Welcome to the Fluence Energy first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Samuel Chong, Treasurer and Head of Investor Relations. Please go ahead.
I would like to welcome everyone to our earnings call for the first quarter of fiscal year 2022. On the call today are Manuel Perez Dubuc, our Chief Executive Officer, Dennis Fehr, our Chief Financial Officer, Rebecca Boll, our Chief Product Officer, and Seyed Madaeni, our Chief Digital Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are neither promises nor guarantees and based upon our current estimates and various assumptions and are subject to material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.
These and other risks are described in our filings made with the Securities and Exchange Commission. We encourage you to re-review these filings for a discussion of these factors, including our annual report on Form 10-K for the fiscal year ended September 30, 2021, and our other filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of today, and the company disclaims any obligation to update such 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 measures is available in our earnings materials on the company's investor relations page at ir.fluenceenergy.com. I will now turn the call over to Manuel Perez Dubuc, our CEO.
Thank you, Sam. I would like to extend a warm welcome to our investors, analysts, and employees who are participating on today's call. Let's start on slide four on the earnings presentation found on our investor relations website. This morning, I will provide an update of our market outlook, which remains strong and demonstrate the significant progress we have made since our last earnings call. During the quarter, we have seen a tremendous increase in demand for our energy storage products as evidenced by our recent contracting activity. The market for energy storage products, service, and digital applications continues to grow at a rapid pace, with Fluence solidifying itself as an industry leader. We expect this strong demand to continue, and we are on track to deliver our fiscal year 2022 revenue guidance of $1.1 billion-$1.3 billion, despite some recent headwinds.
Finally, I'm excited to share some additional details with you regarding our recently announced strategic initiatives, including our India joint venture with ReNew Power, the expansion of our digital ecosystem through our partnership with Pexapark, and our collaboration with QuantumScape on solid-state battery technology. Moving on to slide five. We continue to contract increasing amounts of megawatts across each of our three business lines. Industry appetite for applications of energy storage remain robust, suggesting continued momentum for orders throughout 2022. As we have seen, energy storage is key to providing clean energy for a sustainable future. I am pleased to report that during the first quarter, we contracted 600 MW of energy storage products, which is a 525% increase from a year ago. This amount exceeded our expectations, as the first quarter has historically been a seasonally lower one for contracting.
We continue to experience very strong demand for energy storage products across the globe as companies and countries seek long-term solutions for grid stability and reliability as more renewables come online, creating challenges for grids around the world. As of December 31, we deployed or contracted more than 4.2 GW of energy storage products. Turning to our Fluence services business. We added 250 MW of contracts during the first quarter. We also signed 335 MW of contracts for our Fluence IQ bidding application. More importantly, after the end of the quarter, we signed an additional 1.1 GW with AES Clean Energy, which represents our single largest Fluence IQ order ever.
This contract highlights the value that Fluence IQ can deliver. With this, we have already achieved our fiscal year 2022 annual recurring revenue target for Fluence IQ 7 months ahead of schedule. Turning to slide six. I would like to update you on the headwinds that we discussed on our last earnings call and the steps we're taking to mitigate their impact. This mostly stemmed from supply chain disruptions as a result of COVID-19, as well as some cost overruns in the rollout of our first Gen6 product installations and commissioning. Our team has acted swiftly to implement corrective actions that provide us the confidence to further execute on our plan. Some of these mitigation efforts include securing shipping capacity for our high-volume routes on a two to four month forward-looking basis, giving us better visibility to deliver our product to our customers on time.
Furthermore, we have increased the size of our supply chain and manufacturing teams by 57% to provide us with the resources necessary to meet the robust demand we see. Finally, we are documenting lessons learned from our teams around the world and providing additional training so they can deliver our Gen6 product installation and commissioning more effectively. During the second quarter, we will continue to catch up on some of the installations that were delayed in the first quarter. As of today, a vast majority of the products required to fulfill our anticipated Q2 deployments have already made landfall in their respective countries and are going through installation, commissioning, and acceptance testing as we speak. I would also like to address another topic that is a concern for many in our industry, inflationary pressures and raw material price increases.
Our current backlog is hedged through the fixed price contracts we have signed with our suppliers and customers. Given the substantial volatility in commodity prices, we are introducing raw material indices, or RMI-based pricing for future contracts. By implementing RMI on both the supply side and the demand side, we are further minimizing our exposure to future commodity price fluctuations. I would also like to provide a brief update on Moss Landing. Although we cannot comment on the press release issued by Vistra in late January regarding its alleged technical findings about the overheating event last September, we can say that we continue to work with Vistra on the repair of the facility. Our own technical investigation is still actively in progress, and we will provide you an update once it has concluded. Turning now to slide seven.
As I noted earlier, we continued to execute on our business plan during the quarter to position ourselves for long-term success. I will cover a few examples. Let's start with one of our key wins in the new transmission enhancement segment of the market. As you may have seen last year, we were selected to provide a small 1-MW pilot to Litgrid in Lithuania. This pilot program was designed to test the concept of utilizing energy storage to enhance transmission and distribution network, rather than incur the costly expense of installing additional transmission lines. The pilot turned out to be so successful that we were awarded a follow-on 200-MW order for virtual transmission lines. This outcome aligns well with our strategic effort to be the leader in this market segment.
