Good morning, and welcome to the Fluence Energy Inc.'s Second Quarter 2022 Earnings oCnference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, during which you may dial zero one if you have a question. Please note it is zero one, not star one. I will now turn the call over to Lex May, and you may begin.
Thank you. Good morning, and welcome to Fluence Energy's second quarter 2022 earnings conference call. A copy of our earnings presentation and press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the investor relations section of our website at fluenceenergy.com. Joining me on this morning's call are Manuel Pérez Dubuc, our Chief Executive Officer, Dennis Fehr, our Chief Financial Officer, Rebecca Boll, our Chief Product Officer, and Seyed Madaeni, our Chief Digital Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially.
Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the investor relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much.
I will now turn the call over to Manuel.
Thank you, Lex. I would like to extend a warm welcome to our investors, analysts, and employees who are participating on today's call. Let's begin on slide four on the earnings presentation. Today, I will provide an update of our performance and macro environment. In summary, first, we continue to experience a strong demand for our energy storage products and services. In addition, Fluence is well-positioned to capitalize on Europe's growing desire for energy security and independence. Second, we achieved a record quarter for Fluence Digital and acquired Nispera. Later in the call, our Chief Digital Officer, Seyed Madaeni, will provide more color on this acquisition. Third, we successfully raised prices on new contracts and rolled out the new raw material index or RMI-based pricing to protect against raw material price volatility.
Fourth, we have been encountering headwinds in battery production that have resulted in force majeure in some customer contracts. At the same time, we are making progress on diversifying our battery suppliers, which is a key strategic objective for us. Fifth, we also have made progress in rolling out our Gen 6 technology, but still need to tackle further cost improvements. Later in this call, Dennis Fehr, our Chief Financial Officer, will address our Q2 financial performance. As he will discuss, we now expect to be at the low end of our fiscal year 2022 revenue guidance range as the result of the headwinds I mentioned earlier. Turning to slide five. We had an excellent quarter of order intake across the business. We contracted 582 MW of energy storage during the second quarter, illustrating the continuous strong and secular demand we are experiencing.
We have been working closely with customers to reflect cost increases for batteries and raw materials in new contracts, and demand remain unwavering. In our services business, we contracted 343 MW during the second quarter, illustrating an attachment rate of 58% in Q2, below our target of 70%. Many of the energy storage contracts that we executed were with utility companies that tend to sign service contracts several months after contracting the storage equipment. We anticipate follow-on services contracts will be signed with these customers during the second half of this year, similar to our experience in fiscal year 2021. Pleased to note that Fluence IQ delivered a record quarter in terms of revenue and new contracts.
During the quarter, we added 2.8 GW of new digital contracts. As of March 31st, we have deployed or contracted 7.8 GW assets under management. Importantly, this does not include the additional 8 GW under management associated with our Nispera acquisition. The significant growth in Fluence IQ is ahead of our business plan. I would also like to point out that this quarter we added our first pumped hydro contract for 1.2 GW, representing a new asset class for Fluence IQ, which opens up new opportunities for Fluence Bidding Application. I would also like to make a few comments related to the U.S. Commerce Department's probe into solar anti-circumvention and dumping.
Although it is too early for us to speculate what actions could result from this probe, we know that during the first half of this fiscal year, approximately 30% of our overall product order intake was connected to greenfield U.S. solar plus storage projects. In regards to our backlog, let me clarify that we are not responsible for procuring solar panels. In the event that these are not available, it is still commercially beneficial to our customers to complete the energy storage and installation piece to start any revenue on these assets. We currently have not seen an impact on product pipeline relating to this probe. However, we acknowledge this could change and could impact as much as 10%-15% of our product pipeline, at least with respect to timing. However, Fluence is a global company with diversified offerings across geographies and segments.
For example, we expect to see increased demand from Europe that is not yet reflected in our product pipeline. Turning to slide six. We are excited to continue growing our business in Europe, especially as the need for energy independence and security becomes paramount. The recent geopolitical events in Europe have exacerbated the need for many European countries to reduce their dependency on foreign oil and natural gas. One of the key solutions to address this situation will be an increased use of renewables, which will require more energy storage. In fact, in early March, the European Commission launched the REPowerEU initiative that will accelerate the transition to renewables by calling for nearly a doubling of renewable asset additions, from approximately 42 GW to 78 GW annually until 2030.
As you can imagine, this increase in renewable asset generation will create more grid reliability and stability issues, thus necessitating additional energy storage. We have already seen increased interest from our customers in Europe from energy storage. As the market leader in Europe, Fluence is very well positioned to capitalize on this emergent need, enabling Europe to achieve its energy independency and security goals. Now turning to slide seven. I would like to update you on the progress we have made in advancing our strategy. Through the planned addition of regional contract manufacturing locations in the U.S. and Europe, we will be protecting ourselves against logistic interruptions and soaring logistics costs. I am pleased to report that we have signed an agreement for an eighth U.S.-based contract manufacturing facility, and we expect to initiate production there toward the end of this calendar year.
