Yahoo Finance Bloom Energy Corporation (NYSE:BE) Q4 2023 Earnings Call Transcript
Bloom Energy Corporation (NYSE:BE) Q4 2023 Earnings Call Transcript February 15, 2024
Bloom Energy Corporation misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.08. Bloom Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Bloom Energy Q4 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now hand the call over to Ed Vallejo, Vice President of Investor Relations. You may begin your conference.
Ed Vallejo: Thank you, and good afternoon, everybody. Thank you for joining us for Bloom Energy's fourth quarter 2023 earnings conference call. To supplement this conference call, we furnished our fourth quarter 2023 earnings press release with the SEC on Form 8-K and have posted it along with supplemental financial information that we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity and full year outlook for 2024.
These statements are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this conference call and in our fourth quarter 2023 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. Generally Accepted Accounting Principles, and are in addition to, and not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
A reconciliation between the GAAP and non-GAAP financial measures is included in our fourth quarter 2023 earnings press release available on our Investor Relations website. Joining me on the call today are KR Sridhar, Founder, Chairman and Chief Executive Officer; Greg Cameron, our President and Chief Financial Officer; and Aman Joshi, our Chief Commercial Officer. KR will begin with an overview of our business, then Greg will review the operating and financial highlights of the quarter as well as the outlook for 2024. And after our prepared remarks, we will have time to take your questions. I will now turn the call over to KR.
KR Sridhar: Hello, everyone, and thanks for joining us today. Let me start by thanking the Bloom Energy team for relentlessly working on our top objective of 2023, making the company profitable. Together, we achieved profitability by maintaining price discipline, reducing product costs, improving service margins, and reducing operating costs. What a huge milestone for our company. Now, our goal for 2024 is to increase the profitability on a year-over-year basis. In addition to record revenue, significantly improved margins and record annual operating income, we introduced innovative products and offerings, including one just this week. More on that later. Now, let me address the macros in the energy market. Digital transformation, AI, electric vehicles, onshoring of manufacturing and electrification of everything are all increasing demand for electricity at a rate never ever seen before.
All these factors can drive demand for electricity up to 10 times more than the 0.5% average demand growth rate the utility industry is accustomed to for the last four decades. Can a slow-moving industry and the failing grid meet this unprecedented demand challenge? Let's start with electricity generation. Even breakneck speeds of renewable expansion can at best address a very small fraction of this demand growth. In the last 10 years, all the new renewable capacity installed in the U.S. produces less electrical energy than the deficit created by retired coal and nuclear power plants. New nuclear power will not be online during the next decade in a meaningful way. We have to rely on more natural gas to meet the electricity demand. Once power is generated in faraway locations, it has to be transported to the demand centers by high-voltage transmission lines.
While the National Renewable Energy Laboratory estimates that 90,000 miles of high-voltage transmission lines are needed to meet this growth, 90,000 miles, we have built less than 700 miles in 2022. All this suggests that as a nation, we will imminently face severe and huge power shortage that will last a couple of decades. This situation will be the same in many of the population centers and economic hubs around the world. In the past few months, as I speak to CEOs and business leaders, energy security and power availability are top-of-mind issues for them and their Boards. Most management teams today view the future supply and availability of electricity as a key enterprise risk. Unlike even five years ago, when most of the conversations were around cost of power, today, it is about the opportunity cost and business risk of not having power.
So, how have these macros played out for Bloom Energy on our commercial side? Let me start with data centers, particularly AI data centers. For the last few months, my team and I have been engaged deeply with several leading companies in the AI space, from CEOs all the way to working level technical teams. The sales funnel for this sector alone is massive, not in the megawatts but in the gigawatts. The funnel is composed of several A-list companies with credible growth projections who are told by their utility companies to not rely on them for additional power. They love Bloom's technology, our rapid deployment capability and the flexibility and optionality of our solution. They are actively working with us on design configurations and implementation scenarios.
In these interactions, our prospective customers tell us that in the absence of reliable and timely power from the grid, the Bloom Energy solution would be their best alternative. Unlike our sales funnels in other sectors in the past that had mostly single-digit megawatt opportunities, this sector offer tens and hundreds of megawatts per opportunity. Most of the opportunities we are pursuing today are for greenfield data centers, in contrast to the past where we offered a cleaner and more reliable power upgrade to an existing data center facility. Greenfield opportunities inherently have elongated sales and implementation cycles. The market in this sector is rapidly evolving, and we will have better visibility on timing as the year progresses.
Over the coming years, I'm very excited about the Bloom solution for data center power and particularly AI data centers, as I see it as the single biggest segment for our growth in the next decade. This opportunity, I highlighted for data centers, carries over to other energy-intensive industries and service operations that require reliable power, such as semiconductor manufacturing, electric charging of bus, van and car fleets, and environmentally-controlled warehouses. We are in various stages of commercial engagement with prospective customers, and I see great potential to convert some of this interest to bookings this coming year. Let me now comment on our innovative product offerings. In the second half of last year, we announced our combined heat and power CHP offering.