The transmission and distribution enhancement market requires a highly redundant and resilient technical architecture that supports advanced grid forming applications. This suggests a high margin potential compared to other segments. We continue to be bullish of this growing market segment as there are numerous areas around the world that can benefit from this technology, and we are proud to be among the first companies to bring it to the market. Additionally, we selected our contract manufacturer for our North American and European locations. We are on track to start seeing initial production for our North American facility in our fourth quarter. For our European facility, we expect to see initial production in the first quarter of our fiscal year 2023. Both of these contract manufacturing facilities will alleviate the burden of a single manufacturing location.
On the software development side, we made several key additions that further strengthen our deep talent pool. These additions were part of the 139 full-time employees added during the first quarter, providing us with the knowledge and experience to keep the pace with the extraordinary demand we are seeing. Now, I would like to provide you with some color on our recently announced strategic partnerships. Turning to slide eight. In January, we signed a term sheet to enter into a 50/50 joint venture in India with ReNew Power, which is one of the largest pure renewable IPPs in the country. ReNew Power is a well-respected renewables player, and by establishing a joint venture, we will collectively leverage our first mover advantage in this significant market. India currently has just 24 MW of energy storage deployed.
Almost half of that comes from a Fluence pilot that we built in 2019. Even more importantly, the Indian government has stated they will need at least 27 gigawatts by 2030, which provides Fluence a tremendous opportunity to be the industry leader in this significant market. The joint venture will serve as our primary sales outlet in India by licensing Fluence products and services. As a leading IPP, ReNew Power will also be a significant customer to the JV, beginning with a recently announced first contract for 150 MWh. Now turning to slide nine. I would like to highlight the recent expansion of our digital ecosystem. As you may recall, we are developing several in-house applications to complement our flagship digital application, Mosaic. We are paving the way for third parties to build their own applications for the Fluence IQ platform.
In January, we entered into a long-term strategic partnership with Pexapark, an award-winning provider of software and advisory services for renewable energy sales and risk management. Pexapark has supported 20 gigawatts worth of renewable PPA transactions and are currently in 18 markets with a large presence in the EMEA region. By partnering with Pexapark, we will bring together our unique insights that will help investors, IPP, and utilities make better decisions as they navigate merchant markets while trying to maximize revenue. In addition, their significant EMEA presence will also help to accelerate the coverage for our Bidding app in that region. This partnership is a significant milestone for Fluence, as it corroborates our vision for our ecosystem. Through this partnership, we will commercially introduce Pexapark and its four apps to our customer base via our digital platform.
In turn, we expect to receive customer referrals for our products and services from Pexapark. Finally, turning to slide 10. In January, we entered into a collaboration agreement with QuantumScape, a leader in solid-state battery technology. This agreement strengthens the advancement of solid-state battery technology in stationary storage applications. We will test QuantumScape's solid-state technology in Fluence smart energy storage products. This collaboration sets the stage for Fluence and QuantumScape to potentially enter into a large-scale supply agreement once commercialization is determined. We are encouraged by the benefit we see in solid-state battery, specifically around density and performance, and we remain battery technology agnostic and committed to providing our customers with the most economic and efficient product possible. I would like to take the opportunity to send our gratitude and admiration to our people during this pandemic. Thank you for your passion, hard work, and commitment.
I will now turn the call over to Dennis to cover our financial performance and fiscal year 2022 revenue guidance.
Thank you, Manuel, and good morning to everyone on the call. As Manuel stated, we delivered a very strong quarter of new orders for our energy storage products. In addition, we were able to execute on some of our near-term strategic initiatives, which position us for continued growth. Turning to slide 12. We continue to deploy capital in line with our investment framework, with a strong focus on supply chain and talent acquisition. In the first quarter, we prepaid $60 million into our supply chain to support capacity build-up for calendar year 2022 and calendar year 2023 battery supply. As Manuel already explained in detail, in January, we entered into agreements with ReNew, QuantumScape, and Pexapark, which I would like to financially highlight in more detail.
Our 50/50 joint venture agreement with ReNew is projected to be aligned with our capital-light approach, as we will be licensing our technology to the JV. We anticipate that the JV will be mostly self-funded when operational, with nominal amounts of paternal support. While the terms of the transactions are not yet publicly disclosed, this investment and expected results are in line with our previous expectations. The collaboration agreement with QuantumScape will be accounted for as R&D expense and is consistent with our previous expectations. At this juncture, we expect that it will be a few years until we can have a mass-produced solid-state storage battery. Upon production, we expect that a future solid-state based energy storage product will contribute to achieving our long-term product margin targets. The Pexapark partnership is a validation of commercial relationships being built on our digital platform.
As part of the partnership, we have a revenue share agreement in place for sales of Pexapark applications made through our app store. As our previous expectations did not include any such revenue share incomes, this partnership will be accretive to our financials from calendar year 2023 onwards. Furthermore, we continue to add talent and resources necessary to keep pace with the robust demand we are seeing. As such, during the quarter, we increased our supply chain organization by close to 60%, our service organization by approximately 20%, and acquired key talent to strengthen our software development team. These additions are in line with our model and are important steps for executing our plan. Turning to slide 13. Before we move on to our Q1 results, I would like to remind everyone of the seasonality of our revenues and order intake.
