Prepared remarks
Good morning, and welcome to the Eos Energy Enterprise Fourth Quarter 2024 Conference Call. This call is being recorded, and by participating, you consent to the recording. Now, I would like to turn the call over to Liz Higley, Director of Investor Relations. Please proceed.
Good morning, everyone, and welcome to EOS' fourth quarter and full year 2024 conference call. Today, I'm joined by EOS' CEO, Joe Mastrangelo and newly appointed Chief Commercial Officer, Nathan Kroeker. This call, including the Q&A portion of the call, may include forward-looking statements, including but not limited to current expectations with respect to future results and outlook for our company. Should any of these risks materialize, or should our assumptions prove to be incorrect, our actual results may differ materially from our expectations or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law.
Today's remarks will also include references to non-GAAP financial measures. Additional information, reconciliation between non-GAAP financial information to US GAAP financial information is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies. This conference call will be available for replay via webcast through EOS' Investor Relations website at investors.eosc.com. Joe and Nathan will walk you through our business highlights and financial results before we proceed to Q&A. With that, I'll now turn the call over to EOS' CEO, Joe Mastrangelo.
Thanks, Liz, and welcome, everyone, to the total year 2024 earnings call for EOS. Strong year by the team. I think you have to look inside the numbers here to see the performance and continue to position EOS for the long-term in the long-duration energy storage market. As we saw, we hit our revised guidance that we came out with at the end of last year. The team continues to execute. As we look at the operating highlights on page 4, continue to see a strong commercial pipeline, specifically around long-duration energy storage. Our pipeline is becoming more vibrant, in my view, and really positioning to where EOS wins in the marketplace. It continues to grow. We had a solid year on booked orders with $310.7 million and our orders backlog is now approaching $700 million and over 2.5 gigawatt hours, positioning us to grow for the future. As you look at technology working out in the field, we're approaching 5 gigawatt hours of discharge energy out in the field.
When you look at the number of cycles that we're talking about, the number of cycles that we've put on the technology is becoming immense with over 34,000 cycles out in the field, showing the strength of what the EOS technology can do. With revenue, as I said earlier, we slightly exceeded what our revised guidance was at the end of last year. Really strong performance by the operating team in Turtle Creek. And then on the cash side, Nathan will give a little bit more details, but $103 million in the bank, that doesn't include the $40.5 million that we drew on the last draw for the Cerberus loan. So, when you think about 2024 and really go through the year, we really started off and turned the corner in the second quarter when we closed the loan from Cerberus and created the strategic investment from them, which then flowed into closing the DOE loan, which then allowed us to really bring the soda line, the state-of-the-art line in operation and really position EOS as a strong long-duration energy storage operating company.
If you go to the next page on page 5, I'd like to talk a little bit about the external environment, what we're seeing, and how we're positioning the company against that backdrop. Really, what we're doing is scaling a company into a high-growth environment. It's very exciting for all of us here at EOS on a day-to-day basis. When you look at the external landscape, there are a couple of truths that we really need to consider as you think about how this company will grow over time. The reality is energy demand is going to double out into 2050. But inside those numbers, you have to think about there are a couple of things happening here. We talk about and want to focus on the tremendous growth that we see here in the United States. We also need to think about globally. Part of what we're trying to do is address the energy poverty in the world. We have people that don't have sustainable, reliable power that as we grow the company and think about positioning ourselves for the long-term, we can lean into that because we have such a simple, easy solution to operate in the harshest environments that fit well with that growth as we look to the future.
At the same time, you're seeing a 25% CAGR over the next 10 years for long-duration energy storage. So strong market, really evolving towards the EOS solution that will allow us to grow over the long-term. At the same time, we are operating in an uncertain regulatory environment. The uncertainty of that regulatory environment, when you really think about it, EOS has been working for nearly seven years on building American-made products. When you think about our bill of materials being 90% US sourced, that protects us against the tariffs that we're seeing. At the same time, when you think about the IRA and the production tax credit and the investment tax credit, I believe and I think as people look at this, having a long-term investment tax credit is only going to help us as we grow into American Energy's independence and dominance. If you will, having that long-term ITC is only beneficial.
