Bloom Energy Corporation (BE) Q1 2019 Earnings Call Transcript

In the directed biogas case, biomethane produced from biomass is purified to pipe gas standards, injected into the gas pipeline and transported pipe gas is used by Bloom Energy Servers to generate electricity. In the case of on-site generation, biomethane produced from biomass goes through a relatively inexpensive and minimal cleaning process before it is spread directly to a Bloom Energy Server located on-site. Then the electricity produced from the biomethane is transported via the electrical grid to our customer. The on-site biomethane method is more efficient energetically, has lower capital cost and lower carbon footprint than even the directed biogas program.

In California alone, there is sufficient biomass to generate and deliver as much electricity as 4 million solar panels or a nuclear power plant. This type of on-site biogas-powered electricity generation will play a meaningful role as a source of renewable, always-on power helping to stabilize the grid as penetration of intermittent renewables increases. Legacy power generation has not been able to offer a method for biogas-powered electricity generation that is highly efficient, distributed, highly reliable and cost effectively removes moisture, sulfur, siloxanes and other contaminants from biogas prior to utilization. We believe we have the answers to those problems.

By Q1, we demonstrated the increasing commercial readiness of our biogas solution to a pilot with a utility. We commenced a pilot at a landfill facility in January of 2019. We began by conditioning biomethane from the landfill and then feeding it to our on-site biogas-powered system in February. The 50-kilowatt Bloom Energy Server with integrated biogas cleanup module has since operated and delivered 100% clean and renewable baseload power into the local grid.

We are excited to have delivered this first demonstration and expect to have commercial on-site biogas deployments in the future. Now let me move to the second topic on our value proposition I wanted to discuss, which is resiliency solutions. According to the Eaton Blackout Tracker, there were more than 3,500 utility outages in the U.S. in 2017 alone.

A recent study by the EIA highlighted that the duration of electric power outages in the U.S. has doubled in the past two years with an increase in extreme weather systems being the main cause. Estimates suggest that the total annual cost of power interruptions to the U.S. economy is around $200 billion.

With outages increasing in frequency and duration it seems likely that cost will soar in the future. With the U.S. economy ever more dependent on electricity for its digital and high-tech industry, it should come as no surprise that demand for resilient power solutions is on the rise. Microgrid projects, in particular, are surging with almost 500 new projects developed in the past six months, more of them in North America than anywhere else.

Bloom Energy is a beneficiary of this trend. Our systems have now been deployed in more than 80 microgrids with 65% of those deployed in the past three years. We define a microgrid as an electrical infrastructure that has sufficient supply and intelligence to operate independently off the utility grid to meet the demand of a specific site or locality. This electrical infrastructure will operate symbiotically with the larger grid in normal mode.

However, it is also able to isolate from the utility grid and provide always-on power to the site or locality when the larger utility grid is out of service for any duration of time. During Q1, we announced several microgrid customers. These wins underscore the important role we play in elevating power resiliency for our customers in a post-climate change world, and how we help them accelerate time to power when the grid is under strain and utilities are unable to meet fast-growing demand. Let me tell you about two customers.

Our microgrid deployment at the headquarters of Extreme Networks aptly describes how we are helping customers solve grid reliability problems. Extreme experienced three separate power outages to its San Jose offices in the summer of 2018. The outages impacted critical engineering and IT functions. Thereafter, Extreme deployed a Bloom Energy Server microgrid to provide an electricity supply to its headquarters that will be uninterrupted even if the grid fails.

Additionally, Extreme is reducing its cost of electricity by 25% and reducing carbon dioxide emissions by 20%. Lower cost, lower emissions and higher reliability, that's a triple win. Let me talk about another microgrid we deployed in Q1 at a New Jersey manufacturing location of engineered materials and optoelectronics components maker, II-VI. The II-VI microgrid illustrates how we can help businesses remain agile and responsive to growth opportunities when utilities are unable to meet growing power needs in a timely manner.

II-VI has ramped up production at its Warren facility in the past year to meet demand for its 3D-sensing technology. However, it hit a roadblock when the local electric utility was unable to supply power quickly enough to keep up with this growth. This led II-VI to seek an on-site grid-independent power solution. II-VI selected Bloom to build a 2.5-megawatt microgrid power system.

The microgrid was up and running within nine months of the two companies starting to work together. II-VI is also reducing CO2 emissions by 15 million pounds per year relative to the power it would have bought from the New Jersey grid. The Bloom solution enabled timely growth, greener growth and greater reliability for II-VI. As demand for power from EV adoption and edge data center proliferation increases, the aging grid will become ever more stressed and we anticipate robust demand from microgrid solutions.

Finally, moving on to our overall ability to execute our business plan, I am delighted to share news of two appointments to our leadership team. Former Sanmina President and Contec Holdings CEO Hari Pillai, has joined us as executive vice president overseeing the customer installations group. This is the first time we have made a dedicated executive appointment to this position, reflecting our strategic focus to make the installed process even more predictable and scalable while reducing the cycle time. Hari is an extremely accomplished electronics and logistics industry veteran, and I'm delighted he has joined our team.

We also welcome Sonja Wilkerson to Bloom Energy as executive vice president and chief people officer this quarter. David Barber, our previous chief people officer, made an indelible mark on Bloom Energy, and it has been incredibly important for us to find the right successor following a sudden passing last year. Sonja is an incredible talent with an impressive HR leadership track record at Cisco, HP and Infinera, and she is the right cultural fit for us. Her appointment reflects our continued commitment to recruiting, retaining and developing our talent as we continue to grow.

With that perspective, I would like to invite Randy Furr, our chief financial officer, to walk you through our operating results for Q1 and estimates for Q2 2019. Over to you, Randy.

Randy Furr -- Chief Financial Officer

Thanks, K.R. 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.