Fluence Energy, Inc. (FLNC) Earnings Call Transcript

Good morning, and welcome to Fluence Energy's Third Quarter Earnings Conference Call. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the Investor Relations section of our website at fluenceenergy.com. During the course of this call, Fluence's management may make certain forward-looking statements regarding various matters relating to our business, including, but not limited to, statements related to our future financial and operational performance, future market growth and related opportunities anticipated growth and business strategy, liquidity and access to capital, expectations relating to pipeline, order intake and contracted backlog, future results of operations and impact of the One Big Beautiful Bill Act, projected costs, beliefs, assumptions, prospects, plans and objectives of management and the timing of any of the foregoing. Such statements are based upon current expectations and certain assumptions and are therefore subject to certain risks, uncertainties and other important factors, which could cause actual results to differ materially. Please refer to our SEC filings for more information regarding these risks, uncertainties and important factors. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business, including adjusted EBITDA, adjusted gross profit and adjusted gross profit margin. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the Investor Relations website. Following our prepared remarks, we will conduct a question-and-answer session with our team. Thank you very much. I'll now turn the call over to Julian.

Thank you, Chris, and welcome to everyone joining us today. Turning to Slide 4. Today, I will provide an update on the progress we have made in driving new order intake and building our backlog, both of which were at record levels this quarter. I'll discuss our growing business, which includes robust demand from our core customers, combined with a rapid expansion of data center customers, from which we received our first orders and contract awards totaling $850 million. We believe that the momentum of the past few months will continue in the quarters to come, driven by our differentiated product offering and our team's long-standing ability to meet customer needs. Following my remarks, Ahmed will review our financial results for the quarter and our outlook for the remainder of the year. Starting with key highlights for the third fiscal quarter. First, we signed $1.44 billion of orders during the quarter, which is nearly triple the $509 million we signed in the same period last year. Second, included in our record order intake was our first deal with a data center developer worth $300 million. During July, we were awarded an additional $550 million of business across multiple data center sites by one of the hyperscalers that we discussed last quarter. Third, we ended the quarter with a record backlog of $6.4 billion, representing 14% growth over the second quarter and more than 30% growth since the third quarter of last year. Fourth, we ended the quarter with total liquidity of approximately $860 million, in line with our expectations. Fifth, Ahmed will discuss our third quarter financial results shortly, but revenues were affected by delays in expected project deliveries driven by the ramp-up of 2 new contracted manufacturing facilities. Accordingly, we are lowering our guidance midpoint for 2026 revenue and adjusted EBITDA to $3 billion and negative $10 million, respectively. We do not take this reduction rightly and have instituted changes in an effort to ensure we deliver on our growing market demand. I will detail our plan further in a moment. Please turn to Slide 5 for more detail on our order intake. With $2.7 billion now signed to the third quarter of this year, our orders are 80% higher than the amount from last year, with utilities and IPPs making up approximately 90% of this total. We expect fourth quarter orders will be another record level for the company, and we see reason for this strong momentum to continue in future quarters given our current demand and competitive position. Please turn to Slide 6 as I detail our progress with data center customers. Our announcements on last quarter's call that we have signed 2 master supply agreements with hyperscalers raised our profile with other potential data center customers. Overall, our data center pipeline has increased to 16 gigawatt hours, representing a more than 35% increase compared to the second quarter. Our pipeline now includes a mix of projects from both hyperscalers and data center developers. During the quarter, we signed a $300 million order for a behind-the-meter project with a developer. We were introduced to these customers by one of the hyperscalers we have been working with. The sales cycle for this customer was much faster than our traditional market segment, converting from lead to order in 3 months. We continue to see the developer segment center on speed to power solutions, and we are pleased to be positioned to meet their needs. Hyperscaler customers continue to focus on quality of power solutions, where we also stand out in terms of our ability to deliver. We were pleased to receive approximately $550 million of awards under one of our MSAs in July. These are not yet purchase orders, and we expect this will add to our total of signed orders in the coming months. These data center customers have a pipeline of projects that we continue to believe we are well positioned to bid on, and we look forward to expanding our business with them in the near