Fluence Energy Inc
NASDAQ:FLNC
Earnings Call Analysis
Q1-2024 Analysis
Fluence Energy Inc
Fluence Energy has kicked off fiscal year 2024 with positive momentum, reporting $364 million in revenue and achieving double-digit gross margins for the second quarter in a row. Their adjusted EBITDA has seen an improvement, rising from the previous year's first-quarter negative $26 million to negative $18 million. Moreover, the company has secured a record-breaking $1.1 billion in new orders, demonstrating a surging interest in their energy solutions, services, and digital offerings.
Fluence's strategic maneuvers have successfully grown their order backlog by $800 million to an all-time high of $3.7 billion, setting the stage for sustained financial health. With a solid strategy in place, the company is poised to continue delivering on its financial objectives thanks to careful project selection that's expected to yield lucrative gross margins.
In a strategic effort to meet U.S. domestic content requirements and expand their competitive advantage, Fluence is gearing up to start manufacturing battery modules by the summer of 2024. This move is timed with the growing global demand for energy storage systems and will be complemented by their robust and diversified supply chain.
The energy storage market is receiving a boost as prices for lithium carbonate plummet, dropping by over 80%, which, in turn, decreases battery costs and improves project viability for customers. This price shift is one of the drivers behind the significant expansion of Fluence's backlog, now at a record $3.7 billion, signaling strong market demand for their products.
Looking ahead, Fluence anticipates a robust revenue growth of approximately 35-40% in fiscal year 2025 compared to 2024. This future growth is supported by an impressive $13.4 billion project pipeline, with expectations of converting around 50% of these opportunities within the next two years.
By bringing battery module production to U.S. soil and integrating their proprietary battery management system, Fluence positions itself to tap into domestic content tax credits under Section 45X, further advancing its supply chain strategy and cementing its place in the market.
It's crucial for investors to note that all forward-looking statements made by Fluence management are based on current expectations and assumptions and are inherently subject to various risks and uncertainties. Therefore, actual future results may significantly differ, and the company does not assume the responsibility to update these predictions. Investors are advised to be cautious and not to place undue reliance on these statements.
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Good day, and thank you for standing by. Welcome to the Fluence Energy First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President of Finance and Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Fluence Energy's First Quarter 2024 Earnings Conference Call. 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.
Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; Ahmed Pasha, our Chief Financial Officer; and Rebecca Boll, our Chief Products Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not 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 or new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Julian.
Thank you, Lex. I would like to send our welcome to our investors, analysts and employees participating on today's call. I will provide a brief update on our business and then review progress on our strategic objectives. Ahmed will then give more details on our financial performance and outlook.
Beginning on Slide 4 with the key highlights. I'm pleased to report that we are off to a good start for fiscal '24 and continue to benefit from a robust energy storage market. In the first quarter, we recognized $364 million of revenue. Furthermore, we delivered our second consecutive quarter of double-digit gross margin. Our adjusted EBITDA for the first quarter was approximately negative $18 million.
In line with our expectations it is improving from negative $26 million in the first Q of '23. Additionally, we recognized a record $1.1 billion of new orders. This is broken down by our solutions business contracted 2.7 gigawatt hours. Our services business adding 2.3 gigawatt hours, and our digital business adding 400-megawatt hours of new contracts.
Furthermore, our signed contract backlog as of December 31 increased $800 million to $3.7 billion, the highest level in our history. Additionally, our pipeline increased $400 million to $13.4 billion, which gives us confidence to achieve our growth goals in 2024 and the year.
Our service and digital businesses which together represent our recurring revenue streams continue to gain traction. We ended the quarter with 3.3 gigawatts of service assets under management. Importantly, our deployed service attachment rate which is based on our community of active services contracts relative to our deployed storage remains above 90%. We had a strong quarter in our digital business, adding 400 megawatts to our backlog. More importantly, our digital assets under management increased to 17 gigawatts as of December 31 from 15.5 gigawatts at September 30.
In summary, our combined services and digital annual recurring revenue, or ARR, was approximately $64 million as of December 31 and is on track for our guidance of approximately $80 million by the end of fiscal year '24.
Turning to Slide 5. I'd like to discuss our progress on the 5 strategic objectives that guide our decisions and actions. They are also important markers for investors to monitor and measure our performance. First, on delivering profitable growth. This quarter, we continue to grow our backlog as we added $1.1 billion of projects that we expect to yield double-digit gross margins. Our disciplined approach to offer competitive solutions to customers keeps us on track to deliver on our financial objectives.
Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we are on track for our battery module manufacturing to begin production in the summer of '24 gradually ramping up over the subsequent quarters. This battery module manufacturing will enable us to provide a product that meets the U.S. domestic content requirements for battery energy storage which I will touch on more in a moment.
Third, to our scale and global outreach, we have established a supply chain as one of our key strategic competitive advantages. Our diversity of suppliers is a key component of this and enables us to take advantage of favorable terms and battery prices, which I will discuss in more detail shortly.
Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we have strong digital customer retention with 21 digital contracts renewed during the quarter and 0 customer attrition. And our fifth objective is to work better. I'm proud to state that in November, Fluence became an official signatory member of the UN Global Compact ahead of the expected time line outlined in our 2022 sustainability report.
