Eguana Technologies Inc
XTSX:EGT
Earnings Call Analysis
Q3-2023 Analysis
Eguana Technologies Inc
Eguana faced challenging market conditions in Q3 2023 due to a slowdown in consumer spending which led to lower sales than expected, primarily in residential solar and energy storage, especially through North American distribution channels. Despite this downturn, which was reflected in a lackluster sales performance and liquidity constraints exacerbated by slower collections from a primary U.S. customer, the company has slightly improved its financial position through strategic initiatives focused on revenue diversification. The Australian and European markets have shown signs of recovery, which could bode well for Eguana's future performance.
Eguana's strategic direction shines in the virtual power plant (VPP) space, with notable progress including partnerships with leading DERMS software platforms like Virtual Peaker and AutoGrid to enhance VPP channel execution. The company's entrance into 7 VPPs and engagement with over 20 utility companies underscores their commitment to capitalize on this growing segment. The market's near-term outlook in the VPP space is optimistic, driven by consumer rebates, Investment Tax Credits (ITCs), and the reduction in energy bills, all contributing to an ROI of less than 5 years in most regions. Eguana's aim to become a global leader in grid-connected energy storage positions it well in a market moving towards grid modernization, requiring key changes such as decarbonization, decentralization, and digitization.
The company made important strides in product development, achieving ISO/IEC 17025 accreditation for grid compliance and safety tests, which allows for better control over certification schedules and a faster speed to market. They've also certified their North American Evolve LFP product to the latest grid standards and developed a new variant designed for Puerto Rico. Their integrations to support VPP programs and the development of new features are set to improve their offerings and market positioning.
Eguana's Q3 2023 revenue held steady at $2.6 million, consistent with the previous year, reflecting resilience despite market challenges. However, gross margin was negatively impacted by inventory impairment, and operating expenses grew due to investments in sales, marketing, and supporting company growth. Product development costs saw a decrease, reflecting a focus on near-term opportunities. The operating loss widened compared to the previous year, primarily due to these higher expenses.
Although cautious about the near-term outlook, Eguana's leadership anticipates improvement in market conditions over the next two quarters, with market recovery expected to align with renewable sector seasonality patterns. Justin Holland, CEO, highlighted the importance of integrating into VPP applications to drive market penetration and adoption of energy storage products, despite distribution and consumer spending constraints. The company's ongoing installer training and VPP partnerships with utilities signify an optimistic future focus. With the initial success of their micro inverter launch in December 2022, the company is poised to benefit from a market showing signs of demand for residential solar solutions and aligned interest rate stabilization.
You don't have any saved screeners yet
Thank you for standing by. This is the conference operator. Welcome to the Eguana Technologies Inc's Third Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. [Operator Instructions].I would now like to turn the conference over to Justin Holland, CEO of Eguana Technologies. Please go ahead.
Thank you, and good morning for joining the Eguana third quarter 2023 earnings call. On the call today, we also have Brent Harris, COO; Hansine Ullberg, CFO; and Maddison Duncan, our Corporate Controller.Before we begin, please note that certain remarks may constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings on SEDAR+ for a more inclusive discussion of risks and more details relating to the uncertainty of forward-looking statements. Please also note that these statements are being made as of today, and we disclaim any obligation to update or revise them. All financial data is represented in Canadian dollars and on an unaudited consolidated basis, unless otherwise noted. We will talk about the general market conditions and provide some additional details on the strategic direction and positioning of the business.The financial results for the third quarter ended September 30, 2023, do reflect the continued slowdown in consumer spending, which has driven lower-than-expected sales through our residential and distribution channels. The quick economic downturn in the solar industry globally, which started in early 2023, was not widely anticipated by the market or in the company, and we have been since managing through very cautiously. Overall macroeconomic factors, continued constrained demand in the industry for almost all renewables and consumer spending due to inflation, high interest rates and changing policy framework and incentives. Until the industry recovers, consumer spending rebounds and/or solar energy incentives increase, management believes residential solar and energy storage sales, particularly through North American distribution channels will remain under market forecast. For Eguana, this situation has exacerbated slower-than-expected collection of prior accounts receivable from our primary U.S. customer, which has constrained liquidity and our financial position. On the positive, Australian and European markets do appear to be recovering at a faster rate than North America. Additionally, virtual power plant rollouts where utilities have financial options for consumers, including upfront rebate, bill credit and financing appear to be less impacted by the macroeconomic factors mentioned.General market sentiment remains cautious with some reports of sluggish growth in the U.S. into mid-2024. The overall market stall in demand had a follow-on effect for the company and its Duracell Power Center partner as each party was holding receivables and/or inventories, which has also impacted near-term liquidity flexibility. The last few quarters have been challenging. We've identified key lessons and modified our execution with respect to adding additional revenue channels and in particularly channels that reduce upfront consumer costs to limit the impact of the macroeconomic constraints