Tecogen - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered sequential improvement: revenue $6.08M (+3% YoY), gross margin 45% (+500 bps YoY), and net loss narrowed to $1.19M ($0.05/share) from $1.85M ($0.07/share) in Q4 2023, aided by stronger Services and Energy margins and lower inventory provisions.
• Services remained the growth engine: $4.08M (+13.7% YoY), with steady 51% gross margin; Energy Production grew to $0.55M (+1.6% YoY) with margin expansion to 39% (+900 bps YoY).
• Strategic catalysts: signed global marketing partnership with Vertiv (No.1 data center thermal management), closed a small data center InVerde project in CT, and highlighted the potential for single data center projects to drive $13–$16M revenue and inflect profitability; backlog at $12.2M; YE cash $5.41M (currently ~$4M) supported by customer deposits.
• Guidance tone: management expects higher 2025 revenues vs prior years and continued sequential improvements; formal numeric guidance not issued. Adjusted EBITDA breakeven targeted at ~$30M revenue; Q4 adjusted EBITDA loss was $0.69M.
• Estimate comparison: S&P Global consensus for EPS and revenue was not available for Q4; thus no beat/miss determination. Values retrieved from S&P Global.*

What Went Well and What Went Wrong

What Went Well

• Services strength and margin resilience: Services revenue rose 13.7% YoY to $4.08M, with gross margin steady at 51% as pricing and cost management held; management emphasized expanding recurring cash flow streams from Service and Energy.
• Energy Production margin expansion: Energy Production revenue increased to $0.55M (+1.6% YoY), with gross margin improving to 39% (+900 bps YoY) due to better run hours and rates.
• Strategic data center progress: signed Vertiv partnership, closed a small CT data center project, and highlighted a 50MW sample site that could add $13–$16M revenue, positioning Tecogen’s Tecochill as a path to freeing up power and lowering cooling costs (“We couldn’t have a better partner in the data center space”).

What Went Wrong

• Products weakness and factory move impacts: Product revenue fell 18% YoY in Q4 to $1.44M; FY 2024 Products revenue declined 50% due to production constraints during the move and restart inefficiencies.
• One-time charges in Q4: Opex included a $109K credit loss provision tied to a hospital bankruptcy and a $217K goodwill impairment (ADGE contracts end-of-life), which weighed on operating loss and adjusted EBITDA.
• Full-year losses still elevated: FY 2024 net loss of $4.76M (vs $4.60M in FY 2023) and adjusted EBITDA loss of $3.63M (vs $2.58M), reflecting reduced Products revenue from the factory relocation despite Services margin expansion.

Transcript

Operator (participant)

Greetings, and welcome to the Tecogen Year-End 2024 Conference Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may press star one at any time to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Jack Whiting, General Counsel. Please go ahead, sir.

Jack Whiting (General Counsel and Secretary)

Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen. This call is being recorded and will be archived on our website at tecogen.com. The press release regarding our fourth quarter and year-end 2024 earnings and the presentation provided this morning are available in the investor section of our website as well. I would like to direct your attention to our safe harbor statement included in our earnings release and presentation. Various remarks that we make about the company's expectations, plans, and prospects constitute forward-looking statements for purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by forward-looking statements as a result of various factors, including those discussed in the company's most recent annual and quarterly reports on Forms 10-K and 10-Q under the captioned risk factors filed with the Securities and Exchange Commission and available in the investor section of our website under the heading SEC Filings. While we may elect to update forward-looking statements, we specifically disclaim any obligation to do so, so you should not rely on any forward-looking statements as representing our views as of any future date. During this call, we will refer to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. Reconciliation of non-GAAP financial measures to the most recently, excuse me, most directly comparable GAAP measures is provided in the press release regarding our fourth quarter and year-end 2024 earnings and on our website.

I'll now turn the call over to Abinand Rangesh, Tecogen CEO, who will provide an overview of fourth quarter and year-end 2024 activity and results, and then Roger Deschenes, Tecogen CFO, who will provide additional information regarding fourth quarter and year-end 2024 financial results.