Turning to Slide 6. We continue to see strong growth in demand for utility scale energy storage systems. Over the past 12 months, we've seen lithium carbonate prices decline over 80%. This has in turn led to a decrease in battery prices, which has improved customer economics and allowed for more projects to be penciled in. It has been reflected in the growth of our backlog, which now sits at a record level of $3.7 billion, which is an increase of approximately $800 million from the fourth quarter. This is also the ninth consecutive quarter in which we added more order intake to backlog than revenue that was recognized out of that, further illustrating the growth in demand.
Additionally, this $3.7 billion does not include some awards signed since the end of the quarter, such as our 650-megawatt hour Mortlake project in Australia. More importantly, 100% of our backlog is at fixed battery prices with both suppliers and customers with no commodity price exposure, thus giving us strong visibility into revenue and margin for these projects. Additionally, approximately 80% of our fiscal '24 revenue guidance midpoint is already covered by our current backlog attributable to fiscal '24, plus revenue already recognized in the first quarter. These 2 data points provide us with high confidence that we will be able to achieve our guidance ranges for revenue and adjusted EBITDA for fiscal '24.
Based on the conversations we're having with our customers and potential customers, we're expecting to see continued strong revenue growth in fiscal '25 of approximately 35 to 40 from fiscal '24. Our 2025 outlook is supported by our pipeline, which sits at approximately $13.4 billion and grew $400 million from the last quarter. As we have communicated in prior calls, our expectations for pipeline conversion is at approximately 50% over the next 24 months.
Turning to Slide 7. Over the past couple of years, we have taken major steps to diversify and improve the resilience of our supply chains. Our supply chain strategy is centered around 4 key elements. The first is the diversity of battery suppliers. Currently we utilize 5 battery suppliers located in China, South Korea, Sweden and the United States. This ensures we have multiple geographies to pull from which support our growth while mitigating disruptions. We will also note that building a stable and reliable U.S. supply chain is critical for the industry. And as I will discuss, we are taking significant steps to establish a U.S.-based supply chain this year.
Second, to capitalize on growing demand for our products, we have secured multiyear guaranteed battery capacity from these suppliers. This covered our needs for fiscal '24 and fiscal '25 and provides flexibility for upside in demand. These capacity agreements are subject to market price adjustments. Additionally, we also use a price discovery mechanism involving multiple battery suppliers to ensure we are constantly delivering the most competitive prices to our customers.
And finally, these capacity agreements come with minimal take-or-pay obligations. Third, to capture the incentives laid out by the IRA, we will be manufacturing our own battery modules in the U.S. which represents 2/3 of our global business. It also enables us to introduce our proprietary battery management system, the software that runs the controls at the battery cell level, and the initial point of control in a battery storage system.
Additionally, it enables us to further commoditize our supply chains by facilitating the integration of multiple battery vendors. We are currently on schedule for our battery module manufacturing to begin this summer. In doing so, we expect to qualify for the domestic content tax credit under Section 45X.
The fourth element of our strategy is an asset-light regional supply chain. This involves using 2 major contract manufacturers for system integration, one in Vietnam and one in Utah. We will look to continue to regionalize our asset-light model in other areas such as Europe and India. This strategy provides us with enhanced flexibility and agility, particularly in scaling and positions Fluence for a high return on invested capital as we do not incur the capital costs associated with building or maintaining our own production facility.
When we look around the world, we're using various shipping routes for our projects. To that end, I would like to make a few comments in relation to the recent disruptions in the Red Sea. Only approximately 50% of our global shipments were expected to use the Red Sea route. The rerouting of these shipments adds around 2 weeks to our shipping schedule. Time we have been able to accommodate without affecting customer delivery commitments. Finally, the incremental costs we're experiencing in shipping we're able to transfer to our customers in their entirety in accordance with our contracts. In any event, our logistics team is working very diligently to reduce as much as possible these increases in costs.
Overall, these 4 elements are the cornerstones of our supply chain strategy, which provides flexibility, competitiveness and high certainty for our customers. We will look to build on this as we continue to strengthen our global supply chain.
Turning to Slide 8. We're well positioned to recognize multiple benefits from the IRA, which is already boosting demand for energy storage. These benefits fall in two categories. Under the first category, our customers have the potential to receive up to a 50% tax credit for their projects capital costs, which significantly improves project economics and attractiveness. These incentives to our customers include a base ITC or investment tax credit as well as bonus incentives for deploying in an energy community and using domestic content.
The second category of incentives under the IRA includes those provisions that directly benefit Fluence. By producing battery modules in the U.S., as I just discussed, we expect to qualify for a production tax credit of $10 per kilowatt hour of battery modules produced under Section 45X. These 2 categories of incentives provide for our products to be more competitive and enables us to benefit from increased scale, more volumes and operating leverage.
Turning to Slide 9. I'm proud to report that in November, Fluence became an official signatory member of the United Nations Global Compact. Being accepted as a signatory member is an important step on our sustainability journey of building a strong ESG program based on a structural framework data and active engagement.
Fluence has joined more than 20,000 companies and organizations around the world that have signed the UN Global Compact and are committed to responsible corporate citizenship and sustainability. We are excited to collaborate with like-minded companies, nongovernmental organizations and other stakeholders through the Global Compact network to exchange best practices and drive positive change.
