Q4 2023 Fluence Energy Inc Earnings Call

Participants

Ahmed Pasha

Julian Jose Nebreda Marquez; President, CEO & Director; Fluence Energy, Inc.

Lexington May

Manavendra S. Sial; Senior VP & CFO; Fluence Energy, Inc.

Rebecca Boll; Senior VP & Chief Product Officer; Fluence Energy, Inc.

Unidentified Company Representative

Alexander John Vrabel; Analyst; BofA Securities, Research Division

Ameet Ishwar Thakkar; Energy Transition & Infrastructure Analyst; BMO Capital Markets Equity Research

Andrew Salvatore Percoco; Associate; Morgan Stanley, Research Division

Benjamin Joseph Kallo; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Brian K. Lee; VP & Senior Clean Energy Analyst; Goldman Sachs Group, Inc., Research Division

Christopher Ronald Ellinghaus; MD, Principal & Senior Equity Utility Analyst; Siebert Williams Shank & Co., L.L.C., Research Division

Dylan Thomas Nassano; Research Analyst; Wolfe Research, LLC

George Gianarikas; Analyst; Canaccord Genuity Corp., Research Division

Joseph Amil Osha; MD & Senior Energy and Industrial Technology Analyst; Guggenheim Securities, LLC, Research Division

Kasope Oladipo Harrison; Director & Senior Research Analyst; Piper Sandler & Co., Research Division

Pavel S. Molchanov; MD & Energy Analyst; Raymond James & Associates, Inc., Research Division

Thomas Patrick Curran; Senior Analyst; Seaport Research Partners

Presentation

Operator

Good day, and thank you for standing by. Welcome to Fluence Energy, Inc.'s Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Lexington May, Vice President, Investor Relations. Please go ahead.

Lexington May

Thank you. Good morning, and welcome to Fluence Energy's Fourth Quarter 2023 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 Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; Rebecca Boll, our Chief Products Officer; and Ahmed Pasha, our incoming Chief Financial Officer.
During the course of this call, Fluence's management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the 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, please note that the company undertakes no duty to update or revise forward-looking statements for new information.
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. (Operator Instructions)
Also note that while Ahmed is participating on today's call, he is not going to be participating in the Q&A session, and thus, please direct your questions to the other members of the team. Thank you very much. I'll now turn the call over to Julian.

Julian Jose Nebreda Marquez

Thank you, Lex. I would like to start my warm welcome to our investors, analysts and employees who are participating on today's call. This morning, we'll provide a brief update on our business and then review our progress and our strategic objectives. Following my remarks, Manu will discuss our financial performance for the fourth quarter, and then I will discuss our outlook for fiscal '24.
Before we begin our discussion on the fourth quarter results, I'd like to spend a few moments addressing the announcement we made a few weeks ago. Manu has decided to step down as CFO of Fluence. He has done a remarkable turnaround job here. And as a result, he got the attention of others. He received an offer he could not refuse and more importantly, one that we could not match. As such, he will be leaving effective December 31 to become CFO of another company in a different industry.
On behalf of the Board, I would like to send my warm -- to send a sincere thank you to Manu for the value he helped create at Fluence in the past 15 months. Additionally, I would like to send a warm welcome to Ahmed Pasha, our incoming CFO. Ahmed will officially assume this role on January 1, thus ensuring a sufficient transition period. Ahmed comes to us from AES where he had a 30-year career most recently serving as the CFO of the Utility Business Unit. I personally have worked with Ahmed for many years, and I am excited to continue that at Fluence.
Now I would like to turn the call over to Ahmed to make a few remarks.

Ahmed Pasha

Thank you, Julian, and good morning, everyone. I am excited to be joining Fluence at a time when energy transition is achieving critical momentum which presents so much opportunity for the company and for energy storage in general.
As some of you may know, I have had some experience working with Fluence during my tenure at AES, including during the IPO process, and more currently as CFO of the U.S. Utilities Business, where Fluence is playing a critical role in helping to transform our energy mix.
Since the announcement about 2 weeks ago, I have had the opportunity to meet with some members of Fluence's team, and I'm very impressed with their experience and commitment to enabling the global energy transition. I look forward to working with them and helping Fluence to achieve its ambitious growth and profitability goals, increase shareholders' value and deliver on its mission to transform the way we power the world.
I would like to express my appreciation to Manu for his invaluable contributions to Fluence, particularly the strong foundation he has established to position us for continued success in the future. In the near term, I will be getting up to speed on things, but I expect to meet with many of our investors and analysts in the coming months. I look forward to hearing their views and sharing how we plan to achieve our key financial and strategic objectives.
With that, I will turn the call back to Julian.

