FTC Solar, Inc. (FTCI) Q4 2021 Earnings Call Transcript

FTC Solar, Inc. (FTCI 8.59%)
Q4 2021 Earnings Call
Mar 15, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the FTC Solar fourth quarter and full year 2021 earnings conference call. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] I would now like to hand the conference over to your host today, Bill Michalek, vice president, investor relations.

Please go ahead.

Bill Michalek -- Vice President, Investor Relations

Thank you, and welcome, everyone, to FTC Solar's fourth quarter and full year 2021 earnings conference call. Prior to today's call, you've likely had opportunity to review our earnings release, supplemental financial information, and slide presentation, which were posted earlier today. If you've not reviewed these documents, they are available on the investor relations section of our website at ftcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's president and chief executive officer; and Patrick Cook, company's chief financial officer.

Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law.

As you would expect, we'll be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we will discuss our executed contract and awarded orders, and our definition for this metric is also included in our press release. With that, I'll turn the call over to Sean.

Sean Hunkler -- President and Chief Executive Officer

Thanks, Bill, and good morning, everyone. We covered a lot of ground in our business update call in January, so we'll keep our prepared remarks today relatively brief. I'll start with a few fourth quarter and other recent business highlights. First, our fourth quarter revenue grew approximately 92% sequentially and 130% year over year.

This was significantly ahead of the top end of our guidance range as we had some pull forward of revenue previously expected in Q1. Even though revenue was above the range and gross margin saw strong improvement, we recorded a $3 million reduction to revenue and margin related to a reserve for a potential customer credit. This caused our adjusted EBITDA to come in at the lower end of the range. We're on to normalize for this reserve and the incremental impact from logistics of about $1.8 million, our non-GAAP gross margin in the quarter would have been in the negative 2.5% range, which puts our performance on target to achieve our profitability goals in 2022.

Regarding SunPath, we have added three more contracts since our last earnings call, bringing our total to seven. We also recently launched a new turnkey DG offering targeted at the profitable sub-20-megawatt segment of the market. This is a growing market with favorable pricing and margin with average PPA prices that are two times that of larger systems. Based on a significant amount of customer feedback, we listened and acted and have worked over recent months to develop an offering that will address market needs and specific customer pain points, while maintaining all the benefits of an FTC Solar System.

We have an EPC partner lined up and have already won our first two projects. We believe this business can achieve higher than our average target margin profile and can represent a meaningful portion of our overall portfolio by 2024. During our business update call, we presented our financial outlook for 2022, which at the midpoint would represent annual revenue growth of about 62%. We believe this would be much faster than market growth and reflects the continued strong customer growth and interest in our solutions.

And finally, in addition to those highlights this morning, we announced our intent to acquire a strategic tracker company, which will accelerate our international expansion and be accretive to our shareholders. So why are we doing an acquisition? I would point you to four main takeaways. First, it accelerates our international expansion plans, where it adds to our growth, in particular, is in China, the Middle East, Southeast Asia, and Africa. These regions are expected to be significant for tracker sales.

In fact, the home market of China is expected to be the largest market for tracker installations outside the U.S. by 2030 and a top-two market outside the U.S. over the next 10 years. With the WRO and new AD/CVD is overhangs on the U.S.

market, we believe now is the time to bolster our international growth activities. We have seen progress from our organic growth actions in various regions, as I mentioned earlier, but these organic efforts typically take about 18 months from boots on the ground to first project wins. The company is well-positioned to generate revenue now. They are positioned in strong growth markets with current orders and a large pipeline in markets where we don't have a sales presence, so it is fully additive to FTC's business.

Second, it provides complementary technology that increases our total addressable market. The company produces 1P trackers for low-cost markets, which complements our Voyager 2P tracker. While we believe our 2P tracker is a best-in-class solution and has achieved rapid adoption, we realized that 2P may not always be the best solution for every market or site. The pending acquisition would strengthen our product portfolio allow us to be technology agnostic in low-cost international markets and position us to analyze each project site and determine the best FTC Solar Solution in any market in which we offer both.

In addition, our Voyager 2P product is designed to be fully differentiated in its ease of construction and reduced labor hours, which is most advantageous in high labor cost markets. The target company's trackers are designed and optimized for low labor cost markets, giving us more options in more targeted markets. Third, it strengthens our capabilities in several key areas, including engineering, logistics, supply chain, and sales. For example, we expect to see significant synergies in product IP and know-how, allowing us to improve process and design to bring the best products to market.

The acquisition gives us an opportunity to leverage relationships, infrastructure, and technology across the full platform around the world. And the founders have deep expertise in renewables and operations and strong relationships with important suppliers, customers, and other key stakeholders in their market. Their combined experiences include leadership positions with JA Solar, Harry on Solar, Cypress Semiconductor, McKenzie, and Smith. And finally, the acquisition enhances our growth and profit opportunities and will be accretive to our shareholders.

