Fluence Energy Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2025

Key Takeaways

  • Positive Sentiment: Fluence signed two contracts in Australia worth approximately $700 million of combined revenue, including the largest contract in its history.
  • Negative Sentiment: Q3 revenue of $603 million fell short of expectations due to ramp-up delays at the new U.S. manufacturing facility, shifting about $100 million of revenue into fiscal 2026.
  • Positive Sentiment: The company delivered a 15.4% adjusted gross profit margin, exceeded targets, and grew annual recurring revenue to $124 million.
  • Positive Sentiment: Recent U.S. legislation (O3) extends standalone storage tax credits, restricts Chinese equipment, and raises domestic content requirements, boosting Fluence’s competitive position.
  • Positive Sentiment: Fluence ended Q3 with a $4.9 billion backlog—up $1.1 billion since June—and a pipeline of $23.5 billion, reflecting sustained global demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Fluence Energy Q3 2025
00:00 / 00:00

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Janice, and I will be the operator for today. At this time, I would like to welcome everyone to Fluence Energy Inc. Q3 twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. And I would now like to turn the conference over to Lexington May, Vice President of Investor Relations. You may begin.

Speaker 1

Thank you. Good morning, and welcome to Fluence Energy's Third Quarter twenty twenty five Earnings Conference Call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nabreta, our President and Chief Executive Officer and Ahmed Pasha, our Chief Financial Officer. During the course of this call, Fluent's management may make certain forward looking statements regarding various matters relating to our business and company that are not historical facts.

Speaker 1

Such statements are based upon current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward looking statements, which speak only as of today. Also, note that the company undertakes no duty to update or revise forward looking statements for new information.

Speaker 1

This call will also reference non GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much.

Speaker 1

I'll now turn the call over to Julian.

Speaker 2

Thank you, Lex. I would like to send a warm welcome to our investors, analysts and employees who are participating in today's call. This morning, I will briefly review our Q3 results and then address the impact of recent legislation, which we believe provides a strong foundation for the future of our business. I will also provide an update on the current market environment and the progress we made in executing on our strategy. Ahmed will then cover our quarterly financial results and 2025 outlook in more detail.

Speaker 2

Turning to slide four. I am pleased to report that since our Q2 call, as we expected, we signed two contracts in Australia worth approximately $700,000,000 of combined revenue. One of these countries is the largest contract in our history. Additionally, we delivered on our first domestic content product, which we believe is the first domestic content compliant battery storage system delivered in The U. S.

Speaker 2

We're ramping up our U. S. Production and working through some typical production ramp up issues as we scale. And finally, all of our contracts that were halted in The U. S.

Speaker 2

Market due to tariff and regulatory uncertainty are now reactivated and moving forward. Turning to slide five and our Q3 performance. First, we ended the quarter with approximately $4,900,000,000 in backlog. Since June 30, we had added to our backlog approximately $1,100,000,000 of contracts, including the two Australia contracts that I mentioned. Second, we recorded approximately $6.00 $3,000,000 in revenue, which was below our expectations, mostly due to delays in ramping up volume at our U.

Speaker 2

S. Manufacturing facility. We expect to recover this revenue in fiscal twenty twenty six as production rates at these facilities continue to improve and reach their targeted capacity levels. Third, despite this revenue shortfall, we generated a 15.4 adjusted gross profit margin, well above our target for the quarter. And our annual recurring revenue increased to 124,000,000 And finally, we closed the quarter with more than $900,000,000 in liquidity, including approximately $460,000,000 in total cash, which we believe allowed us to continue operating from a position of financial strength and provide significant flexibility in the current market.

Speaker 2

Please turn to slide six. Since our last call, several developments have reshaped the energy policy landscape in The United States. The One Big Beautiful Bill Act or the O. Three came out with strong support for battery storage. It differentiates best from other sources of generation by recognizing our technology as a dependable and dispatchable source of electricity, much like nuclear or gas plants.

Speaker 2

This morning I would like to highlight four provisions of the OV-three that provide support to Fluent's U. S. Strategy centered on domestically produced energy storage systems. First, the OV3 extends the investment tax credits for standalone storage through 02/1934. Second, it establishes new restrictions on the base ITC, limiting eligibility for Chinese equipment.

Speaker 2

Third, imposes tighter and increasing over time FeOC requirements on the 10% domestic content bond. And four, it has FeOC restrictions on Section 45X manufacturing credits. We believe that these provisions enhance our competitive position. As one of the few companies currently capable of delivering domestic content energy storage systems at scale, We're seeing increased customer interest and growing opportunities that reflect the scarcity of compliance solutions in The U. S.

Speaker 2

Storage market. Turning to slide seven, as I noted, the OV3 adds FPOC restrictions to the Section 45X tax credit, limiting ownership, control, and material sourcing from certain countries. We expect that the forthcoming treasury rules implementing these restrictions will be workable. And we are actively engaged with our suppliers to ensure compliance by the deadline next year. Here I want to highlight two important topics.