Julian Jose Nebreda Marquez

Thank you, Ahmed. Beginning on Slide 4 with the key highlights. I'm pleased to report that in the quarter, we recognized $673 million of revenue. We continue to experience strong demand for our products and services with new orders totaling approximately $737 million, highlighted by our solution business contracted 2.1 gigawatt hours, our services business added 1.6 gigawatt hours and our digital business adding 1.8 gigawatts of new contracts.
Furthermore, our signed contract backlog as of September 30 remain at $2.9 billion due to acceleration of select projects ahead of schedule. Turning to adjusted EBITDA, we delivered approximately $20 million over the quarter. This is a tremendous milestone as we achieved this level ahead of schedule. As you recall, we expected to be close to adjusted EBITDA breakeven for the fourth quarter. However, we were able to accelerate select projects that resulted in higher revenue and margins for the quarter.
One of the areas we're concentrated on is organizational speed, especially reducing our project cycle times. We see a lot of value in reducing our cycle time from the roughly 18 months to closer to 12 months. We believe it will take us at least 2 years to reduce our cycle times down to 12 months. This quarter results are a perfect example of what speed can do to bring increased value to both our customers and our shareholders.
Lastly, our services and digital businesses, which will together represent our recurring revenue stream continue to see traction, our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage remains above 90%. As I noted previously, we typically see a lag between signing solution contracts and entering into a service contract, which is why we believe that cumulative attachment rate is important to monitor.
Turning to our digital business. We had a very strong quarter as we were able to contract 1.8 gigawatts. More importantly, our digital assets under management increased by more than 1 gigawatt, and the total number reached 15.5 gigawatts as of September 30.
Turning to Slide 5. I'd like to highlight some of our accomplishments of the past fiscal year. As you may recall, a year ago, we embarked on the transformation of our business. I'm pleased to report that we delivered on our commitments to the market. We grew our iron ore revenue by 85% and achieved our first profitable quarter. Importantly, we exceeded our regional annual revenue guidance by more than $600 million, thanks to improved execution, easing supply chains and project time line acceleration.
We burned through almost all our legacy lower-margin backlog and we diversify our supply chains, including securing U.S.-made battery sales with the AESC. With the rollout of Fluence OS7, we have integrated Nispera into our hardware solutions on a go-forward basis so that now a renewed store solution cell has Nispera bundle input. We built out our India technology center and we published our inaugural sustainability report. A successful year that sets the tone for the years to come.
Turning to Slide 6. I would like to discuss progress on our 5 strategic objectives. As you recall, at this time last year, we laid out 5 strategic objectives that will guide our actions and markets that our investors can monitor and measure the company performance again. As we generated our first profitable quarter, I'm pleased to say the first phase of our transformation is complete. The second phase is just getting started, which will continue the theme of profitable growth. Now measured through the growth on a nominal adjusted EBITDA and annual recurring revenue or ARR, alongside the other strategic objectives that will continue to guide us on the second phase of our journey.
First, on delivering profitable growth. I'm pleased to report that we exceeded our fiscal year '23 guidance for both revenue and adjusted gross profit. Today, we're initiating guidance for fiscal '24. We expect total revenue for fiscal '24 to be between $2.7 billion and $3.3 billion. In line with our commitment from our last call, we are initiating guidance for adjusted EBITDA for fiscal '24 to be between $50 million and $80 million.
Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that in October, we launched Gridstack Pro, our larger enclosure providing higher density, faster installation, enhanced performance and industry-leading safety. In conjunction with the launch of Gridstack Pro, we also launched Fluence OS7, the latest Fluence operating system, designed with enhanced capabilities and fully integrated with the new Fluence battery management system, which I will touch on more in a few minutes.
Third, I'm pleased to report that we have secured all our battery needs for fiscal '24 and '25. Four, we will use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we are initiating guidance for our annual recurring revenue from our combined service and digital businesses. We expect to generate around $80 million of ARR by the end of fiscal '24.
And finally, our fifth objective, which is to work better. I'm proud to say that just recently, we have launched a new $400 million Asset-Backed Lending facility or ABL. This credit facility is secured by our U.S. inventory, and we expect it will provide us increased flexibility. More importantly, we believe that the ABL facility provides us additional tools to manage our working capital as we continue to grow.
Turning to Slide 7. Demand for energy storage continues to accelerate. In fact, our pipeline now sits at $13 billion, which is an increase of approximately $600 million from the third quarter and a 50% increase compared to this time last year.
Additionally, as I mentioned, with our backlog remain consistent at $2.9 billion, even after recognizing almost $675 million during the quarter. Importantly, we had several contracts that were signed to subsequent to quarter end amounting to approximately $400 million, which provides us with strong visibility to achieve our 2024 revenue guidance.
This is the eighth consecutive quarter we added more backlog than revenue recognized, further illustrating the growing demand for energy storage. Based on the conversations we are having with our customers and potential customers, we're expecting to see top line year-over-year revenue growth from fiscal '24 to fiscal '25 of approximately 35% to 40%, showcasing the robust market for utility energy storage.
Turning to Slide 8. As I mentioned earlier, we launched our Gridstack Pro and OS7 in fiscal year '24. These product launches are something our stakeholders suspect periodically for us. And we continue to innovate and identify new ways to serve our customer needs. When you look specifically our Gridstack Pro solution, this is a much larger product that integrates 6 battery racks and is designed for the largest and most complex utility scale projects globally. Gridstack Pro will offer our customers (inaudible) product with leading safety measures, faster deployments, first-class reliability and the flexible modular design that defines our product offerings.
More importantly, for the U.S. market, the Fluence battery pack will be available with U.S. manufactured battery cells and modules. This positions Gridstack Pro as one of the first energy storage solutions to qualify for the 10% investment tax credit, domestic content bonus under the Inflation Reduction Act.
In conjunction with Gridstack Pro, we launched OS7, the next generation of our operating system. This iteration is meant to handle bigger and more complex projects, and can reliably control more than 1 gigawatt hour system and is fully integrated with the Fluence battery management system.
The software also provides a foundation for future enhancements to the architecture and enables component commoditization such as DC-DC converters. It provides new tools targeted to reduce our commissioning at times which, as I mentioned earlier, is a key area for the company. And importantly, OS7 comes standard with Nispera platform already preloaded. This is an important feature as we expect to provide all our product deployments with basic Nispera access for a certain amount of time. After which customers will be required to sign a longer-term contract, if they wish to continue using the APM platform for the best facility of which to upgrade to additional (inaudible).
Turning to Slide 9. I'm pleased to say that earlier this week, we secured a new $400 million ABL facility. This provides us with an additional tool to help manage our working capital. The new ABL facility features a lower cost of capital relative to our legacy revolving credit facility by approximately 50 basis points and is secured by a U.S. inventory balance, and is expected to provide us with more flexibility.
As our U.S. inventory balance increase and so does our borrowing capacity, this ABL facility replaces our smaller $200 million revolving credit facility that require cash collateralization. As we enter fiscal year '24, we believe we have a very strong balance and an ample working capital facilities necessary to scale our platform and achieve our '24 guidance.
Shifting to Slide 10, we're introducing guidance for annual recurring revenue, ARR. For our combined digital and business enterprises, our objective is to reach approximately $80 million in ARR by the conclusion of fiscal year '24, implying a notable increase of 40% from the preceding year. This target is well supported by a robust service attachment rate exceeding 90% and a full 100% attachment rate for Nispera moving forward.
Additionally, our strategic efforts are concentrated on advancing our Mosaic offering, calling operational into the markets, Australia, CAISO and ERCOT. It's essential to note that we're in the process of refining this platform with substantial contributions not anticipated before '25, as previously communicated.
In conclusion, I'm pleased with the achievements of the fourth quarter, although we're mindful there is still work to be done. We will look to continue this momentum as we progress into a new fiscal year. I will now turn the call over to Manu.