Abinand Rangesh (CEO)

Thank you, Jack. Welcome to our 2024 earnings presentation. There are some exciting developments at Tecogen. As many of you have seen, we signed a sales and marketing agreement with Vertiv, the leader in thermal management for data centers. Before Roger gives us an overview of the financials for Q4 and fiscal year 2024, I'll provide more information on the data center market, what our target market segment is, why we signed this agreement with Vertiv, and what data center sales could mean for the company. In addition to the data center market, sales prospects for our other market segments are also looking extremely favorable. We have many new leads. Our backlog is strong, a majority of which we expect to ship in the next 9-12 months. We are also expecting to close more multi-unit orders over the next few months.

Our recurring revenue from service and energy has also grown to greater than $18 million for 2024, so with product revenue growth, we expect to see higher revenues in 2025 compared to previous years. Overall, Q4 revenues were in line with forecasts. We had forecast $6 million for Q4 and higher from there. Our gross profit margin also increased by 5 percentage points to 45%. Although our operating expenses were higher than in past quarters, this contains a few one-time expenses such as a $109,000 increase to the credit loss reserve because of a hospital customer that went into Chapter 11, and also a $217,000 goodwill impairment charge because a couple of energy contracts have reached end of life. We also expect to see increased manufacturing efficiencies and hence margins as the product revenue increases.

Lastly, we collected significant customer deposits, so our cash at year-end was greater than $5 million. In order to understand why we think the partnership with Vertiv is so exciting, I'd like to explain the underlying data center cooling opportunity in more detail. As we've discussed in past calls, the market opportunity for AI and data centers is massive compared to our current size. Using a simple calculation of the number of chips the main chip manufacturers are shipping per year and looking at the amount of cooling required over the next 10 years puts the market in excess of $20 billion. As the power density of AI chips has increased, the need for cooling has also increased.

The cooling system for a data center needs to be designed for the worst-case scenario, for example, when it's 90 degrees Fahrenheit outside and all the AI chips are operating at full capacity. It doesn't matter if the cooling capacity is used at peak power for one minute or 1,000 hours. The maximum power at the worst-case scenario is what needs to be allocated to the cooling system. Once this power has been allocated to cooling, it is no longer available for computing. This means that a data center could be losing 15-30% of the total power available because they are using electric chillers. Given that computing is the primary revenue source for a data center, freeing up this power can directly impact a data center's bottom line. This is not just a problem for new construction data centers that are short of power.

It is also a problem for existing data centers trying to upgrade to AI or repurpose existing buildings to data centers. As I've mentioned before, our TECOCHILL represents an easy way for a data center to free up this power because it runs on natural gas. It is also faster to install than an on-site power plant, especially in the case of an existing data center, since it can use the existing cooling infrastructure. It can be a direct swap for an existing electric chiller or be installed side by side with an electric chiller or as a completely new build. In the case of a new build, the TECOCHILL doesn't need any long lead-time switchgear or electrical panels to power the chiller.

The TECOCHILL also comes as standard with our Ultera emission system with best-in-class NOx and CO emissions, making it easy to obtain air permits in almost any jurisdiction. How does the TECOCHILL compare against the alternatives? Compared to the nearest other gas cooling technology called an absorption chiller, the TECOCHILL consumes half the amount of gas for the same amount of cooling. The TECOCHILL has also been proven in many critical cooling applications, including hospitals, ice rinks, and cannabis. Compared to an electric chiller, the TECOCHILL has both a lower annual operating cost and frees up power. Lastly, the TECOCHILL is made in the U.S., so we are less susceptible to tariffs. The economics of having more power available are highly compelling.