as well as continuing to find additional operational efficiencies. We believe these changes and having the executed partnerships now in place in each key market, the company has a direct path to its long-term success.Strategically, the company continues to make very good progress in the virtual power plant space with acceptance into 7 VPPs and engagement with over 20 individual utilities. Installer training enrollment numbers continue to exceed our expectation with over 1,200 in the program and with our product development and lab certification initiatives. To expedite VPP channel execution, the company has partnered with leading DERMS software platform providers, Virtual Peaker and recently with AutoGrid. In addition to these announced DERMS partnership, the company has ongoing software integration projects with 4 additional DERMS providers. These software platforms have been fully integrated with the Eguana Cloud, which also creates our recurring revenue opportunities.Management believes the near-term outlook in the virtual power plant space is positive, and we are seeing engagement with major utility companies within the energy storage sector at a very fast rate. In addition, consumer rebates from the utilities as part of the VPP programs, coupled with the ITCs and energy bill reduction will have a positive impact on consumer purchasing bringing the return on investment time in most regions to below 5 years. Eguana's mission is to become a global leader in residential and small commercial grid-connected energy storage solutions, which are expected to be an essential contributor to electrification and migration to a distributed power grid, sometimes referred to as distributed energy resources, or DERs, or distributed energy management, DEM. In short, to be a leader in power grid modernization globally. Modernization will require decarbonization, decentralization and digitization. All of these factors come into play with the concept of virtual power plant. A VPP is a cloud-based distributed power plant that aggregates the capacities of various DERs for the purpose of sharing power generation, trading or selling power, and the demand-side optimization for load reduction and demand management. Assets in a VPP can include solar, energy storage, EV chargers and demand responsive devices such as water heaters, thermostats and other smart appliances.Eguana participated in its first VPP in 2014, 2015 in Fontana, California, and our platform was designed for control and accuracy, specifically for these VPP environments. We have now signed partnerships with major utility companies such as Simply Energy, Portland General Electric, and the Massachusetts Municipal Wholesale Electric Company and are engaged with more than a dozen additional utilities across the United States and Canada. The company's advanced power electronics platform has key advancements in accuracy, measurement and efficiency that are all attractive to DERMS and utility partners alike.In Australia, the strategic step to deliver recurring or to deliver revenue throughout the value chain from roof to grid has begun delivering positive growth and larger opportunities. Australia has a broad market opportunity for ESS and GPPs as approximately 1 in 3 homes already has rooftop solar. The company headquarters in South Australia, the business is expanding into other regions to support national business objectives, including homebuilder and more VPP strategy. Key relationships in both channels expressed a strong interest in Eguana providing installation and support services alongside our solar and storage product lines. The FCAS VPP partnership with Simply Energy, a major electricity retailer in Australia, will also kick off in January of 2024. Brent will touch on some of the specifics of this program shortly.In Europe, due to previous supply chain availability challenges with a former battery partner, the development team recently recertified our Enduro product line with a new battery module. During the quarter, we announced a new partnership with Dusseldorf-based FinanzDesk, an initial 20-unit bulk order shipped post quarter end, and we anticipate seeing accelerating growth through 2024. FinanzDesk has a simplified sales process selling to [ pre-validated ] customers who are already with rooftop solar lease agreements as well as new customers looking for both rooftop solar and energy storage. Based on this new partnership and additional European market opportunities identified, the development team has begun work on a 3.7 kilowatt cascading tower for Europe, which will also be sent into the Australian market.The company continues to focus on dealer and solar partner training through Eguana University, our online training program launched last December. Specific modules have been designed to reduce customer acquisition costs, train product sales and installation best practices, reduce installation error risks and provide a best-in-class consumer experience. Enrollment has surpassed our stretch targets for the year with more than 1,200, representing more than 200 individual installation companies.Product gross margins were as expected and in line with lower sales volumes. The company continues to experience higher-than-normal warranty costs that are related to battery modules and module required firmware updates. However, we do anticipate recovery of these costs from the battery partner in the fourth quarter. Currently, each unit sold also has a higher freight cost allocation as materials being consumed are from pandemic priced freight. This is alongside high-priced battery modules from the same time period. Certain materials and subassembly procurement activities have already been transitioned outside of China, which will have a positive impact on margins by reducing or removing import tariff costs on these components. Additional cost reduction initiatives have begun and are anticipated to deliver a 12% to 15% margin gain through 2024.In response to the slower-than-expected market conditions, the company made the difficult decision to proceed with staff rationalization across all geographies and reduced our headcount by approximately 22% subsequent to quarter end. With the restructuring of functional areas and the focus put on near-term priorities, the management team does not see additional risk to near or midterm operational objectives.At this point, I'll turn it over to Brent to walk through some of the development and operations.