Speaker 2

First, we are looking at multiple options, none of which requires any significant capital beyond liquidity needs we have previously earmarked, thus not requiring us to raise additional equity. And second, the increasing domestic content thresholds under OV3 favors our established U. S. Supply chain,

Speaker 3

which positions us well to deliver compliant cost competitive system in this evolving regulatory landscape.

Speaker 2

Turning to slide eight. The significantly higher tariff from China proposed by the Trump administration and the uncertain tariff environment overall were the primary reasons for the halt in contracting activity last quarter. More recently though, the tariff on certain Chinese battery components has been reduced from 155.9% to 40.9%. This has restored a level of predictability that has prompted customers to resume contracting discussions. We are now seeing early signs of renewed U.

Speaker 2

S. Order activity, supported by our flexible contracting model, global sourcing, and strong customer relationships. As I mentioned earlier, all our contracts that were halted in The U. S. Market due to tariffs and regulatory uncertainty are now reactivated and moving forward.

Speaker 2

Separately, the Department of Commerce issued a preliminary 114% duty on certain Chinese origin graphite material with an estimated $5 per kilowatt hour cost impact that is manageable and reflected in our guidance. We are pursuing alternative sourcing and believe these rulings along with the recent legislation and tariff changes reinforce the value of our U. S. Content leadership and diversified supply chain. Turning to slide nine, I would like to touch on the competitiveness of energy storage.

Speaker 2

The data is increasingly clear. Battery storage is now one of the most competitive solutions for meeting capacity needs and is superior to gas turbine. It's not just about cost, it's also about speed and scalability. Generally, battery projects can be permitted, sited, and deployed far more quickly than new fossil generation, making batteries a flexible tool for utilities and grid operators navigating rapidly growing demand. We already seen this shift in real world operations.

Speaker 2

In June, batteries supplied 26% of Kaizen's evening peak demand, surpassing gas for the first time. That's a landmark moment for our industry and a clear signal that grid scale storage is no longer a futuristic concept. It's here, it's working and it's scaling. Turning to slide 10. In addition to competitive costs, we also seen an expanding addressable market for BEST.

Speaker 2

One of the most transformative trends we've seen in the energy landscape is a rapid growth of data center demand driven by AI and machine learning workloads. These workloads are not only energy intensive, they are also highly variable. Training large AI models or processing inference tasks can lead to sudden spikes in power consumption, placing immense strains on the grid and creating localized reliability challenges. This is where battery energy storage can play a critical and unique role that cannot be filled by conventional sources of generations or renewables.

Speaker 1

BEST can act as a

Speaker 2

buffer, absorbing rapid surges in power and releasing it during high demand intervals, effectively leveling out the fluctuations that come with AI driven compute cycles. What's more, batteries can be co located at the data center itself or deployed at the transmission or distribution level, offering both behind the meter and grid level flexibility. That's a key advantage in markets with interconnection bottlenecks or constrained infrastructure. Fluence is engaging with leading data center operators to develop storage systems that meet these fast changing power demands, providing real time flexibility for some of the grid's most dynamic loads. Initial estimates place the demand for these solutions at $8,500,000,000 through 02/1930.

Speaker 2

Turning to slide 11. Coming back to our Q3 performance, we delivered strong double digit gross margin, driven by disciplined execution, cost controls, and supply chain optimization. Our product mix, pricing strategy, and scale are sustaining higher margins in a dynamic market reflecting a structurally improved margin profile and supporting long term attractive returns. These results reflect the success of our commitment to profitable growth that we laid out a few years back. Turning to slide 12.

Speaker 2

As of June 30, our backlog was approximately $4,900,000,000 providing strong visibility into future growth. Since quarter end, we have signed approximately $1,100,000,000 in additional contracts, including approximately $700,000,000 from the delayed Australia projects. The backlog is well diversified across North America, EMEA, and Asia Pacific. Momentum remains strong in Asia Pacific and EMEA and we are seeing early signs of recovery in The U. S.

Speaker 2

As tariff related uncertainty eases and the enactment of OV3 addresses concerns about risk to the regulatory environment. Our domestic content compliant product, flexible contracting, and resilient supply chain position us to capitalize on this rebound. Our pipeline has grown to 23,500,000,000 from $22,000,000,000 last quarter, underscoring broad global demand. This concludes my prepared remarks. I will now turn the call over to Andres.

Speaker 3

Thank you, Julian, and good morning, everyone. Today, I will review our third quarter financial results and then discuss our liquidity and updated outlook for the remainder of fiscal twenty twenty five. Turning to Slide 14, starting with our third quarter performance, we generated $6.00 $3,000,000 of revenue. This brings our year to date revenue to $1,200,000,000 or 46% of expected full year revenue, which is consistent with our prior year results. Q3 revenue was approximately $100,000,000 or 15% below plan due to a slower ramp up at our new U.

