FTC Solar, Inc. (FTCI) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the FTC Solar First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Bill Michalek, Vice President, Investor Relations. You may begin.

Thank you, and welcome everyone to FTC Solar's First Quarter 2022 Earnings Conference Call. Prior to today's call, you've likely had an opportunity to review our earnings release, supplemental financial information and slide presentation, which were posted earlier today. If you've not yet reviewed these documents, they are available on the Investor Relations section of our website at ftcsolar.com. I 'm joined today by Sean Hunkler, FTC Solar's President and Chief Executive Officer; Phelps Morris, the Company's Chief Financial Officer; and Patrick Cook, Chief Commercial Officer. Before we begin, I remind everyone that today's discussion includes forward-looking statements based on our assumptions and beliefs in the current environment and speaks only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders, and our definition for this metric is also included in our press release. With that, I'll turn it over to Sean.

Thanks, Bill, and good morning, everyone. Before I go into our highlights, I thought I'd address the topic on everyone's mind in our industry, and that's the current market environment with AD/CVD. Since our last update in mid-March, steel and freight are both off their highs, although still elevated. But those aren't the main drivers in the industry. Module availability is the key limiting factor to solar industry growth in the U.S. in the near-term. Customers were already facing supply limitations due to WRO, which had the effect of significantly limiting imports as producers either limited or stopped shipments and idle production as they worked to provide sufficient documentation to avoid detention of the ports. As WRO was appearing to show signs of improvement, the new AD/CVD investigation launched on March 25 with its risk of significant retroactive tariffs has now compounded customers' difficulties in procuring modules. Module makers would appear even less likely to restart production and unlikely to ship modules at all without buyers agreeing to absorb any potential tariff. This issue with module availability has made the near-term environment increasingly uncertain. As customers work to get line of sight on modules, construction timelines and decisions on new projects continue to get pushed out in time. So while we have a lot of business in contracted and awarded, much of the construction has been delayed. This particularly impacts our second quarter profitability as most of the revenue that remains for Q2 is based on old contracts and higher steel content product that doesn't benefit from our significant advances with our design-to-value initiative. So with that backdrop of the environment, I'd like to note that there are several bright spots from our standpoint. We have made nice progress on our bookings with contracted and awarded now at $664 million with $112 million added in the past two months and no cancellations. The vast majority of our contracted and awarded moving forward will be at an attractive margin profile relative to historical. And I'll touch on that more in a moment. We have been able to grow our international business organically and almost half our recent bookings have been international. Our pipeline is at record levels. This includes strong growth in international pipeline, which has grown more than 20% this year alone and now stands at more than 32 gigawatts. And this excludes our pending acquisition of HX Tracker. We're excited about the addition of HX and believe it will enhance our growth and profit opportunities moving forward with incremental pipeline, complementary 1P technology and other benefits. We expect to close on that transaction in the current quarter and expect to see tangible progress on bookings as we progress through the year. Overall, there continues to be healthy activity in the U.S. with active bidding and developers working to find new sources of module supply. I think this really underscores what an incredible amount of demand is out there and how well the market can do if AD/CVD is resolved. In the near-term, we'll continue to focus on what we can control. That includes executing incredibly well on the projects we have in flight while continuing to deepen and broaden our customer relationships; accelerating our international efforts, which include smoothly integrating HX Tracker and supporting their growth as we capitalize on our expanded addressable market. Building our DG business, which has higher margins and for which we have already been awarded 12 projects since our January Business Update call; improving our operational efficiency, which includes automating processes and controlling costs to be most efficient and continuing to drive our gross margin initiatives, including our design-to-value product cost reduction programs and strategic R&D efforts. Our design-to-value initiative has already driven significant cost out of our tracker. We've seen steel reductions roughly in the 20% range with additional reductions expected through year-end. Along with improved logistics costs and more disciplined pricing, the new projects we've been winning now have significantly higher product margins. As our lower-margin legacy projects complete and the newer projects begin, it will have a meaningful impact on our margins and results. As an illustration on the left side of this table, we show what an average margin profile of our legacy projects or those generally ordered prior to Q4 looks like at revenue levels of 100 and $150 million. And in fact, last quarter, when we provided Q4 results, we mentioned that excluding a credit reserve and incremental logistics expense, we would have been in the negative 2.8% range. On the right side of the chart, it shows an illustration of average new projects and what the gross margin would look like. The vast majority of more than $600 million of our contracted and awarded takes advantage of our latest DTV advances. And if there is one silver lining in projects being delayed, it's that we can continuously update those projects as we continue to drive progress in our cost reduction. So essentially, projects can become more profitable than originally designed. Overall, we believe we're well-positioned to make significant progress toward our stated long-term gross margins in the 20-plus-percent range when project activity normalizes post AD/CVD. So in conclusion, we believe the regulatory issues will be a near-term bump in a long-term road of strong growth. We have record pipeline, our winning new business are accelerating internationally and in DG and have higher margin business poised to replace legacy projects. With the differentiated product, strong customer adoption, significant cost reduction initiatives and operational improvements, I believe FTC Solar is controlling what it can control and positioning itself incredibly well for the future. We significantly outgrew the overall market in the past few years and plan to be even more efficient and effective as we get increased visibility on the externalities or regulatory factors impacting the industry. With that, I'm pleased to turn the call over to our CFO, Phelps Morris.

Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional detail on the first quarter performance and our outlook. Beginning with the first quarter, normalizing the effects for the credit reserve, our results for the quarter were generally in line with our expectations. Adjusted EBITDA would have been a midpoint of our guidance range and non-GAAP gross margin revenue coming in at the low end. Specifically, first quarter revenue was $49.6 million, which includes a reserve associated with the potential customer credit that resulted in a $5 million reduction to our first quarter revenue and gross margin. Exclusive of this reserve, revenue was just shy at the low end of our target range. The difference relative to the midpoint of the range was slightly lower than expected production in the quarter as well as a bit of logistics revenue being pushed to the second quarter. This revenue level represents a decrease of 51% compared to the prior quarter on lower volume and a lower ASP and a decreased 25% year-over-year driven by the inclusion of the reserve and lower volume. GAAP gross loss was $9.3 million or 18.7% of revenue compared to $8.6 million or 8.4% of revenue in the prior quarter. Non-GAAP gross loss was $8.8 million or 17.8% of revenue. Excluding the negative impact of the $5 million credit reserve, the improvement in dollars quarter-over-quarter was due to a reduction in warranty expense as well as improved product cost and logistics margin. The margin percentage declined on a lower sequential revenue level, which leads to less absorption of overhead costs. The results for this quarter compares to a gross profit of $0.1 million in the prior year period, with the difference driven primarily by the reserve and reduced production volume versus the prior year and an increase in employee count and other overhead expenses to support the Company's growth. GAAP operating expense was $18.5 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expense was $11.2 million, which compares to $6.9 million in the year ago quarter. The year-over-year increase is driven primarily by the necessary growth in staffing and other costs associated with being a public company. GAAP net loss was $27.8 million or $0.28 per share compared to a loss of $23.9 million or $0.25 per share in the prior quarter and compared to a net loss of $7.4 million or $0.11 per share in the year ago quarter. Adjusted EBITDA loss, which excludes $7.8 million of stock-based compensation, certain consulting and legal fees, severance and other non-cash items was $20 million. Net of the reserve, this was just above the midpoint of our guidance range. This result compares to an adjusted EBITDA loss of $16.4 million in the prior quarter and a $6.7 million in the year-ago quarter. As Sean mentioned the HX transaction remains on track to close in the current quarter. We anticipate integration costs to be approximately $0.3 million, which is primarily composed of legal and administrative activities limited to 2022. With that, let's turn to our outlook. In light of the near-term regulatory uncertainties in the U.S. solar market associated with AD/CVD and WRO, the Company is withdrawing its prior annual guidance for the full year 2022 and instead is moving back to provide quarterly guidance and some qualitative discussion beyond that. Our revenue outlook for the second quarter of 2022 reflects this current U.S. uncertainty as our customers have delayed products until they're unable to secure modules. Our gross margin outlook is expected to step back given the lower revenue base of absorbing our overhead costs and more importantly, the delay of newer, higher-margin products that Sean spoke about previously. Unfortunately, as these projects have pushed, it has left the quarter largely with lower margin legacy projects in Q2. These factors slowed down the adjusted EBITDA, offset to a degree by certain expense reduction initiatives we're implementing as we wait resolution of AD/CVD and WRO industry impacts. Specifically, our targets for the second quarter call for revenue between 30 and $35 million, non-GAAP gross margin of negative 29% to negative 19%, non-GAAP operating expense between 10 and $11 million and finally, adjusted EBITDA loss between 19.7 and $16.7 million. While regulatory factors remain the largest wildcard for the remainder of 2022, we do see some light as we move to the back half of the year as the lower margin projects will largely roll off in Q3 and newer, higher-margin products begin delivery. In addition, we've seen great growth in our international pipeline, which will remain a focus for us given the near-term U.S. uncertainties. Finally, we continue to make good progress on our bookings with contracted and awarded now standing at $664 million with $112 million added in the past two months. As Sean mentioned, one of the silver linings of the AD/CVD delays is products being pushed will allow us to take advantage of further advances and become more profitable than may have been previously designed. We believe that the vast majority over $600 million of the $664 million in contracted and awarded will take advantage of our latest DTV initiatives. This should further aid us down the road towards our previously stated long-term gross margin target of 20-plus-percent. Based on these factors and what we see today, we believe that revenue in the second half of the year will grow versus the first half, our gross margins will improve, and our non-GAAP operating expenses will decline in the second half relative to the first. It should be noted that all outlook figures and commentary include the pending acquisition of HX. In addition, should there be favorable resolution toward the current regulatory issues impacting the U.S. module supply, including AD/CVD and WRO, in the near-term, we believe we'll be well-positioned to quickly respond to the pent-up customer demand we are seeing in the U.S. In closing, while we experienced some short-term headwinds in the U.S. industry, we remain incredibly bullish on the long-term growth and outlook for the global solar markets. With that, we'll conclude our prepared remarks, and I'll turn it over to the operator for any questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Philip Shen from ROTH Capital.