At the same time, the production tax credit is a great program, but that program needs to close loopholes around being able to utilize the production tax credit for repackaging products that are built elsewhere. What EOS does is bring a product that has raw materials sourced in the United States, manufactured in the United States, containerized in the United States, and shipped to customers. So, we look at these regulatory uncertainties and think about the way we've been positioning the company over the past seven years. We also need to remember what we've always talked about, what I've always said is that we love having the incentives that are out there, but we've never relied on them to make the company successful. That holds true even today. Now, when you think about one of the big questions that everybody may have on their mind, it is, what's going to happen with the loan from the Department of Energy?
Where we stand today, and I can only talk about where we stand today, our relationship with the loan program office has not changed. We're continuing to work with them regularly to go through the execution around Project AMAZE and bring our capacity online in Pennsylvania. We remain confident that we'll continue that relationship as it goes forward because this is an American-made technology that plays into a large-scale need for not only the United States, but also our allies and other parts of the world that are experiencing energy poverty and would like to enter the developed world. When you get to the middle, let's talk about commercial growth. What I find on the commercial side right now is you're starting to see a consolidation in the industry. Companies are coming out and really repositioning themselves with new technologies and new durations, changing from battery companies to become solar companies.
EOS, we're sticking to our strategy. We've always thought about spending a lot of time—people talk about features and specific performance parameters of products. But what we sell is a solution. What we sell is readily available megawatt hours that customers can use. We're not selling a battery technology per se, but underlying that solution is a flexible battery technology that provides a levelized cost of storage advantage. We're not selling features around what an EOS battery can do, but we sell the returns and the ability to use that technology in a variety of ways to meet the demand that I was talking about earlier. What we play into is the fact that this is a secure technology. It's compliant in every sense of the word from an energy security standpoint today. It's safe. It's nonflammable. Thermal runaway risk is nonexistent with our product. The reliability of the product and how it can operate and the simplicity of how it can operate is accelerating the demand that I talked about on the prior page, and Nathan will talk about in a few moments.
At the same time that you see that growth, we have to scale the operations of this company. For the first two months of 2025, we've set production records in our facility in Turtle Creek. The team is now operating at a level that continues to improve on a day-by-day, month-by-month basis, and that makes me feel good about how we're going to scale into the year as we think about 2025. We're also working through and have talked about subassembly automation, which will drive our capacity and get us to our current cost entitlement, which then delivers a profitable product. Now, what's important on the subassembly automation is this is not something that we're talking about doing. It's something that we're doing right now. There’s equipment that has been arriving in Turtle Creek. We're performing factory acceptance testing to prepare for site acceptance testing to start bringing this technology online in the second and third quarter of this year.
This will allow us to achieve the 2 gigawatt hour capacity out of the Turtle Creek facility with one line, which allows us to grow and deliver on our backlog. At the same time, what we're seeing is durations are getting longer on energy storage projects. It's not just thinking about an eight-hour project or a six-hour project. It's not that simple. What people talk about is eight-hour discharge in a 24 period that could be cut up into many different discharge durations. It could be two hours and six hours, four hours and four hours, eight hours straight in a row, seven and one hour. EOS is the only readily available technology that can do that, where when you do those multiple cycles in a day, you're not degrading the product, you're not causing it to lose its performance and you're not causing it to use up its useful life faster. We feel like we fit into that long-term. What that means is projects are getting bigger with longer durations as customers come in and they look at the facility in Turtle Creek and are impressed.
They think about having a gigawatt hour project and say, wow, if I do a gigawatt hour, that's 50% of your current capacity. What we're doing now, and this is a change in our strategy, as I've always said, we'll build capacity as we get backlog. We're going out and building capacity because we know the demand is there for the product as we look forward, and I'll talk about that on the next page. If you go to the next page on page 6, that record production that we see off the line is still with a 98% first pass yield. We've actually lowered the cycle time of the line to below 10 seconds and continue to find ways to improve both of those numbers. When you look at Pennsylvania, we're finalizing where future lines will go outside of what we're going to install in our current Turtle Creek facility to continue to grow our presence in the Pittsburgh Mond Valley area. At the same time, on our capacity expansion I was talking about on the prior page, subassembly automation coming online in Q2 and Q3, we're really looking at containerization.
