Welcome, everybody, both in person and virtually, to the UBS Global Technology and AI Conference. Very happy to have with us right now Chuck Boyce, the Chief Financial Officer of Nextracker. This is your host for today's Fireside Chat, JoJon Windham. I head up Alternative Energy and Environmental Services Equity Research here at UBS. And I think maybe as fitting as any previous year, a great year to have clean energy companies here at a tech conference, because you think about the growth of AI and some of the data center bottlenecks. One of the key maybe gateways or hurdles for growth of AI is their ability to source electricity. And in the United States, new electricity capacity means solar. And so very happy to have Nextracker here with us, which maybe provides the critical piece of infrastructure for utility-scale solar. So Chuck, thank you so much for being here.
Great. Thank you.
Yeah. And I think it may be helpful, just particularly with a bit of a larger audience and sort of maybe more tech-focused investors historically, maybe just a brief introduction of Nextracker, how you tell the story, how you fit into the supply chain for solar.
Sounds great, and it's great to be here. This is a historic conference. I was telling John earlier that I think my first time here was in the late 1990s in the internet boom. And this was the conference to be at. And it's great to see UBS carrying on the legacy of the old Credit Suisse conference. So thank you for having us. Nextracker is a really amazing company. It was founded 11 or so years ago by a group of five or six individuals who are all still at the company today. And we've built out a really key piece of the infrastructure. And if you think about solar and you go back 20, 30 years, which actually some of the folks at our company, our founder or president, have been in solar for that long, it's gone through this amazing transformation of driving down cost and reliability.
Nextracker really started with the mission of creating the best tracker and the best engineering and technology to address large-scale ground-mount solar projects around the world. And we've been happy to have number one market share for, I think, nine years in a row. And really, we've been reinvesting heavily in the tech. And we can talk about the technology a little bit differently if you want later in the differentiation. But we're not a huge piece of the overall cost of the system, but we really are super critical. We're like the infrastructure and the backbone of large-scale solar projects. And so as developers, EPC companies, owners think about the technology, we are the backbone of both the steel and infrastructure as well as the software and control systems that operate these. And so we think it's a really important niche.
We've got a really great list of tier one owners and developers as well as EPC firms that we work with on a repeated basis.
Yeah. And let's get into the technology right away, because usually the first question I get when people are getting up to speed on Nextracker, and they'll think about, OK, tracking equipment holds up the module, seems like a pretty commoditized product. Anyone can make it. And then you look at your income statement. And you're like, well, this doesn't look like the income statement with the high gross margins and, in addition, really high market share. So how do you differentiate? What are the key things that allow you to, one, have 50%+ sometimes market share and still really high gross margins? So just talk a little bit about how you drive that value prop.
Yeah, certainly. So at the highest level, cost reduction for energy is super important. And so we've done a really good job over time of driving down the cost of our solution and passing those ASP reductions through via ASPs, which is important for the ecosystem, because as the price of the project comes down, the viability and market opens up. So obviously, as energy prices go up, the market opens up. And as costs come down, the market opens up. And so we've done a really good job over the last 10 or 12 years of really driving down the cost but improving the value. And as I think about differentiation, there's five or six different kind of key tenets of how we're different. And if you look across the market, there's a lot of different competitors that do trackers.
I did those 15 years ago at a different company. We made our own trackers. But what we've done is vastly different. It starts with an engineering mindset. And a couple of the kind of key things you can think about, one is we have independent row tracking, which has a lot of different benefits. And what that means is most of the market, they'll attach or gang a series of rows together with one drive motor, so they all turn like a Venetian blind. And that's OK. And that's what we did 15 years ago. But by doing independent row tracking, you effectively can tune the system to capture more electrons throughout the day. And so think about if there's hills or there's shading or different environmental features.