Thanks, Justin. Thanks, everyone, for joining today. I'll start with on the product development side. Q3 was filled with important key new launches and new initiatives. Some of the highlights are: we completed the necessary work and steps for self-certification development and compliance testing and have been awarded ISO/IEC Standard 17025 accreditation, which requires a rigorous assessment process to meet very stringent guidelines and minimum standards. This achievement underlines Eguana's ability to conduct grid compliance and safety tests independently. By having the ability to conduct self-testing processes, Eguana gains a significant advantage to not only certify new products for AC grid interconnection compliance, but also introduce alternate components quickly while saving time and cost through the certification process. Self-certification accreditation enables the company to be in control of our certification schedules and timing, removing risk and improving speed to market.We also certified North American Evolve LFP product for the latest North American grid standard, UL 1741 SB. We, at the same time, developed and certified variant Eguana Evolve LFP 5-kilowatt whole home ESS, specifically designed for Puerto Rico, however, certified across North America to the same standard. We completed VPP integrations with Virtual Peaker and AutoGrid. These are the DERMS suppliers Justin was talking about to support VPP programs for PGE, MMWEC's member utilities and the Canadian utility. Developed and demonstrated a new ESS cascading feature, which will simplify product certification, sales and installation. Incorporated controls and verification for the most lucrative ancillary service in Australia called very fast FCAS. Kicked off a feature loaded new hub that matches tower aesthetics and supports cascading installations for the North American market. We kicked off our all-in-one ESS in tower format for the EU and kicked off a higher power North American tower format ESS solution with cascading controls in new enclosure aesthetics. We also enhanced our back-end cloud infrastructure, so we have broader remote software update capabilities. On top of those key features, we also updated the AC interface for our Australian Evolve LFP products, conducted a market analysis of a battery module format and cost projections so we can plan our next product development cycle, and completed bulk battery module updates in Hawaii and improved cloud diagnostics to support enhanced fleet management.In business development, we continued integration with additional DERMS providers to continue pursuing VPP opportunities spanning U.S. and Canadian markets. We continue to remain focused on the company's strategic initiatives and our efforts have resulted in the following achievements. In Australia, we signed a multiyear VPP referral and promotion partnership, Justin mentioned, to deploy Eguana's ESS to Australian electricity customers. The initial rollout includes South Australia, Victoria, Queensland and New South Wales and will engage the utility partners' retail network of approximately 750,000 customers with direct marketing campaigns, outlining upfront rebates and monthly on bill credits. In addition, the partner has incentivized referrals for new customers.In the U.S.A., we announced a partnership along with Virtual Peaker, to join the Massachusetts Municipal Wholesale Electric Company, MMWEC's NextZero Connected Homes program. This partnership is the newest addition to our rapidly growing roster of U.S. utility operator partners. Connected Homes program offers customers a participating member utilities, technology to better utilize smart appliances and devices such as Eguana's home energy storage battery systems to better manage their electric load. This generates cost savings and reduces the carbon footprint of both the utility and its customers. Homeowners benefit from upfront rebates on Eguana systems and monthly rewards for participating in the program. Eguana's fleet control can be tailored for participation in a variety of grid solutions to support depending on the utility grid requirements.Eguana's energy management system works in conjunction with its fleet control to provide one of the industry's best fully integrated, distributed storage solutions for residential environments. We also announced a new partnership with AutoGrid, an industry leader in harnessing distributed energy resources for VPPs, to open additional VPP opportunities for power providers across the globe. The companies have integrated Eguana's residential energy storage systems into the AutoGrid Flex platform to support utility companies IN promoting rapid residential storage adoption and consumer participation in the energy transition. AutoGrid Flex supports Eguana's technology by enabling automated demand response during periods of peak demand, directing the energy storage services to offset home energy loads, discharge energy back to the grid and charge up when energy cost is low or from renewable sources. As a result, VPP operators can overcome shortfalls in supply, eliminate outages, avoid additional transmission infrastructure and bypass the need for heavily polluting peaker power plants.Further, Eguana joined the AutoGrid's growing network of device makers, aggregated and orchestrated into multi-asset VPP. In combination of the 2 company solutions, along with the utility rebate programs help consumers reduce the initial cost of energy storage, cut their ongoing energy