We are on track for starting our European-based facility in early calendar year 2023, and look forward to providing you with an update on our next call. As you may recall, from our first quarter call, we announced a strategic joint venture with ReNew Power in India. We expect to have the agreement finalized in the coming weeks, and we'll begin ramping up operations in India accordingly. Additionally, I am pleased to report that we successfully deployed a 2.75 MW C&I product for Google in April to provide them with emission-free battery backup power for their Belgium data center in Saint Ghislain. We are proud to partner with Google for this first-of-its-kind product as they strive to become carbon-free by 2030. While the C&I segment represents a small portion of our overall mix, we are seeing increased demand for the data center sub-segment.
The backup power requirements of this sub-segment are approximately 20 GW worldwide. This commercial development represents a significant opportunity for Fluence as other major organizations increasingly replace current fossil fuel power backup systems with emission-free battery backup solutions. Turning to slide eight. I would like to provide a brief update on some of the headwinds that we have been facing and the actions that we are taking to mitigate their impact. First, supply chain disruptions have affected us in a couple of areas. On the shipping and transportation front. We have seen shipping rates stabilize, providing better visibility on how to price new contracts. We still see global shipping capacity challenges and port congestions, but we are mitigating some of these impacts by shipping earlier where possible. The supply of battery cells is another area that has been affected.
As you may also recall, we have contractually secure 20 GWh of batteries from our suppliers, providing us adequate supply for our 2022/2023 needs. However, the majority of the world's current battery supply comes from China, which again underwent significant lockdowns to enforce their zero-COVID policy. These lockdowns are affecting suppliers' ability to produce and ship battery cells in a timely manner. Therefore, battery suppliers in China have recently declared force majeure to us and others in the industry. Under our contracts, our suppliers' force majeure declaration allow us to declare force majeure to several of our customers for whom we will not be able to meet contractual timelines. We expect this to protect us from possible timing-related charges under the affected contracts.
While we do not know how long the current situation will last, we are working closely with our battery manufacturers, both in China and elsewhere. As part of our regionalization strategy, we have already been working to reduce our exposure to Chinese battery manufacturers by diversifying our supply regionally, as well as by the number of suppliers. I'm pleased to report that non-China-made batteries will represent about 30% of our supply in 2023, and we expect this percentage to grow in 2024. We also have reduced our supplier concentration by increasing the overall number of battery suppliers. Second, as Dennis will address shortly, our second quarter results reflect good progress on reducing the one-off items that were previously associated with the compounding effects on COVID-19. We expect to continue reducing this impact as we progress through the second half of this year.
Third, as I noted earlier, we have been moving to RMI-based pricing for new contracts to protect against the volatility we have seen in the cost of raw materials. So far, we have seen a broad acceptance by our partners to engage in finding optimal and creative solutions for all parties. Finally, we have made progress on installing and commissioning our Gen6 product in the field. As we discussed on our previous call, we have experienced delays and additional costs associated with the rollout of our Gen6 product over the past six months. During this time, we have documented lessons learned and conducted more training for our crews. Faulty or substandard components from some of our battery and inverter suppliers were one of the reasons for the delays, particularly at large installations. That is why we have assembled a new supplier quality control team.
The team is working with our suppliers to ensure components operate as designed, which will reduce the risk of delays and unforeseen costs. As you can see on slide 9, I'm pleased to report that we are now fully caught up on our Gen6 installation schedule. We have successfully installed 10 Gen6 systems since the beginning of this year, with a combined power of about 420 MW. This includes several mega site installations such as Diablo and High Desert, both in California. Furthermore, many of these feature first-of-its-kind elements, such as the first energy storage co-located with geothermal generation, or the first product that guarantees 150-millisecond response time. These are amazing accomplishments and showcase our ability to innovate and push the boundaries of what is possible.
I will now turn the call over to Seyed to provide a bit more color on the Nispera acquisition and its impact on Fluence IQ.
Thank you, Manuel. I'm pleased to have the opportunity to discuss this acquisition, the first since our IPO last fall. I'll begin on slide 11. As Manuel mentioned, like Fluence IQ, Nispera is a SaaS company providing many key applications for customers looking to monitor, analyze, and optimize the performance and value of their renewable energy assets. Nispera currently has 8 GW under management. Their flagship offering is the Nispera Asset Performance Management platform, or APM, which is sold to customers on a dollar per megawatt basis. This platform includes SaaS offerings such as digital twin and performance analysis and portfolio overviews. In addition to the APM platform, Nispera also offers four other applications or modules that can be added on to the APM for an additional cost at a similar dollar per megawatt price. These other applications are in the areas of predictive maintenance, portfolio management, O&M, and forecasting.