Now I would like to make a few remarks regarding the article published in late December regarding the Diablo project in California that highlighted a contract claim filed against us by the project owner alleging that we did not have a valid construction license in California. This contract claim was filed in response to our claim for $37 million in non-pay amounts and related damages. As we have said already, we believe these contract claims are without merit. We intend to get paid for our work on the project. The legal proceedings are ongoing. In the meantime, I wanted to highlight that the Diablo project is performing very well and has delivered availability or uptime above its contractual requirement during 2023.
In conclusion, I'm pleased with the achievements of the first quarter. Although we are mindful there is still work to be done, we will look to continue this momentum as we progress through 2024. I will now turn the call over to Ahmed.
Thank you, Julian, and good morning, everyone. Before we dive into the results, I am very pleased to be here at Fluence, and I would like to share my perspective on my first month at Fluence.
On a macro level, Fluence is well positioned to capitalize on this once in a lifetime opportunity as energy storage benefits from declining input prices and an ever-increasing focus on good stability. I have learned much about the company, the people and the culture. I have been impressed by the team's laser focus on offering competitive solutions to customers while adhering to a disciplined approach to growing our top and bottom lines. I'm looking forward to maintaining this financial discipline and stewardship of our strong balance sheet while delivering attractive returns to our shareholders.
This morning, I will review our first quarter results and 2024 guidance, which we have reaffirmed across all metrics. Beginning with our first quarter 2024 results on Slide 11. We generated $364 million in revenue, 70% of which was in the first -- in the U.S. and largely in line with our expectations. This was an increase of 17% from the first quarter last year. As we discussed on our previous quarterly call, we expect to realize 30% of fiscal '24 revenue in the first half, and our first quarter results reflect this mix.
Turning to adjusted gross profit. For the quarter, we generated approximately $38 million or an adjusted gross margin of approximately 10.5% versus 4.2% in the first quarter of last year. It also represents a second consecutive quarter in which we posted double-digit gross margins. Our operating expenses were $62 million, in line with expectations and consistent with the first quarter of last year, representing 17% of the quarterly revenue.
Adjusted EBITDA for the quarter was negative $18 million versus negative $26 million in the first quarter of last year. Negative adjusted EBITDA reflects our revenue weighting towards the second half and operating costs that are relatively flat on a quarterly basis, as I just discussed. Overall, we believe these results reflect our disciplined approach to grow our top line and improve our bottom line to deliver on our financial commitments.
So turning to Slide 12. I am pleased to report that we ended the first quarter with $477 million of cash. This represents an increase of $14 million from the fourth quarter and is the third consecutive quarter that we increased our total cash position. From a liquidity perspective, we are in excellent position to capitalize on the growing energy storage market. In addition to our cash position, we have access to approximately $130 million in credit facilities. This includes $75 million available under our recently signed $400 million asset-backed lending facility, or ABL facility. Availability in this ABL facility is dependent on the level of collateral available to secure, which is mostly our U.S. inventory. Thus, as our inventory balance increases, so should our borrowing capacity, which provides us another lever to manage our working capital needs. In summary, we have total liquidity of more than $600 million which is sufficient to meet our current business needs.
Moving to Slide 13. As Julian noted, we are reaffirming our guidance for fiscal 2024 of revenue between $2.7 billion and $3.3 billion. To that end, we have approximately 80% of the midpoint of our annual revenue guidance covered by our backlog plus revenue recognized in the first quarter. This provides us confidence that we are on the path to achieving our fiscal '24 guidance range. From a margin perspective, we continue to anticipate fiscal 2024 adjusted gross margins of between 10% and 12%, which is in line with our first quarter results.
Additionally, we are reaffirming adjusted EBITDA guidance of $50 million to $80 million. Furthermore, we are on track to achieving ARR of approximately $80 million by the end of fiscal 2024. I would also remind that we continue to expect fiscal 2024 revenue split of 30% in the first half and 70% in the second half, which implies fiscal Q2 revenue of approximately $530 million.
For Q2, we expect adjusted EBITDA to be negative because annual operating costs have a more even weighting by quarter than revenue. Consistent with our full year guidance, we expect second half '24 adjusted EBITDA to improve significantly relative to the first half as we realize 70% of annual revenue during that time period.
Finally, looking ahead to 2025, we continue to believe that we will achieve 35% to 40% year-over-year top line revenue growth driven by our robust pipeline and record backlog of signed contracts. With that, let me turn the call back to Julian for his closing remarks.
Thank you, Ahmed. Turning to Slide 14 and in conclusion, I want to emphasize the key takeaways from this quarter results. First, we had a record set in order intake and a record backlog of $3.7 billion. We have locked in battery supplies at fixed prices for all our projects in our backlog, thus, providing us strong visibility to achieve in our guidance.
Second, we have a sustainable and resilient supply chain that is a key component of our competitiveness.
Third, we are on track to begin our module manufacturing this summer. Together with our customers, we believe we are in a prime position to capitalize on various incentives under the IRA. Fourth, the falling battery price environment serves as a tailwind for us, and it allows more energy storage projects to be penciled in by our customers. All of these factors provide us confidence in our ability to successfully deliver on our fiscal '24 and '25 objectives. This concludes my prepared remarks. Operator, we are now ready to take questions.