Good job on the strong bookings there. It looks like half was international. I wanted to see if you expect that trend to continue. So when you think about bookings in Q2 and Q3, can you talk about how they're evolving? Do you expect this line or level to maintain? And then do you also expect that international mix to sustain being international?

Philip, this is Sean. Yes, we are extremely excited about the progress we've made with international projects. As we mentioned, the pipeline is now half -- 32 gigawatts of international projects and that doesn't include the HX acquisition, which we think will obviously add to that, and we expect to close here by the end of the quarter. Yes, we expect this trend to continue. We've had lots of progress. We mentioned three countries with new projects that we hadn't -- countries that we hadn't participated in before, and we definitely expect those trends to continue. We see a lot of excitement about the Voyager 2P Tracker system internationally, and we definitely expect the international opportunities to continue to grow.

Shifting back to the U.S. here when you look at your Q2 guide, can you talk about how many of those projects that you're serving in Q2 are being installed without modules? And then what do you expect that mix to be in Q3 and Q4? I have heard of projects for you guys being installed with all the tracker but with no modules. Just want to get a sense for how pervasive that might be.

Yes, Phil, this is Patrick. I mean for all the projects that we have in Q2, those are legacy projects that were really in flight and ultimately being delivered in Q4 and Q1 of this year with the vast majority of those being finalized deliveries here in Q2 and those have models associated with them.

Okay. And then as it relates to working capital it looks like you guys consumed some cash with the [airline] increasing meaningfully to 240 days with our calculation from about less than 100 in Q4. I'm guessing some of that's seasonal, but I was wondering if you could talk through how you expect working capital cash consumption to trend in the coming quarters and with the $49 million on balance sheet, just talk through liquidity and what you see there?

Yes. Thanks a good question, Phil. So as you mentioned, we ended the quarter with a cash balance of $49 million, but we also have $100 million in the undrawn revolver and $130 million in receivables. And timing-wise, we just ended up with a bunch of receivables at the end of the quarter. Since then, we've made a fair amount of progress in terms of collections of the receivables. And we definitely expect Q2 to end with a higher cash balance. So we definitely expect to see some good progress there and are seeing it in the quarter as the receivables are getting paid.

And our next question comes from Maheep Mandloi from Credit Suisse.

So one, just on following up on Phil's question on international. Can you just talk about like the ASPs or gross margins in these markets? How should we think about them versus probably what we're seeing in the U.S. markets today?

So we're seeing -- as we mentioned, we're seeing great progress and interest in the Voyager 2P system internationally now with three new countries added to the mix and basically half the pipeline. Generally speaking, we've said in the past that internationally, the margins are not quite at the level but are improving over time. And so frankly speaking, the margins we're seeing with these projects internationally are good margins. And we think as we model going forward, we expect to see continued progress in gross margins across the year. And part of that is the continued growth in international projects.

