Description

Given the stock price reaction on today, this is timely as the market currently reacts very violently to bad news while the solar/cleantech sector has gotten decimated on residential solar weakness (interest rate sensitive) and uncertainty around IRA related subsidy/tax credit information. After the drop in the stock, FTCI trades at about a $50m market cap with $30m in cash on the balance sheet and a $1.6bln backlog – stock is very likely worth multiples of where it trades, even at 1x gross margin on backlog, discounted back two years.

We know their 2p tracker design advantages are real and there are no known failures of their trackers and we believe the backlog is real which means you’re buying almost $2bln in backlog for virtually no enterprise value. FTCI has a highly credible board which could push to keep running the business but in a sale, you would think Nextracker or any renewables construction company would pay at least 3-4x the market cap for the patented 2p design, salesforce and backlog.

Utility-Scale vs. Residential Solar

Residential solar barely earns a return, even with subsidies and really only exists as aggressive sales tactics push consumers to go green while utility-scale solar at 1/10th the cost per watt to build (significantly more scale) is real and is cheap enough for wide-scale adoption to decarbonize which means these businesses generate a real earnings power and compete with legacy fossil fuel on build cost.

What is a Tracker?

In a utility-scale solar farm, a tracker is the mechanical structure which allows the solar arrays to track the direction of the sun, optimizing the efficiency of the panel over the course of the day. A 1p tracker utilizes a single long steel cylinder that goes across the solar array and works to rotate it. A 2p tracker allows for two panels to be installed, one on top of the other so that the array can be more efficient (more MW installed because the panels go higher), used in narrower spaces (since a typical row is 60 panels long in 2p vs.90 in 1p) and also used in more uneven terrain since 2 sets of panels can be more flexibly placed to optimize sun exposures (rather than a single long rigid row where all panels must be flat across the same plane).

Is there any Secret Sauce to a Tracker?

The secret sauce is marginal and somewhat site specific. 80% of the build cost is steel so there is some scale to steel procurement but all the major tracker companies (Array, Nextracker, FTC, PVH. Soltec) buy steel at relatively similar prices. Freight also plays a role (LSD percentage of cost) and Nextracker has somewhat of a freight advantage through Flex’s facilities but this benefit is also marginal. There is additional benefit to designs that require lower time to build (reduces labor costs) and wind dampening for windier sites. The labor/wind benefits related to design really apply more to 2p trackers than 1p trackers. In 2p, FTC has a definite design advantage which gives them a major competitive advantage but 2p tracker projects have been put on hold due to module availability issues (more below).  

Perfect Storm for Stock

1. In 2021, supply chain issues related to freight and steel (two of the largest input costs for trackers) crushed gross margins for all the tracker companies since they had not previously passed commodity costs on to customers. Given the 12-18 month backlog, negative margin contracts continued to cycle through financials through 2022.
2. In 2022, a Dept of Commerce investigation by Auxin, a US solar panel manufacturer ensued where Auxin alleged that panel makers in Asia shipped panels mainly manufactured in China first to surrounding countries in order to circumvent tariffs. The investigation resulted in a freeze in panel availability which resulted in a freeze in solar projects in the US in mid-2022. On top of this, UFLPA also resulted in Chinese-made panels being held up at customs with a giant checklist to ensure these panels didn’t use anything made in Uyghur by slave labor. The Biden administration put a 2-year moratorium on the circumventing investigation which has allowed panel shipments to resume while the DOC investigates and buyers can qualify modules coming from elsewhere
3. More recently, uncertainty around investment tax credits from IRA has resulted in a delay in project commencement in Q3/Q4 2023.

While the above issues affect all industry players, the issues below are more FTCI related.

4. 2p installation delays – related to (2) above, module scarcity has resulted in the few modules available to be used for flat, easy, quick install 1p sites causing ARRY and NXT revenue to snap back pretty quickly in late 2022/2023 while FTCI has not been able to convert backlog

To put some color around the gravity of limited module availability, a 12/2021 Colliers initiation (I’d argue the analyst is one of the best in the sector) estimated 2023 revenue at $732m while consensus is now $170m. This is not a function of any problems with the product or secular changes to the industry, it’s mainly a function of module availability.

With the constant missteps, poor investor communication, hitting the ATM even with the stock in the $1 range, on 11/8, the board announced more oversight over the business and dismissal of the CEO and CFO, resulting in the stock closing down 64% and down 90% over the past 3 months.

Is the Business Broken?