Speaker 3

S. Manufacturing facilities, particularly at our recently commissioned employer facility in Arizona. Enclosures are the final stage in the production process and therefore the gating item from a revenue standpoint. We have already seen recovery milestone met across our cell module and employer facilities and expect to reach targeted production levels by the calendar year end. I would note that our delivery commitments have sufficient time contingency to cover this delayed ramp up.

Speaker 3

Thus, we expect to continue delivering products to our customers on time and on budget. Our Q3 adjusted gross margin was 15.4%, which reflects solid execution across our portfolio, particularly in Europe and Asia, where we generated more than half of Q3 revenue. Our adjusted EBITDA was approximately $27,000,000 which reflects the higher margins carried by the international projects during the quarter. Turning to Slide 15, we remain focused on maintaining strong liquidity to support our operations. We ended the third quarter with more than $900,000,000 in liquidity.

Speaker 3

This includes approximately $416,000,000 of cash with the rest coming from availability under our credit facilities. I'm also pleased to report that last week we executed a new $150,000,000 of supply chain facility. This is Fluence's first ever unsecured facility, which carries an all in interest cost of approximately 6% and is available to us to meet working capital needs. We appreciate the continued confidence of our relationship banks who share our vision and believe influences long term growth potential. On a pro form a basis, this brings our total liquidity as of June 30 to more than $1,000,000,000 giving us additional flexibility to execute on our future growth plans.

Speaker 3

As I mentioned on our second quarter call, we expected to require a couple of $100,000,000 of working capital during the 2025. During the third quarter, we have already funded approximately $150,000,000 of that, mostly to purchase inventory, which now totals $650,000,000 The majority of this inventory will be used to meet our near term customer commitments. Accordingly, we don't foresee any material additional funding needs in the near term and we expect to maintain our strong liquidity, which is critical to supporting our growth plans. Turning to slide 16 next, I will review our financial guidance for fiscal twenty twenty five. We now expect revenue to come in at the low end of our prior guidance range or approximately $2,600,000,000 As I noted earlier, the delays in ramping up our US manufacturing facilities have had the impact of shifting approximately 100,000,000 of fiscal twenty twenty five revenue into fiscal twenty twenty six.

Speaker 3

With respect to other guidance metrics, we are reaffirming our ARR of $145,000,000 by the end of fiscal twenty twenty five. In addition, we are reaffirming our adjusted EBITDA guidance range of 0 to $20,000,000 We also continue to expect our full year 2025 adjusted gross margin to be between 1012%. Despite the macro headwinds that have occurred this year, such as tariff and legislative uncertainty, we have continued to take necessary steps to manage the business for profitability and cash flow. And this is reflected in our results. For 2026, we will provide formal guidance on our year end call in November, consistent with our prior practice.

Speaker 3

We intend to base guidance on backlog coverage of 80 to 90%, which will represent higher confidence in our revenue and EBITDA forecast compared to the historical practice of 65%. Today, we have fiscal year twenty twenty six backlog of $2,500,000,000 In summary, we remain confident in the long term prospects of energy storage in general and particularly influence his ability to deliver maximum value to our shareholders and customers. With that, I would like to turn the call back to Julian for his closing remarks.

Speaker 2

Thank you, Admin. Turning to Slide 17. In closing, I will highlight the key takeaways from this quarter's performance and our outlook moving forward. First, the market for energy storage remains robust globally. More importantly, we have started to see The U.

Speaker 2

S. Market activity pick back up after the pause we saw earlier this year, driven by a very supportive backdrop from recent federal legislation and some easing of tariff uncertainty. Second, we are actively working with our supply partners to structure our supply arrangements to achieve compliance with the new requirements under OV3, including the POC provisions, and we'll continue to do so as new regulations and guidance are issued. We are working towards these being completed ahead of the deadlines under the OV3. Third, there is a strong business case for battery storage as battery technology is now cheaper than gas and is uniquely positioned to adapt the growing AI data center power demand to grid conditions.

Speaker 2

Together, these factors reinforce our confidence in Fluent's ability to excel in today's environment and deliver value to our stakeholders. With that, I would like to open up the call for questions.

Operator

Your first question is coming from the line of Brian Lee from Goldman Sachs. Please go ahead.

Speaker 2

Good morning, Brian. Thanks

Speaker 4

for taking the questions. I guess, first, when I look at the guidance for the rest of the year fiscal Q4, it implies gross margin. I know you guys don't like to focus on it too much, but you had a really good gross margin in Q3 here. Q4, it's indicating something south of 10%, so below the low end of the guidance range for the year, even though it's a big revenue quarter. So can you kind of talk about the puts and takes on margin into the year end quarter?