It will enhance our economies of scale and leverage with key logistics and steel suppliers. The company is in faster-growing markets, and we believe is positioned to outpace market growth, and we'll have the opportunity to accelerate organic growth by applying best sales and technology efforts across the full base of our business. The proposed acquisition is HX Tracker, a Shanghai China-based supplier of 1P tracker systems for mid-2019. Their tracker launched last year with what we believe to be orders of approximately $12 million in China and about 20 gigawatts of total pipeline opportunities.

The acquisition is right in our wheelhouse and has important attributes that make it both strategically and financially attractive. Their tracker system is designed with a low steel content and is well suited for today's prevalent large-format modules and can go just about anywhere, the large-scale Chinese EPCs operate. HX has a strong team with direct tracker market engineering expertise and deep connections in the market, including within China, the Middle East, and Africa. Consideration for the acquisition consists of $4.3 million in cash and approximately 1.4 million shares.

This represents an attractive multiple of approximately three times 2023 EBITDA. The sellers will also be eligible for an earn-out of approximately 1.6 million shares based on meeting certain performance metrics. Overall, we estimate the transaction can generate $59 million in revenue and $4 million of EBITDA accretion in 2023, and $67 million in revenue, and $7 million of EBITDA accretion in 2024. We're excited about the acquisition and the strategic and financial benefits we expect it will bring to FTC Solar.

They have an impressive and growing pipeline, a strong team and business model and culture that fits ours. We believe they have strong growth opportunities. We expect to complete the acquisition in the second quarter, and we'll be sure to update you on our progress. Looking back on the full year 2021, the FTC Solar team has achieved much.

I'm very proud of our work, including growing total revenue by 44%, increasing top 15 developer and EPC penetration from 40% each to 47% and 60%, respectively. Completing our initial public offering in April, further strengthening our balance sheet. Winning our first projects in certain key international markets, including our first two projects in Africa and our largest project to date in Australia at 88 megawatts, tripling our international pipeline to more than 26 gigawatts, excluding the proposed acquisition. Launching our innovative SunPath performance software and securing several initial contracts, reducing the steel content and cost of our trackers for future projects by more than 20%; and finally, bringing smart, accomplished, and innovative new talent into the organization while retaining our top performers.

In 2021, we delivered strong growth while investing for future growth enhancing our position with customers, expanding into new innovative products and new markets, while strengthening our team as we lay the groundwork to capture the significant opportunities we see ahead. While 2021 was the perfect storm relative to cost, we've taken significant actions controlling what we can control and are making significant cost and margin improvements. The long-term market outlook remains incredibly strong, and I believe FTC Solar is uniquely positioned to continue to outpace the market in the U.S. and we'll continue to see increasing traction internationally.

FTC Solar has a solution that is differentiated in the marketplace and increasingly recognized by customers along with new higher-margin offerings launched, and we believe we're poised for significant growth and margin improvement ahead. While we've made good progress, I'm even more excited about where we'll go from here. Finally, one leadership update before I turn it over to Patrick. As you know, Patrick has been with FTC virtually since the beginning of the company and has been a very strong leader in driving the company's growth.

In addition to being our first CFO and building out our finance, accounting, and IT infrastructure from the ground up through to becoming a public company, he has been a key driver in nearly every aspect of the company's growth. In fact, quite a few of the customer relationships we have and projects in our pipeline have come from Patrick. I'm pleased to announce that Patrick will be taking on a new and expanded role as our chief commercial officer, overseeing sales, sales engineering, legal, and capital markets activities. I'm very excited to have Patrick in this new expanded role and see him as a key partner as we move forward.

As Patrick moves into this new role, I'm pleased to announce that Phelps Morris will succeed Patrick as our new CFO. Phelps brings more than 20 years of experience in global finance operations, including treasury, capital markets, mergers and acquisitions, risk management, and investor relations. He most recently served as senior vice president and treasurer of TrueBlue, a company with $2.2 billion in revenue where he was responsible for strategy and execution of treasury and finance-related functions. He was previously with MEMC Electronic Materials and SunEdison from 2009 to 2016, where he served in multiple roles, including leading the treasury and investor relations functions.

Earlier in his career, he served in various positions for the Dow Chemical Company as well as roles with Duff & Phelps credit rating company and Scudder Kemper Investments. Patrick, is there anything you would like to add?

Patrick Cook -- Chief Financial Officer

Thanks, Sean, and good morning, everyone. Let me just add that I am pleased to be taking on this new role and to have the opportunity to continue serving FTC Solar and its shareholder in new ways. I will continue to be very closely aligned with the finance team as well as the investor community and I'm committed to ensure that we have a smooth transition. While this means there will be changes to my scope of responsibility, there will be no change in my effort and dedication to assist Sean and the executive leadership team to meet our near-term and long-term objectives.

I am also excited to welcome Phelps to the team. I've had the opportunity to work with him in the past and believe he'll make a great addition to FTC Solar. So with that, let's dive into my prepared remarks, which will cover additional detail regarding our fourth quarter and full year performance and our outlook. And as a reminder, our year-over-year comparisons reflect a significant amount of growth in our personnel and corporate infrastructure ahead of becoming a public company, which occurred in the second quarter of last year.