costs and support the integration of clean renewable energy into the grid.In Europe, we signed a multiyear exclusive partnership with FinanzDesk to bring the Eguana Enudro and future next-generation Eguana products to its residential rooftop solar customer base of over 8,000. Enduro is a complete all-in-one custom-engineered energy storage platform, which was developed specifically for European markets. The Enduro provides the simplest and fastest installation process, dashboard control of all storage and consumption data and customizable battery management alerts to give customers the flexibility to make better decisions on their energy consumption, optimize their power bill savings and deliver energy security. We launched the Eguana Essential Whole Home Energy Storage System, specifically designed for North American midsize homes as an economical option for homes with existing 100 amp service panels. Initial deliveries to Puerto Rico started in September 2023, spurred by U.S. Department of Energy's Puerto Rico Energy Resilience Funding announced in July 2023 that anticipate 30,000 to 40,000 residential installations. The Essential Whole Home ESS is simplified installation and remote commissioning processes, delivering installer efficiency and improved homeowner experience in terms of both cost and installation times.Unfortunately, the quarter did see a downward trend in financial results tied to the overall industry slowdown. We expect to see margin improvement from some supply chain optimization decisions such as moving certain materials out of tariff countries, but the lower revenue volumes have delayed the pull through to our financial results. The positive impacts will likely not be seen until mid-2024. The overall negative macroeconomic factors that Justin outlined have also impacted our Q3 results, which Hansine will lead us through now.
Good morning, everyone. Those guys are tough back to follow. There's lots on the go, lots of development, lots of EPP activity. And so the financial piece might be a bit boring. We do feel that, that activity will start to show in revenue and better financial results in 2024. As a reminder, when I'm comparing the quarter numbers, we did change our year-end in 2022. So for clarity, I'm comparing Q3 2023 with last year's Q4 2022, but both quarters are for the 3 and the 9 months ended September 30.With respect to our income statement, Q3 2023 revenue of $2.6 million was consistent with the comparative quarter in 2022 with revenue also of $2.6 million, and it was slightly stronger than the second quarter of 2023. As Justin mentioned, and Brent highlighted as well, the macro industry factors continue to constrain demand in the industry for almost all renewables and consumer spending due to inflation, high interest rates and policy frameworks has slowed and that has impacted the sell-through through the renewable distribution networks. Generally, the rate of change related to the consumer interest rate and the speed that it happened quelled consumer spending. In the industry, peer companies have also been significantly impacted by this and has resulted in elevated inventory positions within the distribution network. But management remains cautious about the near-term outlook, and we anticipate seeing sell-through improvements in mid-2024 from the success of our partner training programs in line with cyclical demand from year-end moving into the new year and also as those macro factors ease.Q3 2023 gross margin was negative of $222,000 due to an inventory impairment of $326,000 for components that are no longer used in production. This is slightly better margin than the prior quarter, which was also slightly negative. The inventory impairment line, if you look at our financial statements, is now shown separately so that you can see sort of regular margin versus this adjustment. Q3 2023 operating expenses of $3.3 million increased from the comparative quarter of September 2022. This increase is largely due to higher expenses supporting sales and marketing build-out and higher costs for G&A related to increased headcount plus professional fees related to facilitating company growth. Product development costs decreased 15% from the comparative quarter 2022, mainly due to less product spending related to certification and other development costs. Brent highlighted a number of activities on the go. And even with those activities, we've been very mindful to stay focused on near-term opportunities, and hence, product development costs have declined.Q3 2023 operating loss of $3.5 million was an increase from the $2.7 million in the comparative 2022 quarter. This increase is mainly due, again, to increased G&A expenses, increased selling and business development expenses and some increased operation costs, all offset by the decline in product development expenses. In September, ITOCHU Corporation, our major strategic investor, converted for the second time, their interest owing under the company's unsecured convertible debenture. So in lieu of making a cash interest payment, we settled that with common shares. Those common shares when ITOCHU does conversions are subject to the 4-month hold period in accordance with applicable Canadian securities laws.Other income of $840,000 was recorded in Q3 in the quarter related to partial insurance proceeds received for the theft of some of our truckloads as disclosed in our Q2. So we had to write off the inventory components due to the theft and have pursued