This seasonality is due to customers' desires to have products operational in time for summer in the Northern Hemisphere. Historically, we recognized approximately 70% of our revenue, mostly in our fiscal second half. This aligned with our patterns for order intake. As a result, fiscal first half results are usually lower compared to our second half. However, as Manuel mentioned, for our current Q2, there's a caveat to the seasonality, and that we expect a portion of the delayed revenue from the fourth quarter of fiscal year 2021 and fourth quarter of fiscal year 2022 will be recognized during Q2, therefore leading to a higher revenue contribution than typical in the second quarter. Moving on to slide 14, starting with the table on top of the slide.
In Q1, we contracted 600 MW of energy storage product, which was an increase of 525% from Q1 of FY 2021. We are encouraged by the high demand for products in a seasonally slower quarter. Energy storage services added 250 MW of contracts, which was a 10% decline from Q1 FY 2021. We sold higher levels of products to utility customers, which typically acquire service at a later date, as they did in Q4 of last year. We do expect an attachment rate of at least 70% for the product sold in Q1. Finally, we contracted 335 MW for Fluence IQ bidding applications in Q1, which was a decline of 36% from Q1 of FY 2021. However, in January, we entered into a 1.1 GW contract with AES Clean Energy.
With this order, we have already achieved our fiscal year 2022 Fluence IQ annual recurring revenue target about seven months ahead of time. Now moving to the second table on the slide. Despite impacts on our supply chain, the number of megawatts that we deployed for our energy storage products grew 6% sequentially. Due to our strong contracting results, contract backlog megawatts increased 20% from the fourth quarter. Our product pipeline is being driven by strong tailwinds from the market and demand for our proprietary Gen6 product. It stood at almost 14,000 MW at the end of Q1. Turning to energy storage services. Assets under management grew 8% and contracted backlog grew 10% from Q4. Similar to our storage products, our services pipeline remains robust, standing at almost 12,000 MW at the end of Q1. Moving to our Fluence IQ digital platform.
In Q1, digital assets under management grew 25% to almost 3,900 MW from Q4, while contracted backlog declined 26% due to successful transitioning to assets under management. Our digital pipeline achieved a new high of 4,500 MW at the end of Q1, which increased by almost 1,200 MW from Q4. Turning to slide 15. Our Q1 fiscal year 2022 revenue grew 50% to $175 million, versus $160 million for Q1 fiscal year 2021. Q1 fiscal year 2022 revenue is below expectations, driven by the already discussed headwinds. We view the delays of revenue recognition as temporary, with expectation to largely catch up within Q2 fiscal year 2022. On a last twelve months basis, total revenue grew 9% versus Q4 to $739 million in Q1. Turning to page 16.
In the first quarter, gross profit was -$53 million vs. $5 million in Q1 fiscal year 2021. This decrease was driven by $41 million of non-recurring expenses in Q1 fiscal year 2022, which included $31.3 million related to project charges and other costs attributable to the compounding effects of COVID-19 pandemic, $5.6 million related to non-recurring excess shipping costs and other non-recurring costs. In our last earnings call, we forecasted non-recurring expenses related to shipping and other COVID-related items of at least $50 million-$55 million in the first half of fiscal year 2022. In Q1, these expenses totaled about $37 million. We continue to forecast an impact of $50 million-$55 million in the first half.
Adjusting for these non-recurring items, we generated adjusted gross loss of $8 million in Q1 FY 2022, versus positive $5 million in Q1 FY 2021. Adjusted gross profit was negative in Q1 due to $13 million of costs associated with first time deploying our Gen6 product. As Manuel noted, we have taken significant corrective actions. However, we expect to see some trailing cost overrun on demand in Q2. Continuing on to slide 17. EBITDA in Q1 was impacted largely by the same non-recurring expenses as the gross profit. Adjusted EBITDA excludes these non-recurring expenses and additional $24.9 million of stock-based compensation, which we have started to record since our successful IPO. However, the $24.9 million includes catch-up entries since April 2021. Therefore, future quarters will see significantly lower stock-based compensation expense. Moving on to page 18.
Our cash and cash equivalents as of December 31 was $632 million. We raised about $940 million in IPO proceeds in October, net of offering costs. Immediately following the IPO, we repaid a total of $100 million in debt. Our short-term working capital in the quarter was negatively affected by the shift in revenue recognition and by the $60 million prepayment to secure battery capacities. However, we expect to catch up on cash flow later in the year. Our strong balance sheet is now enabling us to keep pace with the robust demand we see for our entire ecosystem. Going forward, we will continue to deploy our capital in line with our investment framework of enhancing unit economics, expanding recurring revenues, and developing structured offerings to deliver attractive value for our shareholders. Turning to slide 19 and our FY 2022 outlook.
Our contracted backlog as of December 31 was $1.9 billion. Our guidance for FY 2022 revenue in the range of $1.1 billion-$1.3 billion takes into consideration risks and uncertainties related to our ability to recognize revenue from our energy storage products on a timely basis in H2 FY 2022. Despite a challenging Q1, we expect our H1 FY 2022 revenue to be in line with our historic seasonality of 30% of full-year revenue, plus the majority of the $125 million delayed revenue from Q4 FY 2021. As previously discussed, we also reconfirm our forecast of $50 million-$55 million of non-recurring expenses related to shipping and COVID-19 compounding effects.