And then just on the backlog and the bookings, interesting -- good to see big growth here. But in terms of like your customer kind of checks or conversations are you seeing any cancellations this month or just trying to understand like what's happening with customers? Are they just delaying it into '23 or is any of getting embroiled into force majeures, for example?

Even despite AD/CVD, one of our highlights is that the contracted and awarded has actually grown over the past two months by $112 million, and now we're up to $664 million. Now the majority of that, of course, is in 2023. So we are seeing this tendency to push projects out into the next year with the expectation that AD/CVD is resolved and then module supply is resolved. But we're not really seeing any cancellations. So it's not -- no one is canceling. They just tend to push and the buildup is significant for a strong, strong year in 2023. But again, we are seeing some shift right, but not really any cancellations.

And then just one last one for me. In terms of the gross margins here, to get back to your target or even those high teens kind of gross margins. What scale do you think we need? Is it like the prior Q3, Q4 run rate or do you expect a faster catch up with that, just given these cost reductions? Just any clarity on that would be helpful.

So let me comment a little bit, and then I'm going to ask Phelps Morris, our CFO, to comment as well. So we tried to -- in Slide 6 with the presentation to give you just a little bit of indicative information because, frankly, we feel really good about the things we can control like the steel content of the system, like the relationships we're building with the suppliers in both steel and logistics. Unfortunately, a lot of that progress is getting masked because of AD/CVD and the fact that most of the projects we're doing today and as we guided in the current quarter, our legacy projects, which don't have the benefit of the significant reduction in steel content. We talked about 20% steel content reduction. We're still making great progress. That's what we've done in the past couple of quarters, and we're still making great progress this year. And so we try to indicate how as the mix shifts with -- as AD/CVD rolls off and we get to a more normal environment and new projects roll on that you'll see a lot of opportunity, and we're definitely seeing free gross margins. And we just wanted to give you for a couple of different revenue levels, what we think are indicative numbers for the gross margins out in the second half of the year. So I don't know, Phil, if you want to add a little to that?

Yes. No, thanks, Sean. I mean I think Sean hit it on the nail [there] in terms of where the margins are. So the new projects we are signing up today are at a higher level. What we did on Slide 6 is really just showing an illustration of where we think the margins are going to be here on a go-forward basis. Clearly, if you look at the Q2 guide on a lower revenue target of $30 million to $35 million there's an overhead burden there that's going to bring that down. But as we get up to the higher levels as we exit the year with the new products that are taking advantage of the DTV initiatives as well as the improved logistics environment as well as steel content, that's where we're going to exit with the margins that we shared there on slide 6.

And our next question comes from Paul -- I'm sorry, Pavel Molchanov from Raymond James.

Last year, 75% of the modules installed in the United States came from Southeast Asia. If those modules are not making their way into the U.S. market this year because of the AD/CVD risk, where are they going? And will that diverted supply to other parts of the world accelerate installations outside the U.S.?

So good question. So many of those Southeast Asian countries have factories that specifically build for the North American market, and that's our understanding. And in checking with folks we know in the module business, many of those factories have, in fact, been idle. And so, they're sourcing projects going on in Europe and other parts of Asia out of other factories. And obviously, some of those manufacturers are building in China. And so part of resolving AD/CVD is getting to a point where those folks have confidence to start those factories back up again and fill the supply chain back up, including the logistics of getting those models from Southeast Asia to North America.

Right. So what would it take for those fabs to be reactivated and simply deliver their product elsewhere?

Yes. I think the -- that would be -- the module makers have to have the right level of motivation to operate those factories and ship to other places. The good news is -- I spent a lot of time in wafer cell and module factories. And once they make the decision to start back up, it's pretty straightforward. As long as they can get the workforce back in place, it's not -- the requalification and start-up time is not that great. And so I think those factories could either start up for other markets, if that's what the manufacturers decided or if AD/CVD goes away, I think they can pretty quickly start back up again and backfill the supply chain for North American projects. So I think it's just a matter of AD/CVD going away. And then I think the supply chain could fill up pretty fast after that. It's -- again, it's not super high-tech manufacturing to build modules and the components for modules. And so I think they could all start off pretty quickly.

Okay. Maybe just moving to steel. Shanghai Futures down about 20% from six months ago. Has that worked its way through the value chain where you're seeing lower bill of materials in your manufacturing?