One of the distinguishing characteristics of Nispera is their extensive use of machine learning to drive value for their customers. They have embedded machine learning in their forecasting app and predictive maintenance app for both wind and solar, and are actively working on new machine learning-enabled apps. This aligns well with Fluence IQ's Bidding Application, which also uses AI and machine learning to drive value for our customers. As you may recall, the Bidding Application is currently Fluence IQ's flagship application. We are in the process of developing a dispatch app, manage app, and invest app, and we intend to utilize Nispera's APM as a foundation for our manage app, which we expect will accelerate the time to deploy this application to the market. Not only does Nispera provide us with a solid foundation for our manage app, but it also expands our digital portfolio's geographic footprint.
As you can see on slide 12, Nispera is in 25 countries, which provides us with a powerful cross-selling opportunity for our products and services. While our Bidding Application won't be immediately available in all of these countries, bringing on Nispera will help accelerate our entrance into additional markets around the world. From a financial standpoint, this transaction is on the smaller side, and we expect it to be EBITDA accretive by the end of fiscal year 2024. In summary, we are very excited about adding Nispera into our digital portfolio, which now has a combined 15 GW contracted or under management, and are encouraged by the tremendous growth we've experienced with our platform. With that, I'll turn it over to Dennis.
Thank you, Seyed, and good morning to everyone on the call. Looking at slide 14. First, I will cover our second quarter financial performance, highlighting our record Q2 revenue, the progress we have made in reducing adverse impacts to margin, and the strong cash collection and improved liquidity in the quarter. I will then discuss our revised outlook for revenue and gross profit going forward. Turning to slide 15. As Manuel stated, in Q2, we had very strong new orders across all our business lines. More importantly, this success also shows the ability for the market to absorb price increases. I'd also like to highlight that in the first six months of this fiscal year, we have contracted more than 1.1 GW of energy storage products, of which greater than 95% are with unrelated third parties.
As Manuel and Seyed mentioned, we are very encouraged by the demand we have seen on the digital side. In the first six months of this year, we have contracted more than 3 GW, of which about 70% are with unrelated third parties. I'd also like to point out that our digital numbers, including our pipeline, do not include the acquisition of Nispera, which occurred in April. Turning to slide 16. We delivered a record quarter in terms of revenue. The $343 million represents a 96% increase from Q1. As we disclosed on our prior call, about $100 million of this revenue was attributable to Q2 completion of installations previously shipped out from Q1, demonstrating our ability to deliver on our commitments to customers, despite the longer time required to fulfill these contracts.
In addition, about $60 million of our Q2 revenue was attributable to a higher percentage of completion of certain planned Q4 installations in Q2, which pulled forward revenue anticipated for Q3. Turning to slide 17. In addition to the strong revenue recognition in Q2, we also made progress on our gross profit and gross margins on a GAAP basis. Our gross loss of $15 million improved approximately 72% from -$53 million in Q1, driven mostly by a reduction in non-recurring expenses. Our gross margin improved from -30% to -4%. Adjusted gross profit for Q2 exclude $3 million of non-recurring expenses primarily related to the 2021 cargo loss incident. We delivered an adjusted gross loss of $11 million as compared to -$8 million in Q1, while gross margin improved slightly to -3% from -5%. Turning to slide 18.
We delivered adjusted EBITDA of -$53 million as compared to -$43 million in Q1. Adjusted EBITDA includes non-recurring expenses adjustments mainly related to the 2021 cargo loss incident, as well as $3 million for stock-based compensation adjustments. Now looking at our cash position on slide 19. I am pleased to report total cash balance increased approximately $44 million to a total of $723 million. This increase in cash was due to strong collections from our customers, coupled with customer prepayments for certain contracts. We continue to remain focused on our cash balance when we deploy our capital in line with our strategic framework.
We expect that our cash balance will be up to $250 million lower at the end of this fiscal year, in part due to expected working capital build in the second half of this year, driven by revenue shifts towards the end of fiscal year 2022. Turning now to slide 20. As Manuel mentioned, we source many of our batteries and components from China. Recently, the country has had significant outbreak of COVID-19 that has resulted in lockdowns across the country. We do have dedicated production lines with our battery manufacturing partners. However, these are currently running at reduced capacity. As a result, we are not receiving the number of batteries that we previously expected and contracted for. This, in turn, has affected our ability to produce some of our energy storage products that were previously scheduled for production in the coming months.
As Manuel noted, in some cases, we have declared force majeure to our customers. At this time, we cannot provide a timeline for when force majeure will be relieved, but I can confirm we have not lost any contracts to date as a result. Based on these developments, we now see our full year revenue trending towards the lower end of our guiding range of $1.1 billion-$1.3 billion. With respect to our outlook for the second half specifically, as I noted earlier, we pulled forward some of our Q3 revenue into Q2. As such, we expect our second half revenue to be significantly back-end weighted to Q4. Turning to slide 21. As you can see on the slide, historically, we would place products into service in slightly more than 12 months following receipt of the signed purchase order from our customer.