Lastly, we have already achieved our fiscal year 2022 Fluence IQ annual recurring revenue objective ahead of time and have created upside to our digital plan through the Pexapark partnership. At this time, I would like to turn the call back to Manuel.
Thank you, Dennis. The first quarter proved to be exciting as we continue to execute on our mission to transform the way we power our world for a more sustainable future. We continue to see robust demand for our products, services, and digital solutions as society continues to implement more renewables and reduce its reliance on fossil fuels, providing unique opportunities for Fluence. We are at a better place now than we were three or six months ago, with improved visibility, more capabilities, and more resources that we can deploy to meet the growing demand we are seeing. We are still in the very early stages of the clean energy transition, and I can say the future looks bright for Fluence as we look to deliver attractive value for our shareholders. Operator, we are now ready to take questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from James West with Evercore. Your line is open.
Yes. Hey, good morning, guys.
Good morning.
Manuel, I'm curious, so looking at the order intake for Q1, down year-over-year, but of course, you had the AES order that came in in January. How should we think about order intake? Should we be looking at that on a quarterly basis, or should we look at it on a kind of rolling twelve months basis? Is it lumpy and seasonal, and so I guess it doesn't seem to spark a concern at all from you guys. From your commentary, it sounds like things are very robust. Just curious how we should be thinking about that, as we kind of monitor the business on a quarterly basis.
Good morning. Thank you very much for your question. I first see you're looking more at the Fluence IQ platform-
Sure. Yeah
not the overall, you know, backlog. First is that we are extremely happy and excited that we achieved our goals 7 months ahead of our plan, which, you know, is fantastic. The best way to see Fluence IQ is that on a rolling basis. I
Okay.
It's a product that we expanded to other markets. We enter California. We're making inroads in that market. In Australia, we solidified our presence there with 20% of market share, incorporating additional projects in Australia, California. It's an open market for us, so you will see more coming. It would take a few months until you know, first you test and you model the product for the customer. We incorporate the portfolio into the platform. We do some. Sometimes we do some modeling in parallel so they can see what is the upside and the uplift, the revenue uplift potential. You sign a contract that usually it's a significant amount of megawatts.
Because the fact that we are just not using Fluence IQ for energy storage, but also for renewables, make the market, you know, more significant, the addressable market more significant, and also the growth, it's you know it's becoming the standard in the market. The more people they start testing us, the more people that they see the benefits, they will keep coming. I would say that, you know, very excited, extremely happy about the outcome and we keep moving forward and developing new applications. Seyed, you wanna share any other-
No, I think that answers the question. As Manuel mentioned, we had great momentum over the past 12 months. If you want to think about it on a rolling basis, we're super excited about the progress of the application. As Manuel mentioned, we're very penetrated deeply in Australia, continuing to grow in California. You'll see us growing into adjacent markets here in the U.S., and the landscape has been great for us. If there are any further questions, happy to take them, but I think, Manuel, you covered it.
Thank you. Thanks, Seyed.
Okay. That makes good, perfect sense. Then I guess, Manuel, you know, the momentum in the business seems to be exceptionally strong right now. I mean, every time, you know, we speak, you're on an airplane or heading to an airplane or going somewhere to see a customer. Could you maybe describe kind of how the market is developing, what type of, you know, where we are in kind of the land grab for storage, and kind of where the customer acceptance and understanding of this as being a necessity stands today versus, you know, three, six , 12 months ago?
Thank you. Thank you very much for the question. Yes, I mean, the market is exceptionally strong. Even if you consider all the headwinds that we see in supply chain and some of the concerns in some markets about the capacity to deliver. The market is there. The more they test the technology, the more they like it. We see a lot of, you know, recurring customers coming back to us and repeating their orders and looking at additional applications. Because it's a compound effect on growth. I mean, first, the sites are becoming bigger and bigger because the technology is being understood and really they see the benefit.
Now you see more and more companies, IPPs out there and utilities, they combining renewables with energy storage, but they also replacing
Right
traditional fuel, fossil fuel generation, with energy storage. The sites are getting bigger in megawatts, in capacity, but also the sites are getting bigger in hours. The total megawatt hours is a compound. It's the combination of both. On top of that, look at what happens with the, you know, we have been working for some time on the virtual transmission line concept. We developed the architecture, which is extremely complex and very unique. There are very little people that really understand how to do that. We did a test, just a pilot of 1 MW, and immediately when they saw that operational, they came back to us and say, "Well, we need 200 MW." That is 200 x the pilot.
So and then you see.
Right
Transmission line bottlenecks everywhere in the world, Germany, Chile, Vietnam. You know, there's so many places where you have offshore and onshore wind that energy cannot be delivered to the load centers because transmission constraints. If we can solve that equation without the problem, we all know how difficult it is to build transmission line, without building new transmission line, that is a whole segment with a high margins, and we are, you know, extremely uniquely positioned to take advantage of that.
Right.
I don't know, Rebecca, you wanna say something?
