FTC Solar, Inc. (NASDAQ:FTCI) Q4 2023 Earnings Call Transcript
FTC Solar, Inc. (NASDAQ:FTCI) Q4 2023 Earnings Call Transcript March 13, 2024
FTC Solar, Inc. misses on earnings expectations. Reported EPS is $-0.08 EPS, expectations were $-0.07. FTCI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the FTC Solar Fourth Quarter 2023 Earnings Conference Call. All participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. I'll now turn the conference to you host, Mr. Bill Michalek, Vice President, Investor Relations. Please go ahead.
Bill Michalek: Thank you and welcome everyone to FTC Solar's fourth quarter 2023 earnings conference call. Before today's call, you may have reviewed our earnings release and supplemental financial information, which were posted earlier today. If you've not reviewed these documents, they're available on the Investor Relations section of our website at ftcsolar.com. I'm joined today by Ahmad Chatila, a Member of the Board of Directors and a company founder, Cathy Behnen, 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 speaks 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 as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that earnings release issued this afternoon to include the full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our backlog, and our definition of this metric is included in our press release. With that, I'll turn the call over to Ahmad.
Ahmad Chatila: Thanks, Bill, and good afternoon, everyone. I'm joining the call today as the representative of the Board as the company progresses through this interim period prior to announcing our next CEO. As discussed on last call, I've been helping facilitate communication between management and the board and monitoring key growth activities and initiatives during this interim period. On today's call, I'll touch on some of the recent progress the team has made and address the CEO search before turning it over to Cathy to review the financials. At a high level, I've summarized the key takeaways from this call in the following way. One, fourth quarter financial results were in line with our targets. Two, following an 18 month stretch with limited purchase orders, which has led to depressed revenue levels, the company has seen an acceleration in closing purchase orders, which improves visibility and lays the foundation for a second half revenue recovery.
And three, the company is progressing well and improving efficiencies and lowering the breakeven revenue level. Based on the management team's current outlook, the company expect to grow revenue in 2024 and transition into profitability on a quarterly basis in the second half of the year. So what are some of the issues the company has faced and what progress has been made recently? First, and most importantly, the company has seen an acceleration of contracted projects or signed purchase orders. From January 2022 through June 2023, while we continue to grow our contracted and awarded projects largely through project awards, we had depressed levels of contracted projects and slower rate of conversion from awarded to contracted. That has led to current depressed revenue levels, which we now expect to trough here in the first half of 2024.
More recently, the company has been laser-focused on customers, spending as much time with them as possible and across functional efforts to improve engagement and best support the full range of customer needs. Aside from intense customer focus, the company has also been enhancing its product portfolio. The combination of these efforts has resulted in a significant increase in the rate of contracted projects about 50 million per month over the past eight months. And it has been accelerating every quarter. This includes greater success in converting previously awarded projects into contracted projects with purchase orders. The sustained booking success we've seen now is the foundation for the revenue recovery that will start in earnest in the second half of this year.
Frankly, that rate should be many times larger than 50 million per month, and that's how we're thriving, but we're heading in the right direction and rebuilding. Based on the success, contracted projects are now approximately 450 million of the total backlog. On the backlog, the board has reviewed and is comfortable with the company's 1.7 billion in backlog. However, it has been heavily skewed towards awarded versus contracted historically, resulting in less visibility as to when such awarded, but uncontracted projects will convert to purchase orders on revenue. As noted, we have made significant progress recently on having a higher percentage of the backlog be attributable to contracted projects. Backlog also continues to be heavily skewed towards U.S. and 2P projects.
The U.S. currently represents 80% of backlog. In terms of technology, about 72% of backlog is 2P and that remaining 18% being either 1P or a combination of 1P and 2P. The majority of projects added over the last two quarters have been 1P helping to diversify backlog. Second, the market for 2P trackers have recovered and we have our strongest and most comprehensive product portfolio to-date. In 2022, amid the module shortage, there was about 80% drop in the market for 2P trackers as more scarce modules where largely allocated to relatively easier project sites would tend to be 1P. With module availability improved, we're seeing a more normalized market for 2P with a very good pipeline activity. We're also seeing a ramp in interest in our 1P Pioneer Tracker, which was certified in the third quarter of last year.