We are thinking like an automotive company about how we want to get that into a moving line versus a static line. We believe we've found ways to improve throughput that allow us to get more shipments out of our existing facility. We've put out a request for quotation for three state-of-the-art lines. We will source 6 gigawatt hours of capacity to be able to build into the larger orders that we're seeing. We want to have customers come and say if I give an order, they'll be able to build it. We know the technology works on the state-of-the-art line. We know we can continue to improve it and make it better. We want to build smaller facilities closer to where the demand is to reduce total logistics cost for projects. We have eight states bidding on where Factory 2.0 is going to go. We're negotiating state incentive packages, which will lower the total capital cost of this expansion. We will shortlist these sites over the next few weeks and then continue to move forward in deciding where the second home for EOS will be as we think about expanding our capacity to deliver on these large-scale lines.
It’s exciting, and the team has really done a great job here in finding places that we could potentially be part of, and we look forward to keeping everybody updated on that as we progress. If we go to page 7, I want to talk about delivering a profitable Z3 product. The team did a phenomenal job of taking out direct materials. When you look at this, the fact that we delivered lower volume than anticipated last year impacted the financials that you see for the company in 2024, notwithstanding the fact that we had lower volume. The volume was lower than what we thought, but the material cost was lower than we forecasted. The entitlement of this product and continuing to really drive cost out allowed us to reset the baseline and come up with new opportunities. We think we can get on a leadership basis. When you think about how people talk about the cost of a product, when you're comparing us against other technologies, other technologies talk about cells and cell cost.
We have a module that has 20 cells inside of it. If you do this on a cell basis, we are the cost leader in the market. It's a simple manufacturing process. We met the labor plan for what we did in the state-of-the-art line. Given the fact that we didn't automate the subassemblies, we had to add labor to continue to produce. That labor will come down over time, and we'll get the labor cost down to where we believe it will be in a market leadership position from direct material and labor. The third piece of getting to profitability is delivering on your manufacturing overhead and footprint. The team did a great job controlling expenses and avoiding extra costs as we revised our revenue estimates for the prior year. We really look at this and say, given the facility we have, given the capacity that we can drive, we have a profitable product. I'd also like to point out that some of the projects in our backlog date back to when we were launching the company.
They're priced lower than what we are selling today. If you take where the team is selling the product today with the cost that we have today, you have a profitable Z3 product. We've got to scale into that and grow that over time, but I feel really good about the product we have, the ability to build it, and the ability to grow this company as we look to the future. With that, I'll turn it over to Nathan to walk through the commercial portion of the presentation and the financials.
Thanks, Joe, thank you all for joining us this morning. It really has been an exciting year for us as a business. As you may have seen last night, this is my last earnings call as the CFO here at EOS. It's been an incredible couple of years, and I am looking forward to spending more time with our customers as we go forward. Now, with that, let's dive into our commercial growth and our financial results. As we closed out 2024, our commercial pipeline stood at $14.4 billion reflecting a 9% year-over-year improvement. This represents 55 gigawatt hours of storage, of which 36% is now standalone storage as we're seeing incremental opportunities for energy arbitrage that drives improved customer economics, meaning these projects no longer need to be coupled with solar, wind, or traditional generation to make them attractive. We anticipate this trend to continue as we go forward. You'll notice that we've simplified the format of this page from what you are used to seeing.
As the company has matured, we've decided to consolidate our opportunity pipeline into a single metric. While each of the historical buckets experienced regular ups and downs, the ultimate measure of the commercial team's success is booked orders. We continue to see healthy turnover in both our opportunity pipeline as well as lead generation. Year-over-year lead generation is up 50%, of which $3.4 billion was added in the fourth quarter alone as we're seeing increased activity on the heels of all the progress we've made in 2024. Additionally, we have successfully moved nearly $2.2 billion forward into our pipeline as technical proposals or quotes are being provided to customers. The commercial activity on this page is increasingly aligned with our value proposition of longer duration and multi-cycle use cases, which EOS Z3 technology was uniquely designed for. Where we did lose projects, I’d like to point out that nearly 100% of them were for durations of four hours or less.