Consistent with this, we typically would recognize more than 90% of expected revenues under the contract in the first 12 months. However, because of the increase in production and shipping related cycle times, we are in a new operating environment. This new normal has us completing a contract and recognizing the majority of that revenue within 15-18 months on average, as compared to 12 months previously. This elongated timing for revenue recognition reduces our expectation for revenue progression in fiscal year 2023 and fiscal year 2024 by 10%-15% as we expect this new normal will continue for the foreseeable future. The rapid increase in inflation is another element of the new normal environment in which we are operating. As a result, we've made changes to our approach to achieving margin expansion. Also, we continue to expect significant margin improvement over the next few years.
We have tempered our outlook with respect to timing and the degree of improvement. As we look at slide 22. On the left-hand side of the slide, we have illustrated the current situation. We are selling our products with expected positive gross profit margins. However, this expected margin is being eroded during the delivery and installation of our product. This is due to excess shipping costs, the compounding effects of COVID-19, and installation cost overruns. We are now focused on two levers. First, to reduce the adverse impacts on margin during delivery and installation. Second, to increase the as-sold margin. The chart in the middle of the slide shows the trajectory of improvement with respect to the first of these two levers. During Q1, we incurred total impacts of $53 million. In Q2, we reduced these adverse margin impacts to $23 million.
We are focused on further reducing this margin impact in the second half of this year to approximately $35 million-$40 million, with quarter-over-quarter improvement expected in Q3 and Q4. Even with these improvements, however, we expect that for the full fiscal year, our gross profit on GAAP basis will be negative. The chart on the right illustrates our plan to expand the as-sold margins of our energy storage products during fiscal year 2023 and fiscal year 2024. The most significant driver is through pricing. In addition, we are moving to a regional contract manufacturing business model that will reduce our shipping expense. Increasing the proportion of our revenue mix associated with higher margin segments such as transmission and data centers, and launching our Gen7 product in 2023.
Through these actions, we believe we can achieve the required gross margins in the products business to achieve overall break-even profitability in 2024. In summary, we have faced many unexpected challenges over the past 6 months, ranging from the macro environment to homegrown issues. While we are focused on reducing adverse margin impacts by improving our product delivery operations and have made significant strides in several key areas, we have had to reset our expectations for financial performance for the next 18-24 months. Certainly, we have not lost sight of the bigger picture and favorable longer-term outlook for energy storage. However, as a management team, we are intensely focused on improving the here and now. We acknowledge that change will not happen overnight, yet we are fully committed to providing our shareholders with attractive returns.
We continue to be bullish on the longer term and are excited about the prospects for our business. This concludes my prepared remarks. At this time, I would like to turn the call back to Manuel.
Thank you, Dennis. In summary, we continue to see very strong demand for energy storage and have positioned Fluence to capitalize on new opportunities as the world continues to transition away from fossil fuels. We are executing our strategy of building the best-in-class ecosystem offering. We increased our engagement in attractive market segments such as transmission and data centers, and continue to grow and expand our digital offerings. While we have made some progress on tackling the challenges, we acknowledge a lot still needs to be done. All in all, we are extremely encouraged by our future, and we'll continue to transform the way we power our world for a more sustainable future. I would like to extend my sincere gratitude to our employees around the world. Without you, none of this would be possible. This concludes my comments. Operator, we are now ready to take questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please dial zero one on your phone keypad. If you'd like to be removed from the queue, please dial zero two. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please dial zero one on your phone keypad. From JPMorgan, we have Mark Strouse. Please go ahead.
Yeah, good morning. Thank you very much for taking our questions. You mentioned you're adding some new battery suppliers. Can you just talk about where those suppliers might be located? Kind of if you think about it cumulatively, your supply base, how much of your battery supply, today and kind of in the near future comes from China versus outside of China?
Yeah. Hi, Mark. Good morning. Thank you for your question. First, yes, I mean, this is a strategy that we started, you know, some time ago. We already disclosed that we have this strategic alliance with Northvolt, so that is a key partner for us in the European market. We will see, and we expect to have their product by the end of this calendar year. We're very excited about that partnership. We're also talking to other large modern battery manufacturers in Asia and the ones that are building new facilities in the U.S.
The target is not having, you know, diversify ourselves by not having more than 30% of our overall demand just concentrated in one name. I don't know, Rebecca, if you wanna add something.
Yeah. I would add that so we're on track to, by the end of this year, we'll have about a 30% mix that is not coming out of China, if that's your direct question. Moving into 2024, we'll move that up probably closer to 50%. Some of the players that we're talking to are establishing manufacturing in North America, so that's our next big move, is to also acquire batteries in this region.
Okay, thanks. Just as a quick follow-up, appreciate the color on kind of the U.S. pipeline. You mentioned 10%-15% in the product pipeline in the U.S. How should we think about kind of setting the downside to your 2022 guidance in the event that there are disruptions from AD/CVD?
Yeah, Mark. I mean, you're referring just to the solar plus storage segment, right? Yes, I mean, it's too early. You wanna say something?
No, I'm sorry.
It's too early to-
I was just confirming what you said, yes.
