Good afternoon, and welcome to the Bloom Energy First Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mark Mesler, Vice President of Finance and Investor Relations of Bloom Energy. Please go ahead.

Thank you. Thanks for joining us on Bloom Energy's First Quarter 2019 Earnings Conference Call. To supplement this conference call, we have posted to our Investor Relations website our Q1 2019 shareholder letter as well as supplemental financial information that we will periodically reference throughout this call. The matters we will be discussing today include forward-looking statements regarding future events and the future financial performance of the company. These statements are subject to risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on forms 10-K and 10-Q which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call. During this call, and in our Q1 2019 shareholder letter, we refer to GAAP and non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation between GAAP and non-GAAP is included as part of our Q1 2019 shareholder letter. Joining me on the call today are K.R. Sridhar, Principal Co-founder and Chief Executive Officer; and Randy Furr, Chief Financial Officer. K.R. and Randy will review the operating and financial highlights of the quarter and then we will take questions. I will now turn the call over to KR

Hello. This is KR, and good afternoon to all of you and welcome to our Q1 2019 conference call. Allow me to share my perspectives on our Q1 2019 accomplishments and financial performance. We are pleased to have delivered another record quarter with a strong diversity of acceptances across industry sectors and international markets. Our momentum in the core health care, data center and retail sectors continued and the diversification strategy we discussed last quarter also delivered results with more new customers in tech, utility and life sciences sectors. Overall in Q1 we achieved 235 acceptances, a 41.6% year-over-year increase and slightly higher than the midpoint of our estimates. We achieved $200.7 million of revenue in Q1 of FY 2019. Removing the impact of the onetime retroactive ITC benefit for FY '17 that we recognized in Q1 2018, our revenues increased 62% year-over-year. During Q1, we saw a strong validation of our value proposition and also made progress in further enhancing and strengthening our competitive advantage. As a reminder, Bloom Energy delivers 3 key benefits to our customers: lower and more predictable cost of power; lower emissions; and higher resiliency including the option for uninterruptible power. In our previous calls, I have talked at length about our cost reduction programs. These continue to be a strong focus. During this call, I will focus on the other 2 value propositions: emissions and resiliency. Let us start with an update on our lowered emissions profile, our strategy for decarbonization leading to 0 carbon solutions. Our decarbonization strategy is multifaceted. To date, all of our customers have reduced carbon footprint when using the Bloom Energy Server fed by natural gas when compared to securing their power from the utility grid. They also reduced smog-creating pollutants and avoid consumption of water. Currently, our primary…

Thanks, KR. Throughout my prepared comments, I'll be referring to the slides in the earnings call presentation that Mark referred to earlier. First some highlights. Note that all profit numbers that I reference will exclude stock-based compensation. So on to Slide 3. In summary, a very respectable quarter. Acceptances were 235 systems, up 41% from Q1 '18's 166 systems. Revenue was $200.7 million, up approximately 62% when excluding the onetime retroactive ITC adjustment from 2017 that flowed into Q1 of last year. Non-GAAP gross margin come in at 15%. Our non-GAAP operating income was a loss of $8.8 million with adjusted EBITDA coming in at a slight profit of $2.1 million. Adjusted EPS was a loss of $0.22 and we ended the quarter with $327.9 million in cash and short-term investments and this excludes $42 million of PPA cash. Now onto some color for the quarter. Referring to Slide 4, the 235 acceptances translated to $200.7 million in revenue, both Q1 records for Bloom, in line with Q1 historically being down seasonally on a sequential basis, we saw a revenue decline by 6% from Q4's $213.6 million. However, on a year-over-year basis, revenue was up by 18.5% from Q1 '18's reported $169.4 million and if you exclude the $45.5 billion (sic) [$45.5 million] of onetime retroactive ITC that related to 2017 revenue that was included in Q1 '18, revenue was up by approximately 62% year-over-year. Onto Slide 5. Our average selling price or ASP was in line with our estimates coming in at $6,870 per kilowatt. Once again our ASPs will vary depending upon the mix of international where we generally do not have the installation revenue included in the ASP. Gross profit, excluding stock-based compensation, was down from $38.7 million in Q4 '18 to $30.1 million in Q1. This…

[Operator Instructions] Your first question comes from David Katter with Baird.