Manavendra S. Sial

Thank you, Julian. I will begin by reviewing our financial performance for the fourth quarter, and then I will pass it back to Julian to discuss our guidance for fiscal year '24. Please turn to Slide 12.
Our fourth quarter revenue was $673 million, an increase of 52% from the prior year same period and 25% above the third quarter. We continue to execute well as we were able to accelerate some of our legacy backlog previously anticipated for fiscal year 2024, resulting in higher-than-expected revenue for the fourth quarter. We continue to expect a small portion of our legacy contracts will be recognized in the first quarter of 2024.
Looking at our adjusted gross profit for the quarter. We generated approximately $78 million or approximately 11.6% in line with that commitment discussed on our third quarter call and reflects an increase from our third quarter margins of approximately 4.4%. More importantly, this is an increase from the previous fiscal year of 2.8%. I'm pleased to say we have demonstrated cost discipline as our operating expenses, excluding stock comp as a percentage of revenue continued to decline and ended up around 9% for the quarter.
From a year-over-year comparison, our 2023 OpEx percentage of revenue, excluding stock compensation, came in around 10% which is below our 2022 results of around 15%, further illustrating our cost discipline. As a result of our strong execution in the fourth quarter, we were able to generate $20 million of adjusted EBITDA. And as Julian mentioned, this signals the first phase of our transformation is complete. As we have now become profitable, our focus will shift to growing our nominal adjusted EBITDA and ARR, which we will discuss further.
Turning to our cash balance. I'm pleased to report we ended the fourth quarter with $463 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $45 million from the third quarter. As Julian mentioned, we secured a new $400 million ABL facility. This facility replaces our existing revolving credit facility and upsizes the amount of available borrow and should enable us to better manage the peak to trough elements of our working capital. When you look at our total cash balance combined with a new ABL facility and supply chain financing, we have ample liquidity putting us in an excellent shape to capitalize on the massive time in front of us.
Please turn to Slide 13. From a cash standpoint, we increased our total cash position by 11% relative to the third quarter. For 2024, we will continue to invest in technology, resulting in an expected use of cash of approximately $85 million. From a recurring CapEx assumption, a good run rate is between $20 million and $25 million as this is the level we expect in a steady-state environment without large nonrecurring investment items, such as the technology, IT and systems investments we expect to make in fiscal 2024.
As Julian will expand, we expect to generate around $65 million of adjusted EBITDA in fiscal 2024, and we expect to see approximately $65 million to $70 million change in operating cash due to increase in working capital requirements and includes our deposits for our U.S. manufactured battery cells from AESC. As we mentioned on our last call, our U.S. battery cell supply agreement with AESC called for a down payment of $150 million to reserve this capacity, which will be paid in installments over fiscal year '24 and fiscal year '25, and will be funded by liquidity and customer deposits for these batteries.
The first $35 million will be paid in Q1 of fiscal year '24 and another $35 million will be paid in the second quarter of fiscal year 2024. As Julian and I mentioned earlier, we have a strong balance sheet entering 2024 and have ample cash and facilities to support our 2024 guide and investments that will support multiyear industry growth. We also expect to generate free cash flow in fiscal year 2025.
Before I turn the call back to Julian, I would express -- I'd like to express my appreciation to the Fluence board, management team, employees and shareholders for their trust. Serving as the CFO of Fluence has been one of the highlights of my career. If I were to participate in the energy transition space today, this would be my preferred spot. I take comfort in knowing Fluence is in an excellent position from a balance sheet perspective as I pass the baton to Ahmed, who will take Fluence into the next chapter.
With that, I will turn the call back to Julian.

Julian Jose Nebreda Marquez

Thank you, Manu. Turning to Slide 14, as we previously discussed. We're initiating guidance for fiscal '24 of revenue between $2.7 billion and $3.3 billion. We expect our fiscal '24 adjusted EBITDA to be between $50 million and $80 million. And we are targeting our ARR to be around $80 million by the end of the fiscal '24. I'd like to point out that our revenue guidance represents an increase of $300 million when compared to our prior fiscal year '23 guidance midpoint plus our implied revenue growth of 35% to 40%.
We now expect a fiscal '24 revenue split of 30% in the first half and 70% in the second half, which is an improvement to what we previously communicated to the market. As a result of this, we do expect our first quarter to produce negative adjusted EBITDA due to lower revenue and the execution of the remaining legacy contracts. From a margin perspective, we expect fiscal '24 adjusted gross margins to be between 10% and 12%, which is an improvement from the fiscal '23 adjusted gross margin of nearly 7%.
From a cash standpoint, we currently expect to use approximately $85 million of cash in fiscal '24, mostly funding nonrecurring incremental investments in systems and IT infrastructure necessary to support our continuous growth. When looking out to '25, we expect 35% to 40% year-over-year top line revenue growth. Additionally, we expect to begin generating free cash flow in fiscal '25.
Turning to Slide 15. We established ourselves as the preferred choice for utility-scale storage solution. Our competitive advantage is fortified by being able to offer our customers a full breadth of features, including bankability scale and supply chain management, power electronic engineering and innovation, digital software, services, safety and cybersecurity. While some of our competitors may focus on only a couple of these elements, we often win because we aim to excel in all and provide them universally to our customers.
This is corroborated by the 2023 S&P Global Battery and in-store systems integrator report, which ranked the top 10 integrators globally based on installed and contracted capacity. I'm pleased to say that Fluence was ranked #1 both globally and in the U.S.
In conclusion, I want to emphasize the key takeaway from this quarter results. Firstly, we had a robust financial performance contributing to a record breaking annual revenue. Attaining profitability for the first time is a significant milestone, and we aim to capitalize on this achievement in fiscal '24. Second, we proactively secure our future by solidifying our battery supply for fiscal year '24 and '25, thus ensuring our ability to meet our growing demand. Finally, the introduction of our new $400 million ABL facility, provides us an additional tool to continue capturing the robust growth of the utilities cut.
As a reminder, while Ahmed is participating on today's call, he will not be answering any questions. This concludes my prepared remarks. Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Question comes from the line of George Gianarikas with Canaccord Genuity.