future. Please turn to Slide 7 as I discuss backlog and pipeline growth. Our backlog has benefited from record orders in 2 of the past 4 quarters and sets a strong base of revenue growth in fiscal '27. As of June 30, approximately $2.2 billion of our $6.4 billion backlog is expected to convert to revenues in fiscal '27. This compares to the $1.5 billion of fiscal year '26 revenue coverage we had as of June 30, 2025. Turning to our pipeline. We exited the quarter at $33.1 billion, which is an increase of $1.6 billion compared to last quarter. This indicates $3 billion of new opportunities after considering our conversion of pipeline into orders during the quarter. We continue to see a growing percentage of our pipeline coming from the U.S. market compared to previous years, mostly attributed to the data center segment. Please turn to Slide 8 for details on the expansion of our supply chain. We have been expanding our supply chain capacity to meet the strong demand for our products as reflected in the growth of our backlog. New larger contracted manufacturing facilities globally are expected to increase our capacity and also deliver the quality our customers expect. A major driver of our revised revenue expectation for this year is attributable to ramping up production at 2 of these new factories. In the U.S., we will be the off-taker of a new fully automated facility located in Houston with expected capacity of 15 gigawatt hours per year. Completion of this new facility has been delayed by a few months due to delays in construction and issues related to the automation equipment. Limited production commenced this quarter, and our manufacturer is taking steps to address outstanding issues. We expect the facility to reach full production levels during our fiscal first quarter of '27. I will highlight this contract manufacturer has been our main enclosure supplier from Vietnam, which is a very similar facility to this new one in Houston. We believe their knowledge and experience will be helpful as this factory moves towards full production. Our new international facilities are now fully ramped and our product is being shipped to customers on a delayed time line because initial production did not meet our quality expectations. Corrections were implemented, and we have resumed shipping high-quality products to projects all around the world. Given the importance of timely consistent and high-quality production to our business, we recently made organizational changes to ensure more direct oversight of and accountability for our production capability. Today, we announced that Roman Lewsen will assume leadership of our supply chain; and Peter Williams will concentrate on product, with both leaders reporting directly to me. Roman currently serves as our Chief Enterprise Operations Officer and brings more than 20 years of global leadership experience at Siemens, where he held senior operational and business leadership roles with responsibility for supply chain, manufacturing and business transformation. Roman will lead a set of managers with deep experience and skill sets in supply chain and manufacturing that have joined our company over the past few months. I am confident that this new management team will strengthen our supply chain and manufacturing to meet the growing demand for our products. When combined with our supply of domestic sales, we expect the Houston facility will expand our annual capacity for domestic content significantly compared to our current footprint. Once it is fully run and added to our current supply chain, we expect to have capacity to meet our current backlog of projects and confidence to meet the growth of the U.S. market. Please turn to Slide 9 for details on how we are differentiating in the current market. We have been successful in growing our backlog and penetrating the new and important data center customer segment in a very short period of time. Fluence has new and repeat customers who appreciate our advanced product designs, leading energy density and focus on total cost of ownership. In addition to these factors, our proprietary software stack, including our operating system is designed to enable our customers to optimize their solution over its long-term life and allow for remote monitoring. These features can increase availability and extend the life of our solution for customers in all use cases. Specifically for data center customers, the ability of our operating system to efficiently help smooth loads and handle periods of low voltage have contributed to new awards and orders. [indiscernible] has been gaining favor in terms of orders this year, representing 75% of our orders year-to-date. One of the attractive features of Smartstack is that we design it as a product platform with the ability to upgrade over time. During the quarter, we announced the first evolution with SmartStack 10, which increases density of each unit from 7.5 megawatt hours to 10-megawatt hours. The ability to upgrade our SmartStack offering over time with speed and efficiency allows us to quickly adapt to evolving customer needs, which is valuable for both Fluence and our customers. To conclude, we believe we have the right product and team to win in this rapidly growing market. With our first data center awards adding to our record backlog and a growing global supply chain size to meet future growth, we are committed to delivering for customers and creating long-term value for shareholders. With that, I'll turn the call over to Ahmed to discuss our financial results and outlook for the rest of this year.