This product offering can provide net-zero steam to process industries that are looking to lower their carbon intensity. Alternatively, using this team to create net-zero cooling will be a huge economic and environmental benefit to data centers. We are also seeing a strong interest for our CHP offering in Europe. Earlier this week, we announced the Be Flexible offering. This offering has taken our base load solution offering and transformed it to meet a customer's varying load. For utilities that need reserve power or for data centers whose power usage varies, the Be Flexible offering provides up to 50% cost savings, 50% carbon reduction at reduced load, and more than 5 times faster power ramp than legacy solutions such as diesel generators and gas turbines.
My team is working with several power companies to use the Be Flexible solution in front of the meter. On the international side, let me take a moment to talk about Korea. Five years ago, we started in Korea with our partners SK ecoplant and SK D&D. We had a shared sense of purpose and goals. We knew that together, we could grow and build a great business in Korea. In the last five years, Bloom has sold over $4 billion of product and service to the Korean market and established Bloom SK as the market leader in fuel cell power generation. We are positioning ourselves to sell over $4 billion of product and service in the coming four years. We are engaged as partners in the demonstration and deployment of hydrogen-based energy servers and hydrogen electrolyzers in Korea.
They are also partnering with us to open up new markets in other countries. In 2023, we had to hit a pause in the deployments to adapt to the new policy and procurement rules that the Korean government enforced in the middle of the year. While that created a lowering of our sales to Korea in second half of 2023 and a slow start in first half of 2024, they are back on track, and we expect a strong business in Korea in the second half of 2024 and in the future. For us, Korea is a model and global leader of energy policy progress and commercial adoption. We are bullish about our future in the Korea market. We hope to replicate it in other markets around the world. Outside of Korea, under Tim Schweikert's leadership, we have opened five international markets and have our pilot programs going.
He and his team are building a strong pipeline in those countries and confident of opening at least two new global markets. Based on the quality and quantity of the pipeline, we expect our international market to have a strong bookings growth in 2024. At the core of everything we do is our people. We are constantly working to both develop our existing talent and upgrade by adding new talent. Just last week, our CTO, Dr. Ravi Prasher, was elected to the prestigious National Academy of Engineering. It's a huge honor and well-deserved recognition. Congratulations, Ravi. In January, we were thrilled to welcome Aman Joshi as part of our Bloom leadership team. He joined as our Chief Commercial Officer after a long career in power generation sales.
Aman will be responsible to grow our robust sales pipeline with a special focus on converting the opportunities to orders with urgency. Aman, welcome, and over to you for a few remarks.
Aman Joshi: Thank you, KR. It's great to be speaking with you all today. I just want to say a few words. First, I could not be more excited to join Bloom and be part of all the amazing things happening in this company. The pace of innovation and the confidence in our company's future is palpable among the employees as I walk the floors. In my prior role, I spent over 20 years at General Electric, most recently focusing on gas turbines and power generation. In the past two years, I sold more than 5 gigawatts of generation capacity. At GE, our focus was doing large-scale projects that were complex and incredibly important. As we advance along the energy transition, it started becoming clear that natural gas and hydrogen are going to play a big role in helping decarbonize the world, both in energy and industrial sectors in the coming decade.
Gas turbines and reciprocating engines are far less efficient when burning 100% hydrogen. In addition, when they combust hydrogen, there are challenges around NOx emissions. Bloom's solid oxide fuel cell can solve the hydrogen challenge today and generate zero carbon, zero SOx and zero NOx. This is a game changer. I decided to come to Bloom after seeing the product and realizing that it had arrived at an inflection in its ability to function at scale and be a solution for large, complicated, important and timely projects. Bloom is no longer just about potential, but it's real now and at scale. Bloom's energy servers can address the most pressing needs of customers across industries, including data centers, utilities and industrial processes.
I'm excited about the pace of innovation here and the flexibility of the product suite. Bloom is a kind of company that can move quickly to develop an application and deliver it to the market. Think about what KR said on CHP and the Be Flexible load-following product. The speed from idea to concept to product at Bloom is remarkable. Its product lead the industry. Just look at the Bloom electrolyzer, which tests have proven is the best and the most efficient in the market. Bloom can solve the big problems that I know exist in the market, and I'm very pleased to now have an opportunity to sell these solutions to the customers that need them. I look forward to speaking with you all further in the Q&A. For now, I'll turn it over to our CFO, Greg Cameron.
Greg Cameron: Thanks, KR, and welcome, Aman. Let me begin with a few highlights about our strong execution in 2023. In the fourth quarter, we achieved revenue of $357 million, non-GAAP gross margins of 27.4%, non-GAAP operating income of $27.4 million and positive CFOA of $122 million. These quarterly results accumulated into strong performance for the full year 2023. We had record revenue of just over $1.33 billion, up 11% versus last year. Our non-GAAP gross margins were roughly 26%, up 280 basis points versus 2022. We delivered on our milestone of positive non-GAAP operating income of $19 million, up nearly $53 million from the prior year. Our backlog for product and service is now over $12 billion, up 21% versus year-end 2022.