Yeah. Yes. Okay, good. Yeah, it is too early to tell what will be the results of the probe. We have seen a lot of the, you know, latest news emerging. Some of our customers, they are in a wait-and-see mode. They are delaying a bit, just waiting to see what is the final result. The others are, they're just moving. As we mentioned, in many of those cases, even if you go ahead with the energy storage piece of the project, you can start making some money and generating revenue. It makes sense in many of the markets to keep going ahead with the projects on...
At least on the energy storage side. We see that we can offset, you know, a lot of this 10%-15%, which is important for us, but it's not that big in that we see a lot of demand from Asia and Europe, especially in Europe, when we know all the energy independence and self-reliance is becoming one of the main drivers of all the policies around the community. That the REPowerEU, we just mentioned that it's gonna more than double their renewable capacity that's going to be installed every year until 2030.
The market is very strong and we see a lot of policy makers really working on the energy independence and self-reliance.
Mark, this is Dennis speaking. Just in regards to guidance. When we think about the revenue guidance, just want to clarify that it's fully based on backlogs, so we're not depending on new bookings there.
Thank you.
Right. Okay. Thank you.
From Siebert Williams Shank, we have Chris Ellinghaus. Please go ahead.
Hey, everybody. How are you? Dennis, you have this great slide on 2022. I was gonna ask you about, you know, as you've made some pretty significant progress on diversifying your supply chain, I'm a little bit surprised that the regionalization bar in terms of the margin step up that you're looking for is a little smaller. Can you just sort of talk about that? Also, you know, given that you've had some installation challenges, you don't seem to have anything in this chart that reflects improvement from installation. Can you just talk about those?
Yeah, sure. Happy to do so. On the regionalization side, we will see a full impact from regionalization if we have really the complete supply chain localized. That means batteries and our energy storage products manufacturing. As Manuel just talked before, one of the big next step is to bring also the battery supply chain into the U.S. But that's still a bit further out in that regard. We are really factoring in here the benefit from the regionalization of the products manufacturing in North America. In EMEA, we have the full benefit based on our Northvolt partnership. That's why this number may be in that range here. On the second question in regards to installation costs.
The installation cost reduction, we think that to be in the level one to reduce the adverse margin impacts and to say that's really the key item which we need to tackle now for the second half of the year and to further reduce there. That's sitting over there if that makes sense.
Sure. Manuel, you sort of touched on this a little bit about the energy security issue. Can you give us any color on, you know, who in particular is demonstrating interest and, you know, can you kind of give us any sense of the increase in magnitude of interest that you're seeing, especially from Europe?
Yeah. Well, we already mentioned, you know, how the significant amount of forecasted renewable deployments in Europe. We have seen and without going too much into details, but we have seen very strong demand from the UK. In Ireland, we have several projects there. The fact, and we mentioned this in one of our communications to the market. In Ireland they broke their own record of 98% renewable clean energy during one weekend. That was a few months ago. And that was just possible with the energy storage ultra-high speed response product. It was for around three days. It was a great achievement.
The previous record was around 60%. They acknowledge, I mean, the whole system operator, they acknowledge that it would have been absolutely impossible to reach, you know, such a level of consistency of clean energy in a market without the energy storage. That is a product they already saw that. What we've seen is that other markets are looking at that and say, "Well, if we really want to become carbon free, we have to do the same." That is, you know, they're looking at what happened in that market. They will probably, you know, imitate the same and they will start rolling out, you know, the same type of solutions.
We see a great demand for our transmission product. We are the only company that are doing this transmission booster product that we started in Lithuania as a pilot. Now, you know, we already mentioned about the 200 MW contract that we got. We see that in, for example, in Germany, there's a large tender for moving energy from the north to the south, from the wind of the north to the south industrial area in the south of Germany. We're participating in that. We see very interesting demand for the transmission. Data centers in Belgium, I think that what we did with Google is fantastic.
We all know that every single data center around the world has a diesel backup engine. If we can replace that and replace the number of barrels of diesel fuel oil that is being burned during some of the, you know, the unexpected events or non-expected suspension of energy, interruption of energy, this is a fantastic product. If we can also take advantage of that C&I customer and then we can expand that to other customers as well.
Great. Thanks for the color. I appreciate it, everybody.
Thank you.
From Baird, we have George Gianarikas. Please go ahead.
Hey, good morning, guys, and thanks for taking my question. First, you have a slide in your deck that talks about gaining market share. I'm curious as to whether you could help us paint a picture of what's happening out there with all the delays in projects and in cell supply. What is the competitive dynamic like near term, and how do you see that evolving over the next, you know, couple years? Thanks.
Thank you very much, George, for your question. We mentioned in our previous call that and some of our presentations that our target is to be around 20% market share. We ended up, I would say a little bit higher than that. I think that it has been a result of two things. One is that we have seen other competitors canceling or customers canceling contracts with our competitors. Also, the second element is the lack of availability of batteries. In some cases it's not about the price. In some cases it's about the supply.
That if you really can't get enough batteries to move ahead with one or two projects in your pipeline. The fact that we secure, you know, extensive capacity helped us. We haven't had any cancellations so far. We're still delivering with some delays. It speaks very highly about the quality of our contracts and counterparties. It's a very tight market. We don't know what's going to happen with the COVID situation in China, but we're still getting deliveries. There are three factories in China that are producing for us. That also diversify a little bit the supply and in our case.