Speaker 4

And then also, you got a decent amount of backlog heading into '26, some really good Australia activity here that presumably is going to show up in your '26 execution. What are you seeing in terms of margin outlook for the backlog? Are we tracking ahead of kind of the 10 to 12 that you did this year? Just trying to understand what to read into Q4, but also what you see in the backlog at the 2026?

Speaker 2

Great. Thanks, Ryan. On the margins for the fourth quarter, the fourth quarter has a lot of U. S. Revenue.

Speaker 2

A lot of the revenue in the fourth quarter comes from The U. S. And it has been affected by the new tariff. Was roughly we disclosed in the last call roughly $30,000,000 which generally represents 1%. So that's what's driving, I will say the softer margin numbers for the year.

Speaker 2

But from an execution point of view, from Maria, putting that aside, the other parts of the execution are going, putting the tariff aside, meant. The other parts of the execution are going very well. We're working hard to take this as high up as we can. So we're delivering things are working well. But that's the driver essentially.

Speaker 2

As you know, we had to take some of those tariff costs into our results, so that's driving it. In terms of '26 guidance, I mean, gross margins for '26, I don't want to provide guidance today on that number. What we're seeing is roughly in line with the 10 to 12 that we're giving you, that we've set for this year. Still some work to do that we're working on, and hopefully, you know, things will work out better, but that's where we are at this stage. Okay,

Speaker 5

fair

Speaker 4

enough. Then Julian, I know you talked a lot about the kind of you had a couple of slides here around the policy actions of late and how they impact your business. Can you I know there's been a lot of investor focus and concern around fee of restrictions and how Fluence fits into the new landscape with your relationship and the ownership structure of AESC. Can you give us a bit more elaboration around how you're navigating that and how you're positioned with respect to FIAC and AESC? And if there are actions you need to take and what timeframe and what potential investments you might need to make to make that happen.

Speaker 4

Thank you.

Speaker 2

I'll tell you, I know that you all have expressed some concern around, on the macro view, Our view has always been that The U. S. Battery storage market was going to be a domestic content market. That has been our view even before the IRA and all of that. Think politically about the role that this technology was going to play, how this technology is built.

Speaker 2

It was going to be difficult to see it being dominated, that The US would allow this to become dominated by Chinese suppliers. So I have been a view from day one and that's how we've been working on and we started this ahead of the IRA, we cleared when the IRA came in, we got in financial support. And I think now with the OV3, it kind of confirms our of that case. We don't see it as a threat. It has always been the basis of our assumption planning.

Speaker 2

Just wanted to give you that general statement because that's very, very important how we see this company. In terms of ASC, which is what you're asking, there three drivers of 45X credits for any supplier. Ownership, it cannot be owned by a company that is from certain countries, it cannot be controlled by a company from that group and materials have a limitation of how much of the materials can come from one of the certain countries. We're working on the three of them. Ensuring that we have the supply chains that meets the OV3 requirements and we have developed with, or ASC has developed, we have worked together on developing that supply chain, which is from source out of that area and we're working on it, we already have converted some of it.

Speaker 2

We have many, many suppliers that are going through the process and we believe our view that we will be ready by the deadline under the Act. Control is more of how you're going to manage the O and M and we've been talking to our lawyers, it can be managed effectively. Ownership is what you all are a little bit concerned about, I know it's understandable. You know, we have been working with ASE. ASE is looking at different options and we are looking at different options.

Speaker 2

And we believe those options, are some opportunities, some of them are very viable that we can execute them on time under the OV3 line. And when we look at us potentially entering into the ownership of the line, you know, when we have looked at that option, it's one of them, not the only one, We believe that we can do it and we can make it work within the financial liquidity that we have today. We do not see any need for any capital raise and we believe that transaction can be done on time with it. And it's not that complicated. So I'll tell you, when we looked at the Act and we looked at the effort to convert to the Act, the ownership has been one of them.

Speaker 2

Think we can, they're only us, there are other opportunities here that they're working on. We can do and we can transact on time to meet the ACT requirements. So, generally, that's up you. Jani, if I can repeat the way I started, if you don't mind, we don't see the FUC restrictions necessarily a threat. We see that this in a way confirms our view of how this market was going to evolve.

Speaker 2

We have been investing on this. We have been moving supply chains to The US. Which is challenging and everybody thought that it could not be done and we're doing it. And so we are optimistic that the regulatory environment is supporting our view of the market.

Speaker 4

If I could just squeeze one last one in. Know, again, you're not going to give 2026 guidance, but we're here at the end of almost 2025. You had a lot of good contracts come in, in July and August, so good momentum. But you're almost done for the year and you talked about at least high level guidance should be 80% to 90% covered, just as you think about maybe being more conservative and having more visibility into the upcoming guidance range that you're going to give on the next call. But is that the way to think about it?