These items make the year-over-year comparisons a bit less meaningful. Beginning with the results for the fourth quarter. Total revenue was $101.7 million, which was above our target range due to accelerated production and product delivery, pulling forward revenue we had initially anticipated in Q1. This revenue level represents an increase of 92% compared to the prior quarter, driven by higher product volume and an increase of 130% year over year on higher volume in ASP.

GAAP gross loss was $8.6 million or 8.4% of sales, compared to $8 million or 15.2% of sales in the prior quarter. This strong improvement in margin quarter over quarter and was actually muted by the reserve for potential customer credit that Sean mentioned that was a $3 million reduction to revenue and margin. The results for this quarter compares to a gross loss of $4.8 million in the prior-year period, with the difference driven primarily by logistics impact in 2021 and a strong ramp-up in our employee count and other overhead expenses to support the company's growth trajectory. GAAP operating expenses were $15 million, on a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expenses were $9 million at the low end of the company's guidance range, which compares to $6.2 million in the year-ago quarter.

The year-over-year increase was driven primarily by necessary growth in staffing and other public company preparations. GAAP net loss was $23.9 million or $0.25 per share, compared to a loss of $22.9 million or $0.24 a share in the prior quarter, and compared to a net loss of $9.7 million or $0.15 a share in the year-ago quarter. Adjusted EBITDA loss, which excludes $3.2 million of stock-based compensation expense certain consulting and legal fees, severance, and other items was $16.4 million. This was at the low end of the guidance range due primarily to the $3 million reserve mentioned previously.

This result compares to an adjusted EBITDA of $16.1 million in the prior quarter and $10.9 million in the year-ago quarter. Our contract and awarded orders as of March 14th were $606 million with the expected delivery dates in 2022 and beyond. As a reminder, we can continue to add to our contracts and awarded revenue for expected delivery in 2022 into the fourth quarter of this year and still recognize revenue. Following a seasonally slow holiday period and the headwind of withholding and release order, our bidding activity has increased significantly.

We look forward to resolution on WRO and remain incredibly bullish on the long-term growth opportunity in the U.S. I'd also like to add that I share Sean's excitement about the proposed acquisition. It's a great opportunity for us to further accelerate our growth as well as profitability. The definitive agreements for the transaction was signed yesterday with a consideration consisting of $4.3 million in cash, which will be funded with cash on hand, the issuance of approximately 1.4 million shares plus a potential earnout of approximately 1.6 million shares upon the achievement of certain performance metrics.

We expect the transaction to generate $4 million of EBITDA accretion in 2023 and $7 million in 2024, and we anticipate the integration cost to be approximately $250,000, which primarily is composed of legal and administrative activities and limited to 2022. We expect the transaction to close in the second quarter of 2022, subject to satisfaction of customary closing conditions and formatory due diligence. With that, let's turn to our outlook. As Sean mentioned, we presented our financial targets for 2022 during our business update call in January.

Despite pulling about $25 million in revenue into Q4 of 2021, we continue to feel comfortable with those targets, which call for a revenue of $415 million to $460 million, which at the midpoint, would represent a 62% annual growth year over our '21 results, and we expect that it will outpace the overall market. Along with this revenue, we are targeting 11% to 14% non-GAAP gross margin -- non-GAAP operating expenses between $49 million and $54 million and adjusted EBITDA between negative $4 million and positive $11 million. Our targets for the first quarter would reflect the pull forward in revenue into Q4 call for revenue between $55 million and $65 million, targeting non-GAAP gross margin of negative 7% to breakeven. Non-GAAP operating expenses of $12 million to $13 million and adjusted EBITDA loss between $13.5 million and $17.5 million.

With that, I'll turn it over to the operator for any questions. Operator?

Questions & Answers:

Operator

[Operator instructions] And our first question comes from the line of Donovan Schafer with Collier Securities. Your line is open. Please go ahead.

Donovan Schafer -- Colliers Securities -- Analyst

Hi, guys. Congratulations on the results. With the pull forward from 2022 into Q1, this fourth quarter, I'm just curious, is there anything specific that was sort of driving that in terms of maybe modules being released earlier than expected? Or what changed in terms of your prior expectations to what really unfolded in the fourth quarter that allowed or enable that significant pull forward in revenues.

Sean Hunkler -- President and Chief Executive Officer

So thanks for the question, Donovan. It really -- I guess I would say several factors. One is the working with the suppliers and some customers requesting additional progress on certain projects. And so we were able to support that with capacity that was readily available it's -- the capacity itself is a bit of a sign of what's going on in the market that in some areas, the steel demand is is softening.

They seem to be building only as many automobiles as they can get semiconductor components. It seems like in some markets, like in the China real estate market for second and third homes, things are slowing a little bit. So there was definitely more capacity available and working with our suppliers. And then again, some customers that wanted some additional progress on projects that we were able to support.

Donovan Schafer -- Colliers Securities -- Analyst

OK. And actually, I am curious because I know with module imports, there's some challenge there kind of knowing what type of modules you might be able to get with sort of developers, EPC, sometimes scrambling in some cases or just reworking things to see what working with what's available in terms of -- versus necessarily what we were originally planning for. So has that been a factor at all in terms of maybe a project that originally was going to use one type of tracker maybe switches to your tracker just because the modules that happens to arrive are better suited to your tracker design. I mean is anything like that kind of a factor or even on the steel side, changing the steel prices, switching things up?