We are not just relying on one factory, for example, in the Jiangsu province, that it might be affected by the lockdowns.
May I ask one follow-up to Dennis with regard to your Slide 22 and your gross margin projections for the next, it looks like two years. Is that about 1,000 basis point improvement that you're projecting over the next two years there? Also you mentioned on the call that you expect breakeven in 2024. I would assume that's with regards to EBITDA. Thank you.
That is correct. Yeah, that's in regards to EBITDA, and, yeah, certainly if you'll sum up the numbers here, then you would somewhere be around that 1,000 basis points as a total, as outlined here. That's the correct takeaway.
Thanks.
From Goldman Sachs, we have Brian K. Lee. Please go ahead.
Hey, guys. Good morning. Thanks for taking the questions. Maybe Dennis, just a follow-up to that. I was, you know, looking at the Slide 22, and trying to interpret, you know, some of the moving pieces here. You know, 1,000 basis points, can you kinda level set us? You know, you're doing negative low single digit gross margins, I think. You had been talking about kinda getting to mid-single digit positive gross margin exiting this year. Is that still the baseline for, you know, exiting fiscal 2022 and off of which we should be modeling that 1,000 basis points, i.e., you're talking about kinda mid-teens gross margin come fiscal 2024 when you get to Gen7 ramping?
Yeah, no, thanks for the question, Brian. Yeah, let me clarify on that. On the one side, for the remainder of the fiscal year, we're really focused on reducing these adverse margin impacts and pulling ourself out of the negative gross profit zone. What you then see on the right side on the chart is basically based on the as sold, which we had already over the last 12 months, 400-600 basis points. That's really the starting point you can think about, which is then excluding adverse margin impact.
That's the one thing we need to tackle, no more adverse margin impact, so that we're having that baseline start of 400-600 basis points, and then moving on top of that, these four steps with up to 300 basis points pricing and so on. All that then comes together to high single digits% to low teens% in the margin side of the products business.
Okay, that's super helpful. Something more like, maybe call it 10% in fiscal 2024 gross margin, if we're just kinda using a midpoint. That's helpful. I guess on... I might have missed this, but you mentioned earlier in the call the pricing increases. Can you help quantify that a bit? When should we start to see those read out, in terms of timing? Maybe just lastly, it seems like, you know, the margins are gonna get helped by pricing a lot and by some of these non-recurring charges going away.
Can you give us a sense of how much of your costs are kind of fully locked in for this outlook, this margin trajectory outlook, and then what percent is maybe still variable? I'm just trying to get a sense of what, you know, what potential risk still lies in the margin view here. Thank you, guys.
Yeah. Thank you, Brian. First, we have been able to increase our prices between 15%-25%, and the good news is that no cancellations after those price changes. That's one element of your question. The second is that, what about those contracts that are already signed and they're already in our backlog? We having a very honest and friendly conversation with customers around the world because this is a long-term relationship and they want us to stay supplying and providing more and more applications to them. We having conversations with them. In some cases, we are going back and try to come up with an agreement to increase some of those prices.
We have been successful in those in some of those conversations. I think that the fact that we haven't had any cancellations so far, it speaks that, you know, even with the price increases, they still want to keep working with us and they see us as a long-term partner.
Brian, for the kind of margin expansion outlook, it is really key to go to the RMI-based pricing for us. That means that we're having the same variability in our pricing to the customers as it may be happening to the underlying cost curve. That's really the risk mitigation measure which we have put in place there.
All right. Fair enough. Thanks a lot, guys.
Thank you, Brian.
From Bank of America, we have Julien Dumoulin-Smith. Please go ahead.
Hey, good morning, team. Thank you for the time. I appreciate it. Hey, so maybe just following on Brian's question here a moment ago, just to keep going here. On the back half of the year, how do you think about these timing related issues, just, you know, Chinese logistics improving? Just you talk about being back half weighted. It seems as if maybe third quarter is still somewhat impacted by, I think as you term it, these non-recurring items, you know, be it logistics from China or otherwise, and it's really looking towards a fourth quarter exit run rate. Can you try to tie that 10% margin, say, by 2024 back to how you see that exit by 2022?
Also, how much of an ongoing impact do you see in third quarter here from some of these transient items?
All right. Let me first talk about on the revenue side, Julien, before I go to the margin side. From the revenue side, keep in mind that we pulled forward some of the revenue from the third quarter into the second quarter. Of course now it's also the topics about the China lockdowns and the production topics there. That's really driving the back end weighting of the revenue in the second half year. On the margin side, really we are focused here on pushing to reduce the adverse margin impacts in the second half of the year.
Overall, we expect that the GAAP gross profit will still stay negative in the second half and for the full fiscal year, and then pushing towards low- and mid-single digits% in 2023, and from there, going into the high single digits% in the fiscal year 2024.
