Stem, Inc.

Thank you for standing by. This is the conference operator. Welcome to the STEM, Inc. Fourth Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Ted Durbin, Head of Investor Relations. Please go ahead.

Thank you, Operator. This is Ted Durbin, Head of Investor Relations at STEM, and we welcome you to our fourth quarter and fourth full year 2022 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10-K, and our other SEC filings. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are on the investor relations portion of our website at www.stem.com. John Carrington, our CEO, and Bill Bush, CFO, will start the call today with prepared remarks. Mike Carlson, Chief Operating Officer, and Prakash Patel, Chief Strategy Officer, will also be available for the question and answer portion of the call. And now we'll turn the call over to John.

Thank you, Ted. Ladies and gentlemen, thank you for joining us on the call today. Starting with slide three and the agenda for the discussion today, I will review our fourth quarter 2022 results and highlights, followed by an overview of our commercial execution and provide an update on the supply chain. I will then review our strong operating results and new offerings that demonstrate our technology leadership. Following my remarks, I'll turn the call over to Bill Bush, our Chief Financial Officer, who will discuss our financial results in more detail and provide 2023 guidance. Turning to slide four, today we reported solid fourth quarter results, including record revenue of $156 million, which was three times higher than the same quarter last year. We also reported record bookings of $458 million, which was two times higher than the same quarter last year. Our revenue and bookings in the fourth quarter alone were higher than in the entire year of 2021, which is a remarkable achievement over a short period of time. We achieved these results despite a turbulent environment throughout 2022. including supply chain volatility, interconnection and permitting delays, cost inflation, and solar import declines from the ADCVD and UFLPA restrictions. Our diversified business model across multiple products and geographies helped the company navigate these headwinds. As we previewed in our interim update in early January, Revenue came in within the guidance range and our bookings were well ahead of guidance that we had already raised in the middle of 2022. In fact, if you go back to our 4Q21 earnings call, our bookings ended 50% higher than our original full year guidance. The bookings momentum is a testament to our software and services solutions that are differentiated in the marketplace. We are also capitalizing on the tremendous macro tailwinds in this industry. We grew our contracted annual recurring revenue, or CAR, another 7% quarter over quarter to $65 million in the range of our guidance that was also raised by $5 million during our 2Q earnings call. Focusing on the right side of the page, we continued our momentum in e-mobility with an exciting strategic partnership with ChargePoint. I'll discuss more on this opportunity later in the call. We continue to drive operating leverage as we ramp headcount at a slower rate than our revenue growth. We are implementing technology and processes to control cost and leveraging our infrastructure in India to grow headcount in lower cost regions. We're also staying ahead of the supply chain with capacity contracted through Q1 2024. Before we move on from this slide, I would like to make a couple comments about our full year results. We faced several headwinds during the quarter and throughout the year. We were negatively impacted by COVID-related shutdowns in the fourth quarter in China. To address this risk, we are undertaking a strategy to diversify and deepen our relationships with battery OEMs. In addition, we are leveraging our technology leadership to introduce an offering that provides flexibility for our customers in system design and can help mitigate disruptions at any one supplier. On the solar front, as previously discussed, we were negatively impacted by the lack of panel shipments that resulted from the anti-dumpity and weaker forced labor restrictions. Software services revenue was negatively impacted by interconnection and permitting delays. Bill will discuss the multiple pathways we have to continue growing gross margin. Finally, we effectively manage expenses throughout 2022, coming in on plan to our guidance for adjusted EBITDA, in large part because we were prudent in our hiring and are seeing the benefit of our strategy to expand headcount and lower cost geographies. I've charged our management team and our global organization with reaching positive adjusted EBITDA in the second half of this year, and we will not waver on that key objective. Moving to slide five and our continued commercial execution. As you can see in the chart in the upper right, we had strong services revenue growth in the fourth quarter, up 17% versus the third quarter, which itself was up 9% versus the second quarter. As you know, this is the highest margin portion of our business, and we are focused on driving these revenues higher in 2023 and beyond. I mentioned our strong bookings quarter, which exceeded full-year 2021 bookings. Additionally, over two-thirds of our full-year bookings came from new customers. We expect bookings momentum to continue with the tailwinds we are seeing in the industry. As you can see in the lower right chart, Wood Mackenzie is now calling for a 46% increase in solar and storage build-out in the U.S., primarily as a result of the Inflation Reduction Act. We think that the long-term visibility provided by IRA will drive strong growth for years to come. We are pleased to start our first only software project in ISO New England this quarter and expect to do more software-only deals going forward. We continue to generate strong recurring revenues from our existing customers as they are willing to pay for the incremental additional value we're creating for them. Finally, We have revamped our sales compensation plan to favor margin over revenue. We expect continued strong growth, but we'll focus on the highest margin portion of the value chain where our differentiated solutions most resonate. Turning to slide six and an update on the supply chain. On the storage side, we have now fully contracted supply through the first quarter of 2024, and we are