AI data centers are typically built out in 8-9 megawatt chunks, which with 2,000 tons to 5,000 tons of cooling. This example shows a 2,000-ton chiller plant. This is equivalent to four or five of our big DTX chillers. A larger colocation data center might have 10,000 tons of cooling or more. AI data centers charge their tenants based on the peak power needed at the rack. This example uses 160 kilowatts per month, but a recent CBRE report shows that the average in some markets is greater than $180 per kilowatt per month. This 2,000-ton TECOCHILL plant will free up close to 1,000 kilowatts or 1 megawatt, so this increase in available power is worth more than $2 million per year.

Given that the alternative is an electric chiller, which is a cost center rather than a profit center, by increasing available power, our chiller will directly impact the data center's bottom line. Although the economics are compelling, one of the biggest challenges as a smaller company is competing against some of the incumbent electric chiller manufacturers. As you can see by this chart from a report on data center efficiency, the market is moving to larger colocation and hyperscale data centers. This means that each project is likely to have large chiller plants. However, to achieve significant sales in this market, we need to be able to influence multiple decision-makers: the data center owner, the design engineer, equipment suppliers of complementary systems, etc. Having the right partner that can influence the multiple stakeholders involved in a sale will substantially improve the odds of a successful sale.

We believe that Vertiv is that partner because they have end-to-end expertise. They had more than $8 billion in revenue in 2024, predominantly from data centers, and have a world-renowned brand name in the industry. Conversely, for Vertiv, having our chiller as part of their offering gives them a compelling solution as power constraints become more prevalent. I believe this relationship with Vertiv is a critical part of our go-to-market strategy. Although large portions of our discussions with Vertiv are confidential, both sides see this as a precursor to a larger supply agreement. I also believe that Vertiv's market reach is going to be extremely beneficial to obtain orders from larger colocation data centers. The press release associated with the partnership has already been picked up by numerous data center publications worldwide.

Given Vertiv's strong presence outside the U.S.A., we are also hopeful that we will see orders from overseas locations. Last call, I mentioned we would have our first data center project by early 2025. We have a couple of pieces of good news here. The first is one of our existing sites commissioned in 2024 is powering an enterprise data center in Manhattan. Second, we received an order for an InVerde for an existing cloud storage data center in Connecticut. The customer compared us against other alternatives, including fuel cells and competitors, before choosing our InVerde as the superior option. The other data center projects we're working on are still moving through the procurement process. The customers are working on signing up AI tenants before placing equipment purchases. Some of these projects have also been scaled up significantly in size because of market demand.

I've also been asked by shareholders about the impact of data center sales. Here, I have an illustrative example of a 50-megawatt data center. In this example, the cooling load is greater than 11,000 tons. This means that if the customer chose to install our DTX chillers for the full plant, it would result in between $13 million and $16 million in revenue for us. This means a single sale to a medium-sized data center like this could result in profitability for us. Our present adjusted EBITDA break-even point is approximately $30 million per year. Given that our present backlog is strong and other market segments are also facing power constraints, we hope to see increased order flow across the board. Although the factory move was highly disruptive to our revenues, cash flow, and operations last year, we are now well set up for both chiller and cogeneration production.

The overhead cranes in the new location allow us to move chillers easily, and we have the capacity to scale up product revenue past our break-even point. We are presently focused on working with our supply chain to improve manufacturing throughput. The backlog is presently at $12.2 million. We're expecting another $3 million or so projects to close over the next few months. The cash position was $5.4 million at the end of Q4 and is presently approximately $4 million. We were successful in collecting customer deposits at year-end and some of the outstanding rebates. The current cash position is lower than at year-end as we ramped up working capital for manufacturing and also because some of the rebate money was passed through on behalf of customers.

We have also extended the repayment timeline on the credit line with John Hatsopoulos to 2026 so that we could use our cash for revenue increases. Just as a recap, we have three revenue segments. Our product revenue consists of sales of cogeneration units, microgrid systems, and chillers to a range of markets and customers. Our service revenue primarily consists of our contracted operations and maintenance services. Our energy production revenue stream is from energy sales, including sales of electricity and thermal energy produced by our equipment on-site at customer facilities. I'm now going to hand over to Roger to walk through our financial numbers.