By being able to track each row independently, you can capture more of the photons, convert those to electrons, and generate more electricity. We also have a self-balancing architecture where effectively our PV panels are basically hanging like a swing. If you think about like a swing set, the natural point of that is level. Every person in the rest of the market, they're top heavy, so they fall to one side or the other, and with that, we can basically track faster, more reliably. Our motors last longer. We can use smaller batteries. We can use lithium-ion batteries that last longer versus using lead acid, and those have huge benefits in long-term reliability and the architecture, and then as we think going kind of a step further, we use custom-made battery-powered tools that our EPC companies use, and all of our products are riveted together.
You don't need to have a series of people out there tightening bolts over time. You rivet it. It's put together once. The great thing about solar is the cost generally is all up front. There's very little maintenance cost. We've taken that to the next level. The long-term maintenance costs are significantly lower. With that independent row tracking, with each row tracked independently, you can drive between the rows. It reduces the cost for cleaning and washing panels, for weed mitigation, and for all the maintenance. Our customers really like our technology. We also have a software business that's independent of the tracker itself that we sell separately that allows our customers to leverage machine learning and AI, where effectively the software stack gets better over time.
They use that software to do things like independent row tracking and diffuse light, so think about, as clouds come through, the photons change the angle from being directly at the panel from an angle to being diffuse, meaning that you want to go horizontal with the panel, and so it's really amazing. You could see clouds come through over a solar project, and you'll see the panels automatically rotate to capture that diffuse light and then rotate back. It's like a choreography, and that generates more energy, and it might sound like a small benefit, but that has a huge impact on the overall long-term project returns. I always think about solar as like a DCF model in a spreadsheet, and if you are increasing the overall revenue that you generate over a long period of time, that has a huge NPV benefit to our customers.
And so we've seen a really strong uptake in what we call TrueCapture, our software that enables this advanced technology based on our architecture.
Yeah. What can be just 1% on the top line when that drops down to your return, your levered return can be very meaningful.
Very meaningful.
How do you price that product? Is it five-year contracts, fixed fee? Do you ever price it as maybe a share of the incremental revenue? Just talk to the pricing strategy a little bit.
I mean, yeah, fundamentally, so the value is different in different locations. And so we try to do value-based selling. So obviously, software has high margins. And so you want to quantify what is the benefit. And of course, the customer gets the lion's share of that benefit. We get a piece of that that allows us to continue to invest in our R&D. But all of it is priced basically site-specific based on the value and benefits to that customer. It tends to be upfront pricing. It can be over time. But with the ITC, there's a tax benefit to the buyer of buying it with the system, being able to use the tax credit. Internationally, we've done some deals that have it over time. But for the most part, it's mostly an upfront software license.
There's some small recurring revenue over time for kind of maintenance upgrades and updates.
Got it. And one of the things I wanted to ask about, it came up in an earlier conversation we were having in a meeting. I think you mentioned it was $70 million a year of R&D. And that was maybe more than the entire rest of the industry combined. And you're the CFO. How do you think about returns on that investment? How quickly does it turn into cost savings and a better value proposition?
Yeah. I think being here at this tech conference, it's a really important thing. If you look at a lot of industries, if they're commoditized, the margins effectively go to zero, the old marginal revenue because marginal cost in a commoditized environment. And so when you invest in R&D, that should manifest in terms of revenue growth and/or margin, either expansion or maintaining margins. And so we think of R&D as critical. We are a tech company. We are a research engineering-led company. And I'd say that the two key kind of pillars of Nextracker are really maniacal customer focus and customer success orientation and incredible focus on engineering and R&D. We have three large-scale R&D centers around the world, one in Brazil, one we just opened in India, and at our home office in the Silicon Valley in Fremont, California. And I'm not sure if you've been there, John.
You should come pay a visit if you have not. But you'll see expansive solar fields with engineering labs and really incredible hard work, both mechanical, software development, and those investments, we think, we're at the very early innings of solar. If you just think about where the world is going long-term and you look out 10, 20, 50 years, this is really early innings for solar, and the reason I believe that is the cost equation. Solar is now kind of eclipsed as the lowest cost unsubsidized form of electricity in most parts of the world. That's only going to continue, and the demand for electricity is only going to grow, and so with that thesis, investing early in R&D is super important, because that will allow you to capture this market, the value of the market on the long tail way out in the future.