So I wanted to start on the upfront margin for next quarter. It looks like it might be down a little bit -- the midpoint of your guide is down a little bit sequentially. Can you talk about the mix of customers and just kind of some of the dynamics there?

Yes. Good question, David. We don't really necessarily expect margin to be down quarter-over-quarter. I think if you look at last quarter, we -- the midpoint of our margin was about $1,150, and we guided about $1,175 this quarter. Obviously, we overdelivered a bit in Q1 and there's no reason to think that can't have some upside in Q2 as well. And I want to stress even at the beginning of the year, we felt like just the general mix of business that we had in first half of the year was not going to be as good as the mix of business that we had in the second half of the year. And we're just continuing to work through that business that we have. So we don't expect it to be down. We expect it to be essentially flat, maybe slightly up a bit, but we wanted to provide some room in the expectations that we set.

Understood. That's helpful. And then maybe just shifting gears to the last point you made on kind of the backlog in the business in the second half. Can you provide a little bit of additional color on kind of the opportunity in Korea, the agreement there? And what sort of trends you're seeing and kind of the margin business and the backlog there.

Look, as KR has pointed out last quarter, our expectation is that we'll diversify the business, and that includes international business, not just in Korea but in other locations internationally. And we expect that business to continue to grow and be strong for us as well as our domestic business here. We obviously -- we've reported some wins that we've had in Korea. All of that was certainly not shipped in 2018. We had a backlog going into this year. We have booked, and we expect to continue to book business in Korea throughout this year and to continue to grow that business. The -- I'll just kind of leave it at that. Anything you want to add?

No, I think you answered that. So we are not changing our guidance. I think the key points that's he's making is we have given you guidance on what to expect in terms of mix between U.S. and international. And as we sit here today, we expect to track that trend and see no changes.

Your next question comes from Michael Weinstein with Credit Suisse.

Can you -- I guess on that same topic just talk a little bit about how -- factors of why the second half will be a little stronger than this first half. And then also maybe an update on the Gen 7.5 status.

Yes. So I think what we stated to you is for all the reasons that Randy gave you depending on where the geography is, what the utility rates are, the complexity of the install, the size of the install, whether we have mission-critical, non-mission-critical, they all affect whether we are entering into a new business territory, how much of Korea we have in a particular quarter depending on where things are. All those things ultimately affect the mix and affect the TISC and the ASP and the deltas what we see because we have fairly good visibility based on our bookings, and we know where we slotted these bookings through the various different quarters, understand that our installation process is 9 to 12 months. So we have good visibility into it. Coming into the year, we knew that the first half will be lighter and margin at the second half will be better in margin. And that is what formed the basis for it in terms of market segments, in terms of where we see the growth, in terms of geographies where we see the growth and in terms of the mix of what we see between domestic and international. We have already provided you that color fairly clearly during the last call, and we're just telling you that we're tracking to that at this point. And we're tracking to what we put up the plan and that was the reason I have stated that we expect our growth and margin to be in the 20s in the second half but expect it to be lighter in the first half.

And sorry, I understand that you couldn't hear me. I moved a little closer to the microphone, but I think also you asked about a little discussion on 7.5?

Yes. So 7.5 is on track. Sorry, I didn't mean to ignore that the first time. So thanks for reminding me. And yes, 7.5 is on track. It is going through the design process and the design automation process, as we speak. And at this point, all that we can tell you is it's on track.

And can you -- just one last question, can you provide maybe some kind of time frame when you think it will be in service and then up to full ramp or full production? Maybe kind of an estimate on that.

Yes, the current time line calls for some additional production shipments of the 7.5 in the fourth quarter of next year. We'll clearly ramp over time. Obviously, the current generation of product is a very good product. It's out in the market. We certainly want to deplete all the inventory and everything we have with that. So it will be more like -- at least a 3 and probably a 4-quarter kind of transition to ramp up. So with that said, you can kind of expect the full ramp up by the end of 2021.

Your next question comes from Paul Coster with JPMorgan.