Sure, Manuel. Thanks again. I think you covered a lot of it. I would summarize it that the market does continue to grow and the buckets of growth are in segments, and the transmission opportunity is an example of that kind of segment. Another segment is data centers. More segments is more upward movement of that total available market. We also see growth.
Right
In new geographic regions that didn't, like India, as an example. Regions that previously didn't adopt, energy storage and the associated services in digital, and they are now ready to adopt that. Clearly in our story, we're on top of that with India and actually some other countries as well that we're moving into. Something about the regions is that they move from short-duration to long-duration solutions, so that helps us grow that total available market as well. Of course, to summarize, as Manuel said, just the penetration of renewables. I think it's clear in the market right now that to make the renewables story work, we need to pair renewables with battery energy storage. Great news.
Sure.
Allow me just to make a very short sample, because we are so happy and so proud that we are part of this story. Last weekend in Ireland, they broke the all-time record of renewable generation of 89% renewable in the system last weekend during an-
Right
Our ultra-fast response energy storage solutions in that market. We are the only ones in that market. If you see the performance of our sites with ultra-fast, which is the only one that is in the market right now, how we absorb the ups and downs of the wind generation and keep the lights on and reliable. 20% of the load in Ireland or close to that is data centers. You know the need for the five nines of reliability and availability.
Mm-hmm.
We supported that market. If you go to the statistic, and you look the way that the system operated, we are really enabling the high penetration of renewables in a sustainable and reliable way.
Great. Thanks. Thanks a lot. Thanks, Manuel. Thanks, guys.
Thank you. Our next question comes from Maheep Mandloi with Credit Suisse. Your line is open.
Hi. This is Chandni on behalf of Maheep. You talked a little bit about the near-term headwinds that you're seeing. Could you help us think through, you know, the impact on margin and cash flow through the rest of the year?
Yes, absolutely. Let me take this. This is Dennis speaking. First of all, when we think about especially the second half of the financial year, we look ahead with confidence. When we say confidence, that's stemming from two parts. First of all, it's about the measures and the actions which Manuel outlined in his prepared remarks that we are seeing them taking traction. Second, that overall, we are seeing that the Omicron wave is going down, so that means while we have seen stronger headwinds from the pandemic before, that's declining. In that regard, we're looking ahead with confidence. What that now means in terms of the margin development and the cash.
On the profit side, gross profit side, we are seeing that gross profit margins are to be improving and increasing on a quarter-by-quarter basis to come back to the level of our previous expectations by the year-end on a rolling basis. Also just to be clear on that, on the full year basis, considering the full 12 months, we won't be able to recover on what we have deviated in the first half. On the cash flow side, in the first quarter, we have made the prepayment to secure battery capacities, which is an important step for us to secure our backlog and the demand till the end of the calendar year 2023. In addition to that, cash flow has been also impacted by the delays and the shifting in the revenue recognition from the first quarter into the second quarter.
As we are catching up and looking forward with confidence on that, on the revenue recognition, we will also catch up on the cash side and on the working capital side in the later part of this year.
Thanks, Dennis. That's very helpful. Switching gears a bit, you know, we're expecting to perhaps see changes in the net metering policy in California, which, you know, could potentially drive significant demand for residential batteries. As that market potentially grows at a much faster pace, you know, would it be of interest to Fluence to bring your capabilities of manufacturing and modular batteries to residential market?
We see the same thing in the market that there is potential for residential. I would say surely that we're evaluating it. We're not in the market today, but we're evaluating it.
That's about it for me. Thank you.
Thank you. Our next question comes from Mark Strouse with JP Morgan. Your line is open.
Yeah, good morning. Thanks very much for taking our questions. When thinking about the India market, are there any local manufacturing requirements that we need to be aware of? How are you planning for that? If so, and how does that impact the potential, you know, ramp that we might see in orders in that market?
Yeah. Thank you. Good morning, Mark, and thank you. India. Very excited about India. You know, we established our first pilot of 10 MW in India in 2019. We waited for several months or even, you know, few years to the right moment to find the right time, the right partner, and be ready for such a big market. Because it's not just that we have the technology, it's also that do we have the capacity to ramp up production and to really be able to penetrate a market with a reliable and enough resources to fulfill, you know, the demand that we might see there. We found the right partner.
Very, very happy with the JV with ReNew Power, the leaders in pure renewable penetration projects in India. Initially, there's no requirement of localizing, but you know how competitive that market is. Eventually, when the time is right, we will be publishing and letting you know about how we are going to be starting to use local suppliers to complement our technology. The target is just to fully localize the production. We have, you know, all these, you know, tremendous first mover advantage. Imagine, you know, our pilot, the actual amount of energy storage in India is very, very small.
We represent right now 50% of what is already operating in India. They will do a multi-GW demand. We see that coming. The good thing is that the government already did a local tender for battery manufacturing, giving them a price subsidy on energy for those who will want to establish up to 50 GW of energy of battery manufacturing. The government is already thinking about that. In the short term, most of the equipment is going to come from abroad. There are some investors, manufacturers in India, we're already talking to them. We're already exchanging some technical specifications with them. I don't know, Rebecca, if you wanna give us some color about that. Very exciting.