Roger Deschenes (CFO)

Thank you, Abinand. Good morning, everyone. Our total revenues in the fourth quarter of 2024 were $6.1 million, which compares to $5.9 million in the comparable period in 2023, which represents an increase of 3%.

The net loss for the fourth quarter was $1.2 million, which compares to $1.9 million in the fourth quarter of 2023. Our gross profit increased 16%, and operating expenses decreased by 7% quarter over quarter. The gross margin for the fourth quarter of 2024 rose by 5% to 45% from 40% in 2023. Included in the fourth quarter of 2024 operating expenses are a $109,000 credit loss provision for a hospital customer who filed for bankruptcy under Chapter 11 and the $217,000 goodwill impairment. The goodwill impairment was a result of certain ADG contracts that had reached end of life. We also need to point out in the fourth quarter of 2023, included in the operating expenses was a $744,000 credit loss provision for certain installation receivables, which were deemed uncollectable.

For the full year, revenues were $22.6 million, which compares to $25.1 million in the fiscal year 2023, a decrease of 10%. The decline in revenue was driven primarily by our factory move, which constrained production, reducing our products' revenues, and partially by a pause in sales activity driven by the anti-gas sentiment. The recurring revenue from services and energy production increased 10% year over year. Given our current backlog, we believe we are poised for revenue growth in 2025. The net loss for fiscal year 2024 was $4.8 million, which compares to a net loss of $4.6 million in 2023. The increase in net loss in the current year is due to lower products' revenues, which result in consequently lower gross margin dollars. Our overall gross profit margin increased 3% to 44% in the fiscal year 2024 from 41% in the fiscal year 2023.

This is primarily driven by the increases in our services margin. Our operating expenses were essentially flat year over year. The fiscal year 2024 operating expenses were impacted by the one-time charge for the credit loss provision and the goodwill impairment. We will discuss sales and gross margin further in the segment performance review. In terms of EBITDA and adjusted EBITDA, for the fourth quarter of 2024, the EBITDA loss was $1 million, and the adjusted EBITDA loss was $692,000, which compares to an EBITDA loss of $1.7 million and an adjusted EBITDA loss of $527,000 in the fourth quarter of 2023. For the full year, the EBITDA loss was $4.1 million, and the adjusted EBITDA loss was $3.6 million, which compares to an EBITDA loss of $3.9 million and an adjusted EBITDA loss of $2.6 million in fiscal year 2023.

The higher loss in the current year was driven by the lower products' revenue, which is, in fact, due in part to the factory relocation during the current period. I'll review the performance by segment for the fourth quarter. Products' revenues decreased 18% quarter over quarter to $1.4 million in 2024 from $1.8 million in 2023, which is due to decreased cogeneration shipments and sales of engineered accessories. The products' margins increased to 31% quarter over quarter from 19% in 2023. As you may recall, the fourth quarter of 2023 gross margin was impacted by the obsolescence provision that was recorded during that period. Services revenues increased 14% quarter over quarter to $4.1 million in 2024 from $3.6 million in 2023, which is due to a mix of an 11% increase in revenue from the acquired maintenance contracts and a 14% increase in revenue from our existing contracts.

The gross margin was essentially flat at 51% in both periods. Energy production revenue increased by 2% quarter over quarter to $550,000 in 2024 from $542,000 in 2023. The gross margin increased 9% to 39% in 2024, which compares to 30% in 2023. The gross margin is impacted by seasonality and utility rates in the energy production segment. For the full year segment performance, products' revenue decreased 50% year over year. The decrease is predominantly due to the factory move, which constrained our manufacturing operations for nearly two quarters. Our products' revenue for Q2 were minimal, and revenues in the other quarters in fiscal year 2024 were also lower due to move preparation and subsequent bid-out and production restart in our new facility. Going forward, we expect to see growth in products' revenue.