Sean Hunkler -- President and Chief Executive Officer

So it's been interesting. As we talked about in the update in January, there's a bit of choppiness in the market regarding module supply. And as you know, the big factor behind that is the WRO and then more recently, the new version of AD/CVD. And we've seen some interesting things.

We've seen requests for bids where they're using multiple modules on a project. Typically, in the past, you'd see a single module for any particular project. We have seen the modules change from what was originally requested and we've seen a change order to change the modules to redesign for a different module. Of course, our tracker, as you know, is module agnostic, and so we can accommodate any module.

I haven't seen anyone make a change in the tracker choice. Typically, when they contract, they've kind of worked through all that already. But the module choppiness continues until WRO is fully resolved. That being said, there are some positive signs of additional module flow opening up.

But frankly, we just -- we're looking in anticipation of WRO getting completely resolved. And until then, it will be -- I think they'll just continue to be some choppiness in module supply.

Donovan Schafer -- Colliers Securities -- Analyst

OK. And then just one last question, and I'll get back in the queue. With the reserve for the credit for the customer that you talked about. I know something I've really kind of owned into and taken interest in is these -- you guys have a very unique approach to damping.

You had the white paper that you put out last week. And I was pleased to see that in terms of just my own sort of interest. But the -- I also know that because of the kind of unique and naval approach, I think it was back in 2019 or 2020, you guys had -- you did sort of a customer credit or a retrofit of some kind because the uniqueness of your dampening approach put an unusual amount of sort of strain on the damper bracket. And so some of those brackets we had broken and you had to go back and kind of retrofit them.

So is the $3 million credit related to something along those lines where there's sort of some -- a bit of a learning curve around this kind of unique and novel approach? Or is there something different there? Just any kind of elaboration would be great.

Sean Hunkler -- President and Chief Executive Officer

Well, Donovan, thanks for noticing the white paper. We are really proud of the IP that we have and the unique dampening system we have that provides us with great performance in high wind environments. And so we being excited about that and excited [Technical difficulty] The $3 million that we referenced, yeah, that's simply a small matter of payment discussion between us and a customer. So no, it's no relation whatsoever to the technology or any kind of a warranty issue or anything like that.

It's just a small payment issue that we're working through with the customer.

Donovan Schafer -- Colliers Securities -- Analyst

OK. That's great. Fantastic. Well, congratulations again on the quarter, and I'll jump back in the queue.

Thank you, guys.

Sean Hunkler -- President and Chief Executive Officer

Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of Kashy Harrison with Piper Sandler. Your line is open. Please go ahead.

Kashy Harrison -- Piper Sandler -- Analyst

Good morning, all. Congrats on the revenue pool and thanks for taking my question. So my first question is on the HX acquisition. I was just wondering if you could talk about Slide 6, specifically, what drives your confidence in going from $10 million of revenues in '22 to $59 million of revenues in '23.

Is that -- what's driving that confidence?

Sean Hunkler -- President and Chief Executive Officer

So we did extensive due diligence. We've -- since the beginning, our company has had an M&A function that's always out looking at potential opportunities. And so when this one came about, we gave it to the team to do some really extensive due diligence. So we looked into the pipeline.

We had connections made to their customer base. The founders of this particular company are folks that we trust because many of the folks in our company have worked with them in the past. And so through the due diligence and review of the pipeline, we believe this is a very credible plan that they put forth and that with the support of the strong balance sheet of FTC, we can achieve. I don't know, Patrick, do you -- any further comment on that?

Patrick Cook -- Chief Financial Officer

Yeah. No. I mean, I think from our perspective, just the level of kind of granularity and transparency that the HX team allowed through kind of the due diligence process and engaging with their customer base and their supply base gave us kind of an inside view on what their overall pipeline and their deep relationships with the customers and partnerships were. And then also with the ability to kind of scale within FTC allows them to go meet these production targets for the customer.

So it's really just a combination of those items. -- and really kind of centered around the transparency in which we got through the due diligence process.

Kashy Harrison -- Piper Sandler -- Analyst

Got it. And then maybe switching gears to the base business. On the contracted and awarded $606 million, it was lower than the $692 million disclosed last time. What's driving that decline? And then how much of the what portion of that $606 million is aimed for 2022?.

Sean Hunkler -- President and Chief Executive Officer

I'm sorry, you broke up there at the end. Do you mind repeating the last piece of your question, Kashy?

Kashy Harrison -- Piper Sandler -- Analyst

Apologies. I said what piece of the $606 million is for delivery in '22? I think last time you indicated it was $350 million. So I wanted to get an update on that number?

Sean Hunkler -- President and Chief Executive Officer

Yeah. So we -- since we've guided to 2022, and we continue to reaffirm the guidance, the -- basically the $415 million to $460 million. So essentially, since we're providing the guidance, we're really just focused on that particular revenue number for the year.