Can you talk to us a little bit about the health of the bookings and pipeline? I know you don't share bookings numbers, but anything that kind of gives us a sense of the momentum would be helpful. And I'm particularly interested in whether the PG&E plan to potentially curtail electricity to 5 million customers in California is having any impacts on your pipeline.

Paul, that's a very good question. So I can give you a gut feel as opposed to where we see it in the business because, as you know, even when we start with a customer, that cycle of acquiring customer is a relatively long cycle. Clearly the reports that came out last week, I think and reported in the Wall Street Journal about potentially 5 days of continuous outage once the events peak get beyond a point. Fundamentally breaks the contract that exist between a utility and a customer of providing safe and reliable power to your service territory. And does a pretty significant swath to their service territory they said they would do this. We would expect that to translate to people figuring out how to take better control. And we are definitely an always-on microgrid solution for that kind of solution. However, the uncertainty that exists today is still there is no clarity on whether the taxpayer or the investor or the ratepayer is going to bear the burden and how is it all going to be passed on and what is it going to mean to economics, what is the state going to do or not do. So those things need to shake out for our corporate customers to make their decision on what they're going to do next. We see the fundamentals favoring solutions like Bloom. Immediately, I can tell you that, unlike a consumer product where if there is going to be a hurricane, then suddenly all the consumables in the grocery stores are off the shelves. You don't expect that kind of a quick turnaround for what we do.

Anything you can share regarding bookings momentum at the moment? And then my follow-up question is any business outside -- India, Japan, U.K. have been site to this potential growth opportunities previously. When are we going to see some stuff coming from those countries?

Look, on the backlog, I've stayed pretty consistent that we will update that once a year, again, the orders tend to be lumpy. One thing I would add on the backlog here is that often the international business, we do not have the installation. If you could kind of contrast that to the domestic business that we have where we do have the installation, the time between the bookings and the acceptance or the recognition of revenue. Given all that, design time, all the planning, all that permit that we have to do, it tends to be in that 9- to 12-month range. When we do book business that's international, all that upfront effort has already occurred and by the time they place the order for the systems, it's down to just the lead time it takes us to build the systems. So often, you'll see where it's even possible, I think we have had this, that we're in the international business, we will actually book and ship in the same quarter, if the order comes in early enough in the quarter and certainly, most of it has been where we've booked one quarter and shipped the next quarter. So I just want to stress that there is a different profile or time between the bookings and the actual acceptance or shipment when it comes to domestic versus international business. But hopefully, that will input -- take the same part...

And on the international markets, Paul, as you identified a couple, and let me address them in particular. We are doing a lot of groundwork in India. Part of the biogas that I talked to you, I think will lead to some really interesting opportunities down the line. But in terms of the positive momentum and where things are, I'll tell you India recently opened up the gas market to not just the gas authority of India but to a few other players. And they have come in and now the Indian Oil Corporation has said it is going to create a very large gas facility for the city of Chennai where a lot of IT companies and other companies are located. So the trends are pointing in the right direction there. In the short term, we have a robust pipeline that we are building, but I don't think there's going to be any action -- any business action in India until the impending election that you are very familiar with are completed. People will not make decisions. And again, we know India to be a slow market in terms of entry and then a very fast growth. That is the nature of that market. We are aware of that. We are prepared for that. U.K., I think from a policy and a regulatory perspective, until Brexit is figured out, I don't think people will be putting our energy in it. At this point, it's a wait-and-see.

Your next question comes from Stephen Byrd with Morgan Stanley.

I wanted to -- just a couple a bit further about the biogas development, it seems like a very positive development. And this obviously ties into India, but I think it's just more broad. I wanted to make sure I understood from a technical perspective, the work you've done with Southern Company. It sounds like you have really encouraging operational results. Would that imply that you'd be essentially prepared operationally to start to deploying your product in the very near future using biogas? Or do you feel like you need more time to operationally prove out that approach?