So we talked a little bit about -- the factor we're seeing right now in terms of the steel market in general, the important war that's going on Ukraine right now has had some impact in the fuel supply chain, and that's causing some disruption and not necessarily the cost down [indiscernible]. But we're watching the market very, very closely. One of the new management [indiscernible] basically sourcing 100% out of China. And so we have relationship in China but that's some strong and deep relationship with some of the same suppliers but also with different suppliers. So we think that will help us really take advantage of the Chinese supply team in that ends up being near the below the cost steel is available. So we see that as a particular advantage, right. We're watching it very, very closely.

And our next question comes from Julien Dumoulin-Smith from Bank of America.

Hey Sean and team, can you guys hear me, okay?

Yes, yes. Obviously, there are some technical issues on the line, but you're coming through loud and clear, Julien.

In fact, actually, since we're talking about it, can you talk a little bit about sort of European opportunities given the obvious developments there relative to emerging markets focus that we've seen some of the latest awards. Geographically, where are you thinking some of these international awards could continue to trend, especially given the focus that you have here on growing international backlog while the U.S. takes time to recover?

We certainly see the opportunities in Europe for sure. We see opportunities in Southeast Asia, in Africa and pretty much all around the globe, where we have boots on the ground. In addition, because of the HX acquisition, we think it's going to help really open up the market in China as well. And it's also going to help us in other markets to have a really high quality 1P Tracker from HX as well. So we're really, frankly speaking, we're excited about the opportunities around the globe. The new opportunities that we talked about came from Southeast Asia, came from Africa. And as I mentioned before, our pipeline is up to 64 gigawatts and half of that now is international, 20% growth internationally so far this year. And we're really quite excited about that. Let me also have Patrick Cook, our Chief Commercial Officer comment.

Yes, from our perspective, what we're seeing, I'd say, in the last three to four months, definitely an uptick in activity in the European market. And we've had a team on the ground there for about a year developing relationships and partnerships with folks in that region, similar what we did in Southeast Asia, sub-Saharan Africa and Australia. And so we've definitely seen an uptick in the level of activity in terms of bidding in that region, and we hope to be able to take advantage of that activity in terms of project wins because we have those relationships with the EPCs and developers.

And then maybe can we talk a little bit about the -- just the EBITDA trend here and balance sheet a little bit further? Just how are you thinking about the cash burn rate? Obviously, in the quarter, you saw some working capital outflow contribute alongside EBITDA burn. Can you talk about how you see that trending in 2Q and 3Q? Obviously, you're talking about an improvement here in the third quarter timeframe here, obviously, pulling back guidance in the context of having a little bit less clarity in the near-term. So I appreciate the opacity to the situation, but how are you thinking about sort of managing the liquidity side of this? Obviously, 2Q with an EBITDA burn, how do you think about AR in 2Q? And how do you think about the levers that you have as you think about 3Q even?

So we're definitely seeing progress in AR. I mentioned before at the end of Q1, we had $130 million in receivables, and we've made really good progress in terms of collections on those receivables. And definitely, we'll see a continued improvement in cash. And so honestly speaking, I feel good about the improvement we made even so far in the current quarter, and I expect it to continue. In addition, we also have the $100 million revolver. It's completely undrawn, and so we have that as well. And again, I feel good about the progress we've made in terms of cash and we'll continue to make. Let me let our CFO, Phelps Morris comment on that as well.

Yes. So as Sean mentioned, right, we had some timing issues at the end of Q1, where a number of invoices were due. We've done a really good job on collecting those as we moved in this quarter. We do anticipate for this quarter Q2 that we will be able -- a net increase in terms of cash despite the guide in terms of the negative EBITDA. So as we talk about with the kind of the second half, just ranges in terms of margins, we do anticipate margins to increase sequentially throughout the year. And so we do have multiple levers, as Sean mentioned, untapped revolver, etcetera, that will help us manage through any liquidity issues.

So the other thing, too, I would add, Julien is we -- obviously, we have a lot of focus on OpEx and COGS overhead right now. So on spend, given the AD/CVD environment, we're managing that very, very carefully and in areas like discretionary spending and others and just putting a really, really tight look on that. However, we also recognize the need to continue to invest. We see a lot of opportunity in the long term in this business. And so while in the current AD/CVD climate, we need to carefully manage our spend, we also want to -- there are areas where we continue to invest like the DTV initiatives for reducing steel content, like continuing to grow and develop our supply chain, to automate processes and things like that. So we're striking a balance there, recognizing the current AD/CVD environment.