Right partner, right time. The government is supporting. There's some very strong economic and political support, economic incentive. I think that the time is right for us to enter into that market.
Okay, thank you very much. You kinda touched on this earlier about the opportunity for more transmission, you know, upgrades over time. Just curious though, just kinda looking out kind of more near term, do you have any similar-sized projects in your kind of late-stage pipeline?
Yeah. I cannot disclose exactly, you know, who we are working with, but yes, we are working with world-class developers and energy companies actively participating in bidding processes that are already taking place in Europe and in America. There was more, you know, certainly, I mean, if we get this right, there will be a very good segment for us opening up with good margins. We are so far the only one, but we have developed so many applications in the past. We know that others will follow, but we keep, you know, innovating. We keep having this first-mover advantage and creating more and more applications.
Rebecca, you wanna say something about the transmission?
Again, I think you summarized it well. There certainly are opportunities that currently exist, particularly in Europe, and we have bids going on right now.
Thank you.
Okay. Yeah, we'll take the rest offline. Thank you.
Thank you, Mark.
Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good morning. Thanks for taking the questions. Maybe the first one, just going back to the margins. I know there's some pressures here near term. It sounds like they should ease moving through the, you know, back of the fiscal year. It sounds like we should expect sort of steady-state margins by year-end. Dennis, I think based on your prior model, that would imply like positive mid-single digit adjusted gross margins by, you know, let's call it fiscal Q4. First, is that fair? Maybe, can you give us a bit of the bridge here that's about a 1,500 basis point expansion from today's level over just the next couple of quarters? I had a follow-up.
Yeah. Hey, good morning, Brian. Thanks for the question. In that regard, think it like where we started in Q1. In Q1 has been impacted by the non-recurring expenses as well as by the cost overruns, which we disclosed on the call. If you're thinking forward into the second quarter, we will still have some portion of the non-recurring expenses where we had reconfirmed our outlook of $50 million-$55 million. Then we said we will still have a small amount, a trailing off amount of that cost overrun. That means in that regard, we will see a reduction in the non-recurring expenses as well as in the cost overruns in the second quarter.
While we are entering the third quarter and into the fourth quarter into the second half of the year, we are seeing that we are moving back towards these previous expectation levels into the mid-single digits as we had previously discussed.
Okay, fair enough. It's all the non-recurring going away, or it seems like there's a bit more to the bridge than just that.
Yeah. On the non-recurring side, let's say it like this. I mentioned before that we have high confidence in the measures which we put out. Nevertheless, we had stated that $50-$55 million as a guidance for the first half. At the end, we're just through quarter one of this year, therefore, we will give you an update on potential non-recurring expenses in our next earnings call.
Okay, fair enough. Just a second question around this Fluence IQ contract with AES. Congrats on the scale of that. Just wondering, it sounds like you know, clearly this is a big deal, the biggest one you guys have ever done, over 1 GW. I recall you had like a $3-$4 million revenue target for the digital business this year. You know, if I kind of back into it, this 1 GW deal is worth maybe a $1-$2 million annually since it adds about 25% to your assets under management for that piece of the business.
Is that the right way to kinda think about the scale of the revenue opportunity every time you're getting, like, a gigawatt into the IQ business, I mean?
I mean, I'll pass it to Dennis in terms of going to more details about our targets. All I can tell you, it's been a great deal for us, very energizing to see the rate of adoption of Fluence IQ in California. As Dennis mentioned, we've already achieved our expected ARR targets for this year, way ahead of the schedule, and we're building a lot of momentum. I also wanna note that I'm really proud and excited about the diversity of our customer base. Obviously, the deal with AES is very exciting. It's over 1 GW. If you look at the 6 GW that we have contracted and the diversity of our customer base, we have utilities, we have community choice aggregators. We're helping communities with Fluence IQ. We have IPPs. We have renewable developers.
We have renewable asset managers, and most importantly, we have investment banks involved in Fluence IQ. A lot of great momentum. Maybe I'll pass it to Dennis if you wanna speak more about the revenue targets.
Right. Let me take that, Brian. What makes this deal so attractive for us are two things. First of all, it has a high share of battery storage. That means in that regard, I mean, typically, going out with Fluence IQ to also go after the renewable side, this deal also includes renewable, but it has a high share of the energy storage, which brings a high ASP in terms of dollar per kilowatt. That makes it attractive first. Then the second portion is that it has also a highly attractive performance sharing revenue portion to it, which as you may recall from previous discussion, we have been very conservative on how we have put that into our model. Therefore, we are seeing an upside here on our digital side.
Okay, fair enough. I'll take it offline. Thanks, guys.
Yeah. Well, something that I would like to add, because I think it's important. You know, every market is different. I mean, just the same proportion by percentage of the portfolio increase. There are markets with higher volatility. There are markets with higher price points. There are contracts that include renewables. They are not just renewables. Remember that the revenue uplift potential for just renewables is between 10%-15%. But when you have energy storage or you add energy storage, that number goes up to 50%. If you have the revenue sharing and you know that the uplift is 50%, so that is not linear.
You actually have the possibility of exponentially higher revenue sharing when you have a higher revenue uplift, I mean, capacity for the AI system or software, but also by the dynamics of the market.
Thank you. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.