George Gianarikas

So maybe just to start, a lot has been made of the interest rate environment having an impact on project timing in the general renewable space and economics, your results sort of speak for themselves, but what impact, if any, are you seeing on your business from the change in interest rates?

Julian Jose Nebreda Marquez

Thanks, George. I mean, as we have talked to in the past, we work with the top-tier developers in the U.S. where this is where this happens. And when you look at them, they don't really see any problems raising capital, accessing capital or putting the projects together. So we have not seen any delays due to cost of capital or access to capital in general.
And I will tell you even more in our case because as you all know, our product costs have come down with battery prices coming down significantly this year in a way when you do the math between what our cost or lower costs compared with the higher 100 basis points, generally that prices have gone that -- the cost of money has gone up during the year. It's essentially a (inaudible) or maybe actually, you actually can do even better returns than what you do in the past. So we haven't seen any real effect of today.
In our customer segment, we do get the same information you get from other parties who tend not to work with, where they have had some problems raising money or raising money at competitive rates, well, but we haven't seen it in our group. We segment with a top-tier group and that top tier group essentially has had no problem of addressing capital.

George Gianarikas

Maybe if I can ask one follow-up. Recently, one of your competitors, Wartsila announced that they're exploring strategic alternatives for their energy storage business. What -- any thoughts on that and any impact that it could have on your strategy going forward?

Julian Jose Nebreda Marquez

What I can do -- I was surprised by it because the prior quarter, they say that this was going to be the growth engine. In this quarter, they say that it's difficult to know we've been trying to understand where they come from. I prefer not to speculate at this stage. But I was surprised that this is a market that is offering tremendous growth. It's a tremendous opportunity to create value for shareholders to play in the new energy space. So why are they revising their view on the market if -- have no idea.
But I've been reading the Investor Day call and the rationale, at least it wasn't clear to me, but we will continue looking at it. While we are on the other side of that spectrum, doubling down on this. This is a once-in-a-life opportunity. It doesn't get any better than what this market offers today.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Brian K. Lee

First off, Manu, congrats and best of luck on your new role and Ahmed looking forward to working with you more closely going forward. A couple of questions I had was, I guess, I appreciate the ARR breakout $80 million end of this year or end of the fiscal year. A 40% growth, it seems like versus last year's number. If I look at your bookings, though, in services and digital, it's growing a lot faster.
So can you give us a sense of -- I know there's a little bit of a delay, but as we think about your initial '25 revenue guidance consolidated like how fast can you grow that ARR balance off of the $80 million? When I kind of look at your bookings volume growing at a much faster rate across services and digital. And then also, what sort of the margins implied in that ARR balance? I suppose it's -- I would presume it's pretty high, but can you give us a sense of what the range is?

Julian Jose Nebreda Marquez

I mean on the growth rate, I do think that our view is that our ARR to grow at a higher rate than our solutions business just the way it works. And the concept is very simple. We will -- we have Nispera and Mosaic and our services business. Our services business, 90% of our growth rate of our service, Nispera roughly around 100 and then Mosaic is on top of that. So not on top of that, will be -- we can add to it.
So I do think that we will see that growth being ahead of it. So that's conceptually where we are, and you can -- we're growing 40% compared to what the 35% to 40% that we have set from last year. In terms of margins, the margins differ. I think that for their digital business, they are more on the -- around 70%, while our service business is between 20% and 30% depending on the type of service that deal that we agree. So the combined -- there's not a combined -- there's not a combined margin, but you should think about it this way.
And then in terms of the -- today, I think that the great -- or the majority of these services, but I'll see -- our view is that the digital will grow at a higher rate than our services business that you'll see, digital becoming a much more relevant part of our ARR as we move forward. So that's kind of it that you should think about all of this.

Brian K. Lee

That's great. Yes. I appreciate that color. That's super helpful. Second question for me, and I'll pass it on is looking at that kind of preliminary fiscal '25 revenue guidance, $35 million to $40 million. And that's quite robust. It puts you in kind of the $4 billion top line range. I'm assuming you kind of get to the midpoint. Can you -- it sounded (inaudible) like you were mostly, there are a lot of customer conversations and feedbacks. But could you give us a sense of (inaudible) backlogs?

Julian Jose Nebreda Marquez

Brian, I lost -- we're losing you a little bit. I don't know. You mentioned that you were talking about '25 robust growth and then somehow you got -- can you repeat?

Brian K. Lee

Yes. Maybe that's clear. Sorry, I turned off the Bluetooth. It's I'm just wondering what beyond customer conversations do you have any MSAs, contracted backlog? Like what else are you able to sort of key off on to get comfortable with the 35% to 40% additional growth into fiscal '25. And then when you talk about batteries being secured for '25, I mean I would assume that is matching up to that revenue growth potential you're looking at.
Is it fixed pricing? Or is it indexed? Are you subject to any kind of cost volatility on the battery side, just having locked in the volume, maybe could you remind us where you are on the pricing side of things as well?