Kashy Harrison -- Piper Sandler -- Analyst

Got it. And the driver of the decline from -- in the -- from $692 million to $606 million, what's the driver there?

Patrick Cook -- Chief Financial Officer

Yeah. I mean I think it really kind of relates to what we're seeing as project kind of pushouts in terms of PO execution as it relates to just overall module availability. I mean I think the good news, what we're seeing no cancellations. And we're not seeing that FTCs are losing projects.

Just decisions aren't getting made in the overall macro environment. And we're seeing a lot of momentum in terms of our overall pipeline. Our sales engineering team is really working overtime with our customers bidding two or three different module suppliers in order to -- once the module supply gets turned back on, it'll be effectively turned the purchase order and start ultimately executing. So that's really kind of the driver.

But our bidding activity remains high -- and we aren't seeing FTC losing projects in the first quarter. It's really just tied to project decision pushout.

Sean Hunkler -- President and Chief Executive Officer

It's just a little bit of the ongoing the choppiness in the module supply caused by primarily WRO. And as I mentioned, we are seeing some positive signs in terms of certain flows being approved and modules from certain suppliers coming back in. But still, until it's completely resolved, I think you'll see this level of choppy niche.

Kashy Harrison -- Piper Sandler -- Analyst

Got it. And then maybe just a last one for me. Following the invasion of Ukraine, we've seen U.S. steel prices or at least the forward curve move up here.

Just -- but they're still below last year. And so just curious how current or recent steel prices are tracking relative to your expectations that were incorporated in the full year 2022 guides? Thank you.

Sean Hunkler -- President and Chief Executive Officer

So we are OK at this point with our steel pricing. Remember, most of our steel is sourced internationally though we are prepared in the event that some version of build back better comes about that requires U.S. content. We'll be able to support that as well.

But we see the international pricing is still in line with our expectations with the plan for the year. The other thing is that we've really added to some expertise to the team and particularly in the areas of steel and logistics, and that's helping us as well in terms of managing with our steel suppliers. And finally, the fact that we have enough scale and volume now to really matter to those suppliers is helping us well. But we're still aligned with expectations.

Patrick Cook -- Chief Financial Officer

And Kashy, the one thing I think it's important to note is how we bid our projects. We're refreshing our project bids inside of every two weeks and not take the steel exposure on ourselves and really working to pass that off to the customer. So that allows us in these kind of commodity fluctuation pricing to make sure that we're able to kind of ultimately maintain the margin by having that transparent relationship with our customers.

Kashy Harrison -- Piper Sandler -- Analyst

Got it. Thank you.

Sean Hunkler -- President and Chief Executive Officer

Thank you for your questions.

Operator

Thank you. And our next question comes from the line of Pavel Molchanov with Raymond James. Your line is open. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

Yes. Thanks for taking the question. The revenue that you expect to get from the new acquisition, what's the geographic mix of that. So I imagine it's much more international versus your legacy business.

Is that correct?

Sean Hunkler -- President and Chief Executive Officer

Yeah. That's exactly right, Pavel. So as you know, our international expansion has been driven by the boots on the ground strategy. And so as this opportunity came about and we looked at it, we felt that while our organic approach has yielded results, we thought this approach would help us to accelerate in international markets and so we talked in the announcement about the opportunity in Middle East, in China in Africa.

One of the good things about this acquisition is the relationship that the founders have some of the large Chinese EPCs. And as you know, a lot of the business outside China in certain markets like Africa, like Middle East are driven by those PCs. So we're really excited about not only opportunity in China, but the opportunity outside China, and this is all pretty much international business for us.

Pavel Molchanov -- Raymond James -- Analyst

Yeah. In that contact cannot help but as kind of the obvious political dynamic here since this will now be owned by an American company would Chinese project developers be comfortable purchasing from effectively a U.S. equipment supplier?

Sean Hunkler -- President and Chief Executive Officer

So we as a consequence of this transaction, we'll have people in China, dealing with the Chinese EPCs. And we've done some due diligence in that area, and we feel very comfortable that, in fact, the association with us is going to be a positive. It will help enhance the quality reputation, for example, the engineering reputation, etc., which are all really important factors. And frankly, on the ground, it's still -- a U.S.

company is not necessarily a negative in the China business environment.

Pavel Molchanov -- Raymond James -- Analyst

OK. Fair enough. Thank you, guys.

Sean Hunkler -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Maheep Mandloi with Credit Suisse. Your line is open. Please go ahead.

Maheep Mandloi -- Credit Suisse -- Analyst

Hey. Good morning. Thanks for taking the questions. Can you just talk more about the HX tracker acquisition how much of the business you're kind of expecting in '23, '24 comes from the Chinese markets versus other markets? And should we consider this a similar EBITDA margin business like the core business? Thanks.

Sean Hunkler -- President and Chief Executive Officer

It should definitely be considered a similar EBITDA performing business then as the current business and the expectations that we have for the current business. It's a mix in terms of the pipeline. So they have a pretty well-distributed pipeline that includes China, that includes Africa, that includes the Middle East and so we're expecting a fairly robust mix across those markets. And so that's what we've included in the guidance that we are providing in terms of both the revenue contribution and the EBITDA contribution.