Speaker 4

You're sort of 80% to 90% covered and you got this sort of $2,500,000,000 of backlog thus far through July, early August and whatever you booked between now and the rest of the quarter sort of the starting point of reference for what guidance should look like for next year?

Speaker 2

We will base guidance on the backlog we have for '26 at the time of the earnings call, so a couple of months to move forward. We have a good pipeline going forward, so we expect the 2.5 to be a higher number at a time. But I'm resolute of guiding to 80 to 90. Think I don't want to go over what happened this year. So we're very, the market in The U.

Speaker 2

S. Picked up, things are moving forward. We see good prospects in Australia, not only in Australia where we have done a good job, but also in EMEA. Stay tuned, we'll provide you the actual guidance, but it will be based on the 80% to 90% of the backlog we have for '26 starting on at the end of the call. I think Amir will let

Speaker 5

you Yeah, I think, Brian, I

Speaker 3

think, I don't think you need to leave anything in between the lines here. I think there's more to tell you how we are thinking about the guidance when we give our guidance there on November. I think it will hopefully, you know, we will continue to do what we have done in the first month. In July, we have signed a $1,000,000,000 contract. So I think hopefully, we will maintain this momentum, but that is where we will end up.

Speaker 3

So goal is to give you guidance where we have more confidence, unlike in the past, where we had 65% coverage and we had to sign contracts and we missed the numbers. So that was the intent. I don't think there's anything beyond that.

Speaker 2

That's right.

Speaker 4

Okay. Thanks, I'll pass it on.

Speaker 2

Thanks, Ryan.

Operator

Thank you. Your next question is coming from the line of Dylan Nisano with Wolfe Research. Please go ahead.

Speaker 2

Good morning, Dylan. How are Can just

Speaker 6

start with opening comments on data centers? So correct me if I'm wrong, I mean, sounds like maybe you're engaging a little more directly with the data centers. Can you just kinda walk us through that? Have you actually signed any kinda new contracts there?

Speaker 2

No. So this is a new and emerging need that that you know, as you know, we've been serving data centers indirectly through IPPs and other players who actually provide services to them. But now we have this emerging need that AI data centers are training or managing AI, complex AI processes, very volatile energy consumption. And there's no way, there's no other way of resolving that issue and not affecting the grid that adding a battery storage. So, you know, this is an emerging need.

Speaker 2

It requires a lot of technical work, especially the response time of the batteries needs to be, you know, very, very quick. I wanna give you a number not to not to provide give my competitors a view. But it requires very, very quick response time to ensure that the the the electrons in no way affect the the algorithms that are learning in the process. That's picking up, we have a pipeline, but we have not signed an agreement. And as I said in the call, we're working on the solution.

Speaker 2

The solution is we think we have it, but we need to test it and be sure that we have it available for our customers. It is our view, this in a way, and the reason why we included in the script is not only because clearly it's a data center opportunity, but it also shows the expanding scope of products that battery storage can offer. And I think that's where our solutions are going to put it differently. And I think that's where have been our view from day one that the value of this technology should not be only looked at, hey, integrating renewals into a grid is much broader and will continue to play a very broad loop jobs, more broad, more jobs both behind and in front of the meter as we move forward. Dylan, you're getting I'm cut sorry.

Operator

Yeah, Yeah, your next question is coming from David Arcaro with Morgan Stanley. Please go ahead.

Speaker 2

Hello, David. Good morning. Good

Speaker 7

Good morning. I was wondering if you could maybe give a little bit more color on just how The U. S. Demand picture is trending following the passage of the OBBB and was curious if you're seeing the executive order uncertainty impacting the pace of bookings, given that it might impact the solar outlook in any battery attachments to solar?

Speaker 2

Well, it's picking up. We remember we had to halt a few of the execution of a few contracts we had signed. All those contracts are now moving forward are moving forward to execution. There will be 26 revenue rather than 25. So very active, we have signed a few contracts as of late and we are seeing more and more opportunities come up.

Speaker 2

We haven't seen people concerned today, at least with the projects they're having, concerned about the executive order. I think that the projects that we're working on are projects that people feel are very much solidly They're already buying the stuff and putting it in place. I don't think at least the projects that we're signing, which are projects that are very, very mature, will not be affected or are not affected.

Speaker 7

Great, got it. That makes sense. And let me see, I was wondering if you could just elaborate on the ramp up issues that you had. I think you mentioned it was at your Arizona facility, but are those now fully resolved? Any lingering impacts or issues that you're managing through the end of the year?

