FTC Solar, Inc. (NASDAQ:FTCI) Q4 2022 Earnings Call Transcript
FTC Solar, Inc. (NASDAQ:FTCI) Q4 2022 Earnings Call Transcript February 28, 2023
Operator: Good day and thank you for standing by. Welcome to the FTC Solar Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference maybe recorded. I would like to turn the conference over now to your speaker for today, Bill Michalek, You may go ahead.
Bill Michalek: Thank you, and welcome, everyone, to FTC Solar's fourth quarter 2022 earnings conference call. Before today's call, you'd likely had opportunity to review our earnings release, supplemental financial information and slide presentation, which were posted earlier today. If you've not yet reviewed these documents, they are available on the Investor Relations section of our website@ftcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's President and Chief Executive Officer; Phelps Morris, the Company's Chief Financial Officer; and Patrick Cook, the Company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date.
As such, these forward-looking statements include risks and uncertainties and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law. As you'd expect, we will be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contract and awarded orders collectively referred to as backlog, and our definition of this metric is also included in our press release.
With that, I'll turn it over to Sean.
Sean Hunkler: Thanks, Bill, and good morning everyone. As I reflect on my first full calendar year as CEO in 2022, I am proud of how the team navigated many external challenges. The year began with historically high logistics and steel costs followed by a rather challenging regulatory market in the U.S., which as you know has historically represented the primary source of our revenue. The team has responded well to the challenges, utilizing the downturn to focus on what we can control, improve our competitive positioning, and emerge as a stronger company. As we close out the year, I believe we're on a significantly improving trajectory. We delivered fourth quarter results, showed significant improvement and exceeded the midpoint of our guidance on all metrics.
We also continued our operational improvements, which I'll discuss in more detail, one of which includes improving our international exposure, which will allow us to take advantage of near term opportunities, while we wait to unlock our full backlog when the Uyghur Force Labor Prevention Act or UFLPA constraint fully resolves. Today, I'll briefly walk through the market and operational improvement categories we've been discussing to summarize what we accomplished during the first nine months of the year and how we closed out the year on a solid trajectory in Q4. Starting at the market level and perhaps the one constant during the year, the long-term demand trends look great and continue to improve. They have likely never looked better. According to the IEA, renewable are set to become the primary energy source for electricity generation globally in 2027, accounting for about 40% of total electricity output and overtaking coal.
Despite higher module pricing, utility scale solar is the lowest cost source of new electricity generation in most countries worldwide and accounts for more than 60% of all renewable capacity expansion. The low cost to install coupled with additional long-term demand drivers for solar, that include existing government policies including renewable portfolio standards and the current ITC, corporate awareness and technological improvements is only further enhanced by current high fossil fuel pricing discussions of energy security in many countries and the recent passage of IRA in the U.S. So, we have an incredibly positive market backdrop and tailwinds from long-term global growth. The one gating item required to unlock the potential within the U.S market, which represents much of our backlog, remains solar module availability.
Looking at the U.S regulatory landscape during the first nine months of 2022, we saw 80 CBD and WRO concerns transitioned to one remaining issue in UFLPA. In the fourth quarter and more recently, we have seen some early signs and reports of improvement. These include positive trends in trade import data, market reports of small module shipments being released from customs, some module supply agreements being inked and optimism from some that we are getting closer to a more substantial improvement in the back half of the year. There have also been several announcements about new module capacity outside of China, which is an excellent sign for module availability in 2024 and beyond. Overall, we're hopeful that we'll see more substantial improvement in module flow later this year, but as we'll discuss, we don't need to wait for UFLPA resolution to achieve improving financial performance.
From a supply chain and procurement standpoint, we started 2022 at historically high prices for steel and logistics, but have since seen improvement in both steel is now well off its highs and logistics is essentially back to historical norms. Given the improvement in logistics, we have fully transitioned back to containerized shipping from the brake bulk solution we had implemented to weather the high and uncertain market conditions. With that market, regulatory and supply chain backdrop. I'll turn now to our operational improvements. As I have mentioned on recent calls, we have not stood idle through the market uncertainty and have used the time to focus on what we can control to best position ourselves for the coming recovery. One area of significant focus has been on improving our cost and gross margin profile.
In the first nine months of the year, we maximized our design to value initiative, allowing us to take more than 20% of the steel content out of our tracker systems. This helped us create a product cost structure that will enable double digit gross margins on future projects. We also launched a distributed generation business, which has a high margin profile and will be a positive addition to the business. We have received great interest with initial orders and a robust pipeline. In the fourth quarter, we continued our cost reduction focus and launched our design to manufacturing efforts, which aim to ensure that our products are not only designed for constructability, efficiency and effectiveness, but are also cost effective to manufacture.