We expect it to continue to grow over time.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. But like more than half is China versus rest of China?

Sean Hunkler -- President and Chief Executive Officer

I think that's a fair assumption, roughly half and half.

Maheep Mandloi -- Credit Suisse -- Analyst

Gotcha. That's helpful. And then does this product helps with the DG market push also does the DG project is going to be the 2P product for you?

Sean Hunkler -- President and Chief Executive Officer

So our focus today in the DG market is with our Voyager 2P product. So we'll continue to -- with the focus that we announced in January in terms of the DG market with our Voyager 2P product. In the long run, it's exciting that we'll have this portfolio of multiple products. But for now, we'll keep the focus.

We'll focus our Voyager 2P product in terms of our plans for DG.

Maheep Mandloi -- Credit Suisse -- Analyst

Gotcha. No, that's helpful. And then just last one from me, just more on the macro side of solar macro rather. Do you since the last two months, as on when you first spoke about WRO ratios kind of in the industry.

Have those issues or challenges changed? And are you expecting any accelerated resolution for the WRO issues in the industry? And on top of that, you seeing -- kind of seeing any worries around the antification investigation against the Southeast Asian model manufacturers.

Sean Hunkler -- President and Chief Executive Officer

So we see progress on WRO but frankly, we need to see complete resolution for the module supply to get back to normal because even with some of the module flows released and modules flowing back into the country for the module manufacturers that have confidence to start up factories again. I think you'll need to see a more open environment in terms of the flow. So we're optimistic that these issues with WRO will get resolved. The timing, of course, is not clear to us or it's no clearer to us than it is to anyone else, but we've seen some positive signs lately, and that's the good news.

On AD/CVD, the fact that commerce asked for some more time on this latest version of AD/CVD, we'll have to see in the short term, we'll all hear whether they're going to do the investigation or not. And we've heard opinions that run the gamut from they will not investigate because of the additional uncertainty it will cause in the module supply, particularly in the current market where there's still this WRO overhang. And then we've heard on the other hand that there are reasons for the investigation that will continue. So we're watching it very, very closely and hope to see it resolved positively over the next couple of weeks.

Thank you.

Maheep Mandloi -- Credit Suisse -- Analyst

That's really helpful. So that's all from my side. Thanks for question. I'm done.

Sean Hunkler -- President and Chief Executive Officer

Yeah. Thank you. Thank you.

Operator

Thank you. And our next question comes from the line of Philip Shen with ROTH Capital Partners. Your line is open. Please go ahead.

Philip Shen -- ROTH Capital Partners -- Analyst

Hi, everyone. Thanks for taking my questions. I was wondering if we could dig into the HX acquisition just a bit more. How long did the process take? Who else do you consider in your M&A process? And how are you thinking about the risks of diving deeper into China while the world is decoupling? And do you expect the someday offer a 1P tracker in the U.S.? Thanks.

Sean Hunkler -- President and Chief Executive Officer

Yes. So we looked at multiple different opportunities, obviously, I can't name the names, but our M&A activity has been active since the beginning, and we've -- we're always open to looking at opportunities. Obviously, it's got to fit within the culture of our company and the criteria that we set for such activities. And HX, frankly speaking, is a fantastic fit for us.

And in particular, the fact that the founders or people that we have experienced with and, frankly, have a pretty deep trust and has really been helpful to us. And so it was something that we did over a period of months in terms of doing the due diligence. And now we've been able to sign the definitive agreement. We're really excited about that.

And as we mentioned, we hope to close the transaction in Q2. In terms of the 1P tracker, so today, it's our intention to continue the focus that we have of our Voyager 2P product in the North American market, -- and for the 1P tracker that's coming with HX to be focused on those markets that HX has good contacts that are helping us by expanding our international presence will be one day market a 1P in the U.S.? Well, that would say determined. We'll just have to look at the opportunity. And as we learn more about the HX1P tracker, that situation is certain to evolve.

But for now, we're going to very much remain focused on those international markets for the HX1P tracker and the North American as well as some of the international markets where you've seen our focus in the past for the Voyager 2P.

Philip Shen -- ROTH Capital Partners -- Analyst

Thanks, Sean. Our check suggest a substantial amount of megawatts or gigawatts are being installed without modules. What percentage of your deliveries do you think this year are going to be for projects that don't have the modules yet. How do you expect that to trend by quarter? And what do you see there ahead? Thanks.

Sean Hunkler -- President and Chief Executive Officer

Yeah. So there are some unique things going on in the current market given people's uncertainty. We've seen -- we mentioned we've seen projects now with multiple modules. We've seen projects where the modules change.

And then you're right, we've seen people who are doing projects that maybe don't have the module with 100% certainty, which is unique from the past. But I would say that's still a bit the minority of things that most projects, the customers have a sense of which module they're going to use.

Philip Shen -- ROTH Capital Partners -- Analyst

Right. And are you delivering trackers to projects without modules at all where they expect to take delivery of the modules in some future period that may be still uncertain?

