What, at least on the surface, appeared to have been a decent second quarter 2019 and reasonably strong Q3 outlook for leading stationary power generation system provider Bloom Energy, quickly turned into a disaster after management on the conference call surprisingly warned on weaker sales trends in key high-margin markets like New York and California experienced so far in 2019.
Photo: Bloom Energy Server Installation at a Macy's location - Source: Data Center Knowledge
As it usually takes 9-12 months for customer bookings to turn into revenue, FY2019 outlook is unlikely to be affected but FY2020 top- and bottom line performance will likely fall well short of market expectations.
In fact, based on H1/2019 order trends, management now expects FY2020 revenues to remain largely flat with anticipated FY2019 levels compared to current consensus expectations of 20%+ growth next year.
Profitability will also be severely impacted as expected cost reductions in the low double-digit percentage range won't make up for a roughly 30% year-over-year decrease in average selling prices.
At least, management does not expect to burn cash for FY2020 as a whole but even this target looks like quite a stretch given the material reduction in top- and bottom line expectations and an anticipated increase in operating expenses to support development of the company's next generation products.
And while management expressed its firm belief in the company's ability to overcome the current sales weakness rather sooner than later, there's actually very little evidence to support this view given that increased political uncertainty was stated as the main reason behind the disappointing order trends.
Natural gas moratoriums like recently enacted in Berkeley and New York might have indeed caused potential customers to rethink their approach to stationary power supply given the fact that the Bloom Energy Servers in most cases run on natural gas.
Frankly speaking, I firmly expect the increased scrutiny towards natural gas in selected states like New York and California to persist for the foreseeable future and the company's sales into these lucrative markets to remain challenged going forward.
In addition, Q2 revenue and EBITDA performance were actually inflated by the accounting for a large upgrade project in Delaware:
Note that relative to our Q2 of FY19 estimates that we provided last quarter, there was a change related to the PPA II upgrade project that we announced during the quarter. Our Q2 of FY19 estimates netted certain expenses associated with the upgrade against the proceeds received. The Q2 of FY19 actual results recognize incremental revenue and expenses on our profit and loss statement.
So that you can understand the impact of the difference between our Q2 of FY19 stimates and our Q2 of FY19 actual results, we have provided a table in the “Summary Non-GAAP Financial Information” section on page 10 of this letter. This table bridges our actual results to a normalized or “adjusted actuals” that aligns with themethodology of the estimates that we provided last quarter. On an adjusted actuals basis, removing the impact of the $40.6 million of revenue associated with the difference as outlined on page 10, we achieved $193.2 million of revenue, which is an increase of 14.4% year-over-year, but down 3.8% sequentially due to a mix of lower ASPs associated with our international acceptances, where we don’t achieve installation revenue and from the PPA II upgrade, where we achieved minimal installation revenue.
Adjusting for the change from our Q2 of FY19 estimates for the PPA II upgrade, adjusted EBITDA was $12.8 million.
Accordingly, I have included the adjusted numbers provided by the company in its shareholder letter in the following table to provide for an apples to apples comparison:
Sources: Company's SEC-Filings, Shareholder Letters, Author's own work
Keep in mind that Q2 margins benefited from a roughly $8 million cost benefit that won't repeat going forward. Without the benefit, adjusted gross margin would have come in at 19.2%.
At least on the surface, Bloom Energy reported a strong Q2/2019 and provided reasonably good outlook for Q3, initially causing market participants to bid up the shares by more than 15% in after hours.
Unfortunately, not only were the results inflated by the accounting for a large upgrade project in Delaware, management also warned on much weaker than anticipated sales trends in key domestic markets like California and New York.
As a result, FY2020 results will likely fall well short of current consensus expectations on both the top- and bottom line.
Even worse, I view it as unlikely that current uncertainty regarding potential bans of natural gas in selected parts of the aforementioned states will abate anytime soon. As a result, I firmly expect the company's sales in these high-margin markets to remain challenged for the foreseeable future.
After Monday's disappointment, analysts will have to revisit their models and I would expect rather cautious commentary by many of them despite the stock already trading at all time lows at an enterprise value to revenue ratio of just 1.3.
Personally, I took the chance and shorted the company's stock around $8.90 in after hours after management dropped the FY2020 guidance bomb on the conference call.
Expect a slew of price target reductions on Tuesday and the stock to take another hit in the regular session.
As a trader, I intend to cover my short position before the end of Tuesday's session, hopefully at a nice gain.
That said, given the current uncertainty around a recovery in the company's sales trends, I could easily envision the stock to trade down to $5, particularly in case of ongoing overall market weakness.
Disclosure: I am/we are short BE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.