opportunistically adding supply on the spot markets. The choppiness in the electric vehicle market, along with some project delays, appears to have released some excess capacity that is coming into the stationary storage market. We will continue to execute back-to-back contracts that lock in our customer demand as we add additional supply commitments. On the commodities front, we are cautiously optimistic that some of the recent price declines will hold. which could improve project economics for customers and increase our addressable market. For example, lithium carbonate prices are down around 20% from their peak in November, which is starting to flow into the overall energy storage system price. As you know, price increases or decreases are complete pass-through for STEM, but we are encouraged to see these lower prices. And in storage, we continue to progress our unit controller or modular energy storage system strategy that we discussed in our last earnings call. This offering will enable customers to mix and match various hardware combinations with an ability to swap batteries and inverters, ultimately decoupling our customers from some of the supply chain volatility that we have seen in recent years. Importantly, We will still maintain control of the edge hardware solution. Customers and partners are very excited about this offering, and we expect to install our first pilot modular ESS next month. Please turn to slide seven, where we will discuss our technology leadership. We performed well in 2022 on the technology and operations front. Overall, we experienced a 33% in grid calls across the fleet without impacting customer bill reduction expectations. Athena now has 31 million runtime hours across multiple markets, use cases, and hardware devices. Our machine learning algorithm continues to improve as it is exposed to more data in more markets, which extends our competitive mode. We continue to support our customers and the grid in several core markets. In California, we saw a 20X increase in grid calls during December and January tied to the atmospheric river weather patterns, along with the extreme high gas prices in Southern California. Southern California Edison called on the STEM network almost continuously as we provided over 60 megawatts per day for those months. Our virtual power plant delivered the equivalent of several gas-peaking power plants and became a vital capacity option for utilities and grid operators. Athena also continued to exceed our commitments, 8% above baseline for the key SGIP incentive program. In ISO New England, we continued our exceptional performance, with the fleet generating 76% more revenue than forecasted. We had a 94% accuracy in predicting Coincident Peaks, which will be an important differentiator in the PGM market that I will discuss in a moment. And we bid over 200 megawatt hours into the forward capacity market auction this spring that will take effect in 2026. Finally, in ERCOT, our first sites will begin trading in the wholesale market in 2023. We announced in December our first four projects with Rex Storage Holdings, a joint venture between Regus Energy Partners, an independent... developer, and Excelsior Energy Capital, a leading investment fund. Rex has made a substantial equity commitment to ERCOT Storage, which could fund dozens of new projects. Let's move to slide eight in our new partnership with ChargePoint. ChargePoint is a leading electric vehicle charging infrastructure company, which has followed a similar path of innovation and market leadership as STEM. Founded in 2007, ChargePoint has grown to over 200,000 ports under management, focused on charging both personal and fleet vehicles. Our partnership will focus on the confluence of fleet electrification and the grid. STEM will provide battery, hardware, and software to coordinate onsite demand with the grid. ChargePoint will provide the charging solutions. Together, we can help accelerate electric vehicle adoption, enhance customer economics, increase grid resiliency, and reduce greenhouse gas emissions. Collectively, we will leverage the $5 billion of funding incentives from the National Electric Vehicle Infrastructure Program, or NEVI, that went into effect in fourth quarter 2022. We estimate the NEVI program could offset up to 80% of project costs where available. And further, we estimate the IRA will provide another $9 billion of incentives and tax credits in the markets we're focused, driving additional benefits for our customers. In total, we expect e-mobility to comprise around half of our behind-the-meter or BTM sales in three years. We have already booked several EV charging deals, and the ChargePoint announcement will help jumpstart our progress in this exciting market, along with our previously announced partnerships with ONGIE and ABB. Next, please turn to Slide 9 and our entry into the PJM market for energy storage. PJM is the largest competitive power market in the world at around 150 gigawatts, which is three times larger than the California grid. It spans 12 states plus D.C., and the average industrial customer load is almost eight times larger than in California. We've started selling our storage solutions in PJM for several reasons. One, rising transmission charges. You can see over the last nine years, transmission charges have more than doubled for most of the major zones. This is raising electric bills for commercial and industrial customers, driving them to renewable energy sources like solar and increasingly storage. Secondly, new state incentive programs are increasing the returns on storage. And finally, the IRA, in particular, the storage ITC, which has opened many new markets to retrofit storage onto existing solar installations. Our install base from also energy gives us a significant advantage in this regard. We think PJM is an ideal market expansion opportunity as customers will benefit from Athena's ability to co-optimize multiple complex value streams. In addition, we have a strong track record of predicting coincident peaks in other markets. and that will be a key value driver in PJM as well. This is a differentiated offering that is accessible with our best-in-class AI capabilities. Because of the additional value we will add for customers, we expect to charge up to 50% higher fees for Athena. Thank you, and now I will turn the call over to Bill Bush, our Chief Financial Officer. Thank you, John.