Steve, that's a good question. Definitely, we have been working in the lab on this for a long time. What we demonstrated is a field prototype with the Southern Company in a real -- the client felt there were no surprises. By that, I mean there were no unpleasant surprises and our systems operated the way we expect it to operate from that gas which doesn't have to be purified to the levels that it has to be purified if it went into our pipeline. That is a very big deal. And the fact that our systems operate that way, and not put out SOx, NOx, particulates, means that in a way it's not just 0 carbon, it's negative carbon because in the absence of a market for that, that methane is going to go into the atmosphere which is 25x more harmful from a greenhouse perspective than a CO2 molecule. Even if it were used in a conventional method, the SOx, NOx, the particulates and other things that go out, and the energy required to clean it up to make it fully amenable for that technology, all adds to the carbon footprint. So we are potentially one of the best solutions out there to take this into on-site generation. Having proven this, we are now signing up pilot customers, and we expect in the next few quarters to be able to tell you about those customers and what we have done. This year is about pilot customers, and we expect to go -- and it will be closed systems with pilot customers, and we expect to go into a later backlog and funnel with our customers of this starting next year.

That's extremely helpful. I just wanted to shift over to your large customers. Obviously, you have a great success with converting existing customers into follow-on customers. At a high level in terms of that cycle to move from relatively small purchases to very large purchases, I think Randy touched on this a little bit, but I'm just curious, are there any high-level trends you're seeing with respect to that sort of the cycle that moved from, I'll call it, small to very large with some of your existing customers?

There are a couple of trends that are noteworthy. The cycle time to transaction with a repeat customer is shorter than the cycle time to transaction with a brand-new customer typically on average. That is something that we see very clearly. And also as a rule, the repeat orders tend to be larger than the single purchase order than a first order. But it is those first orders that become repeat customers. So we focus on, from a numbers perspective, as much on the getting initial customers signed up. But from a volume perspective and repeatability perspective, we focus heavily on existing customers who scale with us.

Your next question comes from Tahira Afzal with KeyBanc.

K.R., first question for me is it seems that you guys are back on track in predicting the installed base as you're meeting your acceptance rate. As this cleared up into the back half of the year and see more growth into next year, are there any other initiatives you think you need to put in plan?

I think the team we're building now in addition to a very strong team that existed before but we are really by putting in dedicated leadership and adding more people, we are looking to the second half ramp and getting ready for it. As we sit here, we feel like we are taking all the necessary adequate steps to be able to step up to that trend.

And second question may be more for Randy. Randy, we got a glimmer of positive free cash flow in one quarter last year. Any line of sight when we could see free cash flow maybe breakeven and move back up to the positive territory?

Yes. Look, I -- we -- the good news is our free cash flow is tracking pretty well to where it makes sense. We lost roughly $8 million, $9 million in Q1. We had $9 million roughly in capital expenditures. And we had favorable contribution from working capital, which we expect to continue into the future. Obviously, if you look at the midpoint of our guidance, we're certainly expecting something a lot more favorable or less loss than roughly $8 million, $9 million that we had in Q1. So we think that we could see neutral free cash flow this coming quarter, Q2. And then obviously, with expected profits in the second half of the year, we expect that to go to free cash flow positive. So I think I'll stop there. I think that answers your question.

Your next question comes from Colin Rusch with Oppenheimer.

Guys, could you break down the revenue and the guidance, 1Q revenue and 2Q guidance. And the acceptances between how many are stack replacements and how many are new builds. Is there a material delta there?

No. So when you say stock replacements, though, what do you mean by that?

I mean if you're replacing the stack and then the existing installation.

Yes, yes. So again, if you look at our financials as we have reported in the shareholder letter, the stuff that's included in acceptances, that isn't out front in product, that is all new equipment, new installations for which we either sell directly to the customer on the CapEx or it's financed through either our PPA or our leasing managed services transactions. There's a part of our reported revenue and P&L there that we refer to as service. And when we shift these field replaceable units to the field, they end up as an expense in that service P&L, and that's offset by the service revenue that we get. So the guidance that we're providing for Q2, that midpoint of the guidance is all new systems, new revenue and stuff we're shipping out there and anything that ends up in the expense part of the service, that's all the FRUs, as we call it, or the field replaceable units, that we ship back out to the field that we do when the systems deteriorate to a point of about a 45% efficiency. So hopefully that answers your question.

Your next question comes from Shereen Undavia with Raymond James.

So I had a question regarding the microgrid opportunity. Traditionally, the core of the microgrid solution has been battery storage. Are you essentially aiming to display storage in these systems with the Bloom Servers?