[Operator Instructions] And our first question comes from the line of George Gianarikas with Canaccord Genuity.
So maybe just first, I'd like to ask about the orders, the $1.1 billion in orders. Can you help us understand sort of the geographic profile. And also, are those orders consistent with your gross margin profile of mid-teens over the long term?
Yes. The geographic profile is in line with what we have said 2/3 in the U.S. and 1/3 internationally. And they are at double-digit margins for those -- for that order intake, so in line with what we have communicated to the markets.
Great. And then just as a follow-up here. As you look at the M&A landscape, we talked about Wärtsilä in the past, they're still undergoing their strategic review. Do you feel compelled at all to change the profile of Fluence? You have a nice cash balance. And as you look at across the landscape, are you looking to potentially expand footprints or your software profile by making acquisitions?
No. Yes. We have said we -- we're very -- we are very happy with our corporate business position, it's a strong -- very, very strong sales channel. And you can see it not only in our backlog, but also in our pipeline. Our technology, we have a very clear road map that is going well and we're very happy with. And so generally, I don't see any need for acquisitions at this stage and we're not looking at any. We're clearly in the market ensuring to understand what -- how the environment looks. But there's no need to any acquisitions in any of our -- to support any of our business projects and structure at this stage.
And our next question is going to come from the line of Brian Lee with Goldman Sachs.
I had 2 sort of numbers related ones. First, on legacy backlog. I think entering the year, you guys had talked about something like $150 million of still low margin, no margin legacy backlog you needed to work off this year. And I believe most of it would then get deployed in Q1. So if that's right, it implies the gross margins on the non-legacy business was mid- to high teens or something in that range since you reported 10.5% for the quarter. So I guess wondering if that's right, if the backlog legacy is all gone. And then how do you -- how should we be thinking about gross margin for the rest of the year given the implicit higher level for the non-legacy stuff? It seems like the 10% to 12% annual guide for gross margin seems a bit conservative. And then I had a follow-up.
Yes. All the legacy is now gone. But the actual number for the first quarter of the legacy contracts that we had in the -- that we recognized revenue in the first quarter, closer to $50 -- $50 million, not $150 million. So I'll give you -- I think that we are in line with our 10% to 12% margins that we communicated for the year. And this quarter proves that if you take into account the $50 million of legacy contracts, which are essentially at roughly breakeven. So -- but you're at no more legacy going forward, and the actual number for this quarter was $50 million.
Okay. Okay. That's fair. Then if I take the $50 million, it seems like you're sort of closer to the mid-teens, but still within that range. Understood. And then there's been a lot of questions Julian about lower battery prices, we see what's happening with lithium carbonate. I think you made a comment on Slide 12 or 13 that your fiscal '24 battery supply and prices are locked in. So does that mean I know there's the index-based adjustments for your customers. Is there anything in your, I guess, fiscal '24 backlog to be deployed that can still get adjusted on price? Or is that all for future outside of fiscal '24 backlog that maybe still has some of those indexed linked adjustments that could take place? I'm just trying to understand how locked and loaded the backlog dollar value is for this year versus what potentially could maybe move around next year if battery prices keep going lower?
Good. So let me walk you through where we are. So we use RMI as you know. So as far -- that's an important part of how we manage our risk. The RMI supports our projects from the time we start negotiating with our customers to the point when we issue a purchase order, when we buy the batteries and we make a down payment to our battery suppliers and get an actual commitment from the battery suppliers. So what do we have in our backlog today. So what we have said, what we have in our backlog is that we have fixed all our battery prices. In all our backlog, all of it, the $3.8 billion, we already fix it with our suppliers and with our customers. So our current backlog does not have any commodity risk on either direction, an exposure to the suppliers moving up or down or the customers moving up or down.
That means that for '24, as we have said also, 80% of our revenue for '24 is already in our backlog. So though that 80% is very much already fixed and the battery prices will not move that 80%. However, we have 20% to hold. 20% that will be subject to contracts that are in very late stage of negotiation that will be coming in the next couple of months and where the current offers we have outside of we are negotiating with our customers is based on current prices. So we feel very, very comfortable that -- and secure that we will meet our guidance for the year. And then that gives us '25, that gives you '25 in front of us. And we have roughly $1.5 billion of revenue of '25 already in our backlog. That -- so roughly 40% of next year's implied guidance we have given you. That is already in our backlog and it's already also fixed. So when you look at -- if you look at it from the upside, 80% already in the backlog fixed, for '24, 20% subject to new contracts, which are already very late stage of negotiations. We feel very confident, which reflect current battery prices. And we feel very confident and we -- as I said, feel very, very confident that we'll meet our numbers. We are negotiating these numbers. We're talking to our customers. We know where we are. Those will support our '24 revenue guidance. And then for '25. We're still are clearly working on this. 40% is already in our -- in the books. Then 60% to go. When we look at -- and then you can say, well, why do you feel confident about it? We looked at our pipeline. If you looked at our pipeline -- I'm sorry for the long answer, maybe. If you look at our pipeline, we grew our pipeline by $400 million. But that means that the $1.1 billion we converted from our pipeline to backlog, we also cover. So the reality our pipe -- we brought into our pipeline at current prices, $1.5 billion of new contracts. So it gives us very, very clear in one quarter that the demand we're seeing in the market. The interest that is coming to this day how much investors, customers, regulators, feel comfortable with our technology, makes us very confident that we will meet the -- our commitments for '24 and '25. And I do understand that sometimes the financial markets are concerned about the potential downward pressure on revenue of battery prices.