Julian Jose Nebreda Marquez

So on the growth, we clearly -- I think that the best evidence of our growth capabilities comes out of our pipeline. So we looked at our pipeline for this last quarter, we grew our pipeline by $600 million roughly. On top of converting [$735 million] to backlog. So in reality, we added $1.3 billion into the pipeline this quarter. And that's where -- that gives the -- and our view and on top of that, something that we don't disclose, we have lead projects that we're working with customers that we do not believe today, we can consider at a 50% chance of happening within the next 2 years.
But when we looked at our leads and we're talking to our customers, what we're doing gives us a good -- we feel very confident that we can do the 35% to 40% for '25. So that's essentially what it is. In terms of -- on that -- this number compared to where prices are -- we built our planning based on our current deal prices or on costs. So as long as prices stay within what we think, where we are today, generally, which is kind of what we think is going to say for the foreseeable future, I think which will be fine.
Well, what we have also seen, just to be clear, that if prices will continue to come down, I think that generally, what we see is that the volumes increase. So we don't feel that necessarily the 35% to 40% today. We don't believe that the 35% to 40% growth will be affected by costs coming down or battery costs coming down so much that we won't be able to meet it because of that. Because at the end of the day, what happens, a lot of more projects, let's say, our 50% more of our pipeline projects convert into a reality because they are easier to meet the economics of the customer.
So I think that's the -- our view on that one. Your second point, sorry, I did -- you had a second point?

Brian K. Lee

You covered most of it. I guess my question around cost was whether or not, I guess, you have margin risk either up or down based on the security of supply in '25 and volumes and how long are in (inaudible) with us?

Julian Jose Nebreda Marquez

We continue to be -- our strategy is not to take battery price cost risks. So we transferred to our customer that. And that -- and our view has always been with the RMI. So our view has always been as prices of lithium come down, it goes to our customers. If they were to go up, our customers will pay a higher number. And we don't want to become a commodity. They're much better players, there are much better ways of betting on the commodity movements than our stock. So we'll continue with our strategy that hasn't changed.
We're still very, very confident on our 10% to 15% margin. So I don't think that will be affected in any way.

Manavendra S. Sial

And Brian, the margins are held up, right? The battery prices are materially different today than they were a year back.

Unidentified Company Representative

And not only they've gone up.

Manavendra S. Sial

They've gone up, right. So from that perspective, I think Julian and I feel fairly confident.

Julian Jose Nebreda Marquez

I think the lower battery prices are an opportunity. They're not at risk. Clearly, we have organized ourselves in a way that it will not be -- it does not affect or changes, affects our margin, but they are generally we see them as an opportunity.

Operator

Our next question comes from Andrew Percoco with Morgan Stanley.

Andrew Salvatore Percoco

I guess just to come back to Brian's question. I just want to make sure I understand this correctly. For the 2025 battery supply, have you locked in the pricing with your suppliers on that? I'm just kind of curious if battery prices continue to fall and you've locked in your pricing for 2025, is it going to be more difficult to sign a 10%, 15% gross margin contract if you have a higher priced battery versus where prices go from here?

Julian Jose Nebreda Marquez

I think that I'll put it this way. We are -- we have contracts with our suppliers that aligns with the current market world, in a world where prices are coming down. So that's generally our view. So we're not committing to significant volumes at fixed prices that will be out of price. That's conceptually one of (inaudible). No, that's very, very important.
We -- very, very important from our point of view to have very competitive pricing that is better at market or better, and the ability -- the access to volumes. And I think that we have been able to design our contracts in a way that meets those goals. And in terms of margins, as I said, I see this as -- I don't think the lower pricing will affect our margins, our 10% to 15% margins going forward. This is more of good news, more than negative news. And our 10% to 15%, we feel very confident, that's the way we do deals.
And people might argue, "hey, your volumes are going to come down because now you're going to come out of a lower price", but the reality is that, as I said, a lot of more projects meet their return criteria for our investors of our customers. So the volume more than covers any potential price reductions you might see around. So this is a growth -- this is, as I said earlier, you cannot -- if I looked at when I arrived, a $180 per megawatt hour prices today, not going to say price not to be let my competitors know, but it's a different world, and it doesn't get any better.
Well, maybe there will be some price, next year will be even better. But...

Andrew Salvatore Percoco

Understood. That's super helpful context. And then I guess my follow-up would be as you look at your backlog or even the pipeline, what percentage of it is new renewable energy projects that are adding battery storage versus maybe a retrofit opportunity? Obviously, the IRA presents an interesting opportunity there for retrofits. So I'm just kind of curious how that's breaking down as you look at the pipeline and backlog.

Julian Jose Nebreda Marquez

Today, I will say if you look at our pipeline, the ones that have more than 50% is mostly new projects. Retrofits and things of that sort are more in the lead spot. So that's where they why [effect] mostly greenfield, if not essentially all today. However, we do see, as you can see, a lot of our customers are looking and talking to us on retrofits or replacing some [core] facilities. So there are some in our in our pipeline or in our contract backlog that are building it into a former core facility, but generally, they're greenfield.

Operator

Our next question comes from the line of Joseph Osha with Guggenheim Partners.

Joseph Amil Osha

Congratulations on the great outcome. I've got a couple of questions. First, looking -- you've alluded to the gross margin. But as we look at that FY '25 guidance, I'm wondering how we might think about operating cost absorption and what that implies roughly for the ability of the enterprise to grow EBITDA? I have a couple of other questions, but I'll start with that one.

Julian Jose Nebreda Marquez

I'll let Manu answer this.

Manavendra S. Sial

So look, I think consistent with what you said, as you think about '25 EBITDA profile, gross margins are probably at the midpoint of the 10% to 15% range. And then we've been very disciplined around operating expense, and we expect to grow operating expense at a little bit less than half of our top line growth. And you saw that in '23, and you expect to see that in '24 and '25. Look, we are continuing to invest in the business on the backs of a growing market and $13 billion of pipeline.

Joseph Amil Osha

Okay. Could we begin to see any material benefit from 45x credits in FY '25, given how cell availability in the U.S. is evolving?

Manavendra S. Sial

Yes. And the short answer is yes. But I think from a modeling perspective, I'd still stick within the lanes I just talked about.

Joseph Amil Osha

Okay. But to be clear, that number you put out there does not build in any 45x, is that correct?