The products' gross margin was flat year over year, but we do expect our products' margins to improve with increased volume and increased efficiencies. Our services revenue increased 20% year over year to $16.1 million in 2024 from $14.5 million in 2023, which is due to a 42% increase in revenue from the acquired maintenance contracts and a 6% increase in existing services contract revenue. For 2024, our gross margin increased 48%, which compares to a gross margin of 44% in 2023, which is due to decreased labor and material costs incurred to address engine replacements, and also a reduction in the provision of obsolete inventory in 2024 compared to 2023. Our energy production revenue increased 16% year over year to $2.1 million in 2024 from $1.75 million in 2023. Our gross margin increased slightly by 1% to 38% in 2024 compared to 30% in 2023.

It's a function of gross margin, a function of seasonality and utility rates, which affect the energy production segment margins. One other point I'd like to add is that during the fourth quarter, we collected $860,000. Abinand alluded to earlier, these are installation projects which dated from the 2018 to 2020 period. With that, I'll conclude my review of the financials, and I'll turn the call back over to Abinand. Thank you, Roger. I'd just like to recap by saying that we've made significant progress towards our strategic objectives. We couldn't have a better partner than Vertiv in the data center space. We also expect to see more data center activity from the projects we have been developing ourselves. Margins are also expanding across the board, especially in the service group, thereby increasing our recurring cash flow stream.

Finally, our other market segments are looking strong, so I'm very optimistic about what the future brings. I'll now turn the floor over for questions.

Operator (participant)

Thank you. Now, we can go to your question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. Once again, that's star one to be placed in the question queue. Our first question is coming from Alex Blanton from Clear Harbor Asset Management. Your line is now live.

Alexander Blanton (Analyst)

Thank you very much. Well, I like the outlook, Abinand. The backlog compares with what last quarter?

Abinand Rangesh (CEO)

Last quarter, when we reported, the backlog was $10.5 million. We finished the year just over $12 million. Yeah. Now we're at $12.2 million or so.

Alexander Blanton (Analyst)

Okay. Fine. The $20 billion market, you mentioned over what period is that?

Abinand Rangesh (CEO)

I estimated that over a 10-year period.

I just did a very simple calculation because I've seen various reports, but we just took the number of ships that are being shipped and said, "How much cooling does each one of those ships need? How much cooling equipment do you need if you put new equipment for all of that, assuming most of the data center is not built?" I think about at least $20 billion.

Alexander Blanton (Analyst)

Right now, that market is being met primarily by electric-powered chillers. Is that correct?

Abinand Rangesh (CEO)

Predominantly, yes.

Alexander Blanton (Analyst)

Is there competition in what you do in the natural gas chillers?

Abinand Rangesh (CEO)

As I mentioned, the only competing gas chiller technology that exists is called an absorption chiller. It's typically less than half the efficiency of our chiller.

It's rarely used in this kind of critical cooling type application because it's not really designed for this kind of high reliability, constant uptime type scenario. I would say right now, there's no direct competition on the gas chiller market. What people are doing is just building the power plant on-site much bigger and then using that to power an electric chiller. That means that you're giving up a huge portion of your potential revenue because you're not able to send that power to additional chips.

Alexander Blanton (Analyst)

Now, could you give us the background of the relationship with Vertiv that developed? How did that happen?

Abinand Rangesh (CEO)

I recognized the potential for the market, but also I knew that we needed a partner that was going to be able to help us get some of these bigger sales.

I actually just cold emailed the Vertiv CEO, and he introduced me to the key people on the thermal group. We started discussing sometime last year, and they could see that there was a big potential in the gas or potential to do cooling with gas. We basically built—we started the relationship, built a key partnership with some of the thermal division at Vertiv. Getting the agreement in place just took a little longer. Now that we have the agreement in place, they can go full speed on the marketing.

Alexander Blanton (Analyst)

Had they known anything about Tecogen before you called?

Abinand Rangesh (CEO)

No, they had not.

Alexander Blanton (Analyst)

What is the strategy that's going to be pursued with them? Are they going to market your product with their customers? Is that what's going to happen?

