Why equities have been swimming in shoals

Amanda Chicoli is a post-doctoral biologist at the Carnegie Institution for Science in Baltimore, and she teamed up with Derek Paley, a professor in the department of aerospace engineering at the University of Maryland, College Park, to study and model this transmission of information. Their work appears in this week's Chaos , from by AIP publishing. Paley's expertise in coupled oscillator systems," said Chicoli.

Systems of coupled oscillators, like tethered pendula or connected springs for example, are used often to model more complex systems in science, from molecules to shoals fish. Superficially, a single shoal of fish -- or even just a network of matching springs -- may appear to be simple. But the factors playing a part in the group response can get complex very easily. In this study, Chicoli and Paley looked at the orientation of fish within the collection, and the influence it can have to how well the whole group escapes a threat.

The model predicts faster spreading of threat information in groups that are strongly aligned, and slower but more accurate responses in groups that align only after a threat has been detected," said Chicoli. In fact, it is this alignment while swimming that characterizes a social gathering of fish, or a shoal of fish, as a school of fish. Though it may feel intuitive that a school of fish would have common alignment for such purposes as quick evasion, but proving this is not so clear cut. The specific model used, called a susceptible-infected-removed SIR model, was actually one used more commonly in calculating how diseases spread and proved to accurately apply to the fish shoals.

Many biological processes, including the startle from a predator, are probabilistic in nature," Chicoli said. These probabilities can also be observed experimentally at the physiological behavioral levels. Specifically, their work revealed and quantified the relationship between various orientation configurations and the accuracy and speed of responses.

They found some surprising correlations. We also did not expect that the highest probability of responding to the external threat investigated would correspond to fewer individuals responding," said Chicoli. Since individuals do not re-startle, if too many agents startle without spreading the information, the startles die out before propagating and fewer individuals react overall. As for the potential impact for people, particularly in emergency situations, these and future results can provide valuable information when designing and planning for such events.

Chicoli said, "Importantly, the model may be relevant to investigating how individuals will respond to the movement of others in a group in order to decide what direction to travel or what exit route to follow. For example, if you had a large crowd all heading to one exit door, when two doors are available, would an individual follow the group or choose the available door with no crowd?

We expect the transaction to be accretive to our earnings per share. Now turning to our EV business. We are using the site to showcase our products for prospective customers.

We've begun taking orders from customers and, to date, have received orders from a charging network operator, a large investor-owned utility, and an EPC for one or more of our EV charging products.

We expect to begin shipping products to our customers during the fourth quarter. The first public charging station to use our solution will be installed in the end of this year, and we expect that if it performs well, it could become the basis for the rollout of hundreds of more stations using our equipment.

We remain very focused on the EV charging opportunity and are excited about the prospect of creating a significant business in EV to complement our core solar business. Thank you, Jason. The strength in components revenue during the quarter was consistent with the expected change in mix driven by the addition of a significant number of new customers we typically start with component purchases.

The acquisition of ConnectPV closed on August 26, and its contribution during the quarter was immaterial. Prices across our product lines during the third quarter were comparable to the prior year. Gross margin in the third quarter was Gross margins on Components and System Solution products were in line with prior periods.

ConnectPV's historical gross margins are lower than Shoals' historical gross margins primarily due to the higher prices they pay for components used in their products. This results from the smaller size relative to Shoals. Excluding the impact of ConnectPV, gross margins would have been higher in the quarter. We expect to bring Connect PV's margins in line with Shoals' average gross margin as we migrate them to our suppliers.

This increase was primarily a result of higher stock-based compensation, acquisition-related expenses for ConnectPV planned increased payroll expense due to higher headcount to support our growth and product initiatives, new public company costs, and nonrecurring public offering expenses. The increase in backlog and awarded orders reflects continued robust demand for Shoals' products from our customers. Thanks, Phil. Now I'll provide an update on the current market environment in solar and how it is impacting our near-term results.

The key challenge to our growth is the current supply chain environment. Our business model has effectively insulated us from most of the margin pressure that many of our peers are experiencing as a result of rising commodity prices, and the form factor of our products has limited the impact of shipping and logistics shortages on our business.