We could certainly be a lot more profitable today if we cut R&D, didn't spend the money. Our P&L would look even better in the short term. But we'd be jeopardizing the long term. And so we're really carefully investing. But we've significantly increased the investment in R&D over the last few years as the company has scaled and reinvested back in the product and the technology. We recently acquired two companies. We've extended our offering from effectively above the ground with the tracker and the software and the control systems to now our foundations business. And we've been doing a lot of R&D perfecting these products. They're still fairly early. It's a big market. We can talk more about those if you'd like.
But we're spending a lot of additional R&D dollars integrating those foundation offerings to our tracker offering to make it a better solution and really help lower the cost for our customers.
Yeah. I was going to ask about not necessarily the foundations business, but I want to take it a little bit bigger, because one of the things me and my colleague Will, we go around to a lot of the ACP conferences and try to talk to the EPC companies, public and private. And we'll just ask them who they use. And it's sort of the regular list of hardware suppliers on there. We use these guys. We use these guys. But if you just let them talk, they'll start raving about Nextracker. Great customer service, easy to partner with, easy to solve problems with. They don't necessarily say those same things about a lot of the other ones. So it seems like Nextracker has a large mind share.
And thought of someone they want to work with is how far can you take that then to capture more wallet share to move into not just foundations, but you would think there is an ability to bring that brand and customer service to a higher share of the wallet at the utility-scale site.
Yeah, John, we're really going where our customers are asking us to go. And we are Dan Sugar, founder of the company, Marco Miller, his team, Howard Wenger. The leadership of the company is just really, really focused on customer success. And when we go meet with our customers, tier one EPC companies, tier one owner-operators, developers, they have asked us, hey, we're having challenges here with rocky soil. We're having challenges with soft soil. The installation costs are too high. And they really trust our brand. Partially, it's a function of the company's mindset of, I will sacrifice our company today to make the customer successful, i.e., if they're having a challenge at the site, we will drop everything to make them successful and not be like, oh, we're not helping you, or here's a giant change order. Pay us for all this. It's really not that mindset.
It's about making them successful, and then they will want to work with us preferentially. And that has really manifested in helping deepen those relationships. And specifically with the two acquisitions that we recently did, it does increase the wallet share. So if you think about an overall tracker project as 100, we're about 10, or think of that as roughly 10% of the total equation. The foundations are a relatively important part of that as well. And we've seen firsthand challenges. So in the traditional model, they would take an I-beam or a W-beam, and they would pile drive that into the ground. And that beam may not be perfectly lined up across the array, across the solar field. And so when you go to put the tracker on top of that beam, it's not lined up.
We've spent a lot of time and money to help them engineer to line up the torque tubes and the tracker, and so our customers have said there's got to be a better way, and so we looked at the market and bought one company specializing in really hard soil, firm soil, and this is a really unique, innovative company that we're now extending that, and effectively, it allows you to do kind of one pass through the field. It allows you to work on hilly terrain. You don't have to necessarily level the entire solar project. You can use the terrain-following PV system that we've created, plus the drill-in to hard rock and create an A-frame foundation that uses less material, lower cost, better for the environment, and so with that, we'll have wallet share.
We should gain maybe instead of 10%, we can get to 13% or 14% in some of these projects, and so really, the last two acquisitions were really customer-led. There's got to be a better way and better technology, and because we're so good at mechanical engineering, we think we can take those to the next level, drive the cost down, integrate the solution with our tracker, and provide more value to our customers and make some more money along the way.
Got it. Thanks for that. I want to put the U.S. to the side for just a second, and we'll get into some of the policy more U.S.-specific things. But higher tracker penetration internationally is a sort of pretty big theme. You're obviously a global company. Maybe you just walk us around the world, specific markets, where you think over the next three, five years will be most material.