And our next question comes from Donovan Schafer from Northland Capital.

So I first want to ask about these international projects that's really cool to see, and it's something I think it's challenging because I think of companies who've been successful in the United States is often being very focused on reducing man hours per megawatt, and that's such a key part of what makes the product attractive in high-wage markets like the U.S. And then that doesn't always necessarily translate well into lower wage markets. It's very interesting to me because correct me if I'm wrong on this, but I think of South Africa, Kenya; I think it was Indonesia, maybe it was Malaysia -- I'm sorry, I've drawn a blank. But I think of them as being lower wage markets. So I'm curious, is there -- are certain attributes, maybe if it's something to do with the 2P aspect, maybe that plays well with agriculture or some of the things -- are there certain attributes given that these, again, correct me if I'm wrong, are lower wage markets, given that, what are some of the other attributes that make the Voyager Tracker appealing in these cases?

Donovan, hey, it's Patrick. I mean I think the biggest attribute that you see, obviously, man-hours per megawatt has been continuing to drive that down is a big focus for us, especially in the high labor cost countries. But given our ability to now get very terrain-challenged sites in terms of undulation and slow tolerance and -- we've been able to participate at very healthy margins indicative to what we showed on Page 6 in these international markets for these types of projects. But with the acquisition of HX, we're also going to be able to compete in these lower wage markets where 1P solution fits a little bit better on a more flat, less constrained site. But because of our ability to adapt to kind of the rugged terrain, it's allowed us to participate in some of these projects at very high and healthy margins.

And can you comment on the size of these projects? I mean neither -- and without -- everybody kind of likes to bring down a mammoth and have some giant projects, but there's also strength. I mean, I know your design architecture also plays well to these kind of odd shaped lots, DG, more DG-type stuff or fragmented acreage or whatnot. So on these international markets or some of these projects you've had are they kind of larger or smaller or fragmented or what's kind of the nature of them from a size standpoint?

Donovan, this is Sean. Thanks for the question. So yes, the three new countries we mentioned, those three projects total 350 megawatts. And frankly, there's one very large project and two smaller projects. The thing we experienced time and time again in these countries is that once someone looks at the Voyager system and chooses to use it, they -- that one project seems to be the tipping point where they actually experienced the great benefits of the project, whether it's on the terrain-challenged environment, irregularly shaped lots or just the sheer constructability advantage that we have. But it seems that in these markets, once they use it once, they keep coming back for it. And we're really excited in particular, that these three new projects in new countries totaling 350 megawatts. Hope that answers your question.

That does. That does. And then my last question is just -- we're really, obviously, everyone is very focused on the AD/CVD Auxin solar case. But it also -- we joke about this being the solar coaster. And one thing hits you and you get back up and then another thing comes around the corner and you get hit with something else. And so I'm trying to kind of just look ahead a few -- say we get past AD/CVD or there's some resolution there or even not -- we now -- we also have the Uyghur Forced Labor Prevention Act that at this point is just a little over a month away in terms of when that goes into effect. Of course, there's also everything with Congress about whether we could get extension of the tax credits. So I'm just -- if we could look beyond AD/CVD, what are you starting to hear how -- are people starting to plan around implementation of the Uyghur Forced Labor Prevention Act in June? And then has anyone began talking about possibility of more safe harbor purchases at the end of this year if Congress isn't able to do anything, extending tax credits? I mean that's kind of an extreme downside scenario, but then that could also -- even in that extreme downside scenario, maybe you get a bunch of cash coming in the door at the end of the year. If you can comment on any of that, that would be great.

Sure, sure. So obviously, we've been dealing with the WRO in terms of the panel supply and the WRO tied back to that one particular polysilicon plant, again with the forced labor issue. So frankly, because of that, it feels like the supply chain has had time to prepare a bit for the Forced Labor Act that you mentioned. And so we're optimistic that because of the work that the suppliers have done on WRO that, that won't necessarily be a big dip in the solar coaster, so to speak. In terms of the long run, though, Donovan, I got to tell you, I am super optimistic. When I talk to the customer base, whether it's EPCs or investors, energy companies, there's a lot of optimism and people really do believe that the North American market is going to be a 75 gigawatt a year market. And we are doing everything we need to do as a company to be prepared for that. The great work that we're doing in terms of DTV and reducing steel content, the great work we're doing to strengthen our supply chain during this period, to strengthen our business processes within the Company -- I feel really good about the long-term outlook and about the great work that the team in FTC Solar is doing to be prepared to really take advantage of that. And we'll get through this, AD/CVD. And I can say that with certainty that it will pass. And what I tell the team everyday let's focus on the things we control that are going to make us a stronger, better company so that when it does pass, we are absolutely poised, absolutely poised to be the tracker of choice for our customers.