But unfortunately, our customers still have to contend with these issues as they progress their projects. The result is very fluid delivery schedules with customers making frequent changes, both the product specifications and when they want the product on site. Recently, some of our projects have been delayed to accommodate design updates as a result of panel changes or because other materials or components needed are not available.

In both cases, the impact to us is the delay when we can produce and ship product, which will have the effect of shifting revenues that we expected to recognize in the fourth quarter of this year into the first quarter of next. While it's not our practice to provide quarterly guidance, we felt it was important to quantify for our shareholders the impact on our results of the changes that our customers have made, which is why we're providing our outlook for the next two quarters.

Phil will take you through the numbers, but before I turn to him, I'd like to make three final points. First, this is truly a timing issue.

We have not had a single order cancel. And candidly, our primary focus right now is making sure we have the capacity to deliver on the tremendous demand that we're seeing across our business. Second, we're not seeing any pressure on our margins. Our lower gross profit margin in Q3 is solely related to mix. We expected it and talked about it on our last call.

I feel very good about our ability to continue to expand our margins based upon the order book we have in hand today.

Third, this is a temporary situation. We have seen an extraordinary amount of disruption in the global supply chains, but it is clear to us that the market is slowly beginning to normalize.

Suppliers are adapting, customers are adapting, logistics providers are adapting. This won't last forever. And now I'll turn it back to Phil to talk about the specifics of what we see for Q4 and Q1. While the mix of component sales is expected to remain high in the fourth quarter, which will reduce our gross margin in the quarter, we expect that to reverse in the first quarter of , consistent with our outlook for adjusted EBITDA.

Jason, back to you. I'd like to close by thanking all of our customers for their commitment to Shoals, our employees for their contributions to our company's success, and our shareholders for their continuous support.

With that, thank you, everyone, and I appreciate your time today. I'd like to ask the operator to open the line for questions. Please go ahead with your question. Hey, guys. Thanks for taking the question and appreciate the additional guidance here. I guess one of the questions I had was more around the gross margins.

I know you had telegraphed that 3Q, the margins would have a mix impact. Can you kind of talk to what you're seeing on the cost side and supply chain inside of things outside of mix and whether or not any of that is impacting the view for gross margins in 4Q and into 1Q?

And then I had a follow-up. Hey, Brian, this is Jason speaking. Good to talk to you again. Phil, I'll take that question. So, when you look at the margin profile, first and foremost, it is strictly a function of the mix shift in product. And as we talked about before, especially when you look at the success that our sales team has had and converting over customers to our full system BLA, when those customers are in the process of converting, going from prospects and transitions, it's not uncommon for those initial product offerings to ultimately fall into that component category while we're working with them to transition them over.

Fair enough. So, it's all mix-related. And then I think you mentioned ConnectPV, it's immaterial here in the near term, but it did impact margins in the quarter.

Your margins would have been higher if you had not made that acquisition. Any sense of what that magnitude of impact was on a basis-point basis?

And then is there going to be some ConnectPV margin headwind in the next couple of quarters? When do we start to see that maybe become more in line with the corporate average as you're targeting? Go ahead. Brian, that was -- it was approximately basis points. We were working through -- their suppliers are much higher cost, but we are transitioning those to our own suppliers. The impact, of course, there will be a little bit -- there will be some impact in Q4 and rolling into Q1.

But once again, the overall sales are immaterial, and we're integrating them into the Shoals' manufacturing process quickly now. And so, it will be mitigated, hopefully, completely as we get through the first quarter. And then maybe last one for me and I'll pass it on. On the timing here of the revenue. I know you're saying, Jason and Phil, that you haven't seen any orders be canceled, and I know that the Q1 guidance is supposed to give us some sense of what's slipping from the end of this year into the early part of next year.

So, is all of the Q4 pushout being captured in Q1? Or are we going to see some of that slip into the quarters following it? And just how would you kind of characterize your ability to capture the risk of additional project slippage as we move through the next several quarters, not just into the early part of '22? Thanks, guys.

No problem, Brian. So, I'll take that. So, looking at where we are, first of all, I'd like to point out that customer demand is very strong. But when you look at Q4 and rolling into Q1, we have a uniquely high level of demand book for Q1, even aside from the Q4 pushouts. So, we're extremely comfortable with our particular forecast, and we've actually included potential for incremental industry headwinds in those particular numbers.