Starting on page 11 with our results for the fourth quarter and full year 2022, But please recall that we closed the Also Energy transaction on February 1st, 2022, which will impact the comparability to last year's results. As John mentioned, we reported record revenue of $156 million, which was a 194% increase versus the $53 million in the fourth quarter of 2021 and more than recorded in all of 2021. Most of the growth came from storage hardware sales on FTM partner projects and about $18 million from the Powertrack platform. We also recognized approximately $16 million of high-margin software and services revenue, representing 10% of total revenue for the quarter. Full-year 2022 revenue was $363 million, an increase of 186% over 2021. For the quarter, our GAAP gross margin was $13 million, or positive 8%, up from a negative 3% in the same quarter last year. For the full year, GAAP gross margin increased from $1 million to $33 million. Turning to slide 12. Fourth quarter non-GAAP gross margin was $17 million, up from $3 million in the fourth quarter from last year due to higher revenues. On a percentage basis, non-GAAP gross margin was 11% in the quarter, up from 5% last year. Our margins benefited from a greater share of high margin software and services revenue. For the full year 2022, non-GAAP gross margin came in at 13%, up from 9% last year. We came up short of our 15% to 20% non-GAAP gross margin guidance, driven by a higher mix of hardware than we expected. Our storage software revenues also increased more slowly than we expected due to the continued permitting and interconnection delays that our partners experienced. While the solar side of our business underperformed from a revenue standpoint in 2022 with relatively flat revenue versus 2021, the business continues to generate high gross margins, ending the year at 60%, and is well above position to take advantage of the expected snapback in the solar industry. Our solar backlog increased 42% on a year-over-year basis, giving concrete evidence of a rebound in our solar results. Net loss was $35 million versus $34 million in the same quarter last year. And lastly, adjusted EBITDA was a negative $10 million in the fourth quarter versus a negative $12 million in the same quarter last year. Adjusted EBITDA improved as we continued to drive operating leverage in our business. For the full year, adjusted EBITDA was a negative $46 million versus a negative $30 million in 2021. Our adjusted EBITDA results were within our guidance range of negative $20 to negative $60 million. So despite weaker than expected gross margins, we were able to meet our EBITDA guidance, and that's due to cost controls. In particular, when we saw the slowdown in the solar business begin to develop in the spring, we managed the pace of our hiring. will continue to take the same conservative approach this year to ensure we achieve our goal of achieving a positive in the second half of the year fourth quarter bookings were 458 million dollars up more than two times versus bookings in the same quarter last year and a new quarterly record this was the highest bookings a quarter in the company's history and the 1.1 billion dollars of bookings for the full year is up 153 percent from 2021. moving from our financial results to our operating metrics on slide 13. Our backlog more than doubled year over year from $449 million in the fourth quarter to $969 million in the fourth quarter of 2022. The backlog increased approximately 19% on a sequential basis from the third quarter of 2022. The largest driver of the backlog increase was the $458 million of new bookings in the quarter, offset by revenue recognized as well as a $137 million contract cancellation that we disclosed in early January. The nearly $1 billion of backlog gives us good visibility into 2023 and 2024 revenue. We also no longer report the 12-month pipeline as a key metric in 2023. The business has matured to the point where we believe backlog is a more important indicator of our commercial outlook and does not have the volatility of the pipeline metric. Pipeline was sequentially flat in the fourth quarter, mostly due to the strong conversion of pipeline into bookings during the quarter. Our contracted AUM on the storage side of our business grew from 1.6 gigawatt hours in the fourth quarter of 2021 to 2.5 gigawatt hours in the fourth quarter of 2022. That's a 56% year-over-year increase driven by our strong commercial momentum. Our operating AUM on the solar asset performance monitoring side of our business ended this quarter at 25 gigawatts. relatively flat to the third quarter. Customer additions were largely offset by churn, including on the spin down of the legacy platform that we discussed last quarter. We expect solid growth in solar AUM in 2023 as the industry recovers. Contracted annual recurring revenue, or CAR, ended the quarter at $65 million, up 7% sequentially. We are pleased we are able to grow CAR during the quarter despite the contract cancellation, again, a testament to our commercial success and software differentiation. We ended the quarter with $250 million in cash on the balance sheet. We will continue to deploy our cash to fund operational investments, including securing storage hardware for our customers. These funds will come back to the company in the form of service fees, hardware margin, and a long-term recurring software fee. We will remain prudent in our use of cash within risk limits established by management and overseen by our board of directors. Turning to slide 14 in our 2023 guidance. Starting with revenue, we expect to recognize between $550 and $650 million of revenue in 2023. To the right, you can see the seasonality we expect for revenue during the year. Similar to prior years, it is back half-weighted, driven by the timing of the delivery of batteries. We expect more ratable growing service revenue throughout the year. We expect non-GAAP gross margin of 15 to 20% versus the 13% we reported in 2022. This improvement reflects a higher mix of software and services revenue, including