Julian Jose Nebreda Marquez

The way we -- our view on the 45x is that they will be within the range. So that we will see that the 45x will take us outside of the range of the 10% to 15%. That's the way we should think on. Remember, we are building a new line. We are putting it together. We're starting this -- it will require some -- taking it up to more -- if we get to very -- to get to scale and efficiency, it takes a little while. So we believe that the 45x will help us paid for some of that learning curve.

Joseph Amil Osha

Sure. I mean it's -- it's early days. I just wanted to clarify. So it does sound like to the extent that those numbers do flow through the P&L in '25, it would be additive to that range you're discussing. Is that kind of what you're saying?

Julian Jose Nebreda Marquez

Well, I'll put it differently. As I said, I do not -- today where we are. I believe that the 45x will help us bring in our line into -- it will cover the cost of the learning curve. That's our view today. We might be able to do this much better than what we expect, but having gone through processes like this, they usually carry some risk and you need to be. So I don't want to overpromise on this.

Joseph Amil Osha

Okay. And then just a last one for me on business mix. Wondering how you're looking in terms of storage only freestanding products versus wind and solar coupled projects? And that's it for me.

Julian Jose Nebreda Marquez

Yes. They'll see more and more coming into -- in the -- first, outside of the U.S., that's the norm. Just to be clear, in the U.S., we'll see them come more and more enough, more, more. We have solar -- we've signed a few last -- during the year. We see more coming into our leads and into our pipeline. And it will be -- I cannot give you the exact number, but I don't have on the top of my head. But we do see that over time, that will take over in the U.S., the U.S. will start looking more like the rest of the world where battery storage are stand-alone process. It will take a little time.
These projects that need to be -- people are working on projects that were with renewable assets, it will take a little time until they actually get them permitted in the queue and all that process.

Operator

Our next question comes from the line of Dylan Nassano with Wolfe Research.

Dylan Thomas Nassano

Welcome, Ahmed and wishing you the best in your new role, Manu. Just wanted to touch on the domestic content offering. I mean, how are those conversations kind of going with the customers right now? How much volume, I guess, are you seeing a drive within the pipeline? And just on the latest IRS rules that came out, does that kind of give any kind of incremental certainty to move the needle at all?

Julian Jose Nebreda Marquez

I mean, as we said, I think that our volume growth is based on our view of our -- of domestic content. We do, as we mentioned it also, there might be an opportunity for margin expansion. We said it in the past. It's too early to say today. But we are working with our customers and it's going well, but it's too early to say whether we can expand margins based on it. That's our view.
But volumes already where we are, the growth we're offering essentially includes what our view on where we see our domestic content offering. And that's generally our view on this. I think that potentially it could be a margin expansion that we said. And as soon as we have visibility, we'll share that with the market to let you know if it changes. That might be a potential upside for our '25 margins, just to be sure. We won't (inaudible) we will see any real significant revenue in '24. It will be at '25 revenue.
We'll let you know as the year progresses and we start signing contracts, we'll give you a view of what we can do. And the regulations were a step forward. I think like all these regulations they respond a set of questions and open a new set of questions. But I think that in general, it was good to see more coming. The -- we're still waiting for more clarifications. But you've got to see some clarification on that. A lot of the issues that we're addressing were not related to our industry, but the ones that were related to our industry to the battery storage were in line with what we expected, so...

Dylan Thomas Nassano

Got it. And then just a quick follow-up. Can you just talk a little bit about the geographic breakout of the current backlog and where in the pipeline? Are you may be seeing incremental opportunities pop up?

Julian Jose Nebreda Marquez

Yes. I mean, (inaudible) earlier, the same as our revenue, 2/3, the U.S. 1/3 of the rest. We see -- in terms of markets, I think we talked about this already, Canada has become now a new market where we'll be very active and has been doing very well. But besides that, I think that generally, we see a lot of growth in Australia, Europe has been -- Germany. And Germany, I guess, is the other market where we have done the two transmission projects and we are continuing to see growth and movement. But very, very strong market all around and the U.S. still leads the pack.

Operator

The next question comes from the line of Ben Kallo with RW Baird.

Benjamin Joseph Kallo

Just following up on the last question. How do we think about your cell supply matching up with your geographic opportunities? Just meaning U.S. cell supply for domestic content, how you guys think about that in '25, '26 and beyond with those contracts?

Julian Jose Nebreda Marquez

We have -- I think we are -- besides the U.S. sales, we manage the rest of the world as a global market. So we -- today, we don't -- there's no risk from cells not having supply to any of our markets in any specific deal. Our deal for the U.S. supply is a multiyear deal that will cover a few years, and we expect that, that becomes a solidifies and it will continue for many years.
And I will tell you something that I think is important. We do see that the U.S. will have both domestic and import content. So we'll have a mix at the end of the day. So it's not like the U.S. market will become a fully only domestic content market, at least not at the beginning for a while, you'll see both imported batteries and the domestic content batteries competing here.

Benjamin Joseph Kallo

In the past, you've made some acquisitions. I'm just wondering about -- looking at your Slide 21, the different; technologies, either on hardware or software, if there's areas that you see opportunities going forward?

Julian Jose Nebreda Marquez

We have said from day 1 that we were not going to do any M&A until we had a profitability. So that continues to be our case. Clearly, this quarter has been good. If I -- my view on potential acquisitions is as follows: we -- clearly, we see M&A as an opportunity. We will be -- maybe one of our value ways of offering value to our customers. If we were to do any acquisitions, will be connected, most likely to our product development, accelerating our product development. But we have no -- we are not working on any acquisitions. There's nothing in the works. So we're not talking to anybody so don't be -- there's enough work with our current business and for us to make it happen. But to do anything, we'll be more on the technology side and connected to our product road map.

Operator

Our next question comes from the line of Kashy Harrison with Piper Sandler.

Kasope Oladipo Harrison

So maybe just a quick follow-up on gross margins. your Fiscal '24 guidance calls for 10% to 12%, but Manu discussed 10% to 15% as we think about fiscal '25. And so just wondering what are some of the factors that could potentially push you towards the high end of that range, that 15% versus the low end of the range of 10%?