Thanks so much, guys. You know, with wage inflation at the labor level on these projects and in your own inflation, have you guys looked at where your relative value is in terms of labor savings and your pricing strategy here? Is there an opportunity for you to start increasing some prices as you displace more high-cost labor? Yes, that's a great question, Colin, especially when you consider our full system solution offering abroad, one of the key aspects is being able to provide real value with our offering in the form of savings and labor, not only the classification of labor but the amount of labor.

So, we're constantly evaluating that. But keep in mind, when you look at where we are at this point in time, we're really focusing on growth. So, from a project perspective, we're keeping our pricing in line from that particular standpoint. All right. And then just in terms of some of the smaller elements of the design that you guys have, can you talk a little bit about the potential to diversify suppliers with some of these coatings or on the wires or some of the clip systems?

Certainly, we're seeing shortages of basic materials, not just in metals, but all over the supply chain, but I just want to understand how you're resilient to hit your full supply chain to serve a global customer base. Yes, Colin, great question. So, we have a vast ABL-approved vendor list that we operate from, and one of the things that we're constantly doing is we're constantly adding to that particular list itself.

To be able to make sure that if something were to happen with one particular supplier, we could immediately pivot over to another. So that is something that we've been working on since Day 1 many, many, many years ago, and we continue to build that over time. Our next question comes from Kashy Harrison from Simmons Energy.

Good afternoon, guys, and thanks for taking the questions. Jason, you indicated that you expect delivery schedules to eventually normalize. And in your prepared remarks, you said you're actually already seeing supply chains beginning to adjust. Can you go into maybe a little bit more detail on what you mean by that? Where are you seeing improvements in the supply chain? And then when do you expect things to maybe get a little bit closer back to normal?

That's a great question. So, it's definitely hard to predict the exact timing. But when you take a look at the raw material inputs that come into our facilities, we are starting to see those normalize. And based upon, again, the ABLs that we've actually built up, we're actually utilizing and going out and supporting more of those particular ABLs with additional orders to be able to derisk the supply chain itself.

But I think that the key thing is working closely with your vendors themselves to make sure they understand what the actual expectations are so that they can make their changes based upon any of the inputs from a logistics perspective. If it takes, let's just say, five days longer to get somewhere, I'll be able to make those changes accordingly so that you can counteract that and actually receive the material when you need it so that, ultimately, we can make our commitments to our customers.

And what about from your customers' perspective? Are you seeing them -- are they now able to get more components than before? Are they starting to readjust?

Or was that statement more in reference to inputs into your manufacturing capabilities? It's really hard to speak to, you know, all the exact items from a customer perspective. We were mainly just speaking more to our particular inputs in general. Got it. Makes sense.

And the implied bookings and growth -- the implied growth in bookings was quite pronounced. Is the increase just coming from these customers that you've been able to add? Or is there something else going on that's driving such a meaningful increase quarter over quarter in bookings and backlog? And then how should we think about converting that backlog into revenue over the next several quarters or in the next several years?

Thank you. When you take a look at the contribution to backlog, it's really a function of several different things, one of which you pointed out, obviously, new customers that are coming on board as well as supporting customers that we've been working with. But also, as we begin to win more of that particular pipeline from those customers, that also is very accretive to our backlog and awarded orders.

And when you look at the timing of our particular backlog and awarded orders, it's very similar to what we've talked about in the past. You're looking at roughly, give or take, about a month window, nine to 12 months that we actually cover from that perspective. Some particular projects may actually spend further than that, but that's a good rough average on what backlog looks like. Good afternoon. Thanks for taking our questions. Jason, can you just comment about how kind of widely distributed the project timing issues are?

Are these just a handful of larger projects that are causing kind of this near-term air bubble? Or is it a broader issue? You know, there's actually several projects, larger projects that are out there. And I think a good example here, Mark, is when you take a look at a particular panel manufacturer, and let's say that one of our customers shifts from panel manufacture A to panel manufacturer B, so it's the same form factor, same power levels.

Just a simple shift like that could ultimately put us into a redesign that could cause project delays if for no other reason than the connector type itself because we have to actually follow the connectors that are included with the panels themselves. But a large portion of what we're seeing, it's a group of several projects that are out there, and a few of them are fairly large projects.