We entered 2024 with over $745 million in total cash. With those as highlights, let me provide some additional context for our performance. In the fourth quarter, we signed a 500-megawatt volume agreement with SK ecoplant. This is a recommitment of 250 megawatts under our 2021 agreement and a commitment for an incremental 250 megawatts. Under the new agreement, the 500 megawatts will be accepted through 2027, providing visibility for nearly $1.5 billion in product revenue over the next four years and $3 billion in service revenue over the next 20 years. The prior agreement was amended to reflect the implementation of the clean hydrogen portfolio standards in Korea. The new agreement adjusted the timing of deliveries, which reduced 2023 revenue by roughly $160 million versus the prior agreement's 2023 volume commitment.
These deliveries and revenue are incorporated into the $1.5 billion that is expected to be recognized through 2027. As KR shared, global power demand is being driven by electrification, EVs and AI data centers. The world's current generation, transmission and distribution capacity will be incapable of meeting the additional electricity needs. Our fuel-flexible energy server with enhanced capability of combined heat and power, carbon capture and load following is uniquely positioned to meet the needs today while providing optionality through the energy transition. Clearly, the macro trends are in Bloom's favor. I'm very encouraged by Aman's addition to the team. He brings a wealth of experience in the distributed power generation market and rigorous commercial process mindset.
Even after just a few weeks in the role, he's already making significant impacts. Bloom remains committed to the 2025 targets for product margin, service margin and profitability, as well as our long-term revenue growth rate. As we move through the decade, most of the long-term growth will be driven by our power generation solutions. Our electrolyzer and marine products will contribute as those markets evolve. Our 2023 non-GAAP gross margins of 25.8% improved 280 basis points versus 2022. The margin improvement was driven by a 13% reduction in our unit product costs, offsetting a small reduction from pricing mix, resulting in over a 10% increase in our unit product profit. Clearly, our efforts to lower material costs, coupled with automation and increased power output are driving down product costs.
In every quarter in 2023, we have achieved double-digit cost reductions versus prior year, and we exceeded our 2023 product cost down target. As we move into 2024, we expect to maintain our double-digit cost reductions. As expected, our fourth quarter results in service improved versus prior quarters as revenues grew, performance payments declined and replacement power module costs reduced. We remain committed to our service business achieving 20% non-GAAP gross margins by 2025. We expect our service non-GAAP gross margins to continue to improve and will be a key driver to increasing our overall non-GAAP gross margins in 2024 and beyond. In the fourth quarter, we had positive CFOA of roughly $122 million, building our total cash balance to over $745 million.
In 2023, we made investments in increasing inventory that I would not expect to repeat in 2024. Additionally, I would expect our accounts receivable aging to reduce as we collect from a partner on a large project that has experienced delays. In the fourth quarter, we completed our targeted proactive restructurings. These were focused on managing costs, driving efficiencies and optimizing our performance to ensure that as we grow revenue, our margins can improve and we can generate free cash flow and profitability. As we move into 2024, we've consolidated our California stack manufacturing and reduced our operating expenses 19% versus the first half of 2023. A restructuring charge of roughly $7 million was recorded in the fourth quarter that has a pro forma adjustment to our non-GAAP reporting.
As we look forward to 2024, we expect to continue to grow our revenues and expand our margins. Based upon our backlog and pipeline, we are targeting revenue of $1.4 billion to $1.6 billion. We expect additional 200 basis points improvement in our non-GAAP gross margins to about 28%. Based on these targeted revenue and margin performance, I would expect our non-GAAP operating profit to be between $75 million to $100 million. Consistent with prior years, second-half revenue should be greater than first half, driven by timing of Korea shipments and some large acceptances. For the first half, I would expect revenue to be up mid-single digits, with improving profitability versus last year. For the first quarter, the range is a bit broad as we have projects that could be accepted in either the first or second quarter.
First quarter revenue could be flat to down 20% on a tough comparison as the first quarter 2023 was up nearly 40%. Finally, let me spend a few minutes on my departure from Bloom Energy. The last four years has been an amazing professional journey. I want to thank KR, the Board and the entire Bloom family for their support in allowing me to contribute to Bloom's success. I'm proud of how we've worked together to position Bloom for the future. We've doubled revenues, improved margins, strengthened our balance sheet, doubled manufacturing capacity and assembled a strong operating team. The world needs Bloom's solutions, and I'm confident the Bloom team is poised to continue to deliver. This has been a very hard decision for me, but I look forward to enjoying more time closer to my family.
So, while there's rarely a perfect time for a transition, waiting for one often comes with a personal cost. In the near term, I'll be focused on ensuring a smooth CFO transition. I am confident in KR and the Board to find the right person to enable Bloom's continued success. I remain very excited for Bloom's future. With that, operator, please open the line for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Percoco of Morgan Stanley. Please go ahead.
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