Got it. Yeah. Can you talk a little bit more about how this force majeure is sort of cascading through to your customers and through the LDs, right? Just ultimately, how does that impact your margins there on that side? Again, how does that flow through the income statement in kind of a similar way?
Yeah. Hi, Julien.
From your suppliers.
Good morning. Yeah. Yeah. First is that on the force majeure, it has been that in some cases our battery manufacturers, they issue the force majeure and then what we're doing is just, you know, doing the same. We are translating that force majeure event to our customers. That just had happened so far with three customers in three contracts. So it's not, I would say, across the board. The fact that it has been a reduction in the supply from China, but not an interruption, which is very good news. I mentioned about that they are producing for us in three different locations.
It help us to also diversify that the lockdowns are not affecting every single factory and manufacturing facility in China. That's an important element. I don't know, Dennis, you want to add?
Yeah, really like, Julien Dumoulin-Smith, to the question of the P&L side, I mean, at the end, the force majeure is there to protect, and just the contractual basis, for not having liquidated damages. Our expectation is to not see that in the P&L for that battery production reason.
Yeah. Julien , I would add also that and this speaks of, you know, very highly about our teams and you know, the engineering teams and the commissioning teams around the world that, you know, we put in operation 10 projects already and it's. We also closed the gap that we had delays in the last quarter last year. We had delays in the first quarter this year. We caught up everything. Now, that that's an, you know, it's a tremendous effort given all the headwinds. I really want to thank the teams are working so hard to make that happen.
That means that our technology is working. We're fixing the issues and we're moving ahead. That's very good news.
Excellent, guys. Thank you.
From Wolfe Research, we have David Peters. Please go ahead.
Yeah. Hey, good morning, everybody. Just curious on the Nispera acquisition. You said you expect that to be EBITDA accretive in 2024, but I'm just curious if you can give a sense of sort of the revenue contribution, if any, in 2022 and then into 2023. Any sense on like the revenue per megawatt for that 8 GW that they have under contract?
Yeah. Let me go first on the revenue on the modeling side, and then maybe have Seyed say a bit more on the second part of that question. Think about it for us when we just taking one step back here, not going into specific numbers here. This acquisition, as Seyed outlined, in his part of the remarks, is for us really to solidify our path towards the Manage app and to secure basically the existing business plan, which we put out as part of the IPO process and modeling. In that regard, this EBITDA accretive is really a kind of that contribution of the business.
I really want to also clarify that at the end, this acquisition was there to secure the business plan, which we have already put forward, and that's what we are focused on this, to make sure with this acquisition. Please, Seyed, maybe additional thoughts from your side.
Sure. Thank you. Great question. Nispera, the reason we're super excited about it, as Dennis mentioned, it really pulls forward our plan to execute on our digital strategy, which is to really pull forward a couple of applications, including the Manage application. Nispera is spot on in that regard, and it really fits our three main criteria that we've been talking about throughout these calls, which is technology agnosticism, portfolio optimization, and really having an overview of predictive analytics. What is really also important and exciting about Nispera is the scalability of the product.
As you know, with Fluence IQ's bidding application, we're expanding markets one by one, and we're really dealing with the intricacies and complexities of wholesale market, which is totally our kind of a strength that we bring to the table. With the Nispera, given the scalability of the product, it's one product globally. We have a strong presence now in EMEA, Americas, and APAC with this product, and we continue to grow it. In terms of if there's questions around particular ASPs, we've talked about the ASPs for Fluence IQ. We've given a range. Nispera may fall on the lower end of that range, but the volume and the throughput and the scalability is really a strong factor.
Perfect. The other question I just had was just on the elongated revenue recognition timeline. You guys are, you know, calling this the new normal. Just curious if you could specifically, you know, dive into what's driving this. Is it shipping? Is it battery availability that you talked to? I mean, do you see a path to potentially get back to that initial timeline that you guys, you know, initially pointed to?
Yeah, no. Thanks for that clarifying question there. In general, it's really the broader topics what we see in the supply chain. I mean, it's not really related to just one component, but that overall we're seeing that supply chains having their difficulties from component sides to the shipping side, what you're mentioning. That's really. We're factoring that in to the way how we contract with our customers. Is there a way back? Yes, absolutely. You know, we just wanted to make sure that there's the understanding that this is not a near-term thing. I mean, if you look out what's happening globally around supply chains, it just doesn't look like it's going to swing, so therefore we wanted to provide this clarification. Could it become better? Yes, again, absolutely.
David, you know, we mentioned this in our previous earnings call. Remember that the shipping times, you know, they change it from the pre-COVID times of, you know, from Asia to the West Coast of the U.S. They change it from eight days to three weeks. So that is something that's still there. The port congestions are still there. This is just two factors, and there are others about, you know, components availability and a little bit higher than normal faulty rates on some of the equipment that we're receiving. And those are also as a result of everything that we're seeing happening, and it is not just our industry.