But -- let me be very clear, this is a tremendous headwind for this industry. The elasticity of the demand is tremendous, and that provides for a significant uptick in demand that significantly covers the potential downside of our -- that revenue prices. So very, very confident in '24, 80% on it already fixed, with clear line of sight within shooting range to use army concept, and for '24 for the other 20% and '25, 40%, in the book 60% to go and with remainder pipeline coming in that we fill that will more than cover all our projects.
That's great. I appreciate all that.
Sorry for the very long answer, Brian.
No crystal clear. I think I got the message crystal clear. I appreciate it.
And our next question is going to come from the line of Christine Cho with Barclays.
I just wanted a clarification question on the backlog. As I understood it, if the customer had not issued notice to proceed but had booked, that was still subject to move. And it sounded like you locked everything in as for the backlog that as it stands today. But as you get incremental bookings, should we think that on a go-forward basis, all of that will be locked in when it enters your backlog as well or same thing. It's subject to move until they issue notice to proceed in.
Very good point. As I said, the RMI covers from the point we start negotiating with the customer to the point that the purchase order is issued, which is usually at the point of notice to proceed. So the new order intake that we will get, there will be a point between the moment we signed the contract to the point we issued a notice-to-proceed that -- where that potential rises. However, what we have seen and what we kind of show you this time is that, that time frame has collapsed significantly and that we are now issuing notice-to-proceed very close -- in most cases, very close to the point at which we are signing the contract.
So I will say that generally, there for RMI in our backlog will continue to be a small number as we move forward. There might be one or two projects that coming in where the customer wants to wait a little bit, and maybe that will happen. But in general, I think most of the contracts we're signing, the customers wants to secure batteries immediately take advantage of the good price and move forward. So.
Okay. Got it. And then can you give us an idea of how much of your backlog has EPC services tied to it, maybe percentage of the contracted volumes? And as demand goes up, should we think that this number -- this percentage number moves up, down, consistent with incremental bookings? And sorry, how different are the ASPs and margins today for new orders if you provide the EPC versus not?
No. The EPC are roughly around 30%. A lot of -- I mean it's very much market and project dependent. So we have -- to give you a sense, all our transmission projects, our own transact projects are EPC. Very complex projects that require significant coordination between all the elements. So those are EPC. Australia is a market for EPC. The U.S. is less. So it depends a little bit where what -- how the -- where we're working. As we see, we clearly are working on improving -- continue moving forward in our Ultrastack project. Australia is a market that we're very excited with. You might see that those -- as we bring more Australia and Ultrastack projects, those will be EPC.
But generally, if you want to model this going forward, I think the 30% is a good proxy for it. As I said, it depends a little bit on the complexity of the projects and the markets we're working on. Going forward -- and in terms of returns, I think that within the 10% to 15%. That will not change. Clearly, the more complex projects where we take more risks are closer to the upper band as we have always said and the ones that are simpler and less of a problem around the lower side of that band. But -- and generally, you will say that most of the EPC projects are more complex, but I wouldn't necessarily -- it doesn't take us out of the range of 10% to 15%.
Our next question comes from the line of Justin Clare with ROTH MKM.
So first, I wanted to ask about the demand that you're seeing for batteries that would meet the domestic content requirements. And have you signed contracts at this point for those domestic batteries? And then is it possible to give us a sense for what the uplift in pricing might be? And then do you see potential for a margin uplift given that you're going to be one of the first to supply domestically produced batteries. Could you get out of that 10% to 15% range?
Strong demand. I'd say that not only with our current customers, we're also attracting new customers that have -- are talking to John, our America's CEO or President who's really -- we see a lot of people interested and understanding and getting in. So that's the first thing, very strong demand.
In terms of margins, what we have said that kind of what you implied we believe we have a first-mover advantage here and that first-mover advantage will allow us to capture some additional margin. However, this is early in the game. We're still negotiating with our customers. We have to wait. If I tell you here a number, my customers will use it against me. So we are -- we're working with our customers to ensure that they can meet the higher returns and then we can capture some additional margin because they're doing much better than anybody else on those projects. And that's what we're working with them on. And as these things settle down and we see those projects -- those contracts coming in and our customers secure about the returns they're getting, I think we will communicate to you what potential upside we might get. But for now, I prefer not to talk about it.
And then up to date, we have not signed any domestic content contracts, even though they are in very late stage. Just to give you a point, which I think is important, the domestic content projects are 2025 revenue. They're not going to be supporting '24 revenue. Our supply -- our module manufacturing starts in the summer, and then it will pick up during the quarter, and we will start receiving domestic manufactured batteries in the last quarter of this year, but we'll need to integrate them and then move them into -- deliver to our customers. So we won't see any revenue in this year from domestic content.
