Array Technologies, Inc. (NASDAQ:ARRY) Q3 2023 Earnings Call Transcript November 7, 2023
Array Technologies, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.11.
Operator: Greetings and welcome to Array Technologies' Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, Cody Mueller, Investor Relations at Array. Please go ahead.
Cody Mueller: Good evening and thank you for joining us on today's conference call to discuss Array Technologies' third quarter 2023 results. Slides for today's presentation are available on the Investor Relations section of our website, arraytechinc.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.
We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Kevin Hostetler, Array Technologies' Chief Executive Officer.
Kevin Hostetler: Thanks Cody and welcome everyone. In addition to Cody, I'm also joined by Nipul Patel, our Chief Financial Officer. Before I start with the discussion on the quarter, I would like to first discuss our transition into CFO positioned that we announced earlier today. Starting on November 13th, Kurt Wood will take over as the CFO of Array Technologies replacing Nipul Patel. We are grateful that Nipul has agreed to stay on board in an advisory role until the end of the year to ensure that we have a smooth transition. I would like to thank Nipul for his instrumental role in the success of Array, from leading the company through the IPO to being a driving force, behind the gross margin recovery and the improvements in our cash and liquid position, we certainly would not be where we are today without Nipul.
Entire team at Array wishes him the best in his future endeavors. I am also extremely pleased to welcome Kurt Wood on board. Kurt brings an incredibly strong finance and operational background to Array that will be invaluable to us as we continue to grow and mature as a company. With that, let's move to Slide 3 where I'll provide some highlights from the quarter. Array once again delivered a strong performance against all of our key metrics. For the quarter, we delivered $350 million in revenue, which was in line with our expectations, and as Nipul will discuss more later, is inclusive of a roughly $20 million reduction for year-to-date reclassification of Brazilian ICMS tax incentives. This quarter, we also continued to over-deliver on our gross margin expectations, reporting 26% on an adjusted basis, which combined with an increased expectation for Q4, has raised our full year outlook on gross margins once again.
It's important to point out this result does not include any benefit from the IRA's 45X manufacturing credits. On the strength of our margin performance, we recorded adjusted EBITDA of $57.4 million, which represented 16.4% of sales, an increase of 560 basis points from the same quarter last year. I'm also happy to note that we delivered $69 million in free cash flow this quarter, bringing our year-to-date total to $126 million, which keeps us well on pace to our previously stated target of delivering between $150 million and $200 million of free cash flow in 2023. In the quarter, we also made a $50 million prepayment of our term loan, bringing the total principal balance down to $239 million. Finally, this quarter, I'll only spend a short amount of time talking about the overall demand landscape as not much has changed since last quarter.
As shown by our reduced revenue outlook, we have continued to be impacted by short-term project timing challenges that are outside of our control. For instance, this quarter, we had several projects that experienced delays associated with financing as developers are focused on renegotiating PPA rate to improve project returns in this higher interest rate environment. While we fully expect financing and continued delays related to permitting and other items to be sorted out in the near-term. This is yet another complexity that we are working to understand with our customers. However, it's important to note that we have continued to execute on elements that we can control and have largely maintained our profitability and free cash flow expectations for the full year.
As we look past some of these short-term project timing issues, I remain optimistic about the direction of our industry. Remember, solar accounted for over 50% of all new electrical generating capacity added to the US grid at the start of this year, and there is no reason to believe this will slow down. It still represents the cheapest and fastest form of new energy generation. Also, utility scale solar is not facing any structural demand weakness or destocking issues. Add to that, the fact that the tracker market is poised to well outpace the strong overall projected utility scale solar growth over the next few years, and we still have many more tailwinds in this industry than headwinds. So, while our bookings number this quarter was still reflective of these near-term dynamics, we are seeing lots of positive proof points on the longer term outlook, which align with these trends.
For example, we have seen our domestic project pipeline double from June 30th to September 30th. This is a strong sign of the health of our demand overall, but also showcases the traction our new product offerings are gaining with our customers. As we already have multiple gigawatts of quoting activity on both the H250 and the OmniTrack. Also, we're pleased to note that we have recently signed three long-term agreements, which collectively will represent multiple gigawatts in future projects. All of these agreements included deposits tied to dedicated capacity and represent programs that initiate in the second quarter of 2024 beyond. And finally, of the $320 million of IRA-related projects that were on hold at June 30th, we only saw $35 million convert to orders this quarter, which leaves almost $300 million still sitting on the sidelines.
This means we have not yet unlocked anywhere near the full value of those projects into our order book. So, while we will obviously wait until our fourth quarter call to provide a more detailed discussion about 2024, I am encouraged by the positive indications we have been seeing. If we turn to the next slide, this quarter, I wanted to give a brief update on two exciting business developments. Last week, we announced our plans to expand our operations in Albuquerque by leasing a brand new built to spec 216,000 square foot manufacturing campus. This expansion is exciting as it reinforces our longstanding relationship with the community, but also will give us the space to drive even more operational improvements and domestic manufacturing flexibility.
We are appreciative of our partners in the state of New Mexico, and we look forward to updating you more the progress of our new facility as we move forward. Next, building upon what I discussed last quarter on non-tracker revenue streams, Last week, we also announced the rollout of our services and training offerings. These offerings include commissioning, preparation and process training, installation training with the Golden Row, operations and maintenance, and page turn best practices. While these offerings will be a small portion of our revenue initially, we do see a path for these services to become a larger part of our business over time and will positively contribute to our overall gross margin. Each of these value-added services are designed to reduce operational downtime and increased productivity, while improving our customer's overall experience with each of Array's product platforms.