Pioneer brings to 1P much of what customers have loved about our 2P technology. When the company added 1P, a 1P tracker alongside our 2P solution and software, we started our ability to be truly solution-oriented partner for our customers and that we could truly be technology agnostic and optimize each individual project site to maximize the benefit to our customers. We now have several examples of projects or portfolios of projects that we have won that combined both 1P and 2P technologies with many more in the pipeline. Third, we are improving business processes. As Shaker noted on the November call that while the company has become more efficient and lowered product costs, there are opportunities to accelerate decision-making, close gaps within the product portfolio faster and increase customer interaction.
The company under the leadership of Cathy, Sasan and Patrick has been diligently focused on improving business processes across the board emphasizing customer engagement, customer satisfaction and purchase orders. Customer visits have increased tenfold and broadened across functions to accelerate the feedback loop on quality, product roadmap, and future needs and enhance overall customer experience. This is augmented by newly formed customer advisory board to which we have appointed renewable experts, Anthony Carroll as Chairman. We've also implemented a net promoter score system to help us better measure and drive engagement and satisfaction. Fourth, we continue to further improve our cost roadmap to enable higher sustainable long-term gross margins.
The company's cost roadmap has historically been hampered by high steel content due to shift to large format modules, which was exacerbated during the steel prices location in 2021. The company has made great strides in optimizing steel content and bringing manufacturing costs in line with those of the leading competitors. This has helped us significantly improve average new product margins, which has started to show through our financials. In addition, we expect continued cost improvements over the next 18 months as the company continues to work on its design to value and design to manufacturing initiatives supported by rigorous process and excellent engineering team. We are confident that these improvements and strength of our average new project margins will enable greater than 20% gross margin in the future as our revenue level scales.
And finally, our breakeven cost has been greatly improved. Our breakeven revenue level has historically been well over 100 million per quarter. We've now brought that down to what we believe to be approximately 50 million to 60 million going forward, depending whether or not we pay a bonus. This reduction has been driven by higher direct margins as well as a reduction and keen focus on OpEx and overhead costs. Our operating expenses in Q4, for example, were the lowest level in nearly two years as we have focused on operational efficiency, while maintaining or increasing investment in key areas that support growth and pipeline conversion, like a strengthened sales team. So overall, while the near-term depressed revenue level is disappointing, I believe the company is making good progress in repositioning for a strong recovery.
The company has an expanding portfolio of excellent tracker solutions that are well regarded in the industry. Customer engagement is the top priority. We're already seeing an improvement in purchase orders that are the foundation for our revenue growth in the future. The market for 2P trackers is improving. We are improving our systems and processes across the board, including pricing. We have a product cost structure to enable 20% plus long-term gross margin and company cost structure, which has been reduced to enable quarterly profitability in 2024. We have a lot of things going for us. With a great team, it's really just a matter of getting revenue level up to see the profitability and cash flow potential to start to show through. And the last topic for me is just a quick update on the status of CEO search.
As Shaker outlined on the November call, we want to be very deliberate in our approach. We did not want to disrupt the progress on key initiatives of the company and wanted to take our time to find the right CEO. That said, we have started the process and have seen great deal of interest. The board is focusing the process on highly qualified candidates, both within the industry and adjacent industries to identify CEO capable of leading the company for a long tenure. We have a short list of excellent candidates. The board will plan to name a successor at the appropriate time when the process has concluded. With that, I'll turn it over to Cathy.
Cathy Behnen: Thanks, Ahmad, and good afternoon, everyone. I'll provide some additional color on our fourth quarter performance and our outlook. Beginning with a discussion of the fourth quarter, revenue came in at $23.2 million, which was at the midpoint of our target range. This revenue level represents a decrease of 24.1% relative to last quarter and 11.5% relative to the year ago quarter. GAAP gross profit was $0.7 million or 3% of revenue compared to gross profit of $3.4 million or 11.1% of revenue in the prior quarter. On a non-GAAP basis, gross profit was $1.1 million or 4.8% of revenue. While down sequentially from a normalized 9.5% in Q3 on lower revenue and cost absorption, the fourth quarter margin represents our fourth consecutive quarter of positive gross margin and was toward the high end of our guidance range.