Got it. Okay. And then just following up on that, just wondering how much of your Utah manufacturing capacity could be supplied with domestically produced cells given your agreement with AES. Could you fully utilize that facility to produce domestic content or cells that meet the requirements? How are you thinking about that?
That's an area that we will have -- we could fully utilize our current capacity. And as you -- I think we have communicated to you that, that capacity can be easily doable if we need to.
And our next question is going to come from the line of Andrew Percoco with Morgan Stanley.
I just want to go back to some of your commentary on the Red Sea. Sounds like you haven't seen an impact to margins from the freight rates yet. But I'm just curious, do all of your contracts kind of exposed to the Red Sea have freight adjusters? Or could there be some potential margin risk if freight rates don't come back down?
All our contracts, irrespective of the going through the Red Sea or any of the route, have freight adjustments, logistic adjustments. So all these costs are passed on so we should not see any effect on our margins coming out of the Red Sea issues.
Okay. That's super helpful. And then my second question is a little bit more thematic, but there's been a lot of attention paid to AI data center power needs, and it's a big theme right now. And I think the view is energy storage is a pretty critical component when thinking about powering that load with reliable clean electricity. So could you maybe just provide some insights into your conversations that you're having with maybe some of these customers and what the time line might look like for Fluence for this opportunity?
I mean this is something we have looked at. We worked with Google on a project. However, to be very specific today, we're so busy with the utility scale projects and that we are not -- we haven't really worked a lot on it recently. But we did have a project. We - to test it with them. It went well. And -- but it's something that we have not actually -- in the recent quarters, something that we have not worked on, so. But it's one of those opportunities where going to the point on battery cost reductions, where this lowering of prices will start making these projects very attractive. It makes it a lot more attractive than what they were when we looked at it, I think, roughly a year ago. So I think this is kind of the type of thing that when we talked about it [indiscernible] -- on demand elasticity, sorry for that, that when you come, that comes in. And it maybe comes in one-off. You put the price sets a point and you turn the lights on and all this demand comes in [indiscernible] and that's kind of my point to all of you on the tremendous, tremendous tailwind of battery prices in our technology and how business cases start getting new -- start being penciled in and become very, very attractive.
Got it. That's helpful. And I guess maybe just one more follow-up on that. When you had that pilot project or you did that demonstration with Google, was there anything on the software side or battery chemistry side that they were looking for to be changed versus your traditional utility customer.
This is Rebecca. On the battery side, no, the chemistry is the same. The physical delivery of the product was the same based on the size of what we're delivering for Google. There were some changes on the software side for the application space that, that was working in.
And our next question is going to come from the line of Julien Dumoulin-Smith with Bank of America.
Congrats again, pleasure. On the gross margin piece, I just want to come back to this a little bit. I mean, you guys obviously have this 10% to 15% and then 10% to 12% here in the near term. Starting off the year the way that you did with revenues really poised to scale through the year. Again, I get there's not an OpEx operating leverage piece here, but I mean to what extent can we expect those gross margins to scale as revenues and the size of these projects to be conceivably continue to expand into the bulk of the year here? I mean is there an argument to be trending higher within even the 10% to 12% range?
No. I think our guidance -- Julien, thanks for your comments and compliments. I think in terms of the gross margin, I think our guidance was 10% to 12%. I think we feel pretty good about that range going through rest of the year. So I think it will be north of where we had realized in the first quarter, but I think we feel pretty good where we will end up in terms of our range for the full year.
Got it. Excellent. And then, Julian, you mentioned this earlier on the domestic content, your ability to potentially, I think you said something like double AESC contributions here potentially if need be. I mean, just looking at the trade backdrop here, can you comment a little bit about like what the back -- what's your ability to pivot is depending on any future shift in trade policy landscape here? I'm really curious about your ability to shift even more so back to domestic product, especially if the ESS market demands it, what is your ability to bring that to market as you think about providing further disclosures through the year and scaling up, if you will?
Yes. I mean this is a '25 issue more than '24. As you know this line will come back -- will come on line or if these sales were coming up on line. We are working with our suppliers to ensure that we have access to their additional demand -- to the additional production capabilities and have a first right of refusal on the production as we move forward. These are multiyear contracts. So this is what I can tell you. We haven't really disclosed the volumes and stuff that we're working with but the way we envision this project is have a long-term relationship where we are able to take advantage of their increasing production as it continues moving forward. That's the way I will put it. Yes. So in case -- I guess your question is indirectly Julien, maybe I'm sorry that I'm implying is that what happens is that trade issues and then this production becomes even more value. We believe that we have put into that -- into consideration the way we, at least for a period of time, to be able to scale up if this becomes a lot more attractive than what it is today due to potential trade disruptions.
Right. And your point is the 10% to 15% as it stands today, there is fundamentally sort of upside as you disclose what that domestic content sort of ASP is right.
That's right. That's our current view. We'll talk more as we move forward and we signed these contracts and the competitive environment settles. But essentially, just going back, it is our customers need to feel comfortable with their business cases. We have, that they can capture more than what they usually capture and that we will capture part of what that upside that we're giving them. So that's kind of how all this works out and we're working with them on that process. And as soon as that settles down in a way we feel comfortable that is the way it's going to work for a period of time, we'll communicate to the financial markets, what it is.