As it relates to our product portfolio, in the first part of the year, we were quite busy with the development of innovative new products that resulted in new product announcements during the back half of the year. In the third quarter, we announced a differentiated new 1P tracker solution called Pioneer, which significantly expands our ability to serve new markets both in the U.S and worldwide. This gives us more opportunities to win projects, whether it's a preference or benefit for 1P. Customer enthusiasm for our new product has been strong and as we launched Pioneer along with a 500 megawatt agreement from a top EBC. Our pipeline for Pioneers is growing nicely and we continue to anticipate first deliveries in the second half of the year.
In the fourth quarter, we announced the introduction of a new cost effective first solar module solution for our two P product, which filled a GAAP in our offering. We have already received orders for this solution and are recognizing revenue. Combined, these new product introductions expand our addressable market, while also serving to bolster the non-UFLPA portion of our backlog, as we continue to grow revenue. In terms of geography, we entered 2022 as very much a U.S focused company in terms of revenue. However, the investments we've been making to expand our international footprint started to bear fruit early in the year. We have since received awards in four new countries, bringing the total to 10 countries with projects outside of the U.S. We also recorded our largest project in Australia to date at 128 megawatts.
Just today we announced that we added 240 million of backlog since early November. Of that amount, more than 80% is from international locations, including two more projects in Australia, putting us at more than 25 in that country so far. We believe our new 1P tracker will significantly enhance our ability to further grow internationally. International growth is a key focus for us, particularly with the current regulatory challenges in the U.S I'm quite pleased to see our continued growth and pipeline and conversion to backlog. We also recently announced a U.S manufacturing joint venture utilizing domestic steel to strengthen and bolster our domestic supply chain. With the passage of the Inflation Reduction Act, customers are now asking for quotes with U.S local content, including projects for delivery in the latter half of this year.
While we still await additional details from the government on the mechanics of the IRA, we believe this JV will be instrumental in helping us support our customers' needs in the future. For this JV, we partnered with a known existing supplier. The facility located near Houston, Texas will initially be focused on torque tubes and is expected to begin operation around mid-year. Turning to pipeline, in 2022 we saw robust growth and several new record levels including the international portion of the pipeline, which more than doubled in the first nine months of the year. Today, we again achieved new record levels in total pipeline with the international portion now up 150% relative to the start of 2022. International now represents an increasing majority of our pipeline, and as you can see from our near term project awards is expected to make up a growing portion of our revenue base going forward, further diversifying our revenue and reducing exposure to projects subject to UFLPA review.
And finally, with our continued focus on expanding current customer relationships and forming new ones, our backlog has continued to grow nicely despite the constraints in the module market in the U.S. As I mentioned, since our last earnings call in November, we have added $240 million in backlog, bringing the total above the billion dollar mark for the first time at $1.2 billion. The collective results of these initiatives have led to improved financial performance as we close the year. As we progressed through the year working on these initiatives, we completed shipments of our legacy lower margin products in Q3 and reached what we believe was a revenue and margin low point in that quarter, from which we expect to see improvement going forward.
In Q4, our performance did improve as expected and we came in ahead of the midpoint of our guidance on all metrics. This includes revenue that grew 58% sequentially, off the low Q3 base and non-GAAP gross margin that improved from close to negative 50% to approaching breakeven at negative 3.4%. Non-GAAP operating expenses in the quarter were at the low or better end of our guidance range, resulting in adjusted EBITDA also coming in better than the midpoint. We are excited to see the results of our DTB and other initiatives begin to show through in a meaningful way in our results and we see that continuing. So closing out on 2022, we have utilized the downturn significantly improve our competitive positioning across nearly all aspects of our business.
We now have a strong product cost structure on current and future projects, which puts us on track for double digit gross margins as our revenue run rate recovers. We have a more comprehensive product line that expands our addressable market in the U.S and internationally. We are growing and diversifying in new markets and are positioned with a strengthened supply chain and we have a record backlog and pipeline that shows that customer adoption globally is increasing as we look ahead to a market that is not only poised to recover but is poised with powerful long-term tailwinds. As we look ahead to 2023, our focus is solidly on execution, supporting our customers worldwide, continuing to build on our progress and demonstrating the capabilities of our improved business.
We believe we can continue to show margin improvement even in a depressed volume environment, followed by much more significant improvement as module availability and volumes improve in the U.S. With that, I will turn the call over to Phelps.
