This is a Z4 Research post call quick note. We have previously written back ground pieces on Bloom and didn't take a position here until the name fell from the good graces of the green energy space following the second quarter call. Both of those pieces are available on our website (Zman's Energy Brain ~ oil, gas, stocks, etc...). They can also be accessed here along with other material on our Seeking Alpha blog site (backgrounder 7/17/19) and here (post fall and 2Q19 update).
BE Reported 3Q19 Beat On Upper End of Range Acceptances; Demonstrating Notable Margin Strength; Future Continues To Evolve and Brighten
The 3Q19 Numbers:
- Record revenue quarter on record acceptances.
- Margins were stronger than expected. Gross margin has not been that high since early 2018. EBITDA margin is at new highs for BE as a public company. In summary, average selling prices were better than expected on favorable mix, TISC was better than expected, and therefore they exceeded upfront margin guidance.
Guidance:
- 4Q19 Acceptances: 355 to 385
- 4Q19 ASP: $5,920 to $6,220 per kW,
- 4Q19 TISC: $4,250 to $,550 per kW.
- 2020 guidance, which disappointed with the 2Q19 release, was not reversed with this call and you'll note in the cheat sheet below that the Street has market 2020 to 2019 levels for revenue and EBITDA.
Highlights: The call was upbeat (both from a management and sellside perspective) and much of what follows was not covered in the usual quarterly press release.
California and North East Power Outage Thoughts:
- The recent power outages in California were wide spread, multi million customer events - they were completely unprecedented. These events are growing in scale. And they can to an extent be addressed via micro grids of which Bloom has 89 in operation now. We've written on these in past articles on the site.
- Notably, management said 26 of these micro grids were in areas impacted by the safety power outages in California. ALL of those micro grids operated flawlessly during the crisis. Bloom noted one example of a manufacturing site that lost grid power and was disconnected from backup. While the site was evacuated for safety, the company kept their Bloom servers running to handle critical load, knowing the servers would run unattended and could be monitored remotely.
- Recent California government comments center on a critical need for a more reliable "grid" going forward. A grid of the future. This plays to Bloom's strengths.
- Meanwhile, in the northeast in August, power outages due to the heat wave saw a retailer with 5 sites on a Bloom microgrid remain in operation.
- Furthermore, Bloom notes some progress in mindset towards natural gas and power with Democrats from Long Island in recent months altering their opposition on new pipeline capacity feeding NY. This is due to power outages and even the governor seems more inclined now faced with the alternative of burning oil for power.
- Bloom sees this increase in frequency and duration of power outages as changing the mindset on power from "cost of power to cost of NOT HAVING power". They see the decision making process moving to the C-suite rather than the business unit and this change potentially compressing the sales cycle (3 to 7 months, maybe shorter; this effect is new).
- Revenue ramp from orders attributable to these events will likely lead to sales materializing in 2021 (9 to 12 months to build install still applies).
CalBio venture: They noted the previously announced deal to use their servers with dairy farm waste in CA to produce power. In CA alone this could be a 320 MW market. They also noted a deal to rollout 4 MW in India next year and that market will have high potential given large amounts of currently burned biomass that could be used for power generation, especially in light of air quality issues and need for power issues there.
Shipping:
- Bloom elaborated on the partnership with Samsung Heavy to put Bloom servers on ships. They have moved from design phase to early development.
- Size of market is large: each ship would require between 19 and 100 MW (as a reminder, 1 acceptance would be 100 kW). Between 2,000 and 2,500 ships are expected to join global fleets each year for the next five years.
- The U.N. is rapidly pushing for lower ship carbon footprints and they see potential revenues in 2 years as adoption demand will be high.
The Long View - Increasing Project Scope: Eventually moving beyond micro grids to utility scale implementations.
- Eventually Bloom sees an expansion to utility scale projects. The projects would be cleaner than already "clean" gas-fired plants while still consuming natural gas. They have a power stack option that takes the traditional Bloom row of servers (see photo below) and stacks them vertically. The Korea Power Tower demonstrated the efficacy of this approach albeit in a 8.35 MW format in 2018. 100 MW would require only 1 acre of space at a height of 50 feet (with no easement - after all, you're not burning that gas).
Addressing Fuel Cell Life and Service Contract Profitability
- They issued a white paper showing increasing fuel cell life with each generation.
- They are in the 4th generation now (installations starting in 2015) and show a useful life (so far as they are still running) of 4.7 years and they note the 2018 versions are showing better early time performance.
- Generation 5, the 7.5 product, is on track for delivery next year. It will have 50% greater power per module and they see it as having at least a 5 year life.
Other Items:
- They added two new board members including a Stanford economist and former GE CEO Jeff Immelt.
- Short Interest: 20% of shares outstanding.
- We will have additional margin comments when they file the 10Q.
Balance Sheet:
- Net debt to annualized EBITDA of 0.4x (excluding non recourse debt and PPA cash).
- Jefferies has been hired to evaluate options for debt maturing in late 2020 (revolver to pay some, cash to pay some, term roll, all on the table and want to have it addressed in 1H20).
Nutshell: Strong quarter. Solid 4Q19 guidance. We came away from the call with a sense of greater urgency from management, that the long term outlook continues to evolve and improve and that the company is moving to a time in which its products will see greater acceptance, potentially in sale applications as well as in new market segments. We also expect shorts to continue to shadow the name but see management's attempts to address the issues as substantial and adequate at this time.
Food for thought watch: Aside from being always on, the BE solution is, MW for MW, a lot smaller footprint.