Hey, good morning, team. Thanks for the time. I'll make it quick here. Just two follow-up questions if I can. First, on AES, how do you think about the future backlog from AES? Just as you think about the % exposure to AES as a counterparty, both in the quarter and then in terms of your future backlog and else, you know, both in the context of IQ, but also overall in your business. How do you see that evolving here, right? Obviously, things were fairly elevated. We've talked a lot about it on this call, for instance, with the IQ. But how would you frame that 2022 onwards, you know, from what you know already with your backlog and otherwise?
Thank you. Good morning, Julien, and thanks for your question. We saw you wrote this morning about our call and your first impressions. You highlighted, you know, that in this quarter, we had, you know, high concentration on Fluence IQ on AES. First, let's say that, you know, we're extremely happy that AES as one of our, you know, sponsors and main shareholders, but also one of our very important customers, they are ramping up. They're expanding aggressively their renewable targets. They have done that in a very solid way. We're very happy to be linked to them. That's one element.
Second, we have customers all over the world. The fact that California is such an important market for AES, and we will be keeping capturing market share in California, well, I mean, AES will be in the mix. There's no way that, you know, with the huge portfolio that they have in California, we will not be there. So that's one element. We will see, and we are expecting that number will go back to the traditional, you know, long-term numbers that we have seen in the last three to four years in terms of, you know, what is the contribution from AES on the overall ecosystem platform expansion and populating process that we are achieving.
We're very, very excited about AES and we will see them in California, obviously. As we expand to other markets on Fluence IQ, well, then that proportion might change.
Got it. Yeah. Clearly, always good to ride on the coattails of a company expanding, like AES. All right. No doubt about that. Now-
Other companies will follow, Julien. You know that.
Yes, totally. Well, if I can actually, I'm just curious on how, as you think about the balance of this year, certainly you talked about some delays from Q4 from last year here. Can you talk about, you know, when you get some of the $130 million back, if you will?
Yeah. Let me take this, you know, high level. I wanna send a message to you and the rest of our, you know, investors and customers out there. First is that the demand is very strong. We're working very close to each one of our customers to overcome those delays, to fill, you know, to close the gaps. We've seen already that happening in many of our projects. We develop our technology for the first time, the Gen6, so, you know, it's normal that you will see some things that you need to find, you need to fine-tune. The size of the mega sites that we have is a significant step up in the company.
We brought, you know, new talent, which in these times is really difficult, and we have been able to attract very good talent. They like Fluence, they like our mission, they like that we are the leaders. In that sense, you know, things are going in the right direction. We haven't had any cancellation, which is a very good sign. Dennis, you want to add something?
Yeah, Julien, to your question. We expect to recognize the majority of the $125 million of revenue which shifted over from Q4 2021 in our first half, plus being back in line with our historic seasonality of 30% of our annual guidance.
All right. Thank you for that. All right, excellent. I appreciate both the context and the direct answer there.
Thank you, Julien.
Julien.
Thank you. Thank you, and our next question comes from George Gianarikas with Baird. Your line is open.
Hey, good morning, everyone. First, can you talk about your service attach rate at 69%, some of the dynamics that went into that and your confidence of that improving over time?
Yeah. First, we are very confident that the attachment rate that we have seen in the past is stable going forward, so it's going to stay there. As you know, Fluence in general, the Fluence services, they lag a bit after you get the signing of the systems and then the products for the energy storage and smart solutions. It will take some time to get those contracts upon signed and then, you know, incorporated into our metrics. You saw that in our last earnings call that we had an increase of 750%, so you will probably see that coming.
The way that we see it is that around 70%-75% attachment rate is gonna stay at those levels.
Just one follow-up, just to make sure that we all understand your guidance for the year and the context around it. Are you assuming that the world continues to improve from a COVID perspective, that supply chain disruptions get better and that's how you'll hit your guidance, or do you assume continued disruption? I just wanna make sure we all understand the context around it and what to look for to understand it.
Yeah. My first reaction, and thank you for your question, is. You know, we cautiously optimistic as we see the Omicron variant subsiding, and we see less port congestion, for example, in the West Coast of the United States, as we have most, a vast majority of our products already in country in the different locations where we have to install and commission for Q2. We are cautiously optimistic. We do see an improvement for the second half of the year, but we are also accounting that it might be some still places where things will get a little. It will delay their process to get back to normal. We are considering both.
Right. We maybe internally would call that like a, consider it a new normal. That means like a pandemic/post-pandemic kind of level of supply chain reliability. That means not as good as pre-pandemic, but also not as bad as we have seen, especially over the end of the last calendar year with the high levels of Omicron.
Thank you.
I also would like to add that the fact that we have already selected our contract manufacturers for Europe and the U.S., that will also help us on the supply chain and logistics.
Thanks, guys.
Thank you. Our next question comes from Graham Price with Raymond James. Your line is open.
Hi, good morning, and thanks for taking the questions. Just on the newly announced Pexapark partnership, was wondering if you could talk a little bit about how that expands coverage for the IQ platform and maybe specifically what that does for the addressable market for the bid app side of that.