Storage fundamentals are moving in our favor. In fact, over the last year, we've seen a 122% increase in five-plus duration projects, and we've seen the average deal size grow by 28% overall. Projects are getting larger and discharge needs are extending beyond historical norms. We continue to see growing opportunity in microgrids, data centers, and other behind-the-meter applications as this segment of the business gains a better understanding of the incremental value created with our multi-cycling capability. Behind these pipeline numbers are a lot of blue-chip names comprised of large regulated utilities as well as domestic developers that themselves have robust pipelines of battery storage projects at various stages of development. When these customers come to the factory, they continue to be impressed by the progress and the growth that they see firsthand. All of this further reinforces our optimism about the future.
While the majority of our commercial efforts are focused on domestic markets today, we're excited about the developments in several international markets, a key area that I'll be focusing on in my new role. We believe the UK's cap and floor program should accelerate the adoption of long-duration technologies. We continue to focus on Latin America, Germany, and Italy as growth markets as we also keep a keen eye on developments in Australia, Japan, and Poland, to name a few. It's clear that the world needs long-duration storage, and the timing is right for EOS as we now have a commercial product that is easy to manufacture when compared to other technologies. New factories can simply be located near customer demand in order to scale this business. Our 12/31 backlog stands at $682 million on 2.6 gigawatt hours of storage. We had some big wins in the fourth quarter, and I’d like to point out that these were all standalone storage projects.
We're beginning to realize our competitive advantage in the market as customers focus on multi-cycle capabilities, lower operating costs, and 20-plus year life without augmentation. All of this improves the levelized cost of storage, and we've been working closely with customers to ensure that these benefits are being properly captured in their models. When these benefits are properly modeled, they regularly result in a 30-plus percent LCOS advantage compared to other technologies. Before we move on to the next slide, as we announced yesterday, we signed an important order with the Naval Base of San Diego. Fully funded by the California Energy Commission, this order provides essential energy resiliency to the US Navy's Western Fleet. As the nation's focus on national security intensifies, we believe our American-made technology will become the preferred solution for bases and other military applications as they increasingly rely on storage to ensure operational reliability and security.
Flipping to the next page. A lot of work has gone into the details that make up this page over the last two quarters. The left side of this page is what is going to differentiate us as an attractive solution to customers and their investors with the list of solutions you see here driving bankability for customer projects. We believe we now have all the pieces in place to support customer project financing, which should lead to additional orders as we progress throughout the year. Customers and their investors want to see several things. Number one, is there proven product performance and reliability? Will the technology scale? Is the product backed by a strong warranty? Do the returns of the project clear the hurdle rates for all stakeholders? Will the company stand behind the product performance for the long-term? We believe we can now successfully check the box next to all of these questions.
We've fully negotiated a comprehensive insurance policy framework to enhance bankability. This includes three distinct policies - an ITC bridge insurance policy, ITC clawback insurance, and warranty backstop insurance, which incorporates EOS' standard warranty. These policies are important enhancements to our commercial offering that we believe should accelerate our pipeline growth and order conversion. In addition, we've extended our customer warranty to meet or even exceed industry standards. We are now offering our customers a three-year standard warranty with the option to extend to 5 or 10 years. Now, shifting over to the right-hand side of the page, let's talk about our partnership with FlexGen. As announced in December, we signed a teaming agreement with FlexGen to co-develop a fully integrated domestic BESS solution. This collaboration combines our patented Z3 battery storage systems with a domestic inverter and transformer package integrated with FlexGen's EMS.
We've identified approximately 50 gigawatt hours of opportunities that we believe would benefit from this integrated solution. Over the past two months, we have made significant progress across multiple fronts. Initial data sharing, pre-engineering, and system integration planning are well underway, laying the groundwork for full hardware integration and testing in Q2. Our business development teams have generated significant new opportunities while also merging the scope of supply in both companies' existing pipelines to deliver a fully integrated solution to each other's customer base. Specific project opportunities we are engaged in thus far total $1.4 billion in potential revenue. Before getting into the financials, I am proud to announce that the company has completed a significant processing controls documentation and testing project, and I'm pleased to say that EOS is now SOX compliant, and we have successfully remediated our material weakness.