Certainly, so first on the upstream side, the supply chain side, we've got a really amazing global footprint for our supply chain, over 80 manufacturing partners around the world. One of the great things with a lot of you all as investors is we have an asset-light model. We don't necessarily own the factories and inventory. And that really has a huge benefit to return invested capital as a profile. And in that model, with localizing the supply chain, we've taken that to markets like India, Australia, Middle East, Europe to localize manufacturing with our partners. And then so in those markets, they care deeply about local content. So India, as an example, we can provide a tracker solution that's 95% domestic content in India.
That has a huge advantage for, as our customers are bidding to win projects, being able to not necessarily with tax credits, but demonstrate local content. And so those markets, I'll do kind of a brief walk. India, with what Modi's done in that economy, really, I think that there's really great days ahead in India. Traditionally, that was a fixed-tilt market. Energy prices were quite low. Interest costs are really high, very sensitive to upfront costs. It was mostly a fixed-tilt market. As that market develops, it's going to turn more into a tracker market. And we've seen that with a lot of projects. And so I think over time, over the next 10 or 20 years, India is going to be a driving force in the solar market. And we've got a really great team there. I think it might be our second largest market by total headcount.
India started with Nextracker when the company was founded. We built on one of our first offices in India. And we've got hundreds and hundreds of people there. And we're just expanding with a new office there and a new R&D center. So that market, we think long-term, is going to be a really great market. And as that country has been industrializing and the GDP has been growing, we see energy prices going up and the tracker market becoming a real meaningful share of the overall market. If you look at Australia, a smaller market, we've done incredibly well, very high share, an amazing team that we have in Australia, smaller, but a really, really strong market. Latin America, we've seen some really strong wins. I would say Brazil's been up and down in terms of the solar market.
You've seen that market has had periods of incredible growth and then some declines. We have a great office there. We've got a really very large team there as well. We're optimistic on Brazil, long-term. I think in the short term, it's been a little bit shaky as far as the solar industry goes, and then sort of moving more to the Middle East, we've seen some great wins in the Middle East. We feel good about that market. Obviously, energy prices are quite low there, $10-$20 a megawatt hour, and so that has challenging economics, but has incredible long-term growth. If you look at what they've come out with, KSA has published very high targets of annual gigawatts of installations, and so we think that market is going to be really, really strong, but obviously it's more challenging given the price of wholesale electricity.
And in Europe, we've talked the last couple of quarters of having kind of record quarters in Europe. In general, Europe is trickier for large-scale solar projects. They tend to be smaller projects. They tend to cost a little more to build. And so there's many, many projects, but they tend to be on the smaller side if you compare them to, say, Middle East, Australia, the U.S. But really great work. And we've seen some really nice growth in Europe.
Okay. Great. And then maybe pivoting back to the U.S., obviously there's a new administration coming in. And everyone's got an opinion on the probability of this tax credit or that tax credit that was in the IRA. The way I wanted to ask you about it was, what is your message to the incoming administration? And do you believe you're being heard?
Yeah. I think I don't know if we're being heard. I hope so. But I think my message would be that we are all about domestic content. We're all about energy security. There is an insatiable demand for electricity in North America. And we're probably behind the curve on interconnection. We're behind the curve on long transmission and distribution. And so we've outlined a couple of solutions in the short term. But I just think if you look at what China has done, they've got three terawatts of installed capacity going to nine. The U.S. is one and one-fourth terawatts installed, trying to go to two. And at the end of the day, compute, decarbonization, EVs, growth, and GDP, the demand for electricity is insatiable. And the cost of solar is among the lowest costs of energy that's available in the U.S.