Speaker 2

Yeah, we had some typical ramp up issues that come out of putting in place these production lines. In the case of the Arizona facility, we essentially did a technology transfer from what we were doing in Vietnam to The US and some of the work processes and some of it needed to change to a factory US and that kind of delayed the startup and the ramp up. We believe we have it all under control and we are in the process of starting to ramp up and we believe that we will be, you know, by the end of the year, which will solve the problem. Unfortunately, we will not believe today that we'll be able to recuperate the $100,000,000 of revenue that we have to move to next year. So, you know, we will meet a ramp up objective for the end of the year, but it will not be enough that we will do more than from now to year end that will recuperate that 100 in revenue.

Speaker 2

So that's the reason why we have to be a little bit more. But they are typical ramp up issues, know, things that are small or get delayed, processes that need to be affected, processes that needed to adapt to OSHA rules, things of that sort that you only find out or you find out usually when you are trying to ramp up production out of facility. So the quality of the work is very good. You know, was on that factory last week meeting the employees, looking at the people who have like 40 of our engineers working with them, trying to resolve these issues very quickly or actually helping them resolve these issues very quickly. And I'm really excited.

Speaker 2

And it's also, if I can give a little bit of an add, nobody believed we could buy the enclosure, we can build the enclosure with U. S. Steel. These are U. S.

Speaker 2

Steel enclosures. The view was that you could not do it, that it was too expensive that the steel industry in The U. S. Was not going to be able to do it. We now, these enclosures are coming out of that line are made with 100% US steel.

Speaker 2

We're very, very happy with the process and we think this is the way to go forward and we're believers in The US industry and no issues that we have, but we'll make it up.

Speaker 7

Okay, excellent. Yeah, thank you so much.

Speaker 2

Welcome.

Operator

Thank you. Your next question is coming from the line of Julien Dumoulin Smith with Jefferies. Please go ahead.

Speaker 5

JULIEN SMITH:] Hey, Julien.

Speaker 2

Julien. How are you?

Speaker 5

The pleasure of my namesake. Just on this 26 number here, the 2.5, how would you think about that teeing up here into next year? I mean, I know you talked about this 80% to 90%. I just want to understand like how you think about the line of sight and sort of timing and cadence of when you see some of that backlog coming in? Mean, you really see that number accelerating into the end of the year based on BBB?

Speaker 5

And then also, can you speak a little bit more that it's notable the non U. S. Acceleration that you're seeing here too?

Speaker 2

Yeah, so I don't want to provide guidance for next year unfortunately. And we highlighted that number and we highlighted a conservative approach. Remember last year we guided with 2.6 in our backlog, not this year. And we guided to 4,000,000,000. So I didn't want to say 2,500,000,000 and you tell me these guys are going to guide to 3.8.

Speaker 2

So that's kind of what we wanted to give you a sense. Going very well, things are picking up globally. We are in a very good position, but we're going to be a lot more conservative. That was the message. And I think that's the message I can say.

Speaker 2

Are seeing very good momentum and stay tuned. Unfortunately, I don't wanna give a you know, we cannot provide a view to

Speaker 3

a We're not

Speaker 2

shutting down our shop. So I

Speaker 3

think our goal is to continue to grow and provide service to our customers and grow the business. You know? So that's a goal. So let's stay tuned, but we will come and report. But our sales team is actively working, we are adding more resources in sales.

Speaker 2

That's right. So

Speaker 5

Right. And and maybe can you speak to a little bit of what you're expecting on FEOC here and how that's gonna be implemented and how you see yourself vis a vis like the cadence of bookings? Know someone kind of tried to ask the same question earlier, but how do you think about that driving acceleration or just at least the clarity, like when does that drive order activity? If if folks are safe harbored here, perhaps they're

Speaker 6

a little No,

Speaker 2

Julie. You got disconnected at least. I didn't get the can you repeat again, please? Sorry. The the the Oh, oh, oh, oh,

Speaker 5

I I gotcha. Look. Keep it short. On the FEOC part, you got the you have contracts where perhaps folks have safe harbored perhaps FEOC exempt equipment. When do you think you'll start to see FEOC compliant equipment orders really start to come in given what you're seeing with the O BBB?

Speaker 5

What the timeline there as you think about it, right? Again, in theory that might be somewhat lagged. Is that near term or do you think that there could be some changes here with the safe harbor that would force folks to procure more FUC compliant type products and how do you think about that fitting into your business model?

Speaker 2

Yeah, good point. Yeah. As you know, safe harbor gives you a little bit of flexibility on meeting some of the FUC restrictions. What we set for ourselves and with our supplier is to meet the actual act deadline, which will happen as you know in the first half of the year next year unless we see any changes going forward. That's generally our view.

Speaker 2

We want to meet the deadlines that are in the act that they are, even though we'll have some flexibility meeting some contracts with things that are slightly different. That's our approach. That's the way we're taking, we have taken a, I wouldn't call it a conservative approach, but we do not want to lose any of our first mover advantage on this. And I think that part of it is ensuring that we have that supply chain, that ownership and that control, you know, restructured in accordance with the law as soon as we can. Got it.

