Thank you for standing by and welcome to the FTC Solar Fourth Quarter 2023 Earnings Conference Call. All participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. I'll now turn the conference to you host, Mr. Bill Michalek, Vice President, Investor Relations. Please go ahead.

Thank you and welcome everyone to FTC Solar's fourth quarter 2023 earnings conference call. Before today's call, you may have reviewed our earnings release and supplemental financial information, which were posted earlier today. If you've not reviewed these documents, they're available on the Investor Relations section of our website at ftcsolar.com. I'm joined today by Ahmad Chatila, a Member of the Board of Directors and a company founder, Cathy Behnen, the company's Chief Financial Officer, and Patrick Cook, the company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speaks only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that earnings release issued this afternoon to include the full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our backlog, and our definition of this metric is included in our press release. With that, I'll turn the call over to Ahmad.

Thanks, Bill, and good afternoon, everyone. I'm joining the call today as the representative of the Board as the company progresses through this interim period prior to announcing our next CEO. As discussed on last call, I've been helping facilitate communication between management and the board and monitoring key growth activities and initiatives during this interim period. On today's call, I'll touch on some of the recent progress the team has made and address the CEO search before turning it over to Cathy to review the financials. At a high level, I've summarized the key takeaways from this call in the following way. One, fourth quarter financial results were in line with our targets. Two, following an 18 month stretch with limited purchase orders, which has led to depressed revenue levels, the company has seen an acceleration in closing purchase orders, which improves visibility and lays the foundation for a second half revenue recovery. And three, the company is progressing well and improving efficiencies and lowering the breakeven revenue level. Based on the management team's current outlook, the company expect to grow revenue in 2024 and transition into profitability on a quarterly basis in the second half of the year. So what are some of the issues the company has faced and what progress has been made recently? First, and most importantly, the company has seen an acceleration of contracted projects or signed purchase orders. From January 2022 through June 2023, while we continue to grow our contracted and awarded projects largely through project awards, we had depressed levels of contracted projects and slower rate of conversion from awarded to contracted. That has led to current depressed revenue levels, which we now expect to trough here in the first half of 2024. More recently, the company has been laser-focused on…

Thanks, Ahmad, and good afternoon, everyone. I'll provide some additional color on our fourth quarter performance and our outlook. Beginning with a discussion of the fourth quarter, revenue came in at $23.2 million, which was at the midpoint of our target range. This revenue level represents a decrease of 24.1% relative to last quarter and 11.5% relative to the year ago quarter. GAAP gross profit was $0.7 million or 3% of revenue compared to gross profit of $3.4 million or 11.1% of revenue in the prior quarter. On a non-GAAP basis, gross profit was $1.1 million or 4.8% of revenue. While down sequentially from a normalized 9.5% in Q3 on lower revenue and cost absorption, the fourth quarter margin represents our fourth consecutive quarter of positive gross margin and was toward the high end of our guidance range. We continue to believe that we have significant margin upside when our revenue level recovers. Our GAAP operating expenses were $12.4 million. On a non-GAAP basis, excluding stock-based compensation and certain other costs, operating expenses were $10.8 million, which includes a $3.1 million credit loss provision relating to specific customer accounts that was not included in our guidance ranges. Excluding this charge, our non-GAAP operating expenses would have been $7.8 million below or better than our guidance range and representing the lowest level in more than two years as we have diligently looked for efficiencies across the company while continuing to invest strategically in areas that support growth. That normalized $7.8 million would compare to a normalized $9.2 million in the prior quarter and $10 million in the year ago quarter. GAAP net loss was $11.2 million or $0.9 per share compared to a loss of $16.9 million or $0.14 per share in the prior quarter and a net loss of $20.5…

Thank you. [Operator Instructions] Our first question comes from the line of Philip Shen of ROTH. Your line is open.

Couple of years ago, your business, customer wins, and momentum were rising pretty quickly in an oligopolistic market. I believe the Jinko and Longi module, UFLPA detentions really hurt you guys. That said, these module vendors have been cleared and are shipping actively into the U.S. and have been for some time. Why haven't you been able to ramp your revenues with them? Were there previously awarded orders, for example, that you ended up losing to others? So can you give us some color on what's happening as these guys ramp up, although on your side, you're not able to ramp up as quickly? Thanks.

No, Phil, thanks for the question. We haven't seen any material contract cancellation really first and foremost. And the second part is, we are seeing the ramp back in 2P with these contracts in the orders that are moving from our backlog into our POs and revenue. That ramp just been quite frankly a little bit slower than what anybody was expecting.

Okay. Thanks, Patrick. Shifting over to, I think you guys said of the 1.7 billion of backlog, maybe [450 million or ish] [ph]. Roughly that number is contracted. Can you kind of correct that figure? And then also, how much is expected to be delivered in '24? So if you just look at the contracted volumes, how much is set up for '24? Thanks.

Yes. So let me clarify the kind of 1.7 billion to 415 million of the 1.7 has purchase orders. Some of those have defined schedules and some of those schedules are working through with the customers. And Cathy, we're not giving quarterly kind of breakdown of guidance on where that 415 will ultimately going to play out.

