Array Technologies (ARRY) Q2 2023: Gross Margin Expands 2,010bps as Non-Tracker Revenue, Cost Discipline Drive Profitability
Array Technologies delivered a step-change in profitability, expanding gross margin over 2,000 basis points year-over-year, driven by mix shift, cost discipline, and higher-margin non-tracker offerings. While near-term revenue guidance was trimmed due to project push-outs and regulatory friction, management raised full-year EBITDA guidance and highlighted structural improvements in margin and free cash flow. With new products coming online and a robust order book, Array is positioning for sustained profitable growth into 2024 despite industry volatility.
Summary
- Margin Expansion Outpaces Top-Line: Profitability gains stem from internal cost savings, improved mix, and non-tracker revenue.
- Project Push-Outs Cloud Near-Term Revenue: Regulatory delays and module constraints shift revenue into 2024, but backlog remains strong.
- Strategic Product Launches Set Up 2024: OmniTrack and STI H250 broaden addressable market and reinforce pricing discipline for future growth.
Business Overview
Array Technologies designs and manufactures solar tracking systems, enabling utility-scale solar projects to optimize energy output by automatically orienting panels toward the sun. The company generates revenue from two primary segments: Legacy Array, the core U.S. tracker platform (DuraTrack), and STI, the international tracker business with a presence in Brazil and Spain. Array increasingly supplements hardware sales with non-tracker offerings—including software, engineering services, and aftermarket parts—to drive higher-margin, recurring revenue streams.
Performance Analysis
Q2 revenue grew 21% year-over-year, with both segments contributing: Legacy Array delivered $345 million, while STI contributed $162 million. Volume growth (megawatts shipped up 16%) and a 4% increase in average selling price (ASP) supported the top line. Gross margin expanded to 29.6%, a remarkable 2,010 basis point improvement, with Legacy Array margins at 30.9% and STI at 26.7%. Key drivers included lower freight costs, opportunistic material purchases, and a 150 basis point lift from non-tracker offerings.
Despite higher operating expenses tied to headcount and professional fees for finance transformation, adjusted EBITDA surged to $116 million—more than 5x the prior year. Free cash flow turned positive at $15 million, reflecting improved profitability and a tighter cash conversion cycle. Management flagged that while bookings hit $600 million, revenue guidance was lowered as $150 million in projects shifted into 2024, but these were not lost contracts—just delayed deliveries.
- Mix Shift Drives Margin: Non-tracker revenue and cost savings initiatives lifted gross margin by over 2,000 basis points.
- Bookings Lumpy, Backlog Intact: Q2 bookings rebounded after a slow Q1, but timing of deliveries remains volatile due to external factors.
- Cash Generation Accelerates: Higher EBITDA and disciplined capital allocation support faster deleveraging and future reinvestment.
The result is a business model less reliant on top-line growth and more focused on sustainable, high-quality earnings and cash flow generation.
Executive Commentary
"We continue to drive internal cost savings initiatives while delivering on our efforts to develop higher margin non-tracker revenue. Adjusted EBITDA for the quarter was $116 million, an increase of almost $95 million from prior year."
Kevin Hostetler, Chief Executive Officer
"Gross margin for the legacy array business was 30.9%, and the STI business had gross margin of 26.7% in the quarter. The margin of 29.6% benefited from approximately 300 basis points of cost-saving opportunities, including roughly 100 basis points from the continuation of lower freight costs and 200 basis points from opportunistic material purchases."
Nipal Patel, Chief Financial Officer
Strategic Positioning
1. Multi-Product Platform Expands TAM
Array is broadening its addressable market (TAM, total addressable market) with new products—OmniTrack, a terrain-flexible tracker, and STI H250, a lower-cost tracker. These offerings allow Array to compete in segments previously requiring price concessions on its flagship DuraTrack, preserving premium margins and enabling entry into growing project types (e.g., undulating terrain, mild weather markets).
2. Pricing Discipline and Margin Focus
Management emphasized a shift away from “growth at all costs,” instead prioritizing margin discipline and capital efficiency. The company is holding firm on DuraTrack pricing, using new products to avoid diluting value in competitive bids. Incentive structures and process changes reinforce this focus across the organization.
