ESS Tech, Inc. Q3 FY2024 earnings call

Key Points

• Revenue ramp has been slow due to external factors, including a customer in Australia where funding delays affected Q3 revenue recognition. The AUD65 million funding for a Queensland project was announced but didn't close in Q3, but contracts are signed and shipments have started.
• Expect full-year revenue between $9M-$11M. Q4 is expected to include EW systems and initial commercial shipments of EC product, with 6 EC systems planned to ship in Q4, though some units are deferred to 2025.
• EC units for PGE have been operating, with the first unit since March and the second in testing. Units are operating at multiple customers globally, showcasing iron flow performance.
• Honeywell's initial units delivered and deployed, joint development with Honeywell focused on cost reduction and performance improvement. Market opportunities highlighted include data centers, grid resiliency, and decarbonization, with participation in events emphasizing LDES demand.
• Progress with PGE units, including design improvements based on operational experience, and units being deployed at various customer sites globally.

In the third quarter, ESS reported revenue of $359,000. The cost of revenue was $12.7 million, with a significant LCNRV adjustment impacting results. Non-GAAP operating expenses for Q3 were $9.2 million, and adjusted EBITDA was negative $18.9 million. The company has realized 28% unit cost reductions on EC production through Q3 and expects nearly 50% total cost reductions for the full year 2024. Revenue contribution from different segments wasn't explicitly broken down by percentage beyond the overall revenue figure.

Forward-Looking Statements

• Expect full-year revenue between $9 million and $11 million, representing meaningful year-on-year growth.
• Q4 is expected to include previously planned EW systems and initial commercial shipments of the EC product, with 6 EC systems planned to ship in Q4 but some deferred to 2025.
• Anticipate ramp-up in 2025 with volume potentially back half loaded, with Q2 and Q3 seeing ramp and Q3/Q4 picking up pace.

Risks

• Delays in customer funding, as seen with the Australian project where timing affected Q3 revenue recognition.
• Site readiness delays, including issues with third-party equipment like inverters or transformers which can be backordered.
• Challenges with raising capital and uncertainties in the business, markets, economy, and geopolitical situation impacting operations.

Q: Justin Clare from ROTH Capital Partners asked about customer delays, specifically other customers waiting for financing and site preparation reasons.

A: Eric Dresselhuys stated the specific Q3 delay was limited to one Australian customer due to funding timing, and broadly, site readiness delays can be from third-party equipment backorders.

Q: Justin Clare then asked about EC units shipping in Q4 and revenue recognition, and update on second automated line.

A: Eric Dresselhuys said 6 EC units expected to ship in Q4 with revenue recognized upon shipment, and Tony Rabb mentioned the second automated line is being assembled, tested at vendor site by end of year, shipped to site in Q1 2025, reassembled, and expected operational by mid-2025.

Q: Corinne Blanchard from Deutsche Bank asked about balance sheet financing.

A: Tony Rabb said EXIM loan agreement was signed, but current cash balances mean no immediate draw needed, with sufficient capital to operate into 2025 and draw on facility when necessary.

Q: Colin Rusch from Oppenheimer asked about sales pipeline and Honeywell impact.

A: Eric Dresselhuys said sales pipeline is brisk with regulatory mandates and data center requests driving activity, and Honeywell efforts expected to show benefits starting end of 2024/early 2025.

Q: Ben Kallo from Baird asked about customer financing and Honeywell larger battery size.

A: Eric Dresselhuys said most customers are established entities funding from capital budgets, but independent projects take longer; Honeywell discussions around optimizing cost and performance for larger projects.

Q: George Gianarikas from Canaccord Genuity asked about lithium ion pricing impact on ESS pricing.

A: Eric Dresselhuys said lithium pricing is a benchmark, and ESS updates models to ensure superior value proposition to lithium ion in addressed segments.