This company-wide initiative was led by the finance and accounting team but ultimately required the support of the entire business, demanding a lot of time and resources to make this happen. Alongside our ongoing automated manufacturing line and our financial and commercial initiatives, this is an important step toward positioning the company for long-term growth and success. Moving to our capital structure. We ended the year with $103 million in cash on the balance sheet, having successfully brought in $133 million in gross funding in the quarter, a tremendous achievement by the team that strengthens our position as we continue to scale our operations. This included $65 million from the successful achievement of the October 31 milestones with Cerberus and the $68.3 million initial draw on Tranche 1 of the Department of Energy Guaranteed Loan. We are extremely proud to be the first company to close and fund a Title 17 loan under the prior administration.
We continue to work with the DOE on a regular basis, and we expect to submit our second advance request on schedule. This second advance is expected to include eligible costs associated with the completion of subassembly automation and initial deposits and payments for items related to Line 2. At the end of January, we also announced the successful achievement of all four of the third set of Cerberus milestones, allowing us to draw the final $40.5 million on the term loan. As we discussed previously, this loan was structured to align with the company's operational progress and is consistent with the entire organization's determination and drive to be a high-growth, profitable energy company. Additionally, during the fourth quarter, $4.4 million of the December 23 warrants were exercised, bringing $7 million in cash to the balance sheet. We expect this to continue to be a source of capital at current share price levels.
Lastly, customer receipts have continued to be another source of cash to fund our working capital requirements as we ramp up operations, with nearly $30 million coming in from customers throughout 2024. These funding sources put us in a strong financial position to continue advancing our strategic priorities from operational growth to technology development. With that, let's get into our fourth quarter financial results. In the fourth quarter, revenue was $7.3 million, which is 10% higher than the prior year and eight times what we recorded in the most recent sequential quarter. We were able to recover from the cube supply chain challenge we had in the third quarter and deliver to more project sites than we did last year. While our gross loss was essentially flat year-over-year, our gross margin improved by 35 points over the prior year. We've made tremendous progress on our direct material cost out, and we are now focusing on the fixed components of indirect labor and factory overhead as well as improving the efficiency and effectiveness of our field services and project execution teams as we scale up to get more systems and projects through COD and cycling in the field.
Other operating expenses for the quarter totaled $28.2 million, an increase of 52% compared to the prior year. We effectively held non-labor cash operating expenses flat while seeing an 88% increase in non-cash items like stock-based compensation and the PP&E write-off. The largest driver of the cash expense increase was a 10% increase in product engineering and software development talent that is expected to drive better performance, better margins, and profitability going forward. The net loss to shareholders was $268.1 million, compared to a net loss of $41.2 million in the prior year. These significant differences were mainly the result of change in fair value of derivatives tied to mark-to-market adjustments as our share price increased in the quarter compared to the share price decrease for the fourth quarter of 2023. Adjusted EBITDA loss in the quarter was $44.6 million compared to $37.2 million in the prior year.
The difference in this is related to higher debt issuance costs with Cerberus as well as the Gen 2.3 PP&E write-offs. For the full year, we came in at $15.6 million in revenue, which is in line with our revised expectations. This was a slight decrease compared to 2023 revenue of $16.4 million largely driven by Q3 cube availability, which we've discussed on prior calls. As we've said previously, we began to see some recovery in late Q4 and continue to focus on supply chain diversity and cube deliveries as we go into 2025. Despite the significant direct material cost improvements, gross loss increased by 13% to $83.3 million primarily due to manual subassembly inefficiencies and ongoing commissioning costs associated with several legacy projects. As I mentioned earlier, we are scaling up our projects and field services capabilities to be more efficient, and we believe this will yield significant financial benefits over time.
Operating expenses came in at $91 million for the year, a 16% increase over last year. Approximately 62% or $7.7 million of this increase is related to cash operating expenses as we expanded the team, positioning the company for growth and scale. Over the past 12 months, we have invested in key areas of the business, such as sales talent to drive future orders, sourcing expertise to continue taking material costs out of the product, and software engineering to improve system performance. We are positioning the company for significant growth over the next few years. The net loss to shareholders was $685 million in 2024. The decline compared to the prior year was driven by the mark-to-market adjustments on the fair-valued debt that we discussed earlier. Adjusted EBITDA loss for the full year was $156.6 million, an increase of 20% year-over-year as the increase was impacted by the items we've discussed along with $7.4 million in debt issuance costs related to the strategic capital from Cerberus and $2 million related to PP&E write-offs as we transitioned from Gen 2.3 to Z3 manufacturing.