Roger Deschenes (CFO)

Correct.

Abinand Rangesh (CEO)

I mean, they have a broader marketing strategy, right, when it comes to any product, whether it's theirs or ours. I mean, they have their existing channels that they put information out. They do various learning opportunities. Plus, they have relationships already with a large number of the bigger colocation owners. They have various different ways that they approach that market. Some of the details of that are confidential, so I can't get into that. Because they have a lot of these existing relationships, they're in a very strong position to just present this, knowing which customers are building AI, which ones have power constraints, that kind of thing.

Alexander Blanton (Analyst)

They are a major supplier globally of equipment to data centers, correct?

Abinand Rangesh (CEO)

Correct. They are arguably the largest data center supplier of everything from switchgear to thermal systems.

I think there was a Dell study that voted them number one in terms of the thermal management for data centers. They control everything from the cooling, or they have equipment that can handle everything inside the data center to distribute the cooling as well as the actual cooling equipment itself. I believe they provide some of the design services to help customers make decisions on how the thermal system should look in a data center. They also have a partnership with NVIDIA on designing cooling for some of the chips that NVIDIA is launching.

Alexander Blanton (Analyst)

Now, you may not know the answer to this, but their stock peaked last November at around $150 or so, and it's been going down about a third since then. Meanwhile, the data center market has been expanding rapidly. Do you have any idea why that stock has been going down?

Abinand Rangesh (CEO)

If you look at their actual financial results, their numbers have been getting stronger. I think that's just market sentiment. I think that's just the ups and downs of general market sentiment and people's approach to what they think AI is going to be in the future. I don't think the underlying fundamentals appear to still be very strong, and they continue to be growing in that space. As far as we're concerned, right, it doesn't matter for us because just even as I showed, even one data center can mean a huge difference to our revenues and profitability and the scale of this company. It shouldn't make much difference what happens on their business.

Alexander Blanton (Analyst)

Absolutely. Now, they're a global company. If there's a lot of new business flows into Tecogen, you might not have the capacity in your plant.

Is there a thinking that you could use their plants? Because they've got plants all over the place. You can supply Europe with one of their plants, for example. Is that part of the plan?

Abinand Rangesh (CEO)

If you look at the—again, part of this is confidential, so I won't go into the details of it. If you look at the general structure of the sales and marketing agreement we signed with them, one of the first pieces that is included in there is that they will help us with some of our supply chain. It does build in potentially the ability to license, although we haven't—that is, all those kind of details would be worked out as part of a broader supply agreement.

I think the way we see it is that this is a true partnership where we figure out the best way to supply the market. As long as both parties can make a good return on the time and energy required to do that, we see this as a way to grow together to supply these power constraint things. I think there is not a final answer on any of that yet, but it is part of the overall discussions.

Alexander Blanton (Analyst)

It would seem to me that what you have to offer, if it becomes part of their overall product offering for a data center, is going to give them a competitive advantage. Is that correct?

Abinand Rangesh (CEO)

That is definitely correct because it allows them to use this as a tool to sell a lot of their other equipment, whereas a competitor that might only have an electrical cooling system is not going to be able to do that.

Alexander Blanton (Analyst)

They could actually improve on their growth rate given what you have to offer them, correct?

Abinand Rangesh (CEO)

That is at a point where I think I would be speculating if I—I would hope that we could be meaningful to their growth rate, but I do not know if that would be the case.

Alexander Blanton (Analyst)

Okay. It just seems to me that you are giving them a competitive advantage because it is a cost reduction in supplying the data center. Okay. Very, very interesting. I will pass it along to the next person. Thank you.

Abinand Rangesh (CEO)

Thank you, Alex.

Operator (participant)

Thank you. We have reached the end of our question and answer session.

Abinand Rangesh (CEO)

I'd like to turn the floor back over for any further closing comments. Thank you very much for attending. If anybody has any further questions, feel free to send management an email. We look forward to updating investors as we get further improvements in the space.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.