Good morning, everyone. While our results this quarter were disappointing, the challenges we experienced were primarily related to construction and production start-up delays at new manufacturing capacity and scaling of our new products. We have taken actions to address issues and improve execution and are now tracking to our revised production plan. Importantly, these investments strengthen our supply chain globally and position us to support our growing backlog. As these new facilities move beyond the initial ramp-up phase, we believe Fluence will be better positioned to deliver profitable growth and create shareholder value. Starting with Slide 11. We generated Q3 2026 revenue of $650 million, up 8% year-over-year. This was approximately $90 million below the expectations we discussed on our last quarterly call. This shortfall was primarily driven by production delays at 2 new contract manufacturing facilities that are currently ramping. Production from the encloser manufacturing facility in Houston was pushed by a quarter due to construction and automation delays. The facility has begun limited production and is expected to achieve full production levels in the first quarter of fiscal 2027. The other issue occurred at 1 of our 2 new facilities in China, where initial production of components of SmartStack did not meet stringent standards and required rework. The facility is now producing consistently to our standards and has achieved full production in the fourth quarter. While we expect to realize the revenues associated with the Q3 projects that were delayed, the slower ramp-up compresses the time line for production in the fourth quarter, pushing a portion of previously planned 2026 deliveries into fiscal 2027. Our Q3 adjusted gross profit reflects the lost margin from revenue shortfall and an approximately $15 million costs associated with new product rollout and production delays. In addition, we recorded $15 million loss on a planned battery supply agreement, most of which was associated with a single project. Despite the upfront cost, this arrangement secures the long-term supply and attractive pricing, strengthening our ability to support growing demand and price future orders with greater confidence. Turning to Slide 12 for our fiscal 2026 guidance. We have revised our outlook to reflect our updated expectation for production through the end of this fiscal year. More specifically, we expect revenue in the range of $2.9 billion to $3.1 billion with a midpoint of $3 billion. The approximately $400 million reduction versus the prior midpoint is largely the result of manufacturing ramp-up delays that pushed revenue recognition into 2027. In terms of EBITDA, we now expect adjusted EBITDA of negative $30 million to positive $10 million with midpoint of negative $10 million compared to our prior midpoint guidance of $50 million. While there are several puts and takes relative to our prior guidance, the $60 million reduction is largely explained by 2 items, about $44 million of lost margin from shift of approximately $400 million of revenue into 2027 and $15 million related to the proposed long-term battery supply agreement discussed earlier. And we are maintaining our expectation for annual recurring revenue of approximately $180 million by the end of fiscal 2026. Turning to Slide 13 for an update on our liquidity position. We ended the third quarter with total liquidity of approximately $863 million, which includes approximately $365 million in total cash. Consistent with what we said on the last call, we expect total liquidity will return to $900 million level by fiscal year-end, driven by execution on our backlog of projects included in the guidance. Bottom line, our liquidity position continues to support our near-term working capital needs, particularly heading into our highest revenue quarter. Regarding liquidity needs for 2027, we are comfortable that our existing liquidity has us well positioned for success. That said, as Julian noted, our expected order intake is reaching new highs and to support that growth may require an additional $300 million to $500 million of working capital over the coming year. We will remain disciplined and pursue financing only where there is a clear line of sight to profitable growth and shareholder value creation. In summary, while we have more work to do, demands remain strong, our backlog continues to grow and we are taking actions needed to improve our execution and support long-term profitable growth. With that, I will turn the call back to Julian.