To summarize everything we've talked about, we are improving the underlying Z3 related adjusted EBITDA. We know we have work to do on labor and overhead absorption, which is being addressed by our subassembly automation. We held cash operating expenses primarily flat sequentially quarter over quarter, and we are investing in specific areas of the business that drive the scale needed for us to be a profitable operating company. Lastly, before I turn things over to Joe, I want to discuss a very positive development related to our net operating losses. With all the capital raises we've completed over the past couple of years, we previously disclosed the risk that our NOLs may be restricted under Section 382 of the tax code. This restriction would have significantly delayed the timeline when our NOLs would be available for use. We have now completed a Section 382 ownership analysis through the end of 2024 and, based on this analysis, we are confident we'll be able to realize the benefit of all $740 million worth of federal NOL carry forwards with the majority of this amount becoming available for use before December 31, 2029. With that, I want to thank everybody for their time today, and I'll turn the call back over to Joe to say a few more words before we get into Q&A.
Thanks, Nathan. Just to wrap up here before we get to Q&A. We're reiterating the guidance we issued earlier this year with $150 million to $190 million of revenue. That's 10 times what we're talking about last year. Again, as I talked about earlier, we feel good about our ability to scale into that, to manage the supply chain as we move forward to deliver on that. We're going to be doing some big things as you think about the year coming up. We feel really good about the state of subassembly automation, increasing containerization capacity as we get into the second half of the year. When you start thinking about our cost of goods sold line, there are both product and project costs that will be there. We feel those project costs will drive service revenue in the future. There will be a little bit of a ramp-up of those two pieces as we go through the year, but we feel confident about the guidance number that we have and positioning the company to deliver in the long term.
I want to talk about continuing to strengthen the leadership team of EOS, continuing to build the company with aspirations to be a leader in long-duration energy storage. I want to start off by thanking Nathan for all the hard work he did as CFO. Since he came in, he has secured over $850 million in financing for the company, positioning us to grow long-term. At the same time, a lot of the work you saw in bankability at different parts of the company and getting rid of the material weakness—those accomplishments have Nathan's fingerprints all over them. When Nathan came to EOS, he and I discussed that his background as an energy operating leader was critical. He has done excellent work, and I’m excited for his move to Chief Commercial Officer. We've also brought Eric Javidi on as CFO. Eric has a strong background in financial markets, high-growth companies, and considerable experience in the energy industry.
I believe he is the right CFO to help us grow. We have a lot of work ahead to realize our growth and deliver on our commitments for shareholders and customers. Thank you, everyone, for listening. I look forward to keeping everyone updated on our progress.
Questions and answers
Thank you. And the first question will come from Thomas Boyes with TD Cowen. Your line is open.
Thanks for taking the questions. I'm just trying to maybe get a better understanding of what the potential revenue cadence could be for the year. Previously, you've talked about positive contribution margin from Z3 being kind of the linchpin to seeing higher volumes. Is that something that you are currently experiencing, and is it just a composition of the backlog that kind of keeps that from being the case? Or is it really predicated on having subassembly up, and then you will see more of a back half-weighted type of inflection?
Thomas, good morning. So, I think yes to both of your points. There’s a part of this where we wanted to get through the backlog of our early book deals in 2024. That's obviously been pushed into the first quarter. If you look at the orders we're booking now with the costs we have now, we're actually contribution margin positive when you think about the backlog we’re adding to the order book. As you think about the ramp throughout the year, I think you'll see first quarter similar to the fourth quarter just because of that subassembly timing. The marketing team put out a video a week ago of the first equipment that's gone through factory acceptance that's now being installed in the factory in Turtle Creek. As we ramp into that subassembly, labor costs come down, output will go up, which will impact labor and also that overhead number we talked about, allowing us to ramp into growth as we go through the second and third quarters and reach the run rate of the line as we hit the fourth quarter.
And then maybe I'm just wondering about your discussions with customers given the very dynamic tariff environment. I've seen reports just for lithium-ion batteries from China that cost increases could be anywhere from 7.5% to over 20%. Do you think that has induced more demand from potential customers as they look to move away from lithium-ion due to that exposure?