[Operator Instructions] And our next question comes from Kashy Harrison from Piper Sandler.

So my first one, first off, thanks for the sensitivity surrounding margins on Slide 6. I was wondering if you'd maybe just help us widening out that sensitivity a bit. If you brought that the bottom end of that range to $50 million and you took a top end of that range to $200 million can you maybe help us think through how those gross margins would evolve under those cases under 50 and $200 million?

So we wanted to -- given the whole AD/CVD situation, we thought it was really important to convey how the delay in projects, the shift in projects is affecting us. It's basically the law of averages and so the projects that we're dealing with are legacy projects that frankly won't roll off generally until about Q3 and those projects come with the higher steel content and lower margins. And so we wanted to kind of look forward. We wanted to show how we ended up in fourth quarter. Obviously, in the chart it's kind of a bit of a proof point and then really give you some indication at different revenue levels. So we didn't, frankly, caution -- we didn't do a model with sensitivity analysis down to zero and up to 300. We just tried to give a couple of numbers to give you some indicative range of where we thought we would end up. And we're definitely seeing new projects in those -- in that range in terms of gross margins. And we feel really good that as AD/CVD rolls off and the majority of projects shifts from legacy projects to the new projects that we can definitely -- will definitely see improved strength in the gross margin. We definitely still see a trajectory to get to the original planned gross margins over 20%. And so that's kind of the principle behind the slide. And so it wasn't intended to be a precise every different revenue level. But just again, give you some indication because we feel really good about the work that the team has done, and we feel really good about the long-term outlook on gross margin.

Yes, Kashy, this is Phelps. The other thing I'd mention on there just directionally, as revenue go up, obviously, you intend to get operating leverage on your overhead and vice versa, right? So the lower revenue levels, the overhead burden will be much -- will be higher on a relative basis. So when you think of modeling that out, I'd just put that in -- consider that as you model that out.

The other part I'd put, Kashy, is I mean we took the subset, Phelps mentioned in his remarks that north of $600 million of the contracts and awarded to fit the profile that we showed on Slide 6. And so that's how we ultimately model that. That's indicative of what we're seeing on projects that either have a PO or that we've been ultimately awarded. So that's why we feel very confident in the fact that these legacy projects are rolling off because we have purchase orders at these types of margins for projects on a go-forward basis.

My next question actually dovetails into your last comment, Patrick. I was wondering if you could just maybe help us with the split in your executed and awarded. Specifically, I'm trying to understand what proportion falls into the executed or signed PO bucket and what proportion falls into the awarded bucket?

Yes, Kashy, we haven't publicly disclosed kind of the ultimate breakout of what's contracted versus what's awarded.

Okay. And then maybe just a final one for me. It looked like there was a big jump in service revenues in 1Q. Can you maybe walk us through what's driving -- what drove that big uptick? Was there like a one-time item and you would expect the services to come -- to trend down from there or is that indicative of the break bulk shipping approach that you guys had talked about in prior quarters?

Yes, Kashy, great question. Really, that's more tied to logistics revenue associated with kind of that particular quarter. So we recognized more logistics revenue in that particular quarter. It really kind of comes down to the timing. As you recall, the materials revenue is ultimately caught in the total revenue line, while logistics revenue along with our software revenue are kind of broken out in the services piece. So that will fluctuate with -- as logistics revenue ultimately gets recognized.

And I'm showing no further questions. I would now like to turn the call back over to management for closing remarks.

Hey, well, thanks, everyone, for joining us today. While there's uncertainty in the U.S. market right now, we continue to feel good about many factors under our control. This includes driving our cost reduction roadmap, advancing our strong R&D pipeline, accelerating our international focus and reducing expenses in an uncertain environment. We also remain very well-positioned with a well-regarded product set, strong customer adoption and record pipeline levels. We look forward to continuing to update you on our progress. Thanks very much for joining.

This concludes today's conference call. Thank you for participating. You may now disconnect.