Thanks, Ahmed. Let me close with a few key takeaways. First, order momentum continues. Our third quarter order intake, our record of $6.4 billion backlog and the initial order with the data center developers all evidence our successful product strategy and sales effort. We currently expect orders to reach a record level again during the fourth quarter of this year. Second, additional production capacity. We're adding new contract manufacturing capacity in the U.S. and abroad and have realigned our organization with new leadership to strengthen execution. Third, product offering. The integration of SmartStack density, safety and reliability metrics with our software and controls capabilities allowing for fast response, flow smooth and remote operation puts us in a dominant position to meet the growing demand of the diverse customer segments we serve. In conclusion, we are positioning our company to continue profitable growth and to deliver value to our customers and shareholders.

[Operator Instructions] Your first question comes from the line of George Gianarikas from Canaccord Genuity.

George, before you ask, I really want to apologize for the technical mishap we have this morning, which we'll figure out what it is, but we've been waiting in hall for some -- at the same time you were waiting and we were not have been connected. So sorry for that, everybody, we really appreciate and value your time, and we know it was a little bit of a waste of time, but George, Good morning.

Maybe first, if you could provide some additional granularity around the production delays and just sort of go into a little bit of detail what's happening in the facility?

Yes. Great. So we have -- as you know, as we are scaling up the company, we are increasing our production capacity. As part of that, we brought in 2 new manufacturer groups, one to serve the international market and one to serve the U.S. market. On the international market, we're working with reputable, well-known and seasoned contract manufacturers. One of these manufacturers, as you are aware, they are producing our SmartStack for the international markets. One of those manufacturers producing our parts, the ones that things that go on top of the skids that we have. And the initial production had some quality -- was not meeting our stringent testing, and we had to significantly delay production to ensure that we got the production in line with our quality. And that meant significant delays that have been significant. But since then, we have fully resolved and now we are producing that are working full time. We are fully ramped up. They're doing a great job, but we won't be able to recuperate the full amount of the volumes we had -- we lost during the quarter -- during the year. So that's that case. And we feel confident and we're seeing it today that they can meet our quality, our volumes going forward, and it will really put us in a good position to serve the international market with a competitive product. The U.S. is slightly different. The U.S., we're putting a fully facility with our contract manufacturer that works out of Vietnam. The same one is putting up fully automated facilities, an improved version of the one we have in Vietnam, fully automated -- a lot more automated because of the U.S. labor cost somehow, but fully automated system. And they experienced construction delays where the construction delays were then we got delays in connected to the utility. And out of the -- we've been running the plant with generators, and that meant that we had to manage -- we could not do all the works in parallel. That meant that some of the automation took longer than. And it's the same thing as these delays got stuck one another, there was a moment that was clear that we will not -- we were not going to be able to recuperate the volumes for '26 and that we had to volumes to '27. That facility is ramping up, it's producing today. It will connect to the grid in the next couple of weeks. The issues are being resolved. And as I said, this is very much a sister company to the one that's in Vietnam. So we're confident that the production levels we have set for ourselves for the quarter that will be met, that the issues that we have identified are fully resourced and resolved. So we're very confident on it. I would say on a more general point, this facility will be -- will provide us a competitive advantage in the U.S. market that we believe is a very, very important of our strategy here in the U.S. market. It will allow us to produce 15 gigas of fully U.S.-made products, fully automated integration. So we are really, really happy with what we will receive. However, we're going to the delays that, unfortunately, we could not fully resolve on time.

And maybe just as a follow-up, an update on your recent commercial traction in data center, specifically, how would you characterize the competitive dynamics and your win rates and deals you participated in? And what are the key differentiating factors that lead to your wins?