And so I think it's really. I don't see a real long-term. I think solar will continue to grow and be a material part of the overall market in the US. There could be periods of dislocation. But I mean, we grew under Trump the first time. We grew under Obama, grew under Biden. So I think this next administration, I don't see that as like a major hit to the industry just because the economics are there. And if you look at, we already have tariffs on panels. We already have the highest-cost panels in the world are in the US. If you buy panels outside the US, they're far, far cheaper. So I'm optimistic that domestic content, local jobs, local manufacturing, energy independence. I mean, just think if we could increase solar and use more solar and use less gas, we could export more gas.
A lot of the Trump administration is about exporting energy and helping that economy by exporting energy. So why wouldn't we just double down and go bigger on solar, create more energy independence, and then be able to export more energy with the excesses that we may have?
Yeah. It's interesting. We were at the EEI Utility Finance Conference, which would have been three weeks ago, four weeks ago. And I asked them the same question, utility after utility, what's your message to the administration? And maybe a group of companies that are generally seen as maybe more conservative historically, their message was pretty universal. Telling the administration, this isn't 2016. This is 2024. We're short of power in this country. If you would like to do onshore manufacturing and have these data centers built here, you don't get to pick and choose. What we're building is largely solar. There's no capability to build a natural gas plant before you get out of office. And so this is what we're going to do. Don't muck it up. All you're going to do is cause a little bit of delays and cause yourself a lot of headaches with power.
Yeah. I mean, our backlog is incredible. If you think about the projects that we've already signed over the next few years, the momentum is there. And I feel the business is really strong. And I do think you're right that the utilities, they want more power. And because solar is the cheapest, it has an economic advantage. But it's not just solar. It's solar plus. And I think that's gas, wind, and other forms. To firm this up is the cost of batteries continues to come down.
Yep, and a question I've been waiting to ask you. Because you've obviously been at other companies, other industries. You come into solar, you get project delays happen all the time, sometimes more than others. Certainly recently, that's been more often than others. Policy changes. How do you think in the CFO role, how do you think about how do I manage this? How do I hedge against it? How do I think about working capital needs? How do I think about providing guidance that people can be comfortable with? Because certainly, Nextracker, in your time being listed, has done much better on guidance than, say, the peer group on average, so just your thoughts and how you think about that going forward.
Well, I mean, I think in life, my view is success equals results minus expectations. So with my wife and my family, I think that's the case. And it's the same thing with the company. You want to have realistic and achievable results. You also would like to do better than those results. And I think reflecting back on our first quarter of the year, the June quarter, we had a phenomenal quarter. And yet we did see project delays. In the second quarter, in the September quarter, things were pretty stable. As we sit here today, I think things still seem like they're pretty stable. There are delays. It's taking a long time to get transformers. It's taken a long time to get interconnection. I would say it's not worse now than it was. It's not necessarily improved.
And so what we do is we do very detailed reviews and forecasts by project very frequently to see what is happening, keep our finger on the pulse of the industry and what's happening. And the things that we can control is when we deliver, deliver on time, make our customers happy. Our on-time delivery rates are off the charts. Our customer success and customer set metrics are off the charts. They are super happy. A lot of that comes back to manufacturing. Because we have domesticated a big chunk of our U.S. manufacturing, we've moved the vast, vast majority of our manufacturing to the U.S. We have over 20 U.S. manufacturing sites. And so the lead times have reduced. And so with that, we have better visibility of when we're going to deliver to our customers.
And we really are hand in glove with our EPC partners on when they want material to arrive and then be able to adjust, accelerate if they want to accelerate or push out if they need to push out. And that visibility has, I think, really been helpful and helped us kind of navigate these times of uncertainty. But I would say the high-level message is, I would say things are pretty stable on the interconnection delays and whatnot. It has not really changed much in the last quarter or so.
Okay. Great. I know we have a very hard out when that clock goes to zero. The recording goes out. So I guess I would say, Chuck, thank you so much for being here today. And to the investors on the line, keep your eye out for the invite for a site visit at the R&D Center in California with UBS and Nextracker coming.
We'd love to see you. Thank you so much, John. Really appreciate it. Thank you.
Enjoyed it.
Yep.
Be well.