Q3 2024 Earnings Summary
- Strong Momentum in Bookings and Customer Acquisition: Shoals has quoted $2 billion worth of projects in 2024, an increase of 50% year-over-year. Since the ITC ruling, the company has signed four new EPCs, with these previously underpenetrated customers generating $25 million in revenue year-to-date compared to less than $1 million in 2023. This demonstrates significant commercial success and a growing customer base.
- Positive Outlook Despite Macro Uncertainties: Despite concerns over policy changes following the recent election, Shoals' management expresses confidence in the outlook for U.S. utility-scale solar. They highlight increasing power needs in the U.S., projecting 3% to 5% load growth over the next five years, equivalent to 1,000 terawatt-hours of additional power. Solar remains the lowest Levelized Cost of Energy (LCOE) and the quickest to deploy, positioning Shoals favorably to meet this demand.
- Healthy Backlog Supporting Future Growth: Shoals reports a backlog and awarded orders of $455 million scheduled to ship within the next 12 months, up from previous quarters. Management believes the order book is "healthy," driven by improved customer timelines and projects moving forward. This strong backlog provides visibility into future revenue and supports expectations for a return to growth in 2025.
- Project delays may impact revenue recognition and backlog realization. Some of the $455 million backlog scheduled for shipment in the next 12 months includes delayed projects from 2024, raising concerns about the confidence in meeting these projections.
- Margin pressure due to increased labor costs and operational inefficiencies. Gross margins in Q3 fell below the target range of 40% to 45%, affected by elevated labor costs, supply chain issues, and reduced efficiency on the production floor. These factors may continue to pressure margins moving forward.
- Competitive pressures and patent disputes could affect market share and profitability. The company acknowledges ongoing competition, with specific mention of a redesigned voltage product excluded from the ITC ruling, potentially impacting their market position and leading to legal challenges.
-
Gross Margin Decline
Q: Why did gross margins dip below target range?
A: Gross margins in Q3 were 37.9%, slightly below the target 40%-45% range due to elevated labor costs, supply chain issues, and expedited freight expenses. These were nonrecurring operational items, and management remains confident in achieving the long-term margin target of 40%-45%. -
Bookings and Revenue Outlook
Q: What's the outlook for bookings and revenue conversion?
A: Bookings were softer in Q3 but showed strong momentum at the start of Q4. Quoting activity reached record levels, with $2 billion worth of projects quoted, up 50% year-over-year. The backlog scheduled to ship within the next 12 months is $455 million, reflecting a healthy book of business. Management expects to achieve a book-to-bill ratio over 1 in Q4 and is encouraged by the strong pipeline extending into 2025 and 2026. -
Patent Litigation and ITC Decision
Q: Any updates on the ITC case and patent protection?
A: The timing for the ITC decision review is imminent, and no updates have been received yet. Management is excited about the initial determination, which was a win for Shoals, and plans to protect the new BLA patent portfolio. They expect the final determination by the end of December and will continue to defend their patents vigorously. -
Customer Concentration Decreasing
Q: How is customer concentration trending?
A: Customer A's concentration decreased to about 30% from last year's 34%-35%, indicating increased revenue diversification. The backlog is becoming healthier and more diverse, with efforts to increase wallet share among various EPCs showing positive results. -
Project Delays and Cancellations
Q: How are project delays affecting revenue?
A: Project delays are managed closely with customers, with firm timelines obtained through weekly meetings. The company has had only one cancellation in the past year. Delayed projects are pushed out but not lost, and the quality of the order book remains strong. -
Impact of Election on Solar Market
Q: How might the election affect the solar market?
A: Management is optimistic about the solar market despite potential changes in administration. They highlight the continued need for power, with solar being the lowest LCOE and quickest to deploy. Investments in solar are strong in both red and blue states, and support from the new administration is anticipated. -
Competitive Landscape and New Products
Q: What's the response to new products and competition?
A: Customers are responding positively to new products like the 2kV offering, with substantial quoting activity post-launch. While competition exists, the company is focused on customer dynamics, flexibility, and innovation to maintain and grow market share. -
Booking Timelines for 2025 Projects
Q: Can you still book orders for 2025 delivery?
A: Yes, the company is booking orders out into 2026 and can still accept bookings for 2025 projects through the first half of 2025. The project cycle has elongated to 13-14 months, providing better long-term visibility. -
Revenue Conversion Cycles Across Verticals
Q: How do revenue cycles vary across verticals?
A: CC&I projects have shorter revenue conversion cycles, allowing for quicker turnaround. International utility-scale projects tend to take longer, while battery energy storage projects can be turned around relatively quickly. Overall, revenue cycles are not getting worse. -
Backlog Conversion Confidence
Q: How confident are you in backlog conversion?
A: The company is confident in converting 76% of the order book to revenue in the next 12 months, up from 72% last quarter. This improvement is based on better project timelines and a healthier order book. -
Estimating Project Delays
Q: Do you rely on customer timelines for delays?
A: Yes, firm timelines are obtained directly from customers through weekly meetings. They do not use their own discretion in estimating delays. Backlog projects have contracts, and cancellations are rare. -
Gross Margin Impact of Volume Discounts
Q: How do volume discounts affect margins?
A: Volume-driven discounts are part of master supply agreements with top customers. While they may impact margins, these partnerships drive top-line growth. Management may increase disclosures around these discounts as they become more significant. -
International Expansion and New Products
Q: How are customers responding to international products?
A: The rollout of new international products like Super Jumper and trench BLA has led to substantial quoting activity. While no major wins have been announced yet, customer interest is a positive sign. -
Competitors Beyond Voltage Products
Q: Are competitors emerging outside of Voltage?
A: Competition exists, but Shoals is engaging closely with customers to improve EBOS deployments and is introducing new products based on customer feedback to maintain its market position. -
Improved Backlog Conversion Expectations
Q: What's driving improved backlog conversion?
A: Improved project timelines and a stronger order book are increasing expectations for revenue conversion in the next 12 months. Some delayed projects from 2024 are now scheduled for delivery. -
Book-to-Bill Ratio Expectations
Q: Do you expect a book-to-bill over 1 in Q4?
A: Yes, management is targeting a book-to-bill ratio over 1 in Q4, supported by strong commercial gains, customer engagement, and a healthy pipeline.