insurance for them and have received a partial settlement. We continue to work through this with the insurer.Moving to the balance sheet. Working capital at September 30, 2023, was $17.8 million. We always compare this to the year-end December 31, 2022. It was a decrease from the $33 million at that time. And this just relates to ongoing cash used in operations. At September 30, 2023, our cash of $2.8 million was aligned also with our receivables of $17.4 million. In the receivables, the company has our one large partner customer that represents 93% of this total AR, and they continue to be a slow payer, again, due to the industry impacts overall. The company has made judgments and estimates under IFRS accounting and has recorded an expected credit loss in our quarterly financial statements of $1.2 million. This is a noncash estimate bringing our total year-to-date expected credit loss to $1.8 million on that receivable. Collection with this customer is slow, but we do continue to receive amounts coming in, and we are working very closely with them on a weekly basis to see what their business is doing from a sell-through perspective, and they continue to pay down the AR.Justin is going to provide some closing details here on our near-term outlook as we look forward.
Thanks, Hansine, and I think you followed Brent and I perfectly. On November 23, 2023, the company announced a private placement targeted at $2 million. This financing is aimed to ease current cash flow constraints and will also be used to fund operations and working capital. We do have initial subscriptions in hand and expect to close Tranche 1 early next week. Going into the end of 2023 and into 2024, we will also continue collecting historical receivables from a primary U.S. partner. As Hansine mentioned, we remain cautious about near-term market outlook, particularly in U.S. residential channels. However, we do anticipate market improvements over the next 2 quarters as we are already seeing EPC growth in U.S. rooftop solar installations. We also expect market recovery to be in line with typical seasonality patterns within the renewable sector. The seasonality curve is back-end loaded, which is driven by installation timing and the investment tax credits.We expect that the market for sales in the fourth quarter of 2023 will continue to be constrained and the macroeconomic factors mentioned will still impact distribution channels. making it difficult to predict the rate of future growth. We also believe consumer buying patterns will begin to normalize with stable interest rates even at the current elevated level. However, given the overall uncertainty, we will continue taking the cautious approach in the near term. Our objective to strategically integrate into virtual power plant applications will also help accelerate adoption and market penetration of our energy storage product solutions. It is important to note that many of the energy storage products, even in VPP environments, travel through distribution channels to installers through to the homeowner. Therefore, we feel it's critical to continue accelerating our training outreach with the installer base, which significantly reduces customer acquisition costs and increases boots on the ground with trained and certified personnel selling directly to the consumer,VPPs will drive energy storage momentum shifting the renewables focus from rooftop solar to energy storage. Traditionally, revenue streams or the large revenue streams we see with peer companies come almost holistically from rooftop solar. We believe the VPP momentum will shift that as utilities focus on stored energy rather than intermittent generation. When your utilities suggest you have an energy storage solution, your electricity pricing continues to increase with virtually no end in sight, we believe consumers will begin adding these solutions like the Eguana platform to bring down their energy cost and gain additional energy security. This will be demonstrated in the storage to solar attachment rates or how often the storage system is installed alongside residential solar systems. The addition of the micro inverter line also fits perfectly with the direction of the VPP strategy and our 3-pillar revenue stack from the roof, the wall, and the cloud. The micro inverter product line is inclusive of single, dual and quad port configurations, giving the installer who is critical in the sales process, the most flexibility, the fastest installation times, enhanced reliability, all while delivering cheaper power costs to their homeowner.Fast installation times is a critical theme on the energy storage side as well. We believe this to be the single most important feature to an installer. Additional Eguana features, including remote battery recovery, remote commissioning and diagnostics have all been designed into Eguana products to simplify the installation and commissioning processes for the installer, faster installation, more installs per day, more revenue, more loyalty. On the positive side, residential solar markets do appear to be opening up, adding through increasing sales to installers and distributors and sell-through making its way back to the manufacturers. As noted, we believe the rate of change with respect to interest rates, coupled with difficult consumer access to loans, slowed distribution sell-through resulted in significant inventories within distribution channels and particularly in the U.S. marketplace. Interest rate stabilization should change