Look, before I turn it over to our Chief Commercial Officer, I’d say that having an American-made product is clearly an advantage right now in the environment we are in. However, it’s not just the tariff part that makes EOS a compelling solution. What we've focused on as a team, because when you look at the energy leaders in the company, is how to give a technology that’s going to work in real-world situations. We need technology that can flex with the supply and demand ebbs and flows that happen throughout the day, and we've got a technology that allows for that. With that, I'll turn it over to Nathan to add any color.
Yes, every customer has different focuses, so every conversation is a little different. In some cases, if upfront CapEx is paramount, and it's a short duration project, yes, they're focused on tariffs and Chinese products. However, that's becoming a much smaller piece of the conversations we have every day. Like Joe said, we're selling levelized cost of storage, and we have a significant advantage in levelized cost relative to other technologies, particularly for the four-plus hour duration, driven by multi-cycle capability and the additional flexibility that you get out of our system. We're focused on how to deliver the economic returns that our customers need to get their projects done, and while we do talk about Chinese tariffs, that is a small piece of the broader discussion we have with customers these days.
And the next question will come from Stephen Gengaro with Stifel.
Two things for me. The first is a follow-up on the response to the first question. Regarding the enclosures, I thought that was the biggest problem, and I was curious about how that supply chain stands. I believe you've diversified the supply chain. And maybe you could provide more detail on why that doesn’t lead to a more rapid first or even second quarter ramp in revenue, as I'm sort of disconnected on those factors.
So, the first part, Stephen, regarding diversifying the supply chain for enclosures, we have multiple suppliers supplying to us, and we're working with additional suppliers to help us scale capacity, take costs out, and simplify the product. You don’t just turn the supply chain on and produce at scale on day one. There's a ramp for each supplier as you go through that, and we are ramping into that. However, when you think about this, given the timing of when we close the Cerberus loan and the DOE loan, we've seen a push on the subassembly automation that’s going to happen in the first quarter. As we scale into that, we'll have more batteries coming off the line. The problem isn’t the line itself—it's about feeding the line. We're building up the entire supply chain to flow that and get everything operating as we go through.
Okay, great. That helps. And the second question is just about backlog growth. As the backlog gets larger, could you provide more color on the components of the backlog, even if it's by addressable market, rather than customer concentration?
I don’t think we’d ever talk about customer concentration, but we can give metrics around having more standalone storage. When you look at the last three orders we've announced, they’re all standalone storage orders. So, we can talk about segmentation regarding where the use case is going, for example in developer, utility, and commercial and industrial type customers as we move forward.
The next question will come from Chip Moore with ROTH Capital Partners.
Good morning. First, Nathan, congrats on the new role and nice job on all the heavy lifting. Joe, I wanted to ask about the demand you see and why you're proactively looking to build capacity. Can you expand on that? Is this a function of customers becoming more strategic in the long term? Or what are you seeing there? Are there ways to ensure those commitments as you get closer to potentially deploying capital?
Yes, Chip. You've seen the factory with your own eyes in Turtle Creek. It's impressive for people to come see that. We become the supply chain of someone else, and they look at your supply chain and consider whether or not they want to place a large bet on the size of the deals. Initially, a big project was 50 megawatt hours, but now we’re discussing projects that are 500 megawatt hours and higher. It really made more sense to add a substantial chunk of capacity to feed the projects that people like Nathan and the team are bringing in. We are also diversifying, as we discussed in previous strategies about building capacity, where we can build it by line and not needing a massive mega or gigafactory to make the company profitable. We want to co-locate near demand to lower logistics costs. We see opportunities coming in, and we’re determined to expand.
Very helpful, Joe. And maybe just a follow-up. Any lessons or things you've learned applicable to future sites regarding optimization?
When you look at what the team has done in Turtle Creek, we fit capacity into a compact footprint. As we've learned about raw material warehousing, subassembly manufacturing, building modules, and containerizing, we want a facility that can fulfill that process seamlessly on a single line to maximize productivity while minimizing the number of material movements and logistics cost. We want to be co-located near a logistics hub—hopefully with a rail yard nearby—so that we can consider shipping projects more cost-effectively. We're seeing various states showing interest, and we're excited about it. We look forward to updating everyone as we finalize those decisions.
The next question will come from Tom Curran with Seaport Research. Your line is open.