So in microgrid and in the real definition of a microgrid never operates with battery storage because battery storage gives you minutes and hours of operation without the grid operating. A microgrid should operate for days, weeks and months without the grid operating. And you would never be able to put that amount of storage in a single place. So that is the distinction. So the UPS, the availability of uninterruptible power service can be done with a battery. So this is, by no means, a replacement for the battery. It is truly a combination of any generation technologies with which we can provide adequate supply to meet all the demands that have been predetermined by the customer that needs to stay on no matter how long the grid is out of service. So in the past, for large industrial customers, for large commercial customers, such a solution did not exist other than a diesel genset that could potentially run for few days at a time without needing interruption as long as the fuel supply was available. Here, our systems don't even know when the grid goes out because they've already been in operation. There is no need for transition from going from idle to on. So it's one of the most reliable ways of getting the power and understand that our systems depend on a gas grid that is independent of the electric grid and the customers are only out of power if these 2 different infrastructures that are not coupled to each other both fail at the same time, which is highly, highly unlikely. So this is one of the best always-on solution a customer can have. That's the definition of our microgrid. It's a unique offering and our customers love it.

Your final question will come from Julien Dumoulin-Smith from Bank of America.

This is actually [Eric] on for Julien. So we just wanted to touch upon, first and foremost, are there any updates on the intention to pursue an ITC safe harbor particularly as the ITC for fuel subs step down into 2020. And one follow-up question after that.

Look, the ITC that was extended was good for 5 years. And the way it works, even with the step down from 30% to 26%, even with that, we have the opportunity to continue to use 30% for all the projects that we've identified and we started that will go into the future, start construction -- where we commence construction. In the same will occur even on the step down as it goes forward. So as we've been pretty consistent in saying is that -- with the change from the old rules to these new rules that we're operating under today really extends the ITC for us well into year 6 and maybe even into year 7 as we have going forward. And there's already been some talks in Washington of possibly looking at this even in the future. So hopefully that's a good on the ITC. What's the follow-up or the second question, [Eric]?

The second question was on expansion, but sorry, just to touch on the ITC. So I understand that nuance. I'm just wondering is there any plan to, say, procure 5% of expected fair market value ahead of year-end '19, such as through steel boxes or whatnot, that would allow you to extend the ITC for the projects you haven't identified. That's mainly what I'm wondering...

Obviously, we have plans in place and we'll talk more about that when we get nearer the end of this year. But the answer is yes.

Okay. Got it. Just wanted to make sure. And then lastly on the expansions identified with the last call particularly into the Northeast. Could you discuss how that's been progressing so far with first quarter? Primarily I know you talked about the upfront margin being different depending on the geographical mix. Is Northeast expansion something that you guys are driving pretty heavily with first half?

Yes. So the answer is yes. Look, a way to think about Bloom is that we operate today in probably 10 states, 11 states where the tariff or the utility rates that are being charged to commercial industrial customers are some of the highest in the U.S. And why? It's because that lets us achieve our targeted margin or better and give a customer the savings that -- their hurdle rate of savings it takes to transact with the business. As our costs come down that lets us enter more and more of these tariff areas. Even in the state like California, the utility rates charge the C&I customers, as you know, very significantly, that doesn't mean that Bloom is in every single utility in the state of California or in the other states that we operate. However, over time as our costs come down, we'd be able to move into those regions and territories as well as other states moving forward. So clearly, we're in the Northeast today. Back to that comment on margins can differ. Margins can differ not just from East Coast to West Coast. It can differ even within the West Coast and even within the East Coast depending upon which tariff or which utility that we're operating in. Again, on our land and expand strategy, we really focus on a portfolio approach with our customers, so it's not uncommon. In fact, it's the most common when we book an order from one of our customers that they will have sites both in the West Coast, both in the East Coast, some in some very, very high utility tariff rates, some in some lower ones. We look at this all on a blended portfolio approach to give the customers that target hurdle. So obviously, with that, there could be mix for us from time to time from region to region depending upon the acceptances that are accepted within that period. And that's really where we're headed with that earlier comment, [Eric].

This concludes today's conference call. You may now disconnect.