consumer patterns quickly and at a time when consumers are receiving direct marketing from utilities on the benefits of energy storage and how to bring their cost down with the addition of integrated renewable solutions.Better news is utilities will target through virtual power plant and energy storage fleet access, energy storage systems that have a full suite VPP capability, which we are seeing in the early VPP growth. Energy consumption is expected to double by 2050, which highlights the electricity generation problem. However, second and more challenging is the transmission and distribution issues. This is where residential energy storage goes under the spotlight by having storage at or near the point of energy consumption. We see this as the early tipping point for energy storage in the renewables marketplace. Up to this point, the primary focus, as mentioned, has been residential and commercial solar. We believe the utility shift will zero in on residential storage as it delivers key advantages as a power grid asset delivering results to multiple stakeholders at the same time.It's also important to note that utilities have been working with energy storage solutions for over 10 years. From an Eguana perspective, we implemented the first North American [ net zero ] community in Fontana, California in 2014, and Hawaiian Electric utilized our storage platform on the island of Molokai for grid stability and improved efficiency during that same time period. And of course, with Simply Energy in Australia in 2019, testing a wide range of VPP features in the multisystem aggregated fleet format. Even with these early engagements with utilities, attachment rates for residential storage to solar so far have remained very low, particularly in North America when compared to markets in Europe. This is what we see changing now and what we believe will drive mass energy storage adoption.Our near-term objectives, as Brent outlined, are coordinated to focus on installers through our training programs with product development geared to faster installation times, both on the roof and on the wall. Installer base remains key to early success and will be built through the distribution channels. Longer term, we believe utilities will drive consumers towards higher-power products with larger capacities as they can service and manage the grid more effectively as additional power comes online. The development team has been actively working on future products to achieve these exact results in the form of cascading power blocks and tower formats. Additionally, with the early completion of the Eguana Cloud, we can now tie the consumer directly to the utility through hardware and software in a fully integrated Eguana ecosystem. Within this are more key advantages for the company as we transition to a distributed grid. By having internally developed and patented power electronics platform, we fully integrate internally developed software at multiple levels of the ecosystem from the cloud to the fleet and from the fleet to each individual hardware system. We operate in an environment that has constant regulatory change, control both over hardware and software platform simplifies the development road maps, provides faster development times and allows Eguana to keep products on the cutting edge from cloud to hardware device.To sum up, focus will continue on the installer base and their training, which remains well ahead of schedule. New hubs in the 100 and 200 amp configurations provide installers with more options and simplified installation processes. Speed of installation is a critical factor for installers to increase their revenue, which builds on installer loyalty. Our power electronics solutions are now inclusive of micro inverters on the roof, and energy storage on the wall, which are then managed into fleet through Eguana Cloud with each delivering revenue opportunity.Utilities are engaging with the industry very rapidly and are rolling out virtual power plants in almost all jurisdictions. Currently, we are active with over 20 utilities and half a dozen DERMS providers. VPPs will drive energy storage mass adoption by bringing down the required initial investment required from the consumer. Installed systems will be accessed by utilities in the form of aggregated fleets, which will be managed through the Eguana Cloud platform. Recurring revenue streams are then generated by providing access and services through the cloud as it opens up fleet to the utility. Our first full quarter post micro inverter launch was December 2022, where we saw significant revenue growth. Starting in Q1 2023, there was a broad-based market slowdown related to macroeconomic factors impacting sell-through within distribution channels. The distribution channels had since been overstocked as a result of product availability concerns resulting out of the COVID-19 pandemic. This market dynamic has continued through 2023. We believe the situation will clear by mid-2024 and expect recovery within the industry at a time when Eguana is positioned with a significant increase in trained and certified partners, simplified installation processes and utility designed hardware platforms, and initial traction for recurring revenue streams within multiple utilities.With that, we will open it up for some questions.
Thank you. [Operator Instructions] While we wait for callers to join the queue, I'll pass the floor back over to Justin Holland to take us through some questions from the webcast.