Yes. Very great question. I think that -- how we win? We win because of the density, safety and reliability of Smartstack as it combines with our operating systems that allows for very efficient load management and very, very good response times to the low voltage ride through. So it's a combination of technical of our operating systems and our enclosures, which are our delivery equipment, which are safe and reliable. That's how we win. Generally it has been very, very good. It's not -- and we're very happy with the traction we had. This is significantly better than our plans, and we are very, very confident that as that industry growth, that will be an important part. What's interesting for us also is that we are now looking not only in the U.S. with most of the activities we have and the contracts we have signed today are from, but also looking at some of our markets to -- with some of the hyperscalers and some of the same developers to help them in other markets, which I think will put us -- our global footprint will help us on capturing that demand more globally.

Your next question comes from the line of Brian Lee from Goldman Sachs & Co.

I wanted to ask about the battery cell cost uplift. It sounds like it's an international supplier, but can you give us a little bit more detail? Does this have anything to do with the new AESC ownership? Or maybe just walk us through what's changing to impact costs here? And is this also a drag into your fiscal 2028 procurement and cost as well?

Yes. Great question. No, this is an international -- this is for the international market. It's not connected to AESC. And it is -- we entered into a long-term agreement that is not only a supply, but also some technological alignment in how the batteries will work in our modules and how we work going forward. And it's a longer-term contract that we believe will put us in a very good position for '27 and '28 and going forward. However, we had to take a charge in one project that we had that was being supplied by the same customer that as part of the deal we -- as the deal adjusted, we needed to take. So that's what it was. But the NPV of the project is significantly higher than the charge we're taking. So we decided that to take the charge and move forward. That's what it is. I think that we -- as we have continued to grow, we believe that integrating our technological road map with the technological road map of our [indiscernible] suppliers is fundamental for our success longer term.

Yes. Fair enough. Okay. And then maybe just a question on sort of the conversion cycle because this is -- if you look at Slide 7, obviously, a lot of backlog growth in the past couple of years, a lot of pipeline growth, especially the past couple of quarters. So you have a lot of top of the funnel momentum heading into fiscal '28. Obviously, there's some operational challenges here that are tripping you up in terms of meeting expectations this year. But how should we think about the conversion cycle on these record backlog levels and kind of the impact of these data center and hyperscaler bookings? Just any sense of how quickly we should start to see these turn into P&L impact? And does it differ from your historical backlog conversion cycles?

I mean, as you said, I mean, we are starting -- just starting with data centers. So we have no -- we have limited proof points of what it is. Our -- the proof points we have is that they work at a much faster conversion cycle. We have the deal with the developer. We signed it from lead to contract in less than 3 months, so tremendously fast, and they will also have a very fast conversion cycle going forward. So we believe those will help accelerate our conversion cycle. Our normal -- the other 90% today or our other segments are working on the same conversion cycle of roughly a year to 18 months that we had had. So as you know, we recognize revenue, so the revenue recognition occurs in accordance to the milestones of the program. And I would say in a period of 18 months, we recognize the full revenue, some of it is recognized fairly quickly as we recognize the milestones as we move on the execution of the project. Not like it all happens at the end.

Your next question comes from the line of Julien Dumoulin-Smith from Jefferies.

A couple of things real quickly, just to rehash. Number one, you made comments about the expedited nature of the VTM -- the potential customers here with VTM. Can you elaborate a little bit more about how you're thinking about the potential cadence for incremental bookings from here against some of these arrangements? And also elaborate a little bit on the composition of customers in as much as, obviously, last quarter, we talked about a couple in particular. VTM could be an array of different kinds of counterparties as well. Can you talk about sort of the nature of these counterparties? And I got a quick follow-up.

Yes. So last time, we talked mostly about hyperscalers. And now we have -- the hyperscalers have brought on into -- which was our plan, go to the hyperscalers because we know that's the door for the developers. And what we have seen with the develop -- and there has been the change when you talk to hyperscalers, mostly speed to power, mostly quality of power solutions. That's where they're looking to spend very technical analysis, very deep understanding. When we're talking to the developers, it's mostly speed to power. And what we have seen is that the need -- the developers are -- I would say, I don't know at least what we have seen today are in a much of a hurry than compared to the hyperscalers. So we see that market a lot more active, and we see those activities, especially moving from leads to pipelines to orders more quickly. So that's what we can say is what we have seen up today. The pipeline today, hyperscalers have the majority, but the developers represent the growing segment that is working right now.