Speaker 2

Thank you, guys.

Operator

Thank you. Your next question is coming from the line of Justin Claro with Roth Capital. Please go ahead.

Speaker 8

Hey, Justin. Good morning. Morning. So wanted to just follow-up on gross margins here. It sounds like the tariffs in The U.

Speaker 8

S. Might affect your gross margin into the fiscal Q4. So just wondering if you're anticipating being able to offset the tariff related costs in The U. S, whether through pricing, sourcing through your domestic supply chain here, other levers. And if this is a temporary issue, should we anticipate margins for The U.

Speaker 8

S. Being similar to your international margins over time and what that looks like?

Speaker 2

Yes, it's a very good question. I think these reflects the contracts we already signed that was already in our backlog and where we had some rules with our some provisions in our contract, how we divided the tariff effect, the tariff effect on the contracts a bigger number, but this is the amount, the $30,000,000 is the net amount that we need to reflect in our numbers. And this applies to the contracts we're already signed. Said, new contracts come in, they will reflect the new cost structure and we should see them going back to the normal margin levels of 10 to 15 that we have set ourselves. It should not, this is a temporary situation.

Speaker 2

There might be some in the '26 that still have these issues, so there will be some lingering ones, but I think the majority will be done by between this quarter and the 2026.

Speaker 8

Got it. Okay, that's helpful. And then just on the domestic supply chain here, wondering if you could provide an update on the ramp up of AESC's second production line. I think that was expected to come online toward the 2020 your fiscal twenty twenty six. Has that timeline shifted at all given the recent policy developments?

Speaker 8

And then are you considering any alternatives for domestic sales sourcing at this point in time?

Speaker 2

So, good question. As you said, we do not need the second line until early twenty seven, so that's still to be the case and that's when you look at our weekly with what we have with the one line going forward. We kind of put that line on pause during OV3, you know, when things were moving up, people now forget, but remember the cows came with very strict rules and they're liberalized now. So we kind of put it on. Now we will bring it back on as part of our renegotiation on the FULC and it should come, I will say probably a little bit later than the '6, but it should work with our current volume needs.

Speaker 2

However, as you know, are some challenges, we're also looking at other options just to ensure we don't play one, we don't dance to only one tune. So we are looking at other options just in case it gets delayed or we get a lot more volume than what we are thinking of or somehow the negotiations with ASC do not work as expected for the second line. Got it. Thank you.

Operator

Thank you. Your next question is coming from the line of Amit Takkar with BMO Capital Markets. Please go ahead.

Speaker 2

Hey, good morning.

Speaker 6

Good morning, Julian. Thanks for taking my question. Just real quick on kind of OpEx. You guys had historically tried to kind of, I think, grow that at half the rate of revenues. Looks like it's up kind of year to date versus the same period last year.

Speaker 6

Any kind of and I know you guys have embarked on some kind of cost savings initiatives. Can you just kind of give us an update on where that stands and kind of maybe the timing of when we might start to see some progress on that front?

Speaker 2

Okay. I mean, in terms of OpEx, I think generally long term our view is what we have said, keeping our OpEx at half of our growth. However, for next year, likely we'll keep OpEx flat compared to 2025. Why? We were expecting a significant growth in 2025 in revenue that we were not able to deliver and our cost structure in a way reflects part of it.

Speaker 2

So that's why I think that for next year it will be essentially flat, but after 2020 it should go back to growing after 2026 and 2027 onwards it should grow at half the rate of our top line growth. That's the way you should think about it. And just to give you a sense of what we're doing, we are looking at our OpEx, especially taking a deep look at all our costs that are not sales or product development or R and D. And we invested on SAP, so we're looking at our financial costs, our control costs, human resources, all of that, G and A that is not connected to either sales or R and D and really taking a look and taking advantage of our investments in SAP and other systems that I think are helping us. So that's what you should see.

Speaker 2

Flat for 26% then growing back again at half the rate of the top line growth at $27 or more.

Speaker 6

Thanks for that. And then just one quick follow-up. It looks like ASPs were kind of in the low to kind of mid-300s, dollars 1 a kWh during the quarter. If I look at your backlog, it implies something in kind of the lower 200s. I don't think that's necessarily a new phenomenon, but like, is there any kind of additional kind of revenue that you guys end up kind of booking on the product side that allows you to kind of realize a higher kind of realized ASP versus what's implied by bookings?

Speaker 2

No, it's in line with what

Speaker 3

bookings No, I think if you look at our order intake last year, I mean, we were in 300. So, I think it's a timing lag, if you wish, in the revenue that you are seeing in Q3. Those are the contracts we had signed last year. And if you

Speaker 2

go back last year, we

Speaker 3

had in that range 300 plus. The only other thing you have to consider is the EPC, the scope of the projects. For example, in Europe, this quarter we have large of our more than 50% of my revenue this year is from international businesses where I have EPC as part of the scope. And that by itself increases the price 20%, 30%.