Curious, as we look at these three next goals for upgrading Mondeleworks, the stage of subassembly automation, the increased containerization capacity, and the higher project service revenue — for each of these, could you give us an idea of what each achievement, when accomplished, could contribute to gross profit margin improvement?
If you go back to page 7, we've proven that we can drive direct material costs out of the product. It's still an early life cycle technology, so there's a lot of costs that can still come out. The labor required to run the state-of-the-art line is on plan. The productivity gain from moving to semi-automated to automated has been tremendous. To keep pace and feed the line, we've had to bring in temporary workforce. This will lower costs once fully operational. The containerization process also involves productive steps and needs to be optimized for efficiency. These efforts will drive our gross margin towards positive.
I'd like to add that we had about $1 million in service revenue last year. That's high-margin revenue, and a significant number of our customers are purchasing long-term service agreements. The installed base will lead to growth in that revenue line item, which is also a solid margin business.
That's helpful. Are there swing variables that could affect where you fall within that guidance band that are entirely in-house variables?
I think the two main things really are getting the semi-automated manufacturing up to achieve more throughput and bringing in lean principles to get our assembly line approach to containerization. This will help ensure we hit the higher end of the guidance range.
Got it. So, maybe I should have asked another way, Joe. Are there specific projects in the backlog where it's still unclear when they'll ship and could impact whether you come in at certain revenue figures?
We gave guidance because we feel comfortable with that range. It's a dynamic environment. Where we sit today, we're comfortable with the range.
The next question will come from Martin Malloy with Johnson Rice and Company. Your line is open.
First, I wanted to ask about customer feedback on the early Z3 installations and how that’s going. With the performance you're seeing now at the factory, could you discuss the level of engagement you're seeing with utility customers and larger orders from them?
I'd say in general we are receiving positive sentiment. We're seeing a significant increase in overall project size, both in the pipeline and opportunities we're pursuing as well as some recent transactions. This is coming from utilities as well as larger developers. The world understands there's a growing need for long-duration storage, which is highlighted in the proposals we are bidding on and the projects we are winning.
What I would add regarding utility customers is that we're engaging with every major utility. They are in the pipeline of opportunities. They like what they see, but it's a process, and we're working through that journey with them.
I show no further questions in the audio Q&A. I would like to turn the call back over to Liz.
Before we go to Liz, operator, we opened up questions to the retail base today. We’ve received some great questions that reflect similar thoughts from sell-side analysts and the retail base. We’ve prioritized the questions based on shares that voted. Liz will go through the remaining questions we received, and Nathan and I will address those. Go ahead, Liz.
Thanks, Joe. I want to say thanks to everyone for participating in this. We look forward to future calls. For the first question: have potential customers communicated any hesitancy in placing orders due to uncertainty associated with IRA tax credits? If these tax credits are reduced or removed, how does the company project it would impact your growth for Project AMAZE and beyond?
It's a mixed bag. Anything that we currently have in backlog is a defined project. There are no impacts there. Looking into the pipeline, we get mixed feedback, especially for early stage opportunities. However, we believe this business was never built on IRA tax credits; they simply accelerate our path to profitability. If we execute everything we've laid out, we'll have a successful business with good growth potential, regardless of those incentives.
As I’ve seen in my career in both wind and solar industries, timing around ITC can influence decisions. However, the grid needs the storage. Also, consider the amount of energy wasted daily through curtailment. Storage can solve that, and flexible resources like EOS help make it happen. It’s vital for energy independence and dominance.
What is the current strategy for international expansion and global production scaling, particularly regarding timing and geography?
International markets are exciting. We're considering several factors, including market opportunity, regulatory framework, and potential for effective logistics costs that meet customer needs economically. We're evaluating potential pilot projects and hope to announce more on upcoming calls.
Thanks, Nathan. I will hand the call back to Joe.
We're slightly over time, so I'll wrap up quickly. We have a lot happening inside the company every day, and we have the team to deliver. We're building a leadership team experienced in high-growth environments and will stay focused on our overall goals. We'll adjust our strategy as the marketplace changes. The industry consolidation we're seeing begins and ends with having the right product. We believe we have the right product to meet future demand and underscore a latent demand in the marketplace. Now we've got to bring that product to market, and we're focused on that. Thank you all for listening. We look forward to updating you on our progress.
This does conclude today's conference call. Thank you for participating. You may now disconnect.