Patrick Cook -- Chief Financial Officer

Yes, Phil. This is Patrick. From that perspective, if there are developers that have line of sight to modules, but it's out in the, call it, distant future, they do feel comfort around placing the order for the tracker at that point. So the answer is yes to your question.

Philip Shen -- ROTH Capital Partners -- Analyst

OK. Thanks, Patrick. And then as it relates to your quarterly guidance, thanks for all that detail. It's super helpful.

the transition from Q1 to 2, we're seeing a jump in margins. Can you talk about the risks around going from, call it, the midpoint margin in Q1 to the 12% midpoint in Q2 and how conservative that look is? Thanks.

Sean Hunkler -- President and Chief Executive Officer

So we're just -- as we mentioned before, we've reaffirmed the guidance for 2022 and are providing the quarterly guidance for the first quarter. So the -- we're not refreshing the indicative numbers that we had given previously. So like I said, we've reaffirmed the guidance -- the annual guidance and so as I think about it, we've talked before, Phil, about the top to bottom program we have in the company to drive gross margin improvement. And so we have all aspects of gross margin are being focused on value pricing, reducing the steel content, reducing the steel cost, reducing the logistics costs, optimizing the logistics costs.

So there's a huge effort across the company with multiple elements to drive the improved gross margin performance. And so I would say risks come with each of those, right? And in terms of the engineering work we're doing to reduce steel content, the negotiations we're doing to establish MSAs with steel providers, the work that's going on in terms of logistics. The risks are also the externalities. So one risk is that WRO persists and does not get resolved, another risk would be that AD/CVD becomes a substantial issue in terms of driving uncertainty.

Of course, there's -- we're also dealing with the tragedy of a war right now, too. And so all these -- there are all these external factors as well that bring risk to our plan. But we're absolutely laser focused on all the things we can control. And that's the engineering work, the procurement work, the logistics work.

We are just absolutely laser focused on achieving the objectives for our plan.

Philip Shen -- ROTH Capital Partners -- Analyst

Great. Thanks for the call, Sean. I'll pass it on.

Sean Hunkler -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.

Unknown speaker

Hey, guys. It's [Inaudible] on for Julien. Just two quick ones for me. Given the significant pull forward on revenue you guys had here in Q4, which looks to modestly reverse a little bit in Q1.

I mean should we expect any further spillover into Q2? And I guess any sort of perspective challenges you might see on margin pressure there would be kind of the first question? And then I have a follow-up on that.

Sean Hunkler -- President and Chief Executive Officer

Yes. So I think, obviously, we feel good about the guidance that we've provided for Q1. So I think we -- it's absolutely our expectation to be in the range that we've just given for each of the parameters for Q1. So I don't think we're expecting a revenue surprise, so to speak, or any spillover.

So does that address your concern or question?

Unknown speaker

I was really asking about, I guess, given that you have a sizable pull forward roughly like $25 million or so, I guess, versus your guide. Midpoint lowered a little bit into Q1, obviously, not to the same degree, though. I guess I really asked more about Q2, I guess, prospectively, Q3 as well, if that makes any sense?

Sean Hunkler -- President and Chief Executive Officer

Yeah. I don't -- at this point, no, I don't have any -- no, I don't have a concern that, that's going to happen in the out quarters.

Unknown speaker

Got it. I appreciate it. And then just one more. I know we've talked a lot about the acquisition here.

I'm just lasting at HX tracker and kind of the projects that they've been involved in. I mean, it seems like there's sort of a decent base of exposure there at utility scale, ground mount and even some agrible takes it looks like. So kind of curious there, I mean, as far as synergies and takeaways that you might have out of -- what they're doing in the styles of projects that they're doing what do you think that you can take from sort of their technology and how they apply things into, I guess, your legacy U.S. business, if you will? That's all from me.

Thanks.

Sean Hunkler -- President and Chief Executive Officer

Yes. So we've done -- as part of the due diligence, we've done a deep dive on their engineering team their IP portfolio and looked at projects either constructed or under construction. And so we've really been impressed by the quality of their engineering team. And they seem to take a 1P approach similar to the approach we took with the Voyager 2P where a group of engineers got together who had a lot of developer experience as well and said, what is the how do we build the best 1P tracker that solves the customers' issues.

And so we've really been impressed by the quality of engineering work. And we think that, that having that team of engineers added to our team of engineers that we can -- we'll see additional opportunities to both improve their 1P but also to improve the Voyager 2P working together as one company. So yeah, the -- I would tell you that we're really jazzed about the quality of engineering that we've seen there and the quality of IP, and we think there's definitely opportunities for us to work very closely together. Thanks.

Unknown speaker

Yep. Thanks. [Inaudible]

Operator

Thank you. We have a follow-up question from the line of Donovan Schafer with Collier Securities. Your line is open. Please go ahead.

Donovan Schafer -- Colliers Securities -- Analyst

Thanks for letting me get another follow-up in here. So the steel efficiency increase, you say that was a 20% increase in 2021 over the course of the year. I'm going to assume that sort of translates into a -- taking 20% of the steel out of the design. Correct me if I'm wrong on that.