It's in every single industry. Yes, I personally I have no doubt that the world will get back to normal and those challenges will be solved and mitigated. It's a matter of, you know, how much time it will take, you know, the different supply chains and the realignment that we're seeing around the world from the globalization into a regionalization. The other element that might help, it is that, you know, if we are going to see a reduction in the demand, well, this current imbalance, it will certainly change, and it can change really fast.
I don't know what you're seeing on the overall macroeconomic environment, but if we see a small slowdown in economic activity, we will see a kind of a reduction in demand that it will certainly help in that regard.
Perfect. Thank you for the color.
From Tuohy Brothers , we have Craig Shere. Please go ahead.
Good morning. The gross margin improvement sequentially was certainly nice to see. Of course, you've got ongoing price increases you're rolling out. The G&A excluding stock-based comp seemed to stairstep pretty hard in the quarter, and that weighed on the total adjusted EBITDA. What should we expect for ongoing trends in that, you know, G&A ex stock-based comp? How volatile can that be quarter to quarter?
Yeah, no, thanks for the question. So on the G&A side, I mean, on the one side, we ramped up the revenue, almost doubled the revenue compared to the previous quarter. When you think about full year guidance compared to last year, there's almost also a doubling in that number there, but less than doubling. In that regard, we are pulling the G&A in line with the growth increase, and we have been really pushing on the organization expansion in the first quarter as well as in the second quarter. We feel now that we have kind of also reached a level of organizational strength, which kind of gears up to that level of volume.
We're not expecting a similar kind of increase on the G&A side in the third and the fourth quarter. A bit still in the third quarter with additional people added, certainly maybe it's still a little bit higher, but definitely not in that step increase level as you have seen it over the last two quarters.
We're getting close to a relatively steady state rate, say the third quarter G&A can last you into, say, next fiscal year as a run rate?
I mean, maybe if you take it, if you think about it on a percentage of revenue, I think that's a better comparison because consider that we are still on a growth trajectory also throughout fiscal year 2023. Certainly overall, much more focused at this stage on profitability, and it's very clear for us that we are focusing on moving towards the break-even point. That still means that if we are having top line growth, we still need to scale the organization accordingly, but definitely not in that sense to further
Increase in terms of a % of revenue, and that should come down over the next couple of quarters. Maybe in short, on an absolute basis, it may still increase. On a % basis, it will decrease.
Great. Thank you.
From Raymond James, we have Pavel Molchanov. Please go ahead.
Thanks for taking the question. You referenced REPowerEU. In that context, have you noticed any increase in incoming calls, your customer activity since the time the war started?
Yes. I mean, first, you know, thank you very much, Pavel, and good morning to you and the team. There's no doubt about it. I mean, there's a very strong interest. We are the market leaders in Europe, and that's good. We are the market leaders, not just in volume, also in applications. They see what is happening in Ireland, what we have done in Portugal, what we achieve in Belgium, the Lithuania case, our participation in Germany. Our brand is there, top of mind. The solutions are there, and the interest is very, very high.
I mean, if you just talk to every single country, every single customer is really thinking about how the European Community can really assure that they can keep growing and operating as an economic ecosystem in a much better position in terms of energy independence and self-reliance. We are demonstrating to every one of them that with energy storage and our software and controls and the quality of our response time, they can make that happen, and we all can make that happen.
Yeah. Understood. Are there any additional logistics issues in terms of installing or delivering your product to Europe, you know, that have been affected by the war as far as increased costs? Anything along those lines?
No, nothing that is really significant. You know, that might be some components. I mean, some raw materials that used to come from Russia, and they're not available anymore. But nothing material. And in terms of the localization in Europe, Rebecca, you wanna mention about our contract manufacturing process in Europe, how that's going, and then the relationship with Northvolt, which is very exciting about, you know, how we're gonna be localizing, you know, and co-designing with Northvolt, our offerings in Europe.
Sure. Very quickly. More than a year ago, we announced our partnership with Northvolt. We have engineering teams that work together to design the product. The product is at a very near state of readiness to launch for complete sale, and we actually do have our sales teams in Europe, talking to customers about our Gen6 solution, with Northvolt as a key part of it. We're at that stage where we're engaging customers in it. Part of the plan there is to manufacture it in Europe as well. That manufacturer has also been selected, and we're working on the specs of how that product will get designed and created in that factory. In early 2023, that manufacturing will come to fruition. All great progress there to have that footprint in Europe.
Got it. Thank you very much.
Pavel, let me take the opportunity to also mention, we are building a magnificent ecosystem. I mean, we're right now combining all our three business lines. We have 20 GW. This is a platform that is with the acquisition of Nispera, with the new applications are coming, with the services, the data-driven services, the value that we're creating for our customers and the value of the platform is significant. We keep expanding on the ecosystem and it's overall, I see that the customers are really appreciating, you know, how much and how much we're helping them and how much value we're creating for them.
Thank you. We will now turn it back to Lex May for closing comments.
Thank you everyone for your participation on today's call. If you have further questions, please feel free to contact me. We look forward to talking with you again when we report our third quarter results. Have a good day.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.