Edited Transcript of BE.N earnings conference call or presentation 5-Feb-19 10:00pm GMT

--------------------------------------------------------------------------------

Hello. This is K.R., and good afternoon to all of you, and welcome to our Q4 2018 conference call.

I'm very excited to share with you my perspective on our Q4 and FY 2018 results, capping our first fiscal year as a public company. As we enter 2019, we have a strong foundation in the fundamentals of our business: one, a strong and increasingly diversified sales backlog, reflecting the mainstream appeal of our offering; two, continuous cost reduction; and three, a unique, innovative and proven technology platform in the Bloom Energy Server.

As you know, we provide 3 key benefits that our customers highly value today: one, lower cost of power; two, lower emissions; three, higher resiliency, including the option for uninterruptible, always-on power. It is clear that this value proposition is relevant and important to an expanding customer base.

I'll focus on 4 key areas with you today: growth, quality and diversification of our backlog, cost reduction, and outlook for 2019.

Let's start with growth. We grew 2018 acceptances by 30% or 187 systems in comparison to 2017. In 2018, we had 809 acceptances compared to 622 in 2017. In Q4 2018, we grew acceptances by 28% or 56 systems over Q4 2017. We had a record 257 acceptances in Q4 '18 compared to 201 for Q4 '17. We are very happy with this with growth.

As we look ahead to 2019, key metrics to consider are the product and install backlog volume and quality of that backlog. I'm pleased to tell you that we exited 2018 with a strong product and install backlog of 1,384 systems, 70% higher volume than our actual customer acceptances in 2018. Based on this product and install backlog plus anticipated bookings that we expect will convert to acceptances this year, we expect to have year-over-year total percentage revenue growth in 2019 in the 20s.

Now let's look at the quality of our backlog. Diversity of sectors, geographies and the potential for future growth in these areas are key metrics to evaluate the quality of product and install backlog. We have executed on a deliberate strategy to diversify our growth opportunities as our value proposition becomes more mainstream, both geographically and by industry sector.

Data tells the story. In 2011, 100% of our acceptances were in California. In 2017, that number was still 87%, and in 2018, it was 42%. Our backlog exiting 2018 suggests that our acceptances in California will be less than 30% of our total 2019 acceptances and not more than 15% in any single utility service territory in the state. We view this diversification to be very important to our business. When we look outside of California, our backlog shows good geographic diversity in 6 Northeastern states, Japan and South Korea.

Like many companies you are familiar with, Bloom's business today has seasonality to it. If you consider years 2016, '17 and '18, our average acceptances in Q4 cumulatively were higher by over 50% than our cumulative acceptances for the Q1 period in the same years.

In general, second half acceptances are significantly higher than first half acceptances for Bloom. We expect 2019 will follow the same cadence and in fact will be impacted even more by seasonality as our product and the install backlog expands in the northeast where we face winter weather challenges such as the recent polar vortex as opposed to the milder construction-friendly winters in California. Our business in Korea will help to mitigate this in Q1 2019.

Also, when we look at our current bookings, new orders spanned a highly diversified set of industries, including data center, cloud services, health care, retail, hospitality, advanced manufacturing, higher education, real estate, government and utilities. This diversification mitigates our exposure to any one location, any one utility service area or market sector. We have intentionally built this diversity into our product and install backlog, and it enables us to sustain ups and downs in any one area of the economy or any one geographic area.

Let me take a few moments to talk about the momentum we have in the Korean market. We see Korea as a very attractive market to grow our business now and in the future. We achieved our first order in South Korea in December 2017. That 8.35-megawatt project with KOEN is now operational less than a year after the PO. In November 2018, we announced a strategic agreement with SK, the third largest company in South Korea, to be our principal distributor of Bloom Energy solutions in Korea. In December 2018, with SK, we won 4 utility-scale projects with customers including Korea Telecom and Korea Midland Power, a KEPCO power-generation company. We plan to fulfill these orders in Q1 2019 to establish our brand and reputation in a strategic growth market as well as mitigate weather-related risks in the Northeast in Q1. We see it as a worthwhile and prudent investment.

These acceptances will be below the margin targets for the rest of our acceptances. Additionally, we will have nonrecurring expenses relating to certification costs to operate in Korea and the establishment of an infrastructure for operating and maintaining our energy service in Korea. The nonrecurring cost impact and lower ASPs will be reflected in our margin guidance for Q1. We consider this an investment that will pay off as early as the second half of this year, and we expect our margins in Korea to be in line with our corporate targets.

To further fuel our growth, it is the right time for us to be investing in sales and marketing. Historically, our investment in sales and marketing has been modest, well below typical investments in this area for a disruptive innovation company like Bloom. We are now carefully investing in the areas that will help us to enter new markets and expand our penetration in existing markets.

Now let us turn to cost reduction. While we are continuing to reduce cost in our Bloom 5.0 commercial platform, as discussed previously, we have ramped up R&D on our new 7.5 platform. We are on track with our plans on this very important program. We are ramping up our R&D in 2019 to build 7.5 prototype units.

Bloom 7.5 should offer our customers more power in the same footprint and with a further increase in our already world-leading fuel efficiency. This platform will also enable us to continue to drive product and service costs down significantly. Consider this, Bloom 7.5 should deliver 50% more power in the same physical footprint as our current generation, bringing about a step change in reducing our product cost. This, combined with continued manufacturing process innovation and volume growth give us very high confidence of our continuing our rapid cost-down trajectory.

While we are investing in our technology to drive cost reduction, we are also investing in R&D to broaden our offerings for the future. An example is our investment in biogas initiatives, enabling us to provide expanded net 0 carbon solutions. For our customers, biogas-fueled always-on Bloom solutions deliver uninterruptible 24/7 power, enabling them to both lower their emissions and to power through events that otherwise would pose a risk of operational disruption.

We believe now is the time to press our innovation advantage and to lengthen our lead in power solutions that combine low or no emissions with always-on resilience. For this reason, we are also investing in a range of always-on solutions tuned to the needs of different industries and applications. We hope to announce some exciting customer events in 2019.

Now let's summarize what all this means for 2019. Based on our product and install backlog, I expect to see revenue growth in the mid-20 percentage points year-over-year. I also expect our gross margins to be in the mid-20s in the second half of 2019. Together, these expectations should put us well on our way to our long-term business model of 30% revenue growth and 30% gross margin. Our actions and investments are geared to provide not only healthy growth and margin but also a diversified portfolio of opportunities that has the potential to make our business more predictable and less susceptible to localized market and geographic disruptions.

With that perspective, I would like to invite Randy Furr, our Chief Financial Officer, to walk you through our operating results for Q4 and estimates for Q1 2019. Over to you, Randy.

--------------------------------------------------------------------------------

Randy W. Furr, Bloom Energy Corporation - Executive VP & CFO [4]

--------------------------------------------------------------------------------

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.