Julian Jose Nebreda Marquez

I think that, clearly, our execution capabilities moves us higher up. Well, I think something, as I mentioned, that could be material -- I'd say our material driver will be the U.S. content offering if we can capture higher margins on that offering. So that's generally when you looked at it, see it will be a combination of maybe even better execution, so we can do better than what we expected and the U.S. content offering which might -- the domestic content offer, which might, as I said, this is something we might see an opportunity for higher margins.

Kasope Oladipo Harrison

That's helpful. And then just my follow-up, Manu said this as well and just doing the quick math, it's clear that you guys think you're going to be generating free cash flow as we think about fiscal '25. I know it's very early, but if you actually do successfully -- if Fluence actually successfully begins generating free cash flow, how do you think about capital allocation priorities for that free cash flow? Is it -- are you going to look to M&A? Are you going to look to returning capital to shareholders, just shore up the balance sheet. Maybe just thoughts on how you want to use free cash flow to create for the shareholders.

Julian Jose Nebreda Marquez

I think my view on it today, I don't know, is supporting our growth. Technology, that's where I think that -- where we -- I don't see us distributing cash flows or distributing dividends or anything of that. The growth is so -- if the growth continues as we expect it to continue and I would see in the world, we will need all those resources to meet our customer needs to create. And that, I think, will be the best use of money, and it will create the most value for shareholders. So that's our view. It might change over time. But if you ask me about '25, that's the way I think about it.

Operator

Next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Alexander John Vrabel

It's actually -- it's Alex Vrabel on for Julien. Congratulations to you guys. Congrats to you, Manu. We'll miss you in your next journey, but great results here. Maybe my first question, just to -- you guys, obviously, a lot of growth guided for next year, and obviously the indication for fiscal '25 robust as well. Curious just when we think about the bookings cadence to support that, if I look back in time, it seems like you guys see a pretty big step-up in the first quarter. And then things seem to be sort of levelized 1x or a little bit greater book-to-bill throughout the rest of the year. Is that what we should look for kind of next year? Or is there any kind of gyrations or things you should watch for on cadence around IRA allowing projects to move forward or not that we should think about? Just as far as getting confidence in 2025.

Julian Jose Nebreda Marquez

Yes. Maybe what I think we'll be kind of the next step-up will be the domestic content going back to it. So that which will happen over the year. It's difficult to have a seasonality on order intake to be very, very sincere with you. It changes over time. So I cannot give you a guidance as you expect much bigger first quarter and then everything kind of staying the same. It's difficult to give you a view on that from where we are today.
We -- what we can say is that we feel very, very comfortable about our '24 and '25 guidance and with what -- when we see how our converting pipeline into backlog. And we are in discussions with our customers, we feel that we're going to be able to meet very, very comfortably the '24 and '25 volume guidance that we just mentioned. So...
That's what I can say. I don't want -- first, I don't want to manage this company by quarter. I've told my team, there's not -- there's the deals, the right deals, don't worry about meeting a quarter number because in terms of backlog, it doesn't really matter as long as we feel confident that we can make it happen, just do it whenever we get it.

Alexander John Vrabel

Yes. Many of your peers would say, you're in the large project business. I know they sort of pointed the same. Maybe if I can just ask, obviously, a strong environment for storage, obviously, sort of a very price-elastic product as far as how the returns evolve, but the other thing I want to ask about is how much of this is just -- I mean, as far as the volume growth that you guys are able to put up, how much of this is sort of new customers or a higher win rate as opposed to the size of the projects you're seeing are just ballooning in size?
Because if we look at the developer side, it seems like we've gone from 200-megawatt hours to 2 gigawatt hour projects in 1.5 years, and I'm just sort of curious how much of that is really kind of driving the confidence here? Where it's not just -- we have to win a bunch of new customers. It's literally just, hey, it's the same customers, the projects are just 5x bigger than they used to be 2 years ago. You can kind of expand on that?

Julian Jose Nebreda Marquez

Yes. My view is that, all of the above. Clearly, our customers are doing bigger projects for grade. We're also entering new markets like Canada, which are new customers that we didn't have before. and doing more work in Germany. So I will say in the U.S., it's mostly our projects getting bigger. In outside of the U.S. is new customers we're working with, and that's kind of the way I will put it. So we have a lot of repeated customers constantly all the time, but we're also looking to -- for customers that meet our profile, trying to entice them to come and work with us. So it's a...

Manavendra S. Sial

I think in general, as the project sizes get bigger across, at least in the U.S. and also outside the U.S. Given the fact that we have one of the select set of providers that can provide a multitude of attributes between great safety records, bankability, supply chain, flexibility on attribute management. I think the current customers keep coming back to us and we're starting to see new customers who now want to work with partners who can manage large projects with multiple attributes start to come our way.
That's a way to think about how we step up as we go through the years.

Operator

Our next question comes from the line of Chris Ellinghaus with Siebert Williams Shank.

Christopher Ronald Ellinghaus

Congrats to Manu and Ahmed. The fourth quarter, the adjusted gross margin was 11.6%. Is that informative for 2024 relative to the guidance? Or were there some special circumstances there, particularly related to the legacy contracts?

Julian Jose Nebreda Marquez

I think our guidance is 10% to 12% -- midpoint is 11%. In the fourth quarter, there were some change orders that help. That's what I will say. That helped bring it up beyond above the -- and those are difficult to predict. So that's the way I will put it.

Christopher Ronald Ellinghaus

Okay. And Julian, you talked a lot about battery costs, but there's a bit of a slowdown in EV sales. Are you expecting that to maybe be a tailwind for battery costs in '24?

Julian Jose Nebreda Marquez

I think that today, my view is that I don't think prices will continue coming down. That's our current view. It will stay kind of where they are. They won't go up, but I don't see these prices of batteries, lithium and lithium carbonate coming down below where we are, but if I knew where they were going to trade, I wouldn't be doing this job, but we do something where you make a lot more money to be very specific with you. But that's our view. And I think that talking to our suppliers, talking to the market and our [business] to China, we're in kind of -- that's kind of where things will be comfortable that that's the way to think about it.