Understood. Excellent. And then just quickly, I see a comment here about strategic expenses just of late here. Just would love to -- how are you thinking about the company strategically, if there's anything to flag there? I don't know, on the quarterly expenses? Just is there anything we should watch participating?

We have -- this is -- we're looking at -- we're always in the market, and we're always looking at it. So as you know, earlier in the year, we look at AESC as an option, and there some of the costs are connected to the AESC review and all the analysis we have to do for the AESC review. So there is nothing to announce.

Got it. But still looking at alternatives on that front on procurement?

We are seeing -- we are spending a lot of time looking at -- talking to all the battery capacity in the market and talking to them. Nothing really to talk about at this stage, but that's where we're spending our time as we see an opportunity to work more closely with the battery manufacturers in the U.S.

The next question comes from the line of Dylan Nassano from Wolfe Research.

Just wanted to check, so in terms of the scope of the delays that you guys are seeing from the manufacturing facilities, to what extent, if any, are those impacting the hyperscaler MSAs and these orders that you guys are talking about here?

Yes. No, no, not at all. These are issues of contracts that we have today and that are -- that we signed a year, 1.5 years ago, and they have nothing. They are normal contracts that normal contract there are difficult segments. So no affection to -- in no way affecting the MSA of the contracts we're signing with data centers.

Got it. Okay. And then I mean, maybe it would just be helpful if you could just level set us again on the number of MSAs. I believe it was 2 last quarter. And how many hyperscalers exactly does that include? And can you just clarify, so you have the $300 million first order and then the $550 million awarded? Are those from the same hyperscaler? Or is that 2 different hyperscalers?

So we have 2 MSAs with 2 hyperscalers. As we have the engagement in working with the hyperscalers, they have referrals to developers that work for them. And we are now, as I said, our pipeline and our work, we're spending a lot of time with developers as they continue to work with the hyperscalers a lot. But as they have a pipeline that requires very quick response time. In terms of the contracts we signed, we signed the $300 million contract with a developer that was referred by one of the hyperscalers we have an MSA with. So this was a contract that a developer building a data center for one of the hyperscalers that we will be providing our equipment. Then we have -- one of the hyperscalers, there was a tender we got awarded the $550 million we sold and that we're in the process now of finalizing all the final technical points to be able to convert this into backlog and we should convert into backlog in the coming months. And we continue to work to engage with more hyperscalers, and we have seen both hyperscalers we're working on several projects, both in the U.S. and internationally that we will provide -- that we will want to bid on and we would like to serve them with our products.

Your next question comes from the line of Vikram Bagri from Citi.

I wanted to ask about the margins first. One of your larger peers indicated margin pressures in storage. I was wondering how you feel about the 10% to 15% margin guidance. You have backlog converting $2.2 billion next year, $2.8 billion after that. So pretty long-dated backlog at this point. Are there any variance -- is there a variance in margins when you look at the sort of like backlog in the near term, medium term and long term? Are you witnessing the same pressures your peer talked about?

The reality is that we are still very comfortably within the 10% to 15% range. Even when you look at our results this year, if you take out some of the onetime stuff that we had during the year, we will have been in around the 12% that we guided the market toward. So we are confident. We don't see in our backlog or in the new orders, they are in line with the 10% to 15%. We do not understand the pressure that the other big supplier announced that they were coming out with this. We don't really there might be something in their cost structure that is different. As we move forward, our big issue is scale in this company. That's the issue. That's kind of the pains we're having going to are connected to scale and scale drives competitiveness, probably in the case of our competitors that some of them have already reached scale, they're finding some other issues that for us, they are not [indiscernible].