Right. Can you give it by year though? If not quarterly, like how much of that 415 is in '24 versus '25 or beyond?

We're not giving the full year guidance, but those are starting to move. And if you look at kind of how we have laid it out, we've given you what our Q1 guidance is, we showed you that we're moving to breakeven in Q3 and that will be profitable in Q4. But I think if you kind of model that out, that gives you a baseline of what's coming through in 2024 and the rest will be coming in and beyond that.

Okay. All right. I see the sequential growth. I just don't know what is the rate of growth. So it's a bit tough to get, I guess, with the breakeven and profitability in Q4 that helps. You know, execution has been tough, I know. Some of our recent checks suggest you may need to win back the trust of customers. Like, how do you go about doing that? I know it's one step at a time in execution improvement, but have you guys thought through, or can you communicate what that plan might be? Thanks.

Yes. Thank you, Phil. This is Ahmad. You're correct. We had missteps in the past. That's why we are where we are. But the team has done an amazing job over the last eight months. Actually, the prior, even the prior management teams, they really have worked very hard to correct a lot of issues in the past. And by having intense external focus, upgrading the quality systems, improving our cost roadmap, broadening our portfolio so that the sales teams, when they go meet customers, they have more than just 2P to sell. And even in the 2P product, there was not enough variety in it what we're finding. And that portfolio got improved a lot over the last couple of years, and we continue to improve it now. And because of that, we're able to really book 50 million a month. That's a significant number, like 150 million a quarter. And that's how the team is correcting itself.

Thank you. One moment, please. Our next question comes from the line of Pavel Molchanov of Raymond James. Your line is open.

So you've clearly been taking quite a bit of corporate costs out of the system. That Q1 run rate of between 8 million and 9 million in non-GAAP operating expenses. Is that the kind of the steady stage for the rest of the year? Or does it have further room to decline?

I'll start with this and Cathy, you can add. The answer is, this is the run rate. We might increase it in the second half of the year a little bit, Pavel. The team is trying to invest in sales and engineering. I think we cut a lot of the overheads, the things that we didn't need as much. But you can expect the debt that are on rate and it might increase a little bit in the second half of the year because we want to add more salespeople. We want to add more engineering.

Yes. And I would just add on to that that we have really worked on this diligently. And we do keep a very laser focus on our operating expenses and just continue to drive it. So we control the things we can control. And so we've really managed that. We have improved our processes and systems to really continue that control and have that monitoring through good metrics and strong reviews on a period-over-period basis.

You mentioned that bulk of the backlog and new additions are domestic. If we go back a few years, you were making a strong effort to diversify into Australia, parts of Africa and so forth. Given the amount of headcount that you've cut, are you able to play in these overseas geographies?

The answer is yes, Pavel. Absolutely, we can. So the overhead we cut is because we learned that we don't need it. And we might need to add a little bit more salespeople, more effective salespeople in various regions. Let me go back also to your prior question. We cut OpEx because it's not because we want to be a company that is smaller in revenue. We're trying to be efficient. We're not going to scale the company to be a 30 million a quarter company. We do not believe that we're booking at 50 million a month. I recognize that we cannot be 50 million in revenue a month soon. But as long as we continue that trend and it's accelerating actually in Q3, Q4 is better than Q3, and so far in Q1 is better than Q4. One day the revenue can expand. So we actually want to set the company for nice growth and high profitability while being efficient. We have enough resources to be in the 50 million to 75 million booking a month. I think if we want to grow to 150, then we might add more people and expand internationally more aggressively. I hope that gives you some color.

Yes. And then maybe just following up on the international aspect, last August, you announced a good size deal with a developer in Italy and Spain. And I think the plan was to start delivering late '23 and kind of continue through '24. Is that timetable still correct?

Yes. From those projects, that was the announcement we did with 5E, the 350 megawatt portfolio. We're looking still the majority of that revenue to be delivered kind of in 2024. And like we said, into 2025. We saw a couple of project delays in small nature in 2023, but largely the portfolio is still intact.

Thank you. Our next question comes from the line of Jeff Osborne of TD Cowen. Your line is open.

Good evening. A couple of questions from my side. I was wondering, Ahmad, if you could just address, in looking back the awarded backlog conversion into the contracted under the prior management team, as you diagnosed why that was a challenge. Is there a way of framing that?

Yes, just first of all, I want to thank the prior management team to really growing the business to that level. I think a lot of it had to do that we needed everyone to be on the road, also to help customers move the awarded to contracted. And adding more salespeople, getting stuff done internally and that's what it is really, it's a lot of blocking and tackling. And I think we learned our lessons and now we're going to intensify that activity, Jeff.

Good to hear. And then you made some comments that I just wanted to tie into the financials as well, but you made reference to using more steel than your peers. And then a 12-to-18-month sort of design the value and redesign of the portfolio to use the less steel. If I heard you right to get to the 20% gross margin level. Is the comment about the 50 million to 60 million in revenue in the third quarter depending on the bonus payment schedule. Does that assume that you hit a 20% gross margin or do you hit 20% after that 18 month time period.