But I'm curious because I did watch the webinar in September with PV Magazine kind of going through all the details on what you're doing, again, with this kind of extreme damping approach and how that allows you to take steel out of it. And it kind of gives a sense of where you're at in the process because there's the initial wind tunnel testing and then you've got workers actually out in the field standing on ladders, kind of like shaking the modules to collect some data points on stiffness, different parameters there. So you're in this kind of -- I almost want to call it like maybe a last phase or something where you're collecting all those nodes and all those data points, the mechanics of the structure. And then to say, based on that, how can we take out even more steel.

So I'm curious, do you have -- is there like any kind of a rule of thumb or bracketing or something a sense of how much more realistically steel you could actually take out, of course, obviously, you couldn't take another 50% out or if there's diminishing returns, maybe even taking another 20% out could be challenging. So just kind of curious if there is any sort of sense of what's -- what are realistic expectations about getting more steel out?

Sean Hunkler -- President and Chief Executive Officer

So, Donovan, it's really an interesting area. There are a lot of people in the company like myself with a deep semiconductor background and as you know, semiconductor is all about continuous improvement. And in the company, we actually have an R&D facility, we call Solar Tech that's outside or close to the Denver Airport as part of an overall R&D science part there. And so we're actively doing experiments looking at every component in the Voyager 2P system to look for opportunities to optimize and further reduce the steel content.

We also have a lab here in Austin that we're able to do analysis on each individual component. So as we look at making improvements in the system, as we look at reducing the steel content, we can make certain that we're not doing anything that affects the overall quality of the system. And so it's this continuous improvement effort that we'll never cease that we'll continue to remove steel over time out of the Voyager 2P system. It's just a continuous engineering improvement effort.

And then ultimately, you could see that we'd ultimately have a rev of the design, a new version of the product, so to speak, eventually over time. And basically have an overall product roadmap to look at improvements and then revving from one version to the next. But it's just an overall continuous improvement effort. I think if you also go back to the investor update we did in January, there's some materials there, too that talk a little bit about the continuous improvement in reduction of the steel content.

But it's an ongoing effort, and we'll always look to see where there's opportunities to improve the product, where there are opportunities to remove steel content. It's a really great approach.

Donovan Schafer -- Colliers Securities -- Analyst

Thank you. And I'll sneak in one. I'll be a little greedy here and sneak in one last question, if possible. In the U.S.

2P for a long time has really been seen as something that could do very well in the United States as we move to more constrained sites with sort of fewer piles, shorter rows, and being able to accommodate more uneven terrain. And so historically, that was kind of an important thing to say, why would anyone go to 2P, but I know you've also really wanted to be competitive even in sort of the big, flat, open sites, and there's the Samson project in Texas is kind of a one to point to where you had to win there. But in the current -- in your pipeline and your backlog and kind of where you're at now and going forward, do you see -- are you having the majority of your success in places where you're really playing to the strengths like the Carolinas or places where you have to drill rock or those challenging plays or soils or riverbed constraining sites or are you getting a lot of projects? Is it more or even more than maybe you would have expected in big flat land in Texas or California or elsewhere? Just curious about what's going on there, if there's been changes and surprises in one direction or another if it's kind of in line with how it's been in the past year or two?

Sean Hunkler -- President and Chief Executive Officer

Yeah. So there are quite a few advantages to the Voyager 2P system and the basic constructability, meaning the reduction in component count versus competition, the reduction in DC cost with the four-string architecture, the man hours per megawatt in terms of the constructability advantage. And those are all things that apply on all different sites. And that's why exactly like you said, there are flat [Technical difficulty] we do quite well.

But then there are also -- there's a whole another set of advantages for the 2P system for example, on slope sites, right, we can accommodate like a 17.5% grade. There's also the benefit on sites that are difficult terrain where we have a much lower foundation count, and that those apply as well. So we've seen success and continue to see success on both flat sites as well as sites with odd terrain or, I guess, I would say, more challenging terrain. And certainly, it seems like the percentage of sites with the more challenging terrain is increasing over time.

Thanks.

Donovan Schafer -- Colliers Securities -- Analyst

OK. Great. Thank you, guys.

Sean Hunkler -- President and Chief Executive Officer

Yeah. Thanks, Donovan.

Operator

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to management for any further remarks.

Sean Hunkler -- President and Chief Executive Officer

Thanks very much, operator, and thanks to all of you for participating on our earnings call today, and thanks for the questions. I remain extremely excited about the future of FTC Solar. And in particular, the acquisition of HX Tracker, I think it's really going to help to accelerate our international growth, and I'm super excited about that as well. So thank you again for your time, and thank you for your interest.

[Technical difficulty]. Take care.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Bill Michalek -- Vice President, Investor Relations

Sean Hunkler -- President and Chief Executive Officer

Patrick Cook -- Chief Financial Officer

Donovan Schafer -- Colliers Securities -- Analyst

Kashy Harrison -- Piper Sandler -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Philip Shen -- ROTH Capital Partners -- Analyst

Unknown speaker

More FTCI analysis

All earnings call transcripts