And our next question comes from the line of Kashy Harrison with JP Morgan.
Yes. So first question is for 2024 guidance. You indicated that you have 80% already locked in and you should be able to get to 100% shortly. But I was just wondering if you could give a sense of how -- where you were at this point last year. Were you 80% booked last year as well or were you 100% booked at this point for the prior year? And then just in general, how should we conceptually think about the amount of revenues that can be booked and captured within a year?
Yes. So. Last year, if you looked at our -- what we had in the backlog last year at the end of the first quarter, compare -- against where we ended in revenue, where we were guiding. Remember, we guided up over the year, so that gives a little bit of -- we were roughly at 90%. So 90% of our revenue for '23 was in our backlog at this stage. So we're a little bit behind compared to last year from that point of view.
However, looking at the late stage of development of our contracts and how we're going -- where these contracts are we have very, very high confidence that we will be able to secure the contracts we need to meet our guidance. So that's the way it is. And that's it. We feel very, very good. We have -- there are several contracts. We have -- they're all very positive in all of them. And it should allow us to be at a point that we will meet our guidance for the year.
Yes, Kashy, this is Ahmed. And I think your second part of your question was on the profile for the rest of the year. I think as I discussed in my comments, I mean 70% of our revenue or annual revenue is in the second half, and it's more back-end loaded, but that is frankly all based on our current contracts that we have, which are -- when we execute. It's a timing when we are delivering those contracts. So it's more driven by the timing of the projects that we have in our pipeline or backlog.
Got it. Thanks for both of those responses. And my follow-up question is just around the order intakes, $1.1 billion, clearly very impressive. If we look at last year and the prior year. It seems like your order -- there was some type of order seasonality where the second quarter orders look about the same as the first quarter, then you have like a dip into 3Q and then somewhat of a recovery into 4Q. Is that directionally how we should -- without giving super explicit order guidance, I'm just wondering if that's directionally how we should think about seasonality for orders in your pipelines moving forward.
I mean if you look back every year, it's very different. So I don't think there is a strong seasonality in our order intake. So that's -- it moves around. So it's more of how things worked out and something that can be signed on December 15 or January 15 is quite -- it has nothing to do with season. It's more of whether people want to take vacations to give you a sense of this quarter. So I wouldn't give any. We cannot give you a view on seasonality of product orders.
And our next question comes from the line of Mark Strouse with JPMorgan.
I appreciate the color that you were giving earlier about no margin risk from changes in pricing because your contracts with your suppliers and your customers are locked in. Can you talk about the ability, though, of our customers to potentially cancel an order? I mean, especially if pricing goes lower enough? And if so, can you kind of give us what your average deposits that you're collecting on those contracts? And then on the other side, do you then have the ability to turn around and cancel any orders with suppliers?
Yes. I mean the -- what we bring in our backlog, are binding contracts that the customer cannot get out with making us whole on any cancellation. Today, to this day, we have never seen a cancellation of our contract in our backlog. There's a reason for it. We are very, very strict on what comes in. Even though we have contracts that we have signed, which are not in our backlog until they meet the conditions to ensure that if there is a cancellation everybody is covered. So we haven't seen a cancellation, nobody has turned down these projects very much are. So that's never been a risk. And the contract will make it difficult for the customer to get out if they -- they would have significant financial penalties to ensure they meet and make us whole. But as I said, that has never happened. And your second question, sorry, on -- if you don't mind reminding me.
Well, maybe it's not a risk now, but the second question was if your customers canceled on you, would you have the ability to cancel with your suppliers?
I mean we put purchase orders, we'll have penalties if we cancel with our suppliers. But as I said, our customers will more than compensate for that. So that's the way do things.
So the only thing I would add to that is, Mark, I think our -- when we signed the contract, our counter parties sign the contract at the price that makes sense for them at that time. So they look into -- take into account the economics of the project. So I think that is what really drives their decision to continue and then they make advance payments because we generally get anywhere from 10% to 30% advance payments. And I think those are the things and that you have to take into account. So I think -- but overall, as Julian mentioned, we have never seen any contract getting canceled for the same reasons.
Yes, that makes sense. Okay. One quick follow-up, Ahmed. On the last call, Manu gave some color about the timing of down payments to AESC. Was there any update there? I'm sorry if I missed it.
No, nothing changed. I think we basically are on track. No, nothing to report beyond what we just said.
And our next question comes from the line of Tom Curran with Seaport Research Partners. .
Good, good. So under the EU climate law, the European Commission is working on an updated version of its National Energy and Climate Plan that will establish decarbonization targets for 2040. Between an early draft that leaked into the media and then a subsequent official communication, the commission has proposed a target for the power gen mix of 90% renewables complemented by nuclear and referred to grid scale energy storage as a key element in their words for achieving that. This news following last year's adoption of accelerated permitting for stand-alone storage suggests the EU really is placing increasing emphasis on storage support when it comes to policy. What are you guys most excited about that either is just stating and seems to have good odds of becoming part of law or a new rule or incentive. What are you most excited about that you have visibility on over either this year or, let's say, by the end of fiscal '25.