We do not hit 20% gross margin in Q3 because we have absorption issues. So the way I look at it is direct margin. And the answer is, we are in a good path already at this moment we are competitive on steel content. Maybe with a little bit better scale, we can negotiate better with steel manufacturers. I think maybe that's an area we can improve or some of our logistics on supply chain networks in certain international areas we can improve. I think to get to 20% gross margin, we need more than 50 million to 60 million. How much Cathy, do you think we need to be at like 100 million a quarter?

Yes.

I would say we need to be at 105 million a quarter and we'll get to 20% gross margin. Yes, 105 million. Okay.

Got it. Thanks for being precise. Last question is, just as it relates to the IRA. Is there any credits assumed in the guidance for Q1 or how do we think about that for the outlook for the year?

No, we have not assumed the credits into our guidance. We are utilizing our facility at out of steel. So we have capacity to manufacture domestic content and provide that to our customers as needed. But we have not put that into our forecasted.

Thank you. One moment, please. Our next question comes from the line of Donovan Schafer of Northland Capital Markets. Your line is open.

So, Ahmad, first I just want to clarify with your comment around, you're being at a rate, you have a monthly registered run rate, I guess, right now, booking $50 million per month or adding that to the backlog. Do those, do you mean $50 million that goes into that PO bucket, a purchase order that's contracted, or is it some of that -- does that include awards or projects that go into the awarded bucket? And if it's not one or the other, can you give any kind of rough, if it's not 100% one or 100% the other, can you give some rough sense of what kind of a mix we're talking there?

Yes, it's 100% POs, purchase orders, contracted. The awarded is higher than that.

Okay. Fantastic, okay. And then for accounts receivable, yes, I think in the past, so that's come down a bit, but not a lot just on a quarter-by-quarter basis. And given the fairly low level of revenues in Q3 and Q4, yes, I would have expected it to maybe come down a bit more. And I think in the past, you've maybe even talked about improving those collections as a way of providing some of the near-term funding. So, I'm just wondering if we can get an update there. It looks like there was, I think Cathy mentioned that some of that was written down, but are there other amounts in the accounts receivable that are past 90 days or could be coming under pressure for additional write-downs? Just any updates or clarification, that would be helpful.

Yes. Sure, Donovan. No, I'm not anticipating any other write-downs in the accounts receivable balance.

Okay. And then just let's see, talking about Q1 as the trough, on the Q3 call, I think I look back at the transcript and Patrick, you made the comment that you were expecting to improve revenue performance in the first quarter. And obviously with the guidance that's come out, that hasn't played out as expected. So what is it that gives you that -- what gives you confidence this time around, I guess, that Q1 will be the trough and that you'll see that additional growth in Q2, Q3 that gets you to the breakeven. What do you see now that's different? Thank you.

Thank you, Donovan. This is Ahmad again. What we see is a more contracted than before. That's what we see. I mean, let me make a statement about infrastructure projects. By default, they are never on time. But we do not want to use that excuse. Our problem is, we're a smaller company and because of that we get a lot of whiplash because we're smaller and subscale. And as we increase our bookings, all the time and get to hopefully 150 million a month, then our forecasting will become much, much better. So that's our issue. But what happened since last time is, we have a lot more contracted than before. So we are more confident right now than the last time that we did the forecast.

Okay. Thank you. That's helpful. All right. I'll take the rest of my questions offline.

Thank you. [Operator Instructions] Our next question comes from Amit Dayal of H.C. Wainwright. Your line is open.

Most of my questions have been asked, but I just wanted to touch on the backlog number. In the footnotes in the press release, you indicate some of the backlog is verbal. Just wanted to understand what the extent of the backlog in that number is from the verbal side of things. And what are the triggers that convert this backlog into contracted orders?

Yes, we didn't break it out by what verbal and what's not. I mean, I think the disclosure we put in here was really more tied to the purchase orders and 415 million of the 1.7 billion has purchase orders associated with it. The way we look at the rest of the backlog is through LOIs or not -- or LOIs or verbal agreements in which we check with their customers on a monthly and quarterly basis to make sure these projects are progressing. A lot of this is [indiscernible] working with the customers to define the delivery schedules they're getting models. Some of these projects we talked about in previous quarters are 2025 NTP type projects that are out into the future as well. So there's a little bit of mix and breakdown as it relates to that.

Okay. Thank you for that. And maybe just the last one for me. As you sort of get into a recovery phase, revenue starts climbing, et cetera, to the 50 million plus levels, how do you feel with respect to your working capital situation to sort of meet that level of demand with what your balance sheet looks like right now?

Yes. And I think that we're managing our working capital and I think we have sufficient working capital to meet the ramps that we have that we see in the back half of the year. We really look at managing the cash. We look at the fact that we have moved that and we look at the fact that, we have significantly more receivables than we have payables and we continue to manage that. Our project we look at from a cash flow positive approach in terms of deposits that we received from customers. So it really helps us to manage through working capital needs.

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, this does include today's conference. Thank you all for participating. You may now disconnect. Have a great day.