Yes. Thank you. Great question. Let me take you all back to what we shared during our roadshow and analyst day conversation. With Fluence IQ, our flagship application, as being the bidding application, we have been contemplating and in the process of developing new applications. We also noted that an upside for us is to create opportunities for third parties to integrate or get into partnerships with us for additional applications. Now, I should also note none of that was built into our financial models in terms of revenue upside. By the fact that we have actually announced this partnership, we're way ahead of the schedule in terms of creating that momentum around third-party applications.
Obviously, Pexapark, with their presence in Europe, that gives us a greater insight into the European market and allows us to get into that European market with deeper customer relationships. All great, ahead of schedule. Let me pause there if there's any follow-ups, but I should say it's very positive momentum in the right direction.
Got it. Understood. Thank you for that. I guess quickly on the cost overruns that you saw for the Gen6 product installations. Just wondering, are those largely due to commodity price inflation, kind of the typical logistics issues? Is there one thing you can point to, or is it just kind of a combination?
Sure, I'll take that. We've kind of separated the cost overruns from the logistics issues. On the cost overruns, they are temporary, and they are associated with installation and commissioning. The way that we have addressed that is we have done root cause analysis of either operational issues or technical issues that we could optimize to ensure that those cost overruns get to zero closer to the end of this quarter. We've implemented those fixes either in our field installation manuals or in our factory, and those are in play right now. We've identified the issues, and we've implemented the fixes. We've also hired a significant number of more people to be able to handle the installation and commissioning.
That was one of the lessons learned, is that we needed more people, and we have trained those people in the installation procedures and updated our installation manuals.
Okay. Understood. Thank you very much.
Thank you. Our next question comes from Ryan Levine with Citi. Your line is open.
Good morning. Has the AES Fluence IQ contract duration compared to the existing portfolio and are there any material term differences in that agreement versus other contracts that you've signed?
It's actually more on the longer duration side in terms of the contract length, which is more exciting. That gives us further momentum to really adapt IQ with the dynamics of the California market. Like I said, it's more on the longer duration side.
Okay, thanks. In terms of your hiring ability or trends, can you update us on your ability to hire new people both on the engineering and sales force side throughout the organization?
Yeah. As I mentioned, I mean, we're very pleased that in such a difficult market, and we all know that the labor market is, especially for highly qualified engineers and professionals, it's very tight. It has been a quite nice surprise to us that the number of people that they want to come, they want to be a part of Fluence story. They want to, they like our mission and our purpose. They like what we're doing and our global presence, and that we are truly enabling, you know, more and more renewables around the world. We increase our teams in supply chain and manufacturing, logistics, you know, by 57%.
We hire a significant amount of engineers, and control engineers and commissioning engineers. Honestly, you know, the demand has been, you know, tremendous. We have extremely high volume. We might call it, you know, growing pains. We are surprised by, you know, the amount of demand that we have. And the simultaneous effect that having all those sites being commissioned and installed simultaneously, it was a big challenge. I think that, you know, by the almost 150 people that we added in a very tight market is remarkable. Thank you very much for asking.
I mean, an opportunity for us to welcome all of them and thank them for all their hard work.
Just to clarify the comment around fourth quarter achieving single-digit margin, is that referring to on a GAAP basis, or is that on a incremental contract signed or incremental sales basis, given the revenue recognition that you have throughout your organization?
That's referring to the in-quarter numbers on an adjusted gross profit level.
When do you think you'll be able to achieve single digit on a GAAP basis?
We will see that same trend on the GAAP basis as on the adjusted basis. As mentioned before, we are a bit early in the year, and we therefore will give you a more concrete answer on that one in the next earnings call.
Okay, appreciate it. Thank you.
Thank you. Our last question comes from Steve Fleishman with Wolfe Research. Your line is open.
Yeah. Hey, good morning. Thank you. Just, I guess, just on the shipping costs and the like, how are you thinking about, as we move on kind of what to consider one time versus ongoing to the degree that we stay in a kind of a higher inflation environment?
Yeah, let me take that. In general, we think that, or we are seeing that prices have been stabilized on a higher level in the shipping market, and that since Q4 fiscal year 2021, we have been including these higher logistic costs into our customer prices and have been pushing them therefore into the market. That means overall, in terms of the shipping cost side, we are seeing actually a light at the end of the tunnel and seeing that these type of non-recurring expenses are subsiding throughout this fiscal year.
Okay, we should assume those costs. We shouldn't have non-recurring shipping costs pulled out as we get later in the year.
That is correct.
Okay, great. Could you just clarify the comments that you made about Moss Landing? Are you implying that you may disagree with the report that was issued on Moss Landing? There's plans to build a lot more storage there. Like, are you in the running for that or not? Or just like more clarity on what's going on there.
I just want to repeat, you know, what I stated in my initial remarks, is that we are helping and we are working with Vistra, you know, about putting that facility back in operation and fixing the installations. We are conducting our own investigation, and it's too early. Once we have, you know, the final results, well, we will share that with the market. It's too early to say exactly what it is. We will be informing you and the market when that happens.
Okay, great. Thank you.
Thank you.
That's all the questions we have for today. I'd like to turn the call back to Samuel Chong for any closing remarks.
Thank you. We would like to thank everybody for listening to our earnings call today. If you have any further questions, please contact us at investorrelations@fluenceenergy.com. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.