Other than continuing to hit the ATM at $0.40 and massively diluting the equity, we don’t believe the business is broken though we don’t quite understand why the board would take so much pain so quickly. We have spoken to several FTCI employees and competitors and the feedback on 2p trackers is as follows:

The original appeal of a 2p tracker was better ground coverage ratio since you’d have twice as many solar panels per tracker and the expectation was lower labor costs since you’d install twice as many panels per tracker along with lower steel costs since you’d get twice as many panels per unit of steel used in the tracker. However, wind resistance in 2p systems caused more wear and tear, resulting in additional steel and more reinforcements (higher install time) in the ground which impaired any steel/labor cost benefit to 2p trackers. This relegated 2p trackers solely to niche sites with uneven terrains while also differentiating FTCI’s product from competitors.

FTCI’s Voyager system simulates wind resistance levels and utilizes an ‘over-damping’ system to reduce the ‘shaking’ of the panels with wind. Comparable 2p systems increase the stiffness of the panels to negate wind resistance but this significantly increases costs and doesn’t allow for flexible positioning of the tilt angle of the tracker. Less steel reinforcement also means fewer man hours and labor costs to install. More dampers and less ‘shaking in the wind’ also means fewer piles drilled into the ground to install the tracker, meaning additional labor cost savings (often because it requires drilling through rock in the ground).

FTCI has also developed a 1p tracker with a ‘python clip’ where a torque tube with a hexagonal cross section allows the fitting fasteners to avoid piercing the wall of the torque tube with bolts increasing module-spacing flexibility, i.e. allowing different sized modules from different manufacturers to be used (and allowing modules to be replaced in the future) while saving some time on the installation.

Industry Growth

Industry bodies estimate utility-scale solar growth in the US of about 14-15%/year while tracker penetration rates are expected to increase, resulting in a likely 18-20% tracker growth rate (75% penetration going to 85%)

 https://electrek.co/2023/09/06/us-solar-installations-expected-to-be-a-record-32-gw-in-2023/

Financials/Valuation

It’s hard at this point to give any sort of credence in management guidance but as discussed at the top, the backlog is clearly real and module availability should result in unlocking backlog.

From transcript:

As we look to the fourth quarter, our slate of projects in aggregate is getting a later start than we previously anticipated customers continue to experience various project lag. As a result, the guidance we are providing for the fourth quarter is down from Q3. We expect this to be followed by a much more significant revenue growth in the first quarter of 2024 as the delayed projects ramp.

We have previously targeted getting to the 10% to 15% gross margin range on $100 million in quarterly revenue. The fact that we were able to approach the low end of that range or about 9.5% on a normalized basis on only $30 million in revenue

first quarter of 2024, we expect to see about a 96% sequential revenue growth at the midpoint with improvements in all categories. Specifically, revenue between $40 million and $50 million; non-GAAP gross margin between $3.2 million and $6.3 million or between 8% and 13% of revenue; non-GAAP operating expenses between $9 million and $10 million; and finally, adjusted EBITDA loss between $7.3 million and $3 million. Looking forward, we continue to feel good about the opportunity for a strong revenue recovery in 2024 and achieving profitability.

1 gigawatt project that we'll be delivering here and then the 700-megawatt project that we signed last quarter are in process of delivering. So you're going to see a lot of that base load revenue gets shifted into 2024, which is why we're so optimistic about kind of the future prospects is because we've got that 1.7 gigawatts plus already kind of in the hopper and delivering

cash position is -- will be flat to a little improve by the end of Q4. We have some chunky receivables we expect to be coming in, in Q4. And with the ramp that we're seeing and the move to profitability, we're confident and kind of where that stands on our balance sheet.

1.7 gigawatts at historical ASPs translates to about $160m in revenue that is currently being installed and should flow through in 2024 so we know that’s likely a base with significantly more on top of that based on additional backlog conversion.

$100m in quarterly revenue at a 17% gross margin and $10m in opex likely results in $7m in quarterly net income. If $60m in quarterly revenue is the breakeven point, they are very close to breakeven even with just the 1.7 gigawatts they mentioned.

All this is to say that the company is likely very close to breakeven so it’s unlikely massively dilutive equity offerings result in a death spiral.

Monetization of Backlog – in a sale, the question is what is backlog worth? $1.6bln in backlog at a 15% gross margin is $240m in gross profit. If we discount that back 2 years (worst case), we also get almost a 5x on the stock even at 1x gross profit, assuming there’s no future value to the business.

Catalyst

Bringing in a new CEO/CFO, showing the market there's no fraud here, hitting Q4 2023 and Q1 2024 guidance