take them there at some point. They're very limited players and a competitive process.