To support these offerings, we have also expanded our customer and product support teams over the last year, which has included hiring of directors services, product management, and training and development. While we remain early in our journey on the expansion of non-tracker offerings, elements like these trading offerings have already helped to increase our margin expectations for the full year, as Nipul will now discuss in more detail along with a further analysis of the quarter. Nipul?
Nipul Patel: Thanks Kevin and I appreciate the kind words. After nearly a five year run of turning a privately held company into a successful public company listed on NASDAQ, it is the right time for me to step down as the CFO. I'm grateful for the opportunity to have worked alongside such as collaborative and talented team. I thank Kevin for his leadership and for supporting my career growth and I believe Array is well-positioned strategically and financially to continue its growth and drive value for our customers and shareholders. I'm highly confident in Array's leadership and future, and I look forward to working with my successor, Kurt, on a smooth transition in the upcoming months. I'd also like to thank the employees at Array for their hard work and support over the years.
It has been an honor working alongside them. That being said, let's get into a summary of our third quarter financials. Please turn to Slide 6. In the third quarter, we reported revenue of $350.4 million compared to $515 million for the prior year period. It's important to note that our third quarter revenue excluded the impact of a $20.1 million Brazil value-added tax or ICMS that was reclassified from revenue to cost of revenue. This reclassification was determined to be appropriate after we evaluate the expected treatment of governmental incentives for the 45X manufacturing credit under the Inflation Reduction Act, but has no impact to profitability or cash flow. The comparable amount in the prior year was $8.2 million and was not reclassified out of revenue.
Our reported $350 million in revenue reflects roughly $245 million from the Legacy Array segment and $106 million from the STI segment. This result was driven by both a 22% decrease in the total number of megawatts shipped from 4.4 gigawatts to 3.4 gigawatts and a 12% decline in ASP from $0.116 per watt to $0.102 per watt. As communicated last quarter, this was an expected volume decline and change in project timing year-over-year given the scale of project push outs we've seen due to the various macroeconomic elements at play. Additionally, the ASP decline was also anticipating given the reduction in steel, aluminum, and logistics costs year-over-year. This quarter, we introduced adjusted gross profit and margin as a new non-GAAP metric following the reclassification of our developed technology amortization expense from operating expenses to cost of revenue.
We believe this reclassification aligns the presentation of our financials more broadly with industry peers and this change did not affect operating income, net income, or earnings per share for any current or historical periods. That said, adjusted gross profit increased to $91 million from $82.4 million in the prior year period due to improved gross margin despite the reduction in volume. Gross margin increased to 26% from 16% on an adjusted basis. Adjusted gross margin was 25.3% for the Legacy Array business and 27.6% for the STI business in the quarter. We are pleased to see our margin performance continue to benefit from our operational improvements and focused on our non-tracker revenue opportunities. Operating expenses of $47.2 million were down $12.2 million from $59.4 million during the same period in the previous year.
However, we had a $12 million improvement in amortization expense year-over-year due to lower amortization of intangible assets related to the acquisition of STI. Excluding this impact, our operating expenses are roughly flat year-over-year. Net income attributable to common shareholders was $10.1 million compared to $28.4 million during the same period in the prior year. And basic and diluted income per share was $0.07 compared to basic and diluted income per share of $0.19 during the same period in the prior year. This decline year-over-year was largely due to a $43 million legal settlement we received in the third quarter of 2022. Adjusted EBITDA increased to $57.4 million compared to $55.4 million for the prior year period. Adjusted net income increased to $31.4 million compared to adjusted net income of $28.9 million during the same period in the prior year and adjusted basic and diluted net income per share was $0.21 compared to adjusted basic and diluted net income per share of $0.19 during the same period in the prior for the same period in the prior year.
Finally, our free cash flow for the period was $69.4 million versus $102 million for the same period in the prior year. On a year-to-date basis, our free cash flow of $126.4 million represented a 238% year-over-year increase. Now, I'd like to go to Slide 7 where I will discuss our updated outlook for 2023. For the full year 2023, we now expect revenue to be in the range of $1.525 billion to $1.575 billion. This update to our topline guidance was driven by three factors. First, the ICMS reclassification, which will reduce our outlook by approximately $25 million. Second, we had four projects that were delayed due to developer financing challenges. While we fully expect these challenges to be alleviated in the near future, we no longer can count on the deliveries to occur in 2023.
And third, we had several projects with permitting delays in Spain, which we now expect to deliver in the beginning of 2024. However, as a testament to our continued operational improvement and our focus on high-margin non-tracker offerings, we are largely holding our adjusted EBITDA and adjusted EPS guidance as we have increased our gross margin outlook to be in the mid to high 20s for both segments. We now expect to be in the range of $280 million to $290 million for adjusted EBITDA and $1 and $1.05 adjusted EPS. Important to note, these changes do not reflect any assumed benefits from the 45X manufacturing credits. Although we are actively finalizing with our suppliers and will provide an update to the market, when final 45X guidance is provided, or once we complete the agreements with our suppliers and have ensured proper recognition on timing under US GAAP.
Finally, with the improvement in our adjusted EBITDA margin, we are well on track to deliver our previously provided free cash flow guidance of between $150 million and $200 million for the full year as Kevin mentioned. Now, I'll turn it back over to Kevin for some closing remarks.
Kevin Hostetler: Thank you, Nipul. I am pleased with our performance this quarter as we once again delivered better than anticipated earnings. We continue to work hard on improving our business and product and service offerings to ensure we delivered increasingly more value to our customers and we look forward to updating the market on even more exciting progress in this area in the near future. With that, operator, please open the line for questions.
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