3. Innovation and Cost Reduction
Engineering investment is delivering tangible results—over 100 patents granted in 18 months, more than the prior 15 years combined. Innovations are driving down installation costs for customers, improving pile compatibility, and streamlining module mounting, which in turn lowers Array’s own installed cost base by several hundred basis points year-over-year.
4. Non-Tracker Revenue Growth
Software, aftermarket services, and engineering contracts are becoming a material margin lever. The company has productized change orders and value-added services, which contributed 150 basis points to gross margin this quarter. This segment is expected to be lumpy but accretive over time.
5. Operational Maturation and Lean Manufacturing
Process improvements and lean manufacturing in Albuquerque have raised capacity by 40% and reduced margin leakage. New configure-price-quote systems enable more dynamic pricing and faster customer response, further supporting margin consistency.
Key Considerations
This quarter signals a fundamental shift in Array’s business quality, but execution risks remain as the company scales new products and navigates industry headwinds. Investors should weigh:
- Margin Structure Transformation: Array’s focus on higher-margin non-tracker revenue and disciplined pricing is creating a more resilient earnings profile.
- Order Book Quality: Only executed contracts with named projects and start dates are included in backlog, providing strong revenue visibility relative to peers.
- Product Launch Timing: OmniTrack and STI H250 are expected to see meaningful deliveries in Q1 2024, with over 7GW under quote for OmniTrack.
- Cash Flow and Deleveraging: Free cash flow guidance was raised, allowing faster paydown of high-interest debt and positioning for opportunistic reinvestment.
- Regulatory Uncertainty: Final IRA guidance and domestic content rules remain key gating factors for customer commitments and project timing.
Risks
Regulatory delays (notably final IRA guidance), permitting backlogs, and module availability continue to disrupt project timing, pushing revenue into future periods. Margin overperformance in Q2 was partly driven by one-time cost savings and mix, which may not recur in the back half. Competitive pricing pressure and the pace of adoption for new products add further execution risk. Management’s discipline on VCAs (volume commitment agreements) avoids long-term price risk but may limit near-term volume visibility versus peers.
Forward Outlook
For Q3, Array expects:
- Lower revenue than Q4, with roughly 45% of remaining 2023 revenue to be delivered in Q3 and 55% in Q4.
- Gross margins to normalize in the low 20% range as one-time Q2 tailwinds subside.
For full-year 2023, management raised adjusted EBITDA guidance to $280–$295 million (up 14% at midpoint), with adjusted EBITDA margin now expected at 17%. Full-year free cash flow is guided to $150–$200 million, supporting a net leverage ratio below 2x (including convertible notes).
Management noted:
- 99% of 2023 revenue is already secured in the order book, reducing downside risk to current-year guidance.
- No assumed benefits from 45X manufacturing credits are included in the outlook; timing for inclusion remains uncertain.
Takeaways
Array’s Q2 demonstrates a business model pivot toward quality of earnings and operational resilience.
- Margin Expansion: Cost discipline, mix shift, and non-tracker revenue are structurally improving profitability, not just delivering a one-off beat.
- Execution on Product Roadmap: New product launches will determine Array’s ability to capture growth without margin dilution in 2024 and beyond.
- Watch for Regulatory Clarity: Final IRA guidance and domestic content rules are the key swing factors for backlog conversion and pricing power in coming quarters.
Conclusion
Array Technologies is emerging from a period of volatility with a stronger, more disciplined operating model and a clear focus on profitable growth. While near-term revenue is pressured by externalities, the company’s margin profile and cash generation are on a structurally improved trajectory. Execution on new products and regulatory developments will be critical to sustaining this momentum into 2024.
Industry Read-Through
Array’s experience this quarter is emblematic of the broader utility-scale solar sector: regulatory uncertainty and supply chain friction are pushing revenue into future periods, but cost discipline and product innovation are separating leaders from laggards. Margin expansion via mix shift and services is a key theme for hardware-centric renewables players. The company’s approach to backlog—only counting firm projects—sets a high bar for revenue visibility. As IRA guidance and domestic content rules firm up, expect a wave of bookings and renewed pricing power across the sector. Competitors relying on volume commitments without price protection could face margin risk if commodity volatility returns.