We continue to believe that we have significant margin upside when our revenue level recovers. Our GAAP operating expenses were $12.4 million. On a non-GAAP basis, excluding stock-based compensation and certain other costs, operating expenses were $10.8 million, which includes a $3.1 million credit loss provision relating to specific customer accounts that was not included in our guidance ranges. Excluding this charge, our non-GAAP operating expenses would have been $7.8 million below or better than our guidance range and representing the lowest level in more than two years as we have diligently looked for efficiencies across the company while continuing to invest strategically in areas that support growth. That normalized $7.8 million would compare to a normalized $9.2 million in the prior quarter and $10 million in the year ago quarter.
GAAP net loss was $11.2 million or $0.9 per share compared to a loss of $16.9 million or $0.14 per share in the prior quarter and a net loss of $20.5 million or $0.20 per share in the year ago quarter. Adjusted EBITDA loss, which excludes approximately $1.1 million, including stock-based compensation expense and other non-cash items, was $10.1 million compared to losses of $9.7 million in the prior quarter and $11 million in the year ago quarter. Excluding this $3.1 million charge, adjusted EBITDA loss would have been $7 million better than the midpoint of our guidance. To touch briefly on annual results, full year 2023 revenue was $127 million, representing a 3.2% increase versus 2022. The increase was primarily attributable to higher product volumes and ASPs, partially offset by a decline in logistics revenue and ASPs. GAAP gross profit was $8.3 million or $6.5% of revenue compared to gross loss of $27.2 million or negative 22.1% of revenue in the prior year.
On a non-GAAP basis, gross profit was $10.6 million or $8.4% of revenue compared to a gross loss of $23.3 million or 18.9% of revenue in the prior year. The company's product cost reduction efforts, including its designed value initiatives to improve product drag margins, is the primary driver of the significant year-over-year improvement. GAAP operating expenses were $59.1 million on a non-GAAP basis, OpEx was $43.9 million, which included approximately $7.4 million in credit loss provision. Excluding this amount, our operating expenses would have been $36.5 million. This compares to $41.5 million on a similar basis in the prior year. GAAP net loss was $50.3 million compared to $99.6 million in 2022. Adjusted EBITDA loss, which excludes stock-based compensation expense and other non-cash items was $34.1 million compared to a loss of $66.4 million in 2022.
Finally, regarding liquidity, we ended the quarter with $25.2 million in cash on the balance sheet. Our receivables are about 5x our payable, and based on expected timing of payments and deposits, we expect cash to be about flat sequentially in Q1. We continue to hold no debt on the balance sheet and have about $65 million remaining under the ATM program at the end of the quarter. As previewed on the last call, we did not utilize the ATM in Q4, and we similarly don't plan to utilize it in Q1. With all these factors and the expected customer deposits, we will tightly manage those deposits and supplier payments. Our backlog has now grown to $1.7 billion with approximately $213 million added since November 8. With that, let us turn our focus to the outlook.
Based on our current view, we expect first quarter revenues to be down sequentially and represent the trough and the revenue for the year. Specifically, our targets for the first quarter call for the following. Revenue between $10 million and $15 million, non-GAAP gross loss between $3.8 million and $1.8 million, or between negative 38% and 12% of revenue. As you might expect, the percentage ranges vary more greatly at these lower revenue levels. Non-GAAP operating expenses between $8 million and $8.9 million, and finally adjusted EBITDA loss between $12.6 million and $9.8 million. Beyond Q1, we expect to see sequential revenue growth for the remainder of the year, with revenue being weighted towards the second half. We expect it to be approximately breakeven on an adjusted EBITDA basis in the third quarter before moving squarely profitable in the fourth quarter.
With that, we conclude our prepared remarks, and I will turn it over to the operator for any questions. Operator?
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