Photo by Science in HD on Unsplash
Phelps Morris: Thanks Sean, and good morning to everyone. As a follow-up to Sean's comments, I'd like to provide some additional color on the fourth quarter performance and outlook. So let's begin with the discussion of the fourth quarter. Overall, I'm happy to share that we deliver results that were better than the mid-point of our guidance trends on all metrics for the quarter. First revenue is $26.2 million. While on a year-over-year basis revenue is down 74%. It did represent a 58% increase versus the prior quarter, as we begin to build some momentum moving up from a lower than Q3. We are starting to see new production tied to both international products as well as non-UFLPA projects moving forward. We believe this is a sign that the strategy we discussed last quarter of attacking non-UFLPA impacted projects is beginning to benefit the company.
While we sold Knight's sequential growth in revenue, UFLPA's constrain our near-term ability convert backlog into revenue with a bulk of our backlog, roughly two-thirds remaining subject to UFLPA. Now on the plus side, non-UFLPA a backlog doubled quarter-over-quarter now represents a third of our total backlog. Next, our GAAP gross loss for the quarter was $1.9 million or 7.3% of revenue compared to $9.5 million or 57.4% of revenue in the prior quarter. On a non-GAAP basis, the gross loss was $0.9 million or 3.4% of revenue coming above the mid-point of the guidance range. Compared to our Q3 2022 non-GAAP loss of $8.2 million or 49.8% of revenue, we are able to deliver an impressive 46 point improvement quarter-over-quarter. We are able to accomplish this due to the following.
First, the legacy low marketing products we discussed in prior quarters were completed during Q3. Second, the new products we now deliver benefit from our team's efforts on the DTV front, coupled with a more normalized supply chain cost in both steel and shipping. The team is excited to see the early fruits of our labor starting to show in our results. On a year-over-year basis, we delivered improvement to Non-GAAP gross loss by $6.5 million, even in the face of significantly lower revenue in Q4 2022 versus the prior period in 2021; $26.2 million this year versus $101.7 million last year. The improvements were driven primarily by improved tracker and logistics direct margins. Our GAAP operating expenses were $17.9 million on a non-GAAP basis, excluding the stock based compensation charges associated with the FCX legal settlement and certain other expenses are operating expenses was $10 million compared to $9 million in the year ago quarter.
This was at the lower end of our guidance range. The slight year-over-year increase was driven by an increase in the R&D expenses as well as the absence and credits that we had in the year ago quarter. We continued to keep a keen eye on expenses as we managed through the -- this period. To that end, we executed a targeted headcount reduction during the quarter representing approximately 8% of our labor force. In addition, we continue to keep a close eye on our non-labor spent. Next, GAAP net loss is $20.5 million or $0.20 per share compared to the loss of $25.6 million or $0.25 per share in the prior quarter, and compared to a net loss of $23.9 million in a year ago quarter. Collectively results from our improved margins and careful management of operating expense and overhead flowed down to our adjusted EBITDA results.
For the quarter, the adjusted EBITDA loss with excludes approximately $9.1 million, including stock based compensation expense, certain consulting and legal fees, severance and other non-cash items was $11 million better than the midpoint of our guidance range of $12.3 million. The results represented improvement of $6.7 million compared to an adjusted EBITDA loss of $17.7 million in the prior quarter and compares to $16.4 million in the year ago quarter. Finally, regarding liquidity, we ended the quarter with a modest uses of cash and ended with $44.4 million. In addition, we continue to hold no debt on the balance sheet, have an undrawn credit revolver, as well as a $100 million ATM program, which we have not accessed to date. With that, let's turn our focus to the outlook.
Based upon our current view, we continue to expect sequential revenue growth in the first quarter. We also expect gross margin to continue to show improvement quarter-over-quarter and cross into the positive territory. Specifically, our targets for the first quarter call for the following: revenue between $36 million and $40 million, representing 37% to 53% growth off of the Q4 2022 results. Non-GAAP gross margin between $0.7 million and $3.2 million are between two and 8% of revenue, Non-GAAP operating expenses between $10 million and $11 million, and finally adjusted EBITDA loss between $10.3 million and $6.8 million. And for the second quarter, we expect to see further operational improvements. Overall, we continue to believe the ingredients are in place for a very strong industrial recovery and long-term growth.
The rate of recovery in our largest market, the US will largely be determined by the pace of improvement from the importation of modules. Once improvements do occur at scale, we believe FTC Solar is increasingly well positioned competitively cap to capitalize that on that growth with a lower cost structure in the innovative product line, a record pipeline, and more than a billion dollars in backlog. With that, we conclude our prepared remarks and I'll turn it over to the operator for any questions. Operator?
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