Thank you. We do have a number of questions, so we'll try to get to as many as we can.First one, what happened to the automaker?The automaker, which we worked with for about 9 months and solidified the Virtual Peaker relationship, which as we've mentioned, have opened up a series of utility doors, they've not come into the market. They are focused on the EV strategy. If they do come back into the market, certainly, the channels and discussion channels remain open, and we believe that we would be in direct discussion with them. But for the time being, they have not come into the storage market and particularly the residential storage market.When will we see micro inverter growth return?It's a good question. The inventory distribution channels are full. They were full going into the sell-through slowdown. However, as we were breaking into those distribution channels at that time, it hit Eguana first, but we also see recovery first, and we are now seeing rooftop installations ranging from 6 to 10 installations per day with key markets in Texas and Florida. So we are seeing growth in rooftop installations. We do expect to see increased attachment rates of storage. That's where our key patents sit along with increased storage opportunities in 2024 with all the virtual power plant partnerships that we now have in place.How do VPP rebates work?That's another great question. And unfortunately, it's a wide-ranging question. It's utility to utility, if you are in an area where there's one utility, you typically see much higher upfront rebate programs, for instance, you can do it by a kilowatt hour. We see $850 per kilowatt hour offered. We've seen standard upfront rebates of $2,000 with additional bill credits. We're working with multiple utilities who are looking at 10-year 0 interest loans where they will actually be the purchaser and roll out the energy storage devices to the rate base over 10 years. So there's a wide range of how this works. Of course, in Australia, we have the direct marketing program, which comes with bill credit as well as upfront rebates. So it's wide ranging utility to utility on how they will move to get the hardware on the grid as fast as possible.What advantages do Eguana have for VPPs?Most of the advantages are in the form of accuracy and control through reporting. It's critical to have this accuracy as that's how the billing cycles are worked through the VPP. So the tighter control, the more accurate the billing cycle for the consumer and the manufacturer. If you think about our recurring revenue streams, they're going to be based on access to each individual system, but in an aggregated format. So you can imagine the reporting accuracy required to utilize that many systems. But those are 2 of the keys. Efficiency is another one. Of course, then you look at the reliability of the systems in general, which we believe with all our remote diagnostic and recovery capabilities, we have one of the highest reliability factors in the marketplace.Another one on VPPs. That's good. That's the theme that we're looking for. What is the VPP sales process?A lot of the sales use the same installer base that will buy directly from distribution channels. So an installer training is absolutely critical. What we're seeing now with the transition of VPPs designed with bring your own device formats to direct purchasing is that the utility will bring key installers to the table, which are then trained. So you'll have a mix of utilities buying direct, utilities buying through 1 or 2 key installers or key installers making sales through the distribution channels and then bringing that customer into the local utility VPP.How will we drive gross margin improvements?Gross margin improvements. One of the keys we see is a downward trend in battery module pricing into 2024. That will have a significant impact on gross margins. We also see additional supply chain efficiencies through assembly and test processes, which should take our 2024 gross margin targets just above 20% by 2024 Q4.What happened to the towers?Again, the towers, we held the dual power certification back based on the changing market conditions. It was a very expensive certification process that we did not see an enormous opportunity in the channel at that time. So we held that. The team has since developed the algorithms to cascade the products, which simplifies all certification processes for the company. So we will move towards certification of a single tower and then install that power in a cascaded process, which would give you a single, a dual or a 3-unit installation.Mentioned liquidity constraints. How do we supply VPPs in that situation? And when will the sales start?The good news is, from a working capital perspective, we do have inventories of key components as well as finished goods. So we are in a position to ship immediately into Australia, Europe and North American markets. Sales have started with the Canadian VPP as well as the Australian VPP and FinanzDesk installations are also targeted to start in week 1 and week 2 of December. So we are starting to see revenues being driven from the objectives and in particularly in the European and the Australian markets, which we see on a faster recovery than the U.S. resi market.If macro improvements are expected to hit mid-2024, how do we get there?Again, we are sitting with inventory finished goods and subassembly inventories on key components. We do see sales coming in from some of the VPP programs already. FinanzDesk has purchased their first bulk order of 20, we have an additional 40 packaged and ready to go for them. So we have planned during the market slowdown with inventory and key subassemblies in inventory, which is part of the working capital number that we went over earlier today.Another one on management salaries. Have we considered pleasing management salaries?The answer is yes, and we did quite some time ago, but we will continue to look for operational efficiencies as the market continues to recover.I think we've hit most of the questions. So with that, I will thank everybody for joining today, and we look forward to the next update after the fourth quarter. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.