I'll tell you what the things we have seen in the last quarters, clearly, demand very strong. Also, I don't know if you saw the announcement supply chains moving into Germany or into Europe, let's put it. [ Norpole ] announced in a big factory in Germany, other players announcing factories all around Europe. So our localization of supply chain coming now with a better environment for it. So good, that's a good sign. And then our pipeline moving very strongly especially Germany becoming a cost to a market that's very active. The U.K. has always been market. But then markets that have not been that active now becoming more. Italy came out with a 6-hour capacity payment. There are a few things happening around the mix look very, very exciting. I will tell you, if you ask me what I'm excited about all of the above, everything. I'm excited about the fact that we have the supply chain starting incipient, but good, the fact that we believe in the realization of supply chains, so that's great.
And now there's a lot of more players and regulators supporting -- regulators supporting it. So great, we see these changes in Italy and in some of the Nordic contracts, that's right. And then a lot of customers in Germany, in the U.K. that we have been working on contacting us to move forward. So all of the above, I would say, Europe is a fertile ground for battery storage.
That's helpful. It makes sense. And then on the balance sheet, you saw a big sequential increased inventory, which more than doubled to $564 million. Given the steep ramp in shipment and installation activity that you're preparing for is part of recognizing roughly 70% of fiscal '24 revenue over the second half I suppose that it's at least partly self-explanatory. But could you just expound on that inventory surge and then give us an idea of how working capital as a source or use of CFFO should evolve quarter-by-quarter over fiscal '24?
So sure. I think in terms of -- yes, you're right. I think our inventory balance has increased by a couple of hundred million dollars. I mean, this year, I think this quarter, and that is primarily, as we are ramping up our growth in revenue because as I discussed, I mean, our revenue next quarter, second quarter will be not -- about $550 million. So that inventory balance is largely, I think is -- will be deployed to serve our -- or recognize our revenue in Q2. In terms of our working capital needs, we discussed on our Q4 call, in 2024. There will be, about $100 million or so of additional working capital needs. But that is part of the plan, I think that we will be funding through our existing liquidity. So nothing changed from that perspective what we discussed in our Q4 call. I feel pretty good, given our liquidity is north of $600 million, so we can manage any short-term working capital needs if we have to.
And our last question is going to come from the line of Ben Kallo with Baird.
Just 2 quick ones. First, maybe this relates to notice to proceed, but could you talk about any risk in project or sales timing based on interconnection delays or shortage of electricians or labor shortages. And then my second question is just your appetite for offering your software to other battery providers, whether lithium-ion or other types of storage providers?
In terms of when you looked at our -- in terms of the risk of the delays is interconnection, Essentially, it is an acute problem in the U.S., less of a problem generally in the other markets. It's important to make that point. The second one is what we have in our backlog already has -- the queue has been resolved our customer has a clear line of sight of when they're going to connect, what they need to do and by when. So there could be delays, but the delays are usually weeks because something didn't get to a sign on time or things of that sort. So not the delays we talked about. So generally, I would say that our backlog is the risk on transmission delays in general, except for more of a fatal work stop type of delays.
Then you do see, clearly, our pipeline, our ability to convert our pipeline into backlog, it is subject to our customers in the U.S., ensuring that they can get on the queue and get those problems resolved. We -- just seeing what happened this quarter, we are not seeing a significantly -- when we look -- when we build our pipeline, we set days when we see that projects are going to be projects that we believe are going to be -- we're going to be able to sign them. And we haven't seen a significant delay of that, in any way, affect our results or our ability to meet our financial metrics. There are projects here or there, ones that are surprised you by how fast they move, ones that surprise you because they're a little late but I said when you put them in balance, they're generally not the same. In terms of digital solutions, I think I will have to make to -- we have -- our BMS, our operating systems, which are integral to our hardware solutions, and those are not -- that we're not going to sell that to anybody. We don't offer to third parties. This is ours. We use it for ourselves and it makes us different. And it's one of our competitive barriers and our competitive capacity. However, we do have our Fluence digital offering, our Mosaic offering, which is a bidding app and our Nispera offer, which is a performance management tool. Those we do sell to third-party technology. So there are competitors of us who the owners of their technology prefers to use our bidding app and prefer to use our performance management tools rather than whatever the other competitor is offering. But I will say that only on those two points. On the OS and on the operating system and the BMS, it is integral to what we do and we don't offer that to anyone else.
And I would now like to hand the conference back over to Julian for any further remarks.
Great. Well, thank you -- thank you so much, everybody, for your interest and questions. And we had a great quarter, a great quarter, great order intake, revenue, we knew from -- in line with what we expected, what this is what kind of in line where we were going. I think an important point and something that you all brought to me last year that as a main point is the double-digit gross margins. This was a main discussion during '23, whether we were going to be able to do and now we have 2 quarters bring meeting double-digit gross margins. I think this is the basis of which, as we ramp up on revenue, the basis on which we will be able to become reach profitability for this quarter again.
So we're very confident on our '24 guidance and our ability to meet our $3 billion middle of the range earnings revenue guideline and our $50 to $80 million in terms of adjusted EBITDA. So very happy for what's going on. Thank you so much, and talk to you.
This concludes today's conference call. Thank you for participating. You may now disconnect.