Operator

Our next question comes from the line of Pavel Molchanov with Raymond James.

Pavel S. Molchanov

As you look to boost your services and software revenue, would you be open to the idea of placing some battery assets on your own balance sheet from the perspective of virtual power plants, peak shaving, rate arbitrage, any of these services that Fluence could participate in directly?

Julian Jose Nebreda Marquez

Yes, not really. I mean my view on this is that it's our customers. It's our customer's job, they should do it. If I start doing what my customers do, is a recipe for [diaster]. So no, no, I'm not planning -- we're not planning to get into the storage business, using storage as a service business to (inaudible) .

Pavel S. Molchanov

Understood. A quick follow-up on M&A. As you look at potential software acquisitions like AMS a couple of years ago, is it fair to say that valuation multiples on -- in a private company arena have come down quite a bit since AMS, for example?

Julian Jose Nebreda Marquez

Yes. I mean, as I said, we are not actually in the market. So I'm not testing prices. So I cannot give you first evidence of where prices are for potential acquisitions. So -- but generally, I heard what you're telling me, what I hear from the banks is that when they come and pitch me stuff that there's all these great opportunities around. But as I said, we're not we're not jumping around. We're not -- we are in the process of capturing growth.

Operator

Our next question comes from the line of Ameet Thakkar with BMO Capital Markets.

Ameet Ishwar Thakkar

Hopefully, two quick ones here. It looks like we talked a little bit about ASPs out in '24, but it looks like in the current quarter for your revenue recognition megawatts were kind of flat at 600 megawatts, but pretty big revenue increase. I was just wondering what kind of caused that big kind of step-up in ASP. Was it the change orders you mentioned a little while ago, Julian?

Manavendra S. Sial

That is correct. I think it's a combination of project mix and change orders.

Ameet Ishwar Thakkar

So we should kind of think of that as a little bit of a kind of a one-off?

Manavendra S. Sial

Yes. Look, remember, as we run off our legacy projects, some of them were signed way back in '22, early '23. You should expect the ASPs to kind of reflect what's happening with the battery prices. But as we said, our margins continue to be intact and grow through '24 and '25.

Ameet Ishwar Thakkar

Great. And then I think in your kind of cash flow guidance, you included the impact of deposits for the AESC's battery U.S. cells. I was wondering if you could kind of give us a little bit of clarity on what the magnitude of that is and when that cash comes back to you?

Manavendra S. Sial

Yes. So what we've said is, I think it's $150 million over a 2-year period. I think it's roughly half and half between '24 and '25. Half of it gets financed through customer deposits and the other half we get financed through our own liquidity sources. And as you can see, we have ample of them. And then as the product starts coming through, we get it a little bit as we -- as AESC ships the product to us. So you should start to see some of that deposit come back to us starting end of '24, '25, along with the supply of the sales.

Operator

Our next question comes from the line of Thomas Curran with Seaport Research Partners.

Thomas Patrick Curran

Manu, kudos on making so many positive contributions in such a short period of time and best of luck on the private side of the auto parts world. Ahmed, congratulations on (inaudible). Yes. Yes. We are quick to count on it. And then I made congratulations on stepping into some big shoes, I look forward to collaborating with you.
A follow-up on how the nature of storage projects have been evolving. It was just touched on about how the size of them has soared over the last 18 to 24 months. We've also seen an uptrend in the average duration of systems being installed. Would you expect that ever longer duration trend continue? And if so, what are some of the specifics of how you're positioning Fluence to ensure that strategically, technologically and supply chain-wise, you're staying ahead of that trend?

Rebecca Boll

Thomas, it's Rebecca. So what we see right now and what we're developing and delivering from the product road map really is still on that 2-, 4- and 6-hour duration systems. So kind of in the next 18 to 24 months, we're going to deliver what we deliver, which is not yet the multi-day or longer duration than that.
What we're doing from a product road map perspective is we're examining what's out there in the crystal ball of battery chemistries that allow for longer duration solutions. And we're just starting now to engage with those suppliers and put prototyping efforts in place. So when those things become more viable in the market, we will be ready.

Thomas Patrick Curran

Makes sense, Rebecca. And then just looking to dissect the contracted backlog a bit further. I was hoping you could share 2 percentages with us. First, what's the portion of the current backlog that's nonrelated parties? And then could you give us a rough estimate for how much of it represents mega projects and storage of the transmission asset combined?

Julian Jose Nebreda Marquez

So on the unrelated party, it's around 75%. As we said, we want to -- I want to bring it to around 20%. So we're kind of -- it will be bumpy, so -- but now on us, as projects are big, but I think we are -- it's been coming down and around 20% will be a number I feel comfortable with. So today, I think it's around 75%. So it's kind of in line with what -- and our -- if you looked at our revenue for the year, I think it was around 29%, with -- 29% with related parties and 61% with so. And it should tend to go towards a 75% revenue and then at some point, get to the 80% that I just talked about. And then you were saying on standalone. That was the second part of your question?

Thomas Patrick Curran

Just trying to get a sense, either if you want to break them out, that would be great. But even if you just want to look at them on a combined basis, the percentage of the contracted backlog that's either a mega project or storage as transmission assets?

Julian Jose Nebreda Marquez

Yes. No. It's difficult to prefer not to go into that. So at this stage, but we have a lot of flavors in that pipeline, that what we're hopeful for.

Thomas Patrick Curran

Yes. Hence my curiosity.

Julian Jose Nebreda Marquez

I think that -- I think it's better to keep it with this view, and that allows us -- all of us to work better as we move forward. Thanks for the question. I think this is one of our successes the ability to continue growing with -- we are unrelated party transactions that's growing at a much higher rate than the 35% to 40%, as you can see from where our pipeline stands today and where our revenue stands today.

Operator

Thank you for your questions. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.