Speaker 2

Yeah, or 20%, depends on the complexity.

Speaker 3

Then the base equipment price, which in The US, for example, we normally don't do EPC, just the product.

Speaker 4

Okay.

Speaker 2

And I would like to, I mean, if you, I'm in promotion mode way, true. I mean, we have been able to follow the ASP reductions in line with our competitors. And we have signed in good projects with good margins at significantly lower ASPs. Mean, some of you had concerns of our ability to do it. We've been able to do it with our investments in R and D, thinking about our projects.

Speaker 2

In a way, clearly, ASPs is a threat, but at the same time, it's an opportunity for us.

Speaker 6

Got it. Thank you. I'll

Speaker 2

as I said, yeah, thanks. Thanks, Amit.

Operator

And your next question was coming from the line of Chris DeGeneres with RBC Capital Markets. Please go ahead.

Speaker 6

Good morning. Morning. Thank

Speaker 2

How are you?

Speaker 6

Good morning.

Speaker 9

I'm doing well. I wanted to go back to just kind of some of the manufacturing commentary here. And I guess I'm curious, are you in a position going forward to support a ramp from, I guess, AESC? And then separately or related, if you do look at a different supplier, can you support the, I guess, the cells coming off that line, maybe if they're prismic or pouch? And just trying to understand, I guess, your flexibility to support a different cell structure if you switch suppliers?

Speaker 9

Yes.

Speaker 2

Clearly are currently our supply chain is designed to integrate the ASC batteries. If we were to bring another supplier with another technology, there will be a little bit of work in bringing them up. It's not a lot of work, but it will require some work. However, we do not have any need for new supply during the rest of 2025 or 2026. It will be early twenty twenty seven needs that we will have enough time to adapt to it.

Speaker 9

Got it. Okay. And then as a follow-up, maybe just going back to the last question on pricing dynamics. And maybe just broadly, are you it's sort of like in response to a question from Roth that maybe there's pricing increases going on a bit in The U. S.

Speaker 9

As a result of tariffs. I guess, is that true? And then, I guess, are you still kind of seeing some incremental pricing pressure? Or is it kind of dying down? Thanks.

Speaker 2

Good question. I think The U. S. Will over time will see some pressure on costs. However, today most of the projects that we are looking at are projects that are safeguarded under the old IRA provisions, so I don't expect that you will see significant price increases for the next, you know, six to twelve months.

Speaker 2

They will be under the older systems. But generally, I think that we should expect some additional increases going forward. That's the way you should think about it.

Speaker 3

Thank you.

Operator

Thank you. Your final question is coming from the line of Dimple Gossai of Bank of America. Please go ahead.

Speaker 10

Hi, good morning.

Speaker 2

Good morning.

Speaker 10

Thank you. What are you seeing in the market as far as Chinese players front running FIAK and tariff escalations ahead of the 2025? And maybe anything you can add on what customers are saying on that front? And then I have a follow-up.

Speaker 2

Well, we've been selling domestic content production mostly in The U. S. So those are the customers who are working with. The customers who like Chinese equipment, we have not necessarily. So I don't know, to tell you the truth, where we are.

Speaker 2

They don't they don't Chinese equipment does not compete with our domestic content offering. So, you know, people are probably from running it. Maybe they are, but it's for other customers, not the ones we're working.

Speaker 4

Perfect. Or for

Speaker 2

projects that are not within our well, economics of domestic content on the projects that are safeguarded under the IRA and the new projects is very, very strong and continues to be very strong, you know, and we feel very, very confident that that market will continue to expand.

Speaker 10

Okay. And then in the current backlog, what is the tariff sensitivity that perhaps wasn't already baked into the contracts, if any? And are there any potential cancellation risk or mutual terminations that might still be on the cards?

Speaker 2

In The U. We don't see any terminations due to tariffs. I think that we have, as I said, the contracts that we stopped because of the tariff risk and, you know, how this thing all reactivated and now with the 40% tariff this year, it's up to 58%. I think everybody kind of, you know, the provisions that we are in the contract They're already taken care of the current backlog. Yeah.

Speaker 2

And they are already they are in our guidance for this year and so you shouldn't expect any additional change.

Speaker 10

Got it. Thank you.

Speaker 2

Thank you, I'm.

Operator

Thank you. I will now turn the call back over to Lexington May, Vice President of Investor Relations for closing remarks. Please go ahead.

Speaker 1

Thank you for participating on today's call. If you have any questions, feel free to reach out to me. We look forward to speaking with you again when we report our fourth quarter and full year results. Have a good day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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