from the solar side of the business. On bookings, we expect to contract between $1.4 and $1.6 billion this year, representing a 40% plus growth year over year. With our EBITDA focus in mind, we have revamped our sales compensation plan to focus on margin as well as revenue. We will focus on the highest margin opportunities where we can drive differentiated economics for our customers and for STEM. We expect adjusted EBITDA in the range of negative $35 to negative $5 million versus negative $46 million in 2022. This improvement is driven by higher margins and a continued focus on improving our operating expense leverage. More importantly, we expect even to a positive in the second half of 2023. And then lastly, we are introducing car guidance, expecting to exit 2023 at a run rate of between $80 and $90 million. This is a function of our bookings growth, including some software-only deals we're pursuing in core markets. I would like to provide some context into some key uncertainties we considered in developing our guidance. Storage supply chain constraints impacted our Q4 results with manufacturing logistics delays at one of our key suppliers, delaying delivery of product against our contracted backlog. To mitigate this situation, we have pursued both commercial and technology-driven solutions, including onboarding additional suppliers and building domestic supply relationships. A recovery in the solar supply chain is critical to the achievement of our gross margin targets. We are seeing green shoots with the pace of panel deliveries accelerating across top-tier developers and customers, and this should stabilize the contribution from also energy. Our backlog for solar APM was up 42% exiting Q4 2022, so we are cautiously optimistic. On gross margin expansion, we have multiple shots on goal, which I will discuss on the next slide. On slide 15, we expect meaningful accretion in gross margin for 2023 as a result of several factors and key initiatives. By aligning the compensation of our sales team on gross margin achievement, we've seen a market improvement in the gross margin within our backlog as we exited 2022. In addition, our CEO, Mike Carlson, is focused on accelerating the pace of system commissioning through the rigor and focus he is bringing in pushing interconnection and permitting processes in partnership with our customers. We expect to roughly double our operating assets under management in 2023, and this will contribute high gross margin software services as our software contract terms begin upon commissioning. We expect a recovery in the solar asset performance business driven by a return to growth in the solar industry. You can see from the graph on the left, most solar industry expect that the impact of the UFLPA on panel deliveries to be resolved in the first half of this year. In the long term, we were rolling out several service offerings targeting enhanced monetization of activities we've already been providing our customers as we have built a leadership position in the growth of the industry. this includes project modeling project design and asset management offerings tied to the introduction of our modular ess strategy which we expect to begin to deliver in the first half of 2023 additionally we expanded our team of energy market experts last quarter as we roll out services for wholesale energy forecasting and program management for the ftm market we will update you on the progress and uptake of these offerings in the coming quarters bottom line we will manage the business prudently to address risks in our plan and continue to drive to EBITDA positive in the second half of the year. With that, let me turn the call back to John for some closing remarks.

Thanks, Bill. On page 16, to wrap up, we are committed to achieving EBITDA positive in the second half 2023. Our financial progress is supported by the very strong demand we are seeing from customers as they face rising energy costs and as the full impact of the Inflation Reduction Act fuels market growth. We closed 2022 with $1.1 billion in bookings, representing a 153% increase from the prior year. Our technology team is best in class, driving new market expansion and enhancing gross margins. We launched our offerings into PJM, the largest competitive global power market, and are enhancing the economics of sites in CAISO, with Athena's unmatched co-optimization and wholesale energy trading capabilities. In addition, we continue to make inroads into the fast-growing electric vehicle market with the partnership we announced with ChargePoint. All these activities set us up to drive double-digit annual software services growth and enable the company to achieve significant growth in adjusted EBITDA. Finally, I want to recognize our diverse global team for the outstanding performance and looking forward to meeting the commitments we have outlined today. We have world-class employees, products, and customers. With that, let's open the line for questions, please.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. The first question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. First one on the guidance for revenue. I mean, given the backlog position here, I'm just kind of curious, what's your assumption around backlog conversion? I would have thought you'd be in position to do, you know, higher than kind of the revenue guidance here of $600 million at the midpoint. So are you seeing backlog converting more slowly, or is there something with respect to mix that's, you know, maybe not turning over as quickly as we would have thought, just given the overall headline numbers seem to be bigger here? and gave you more coverage than sort of the revenue guidance you're providing here, and then I had to follow up on the margins.

Perfect. Hey, Brian, thanks for the question. So, yeah, and I think we've, in terms of the backlog, it is converting slower. I think we've talked about this in the past. As we're taking on larger and larger projects, those tend to be, you know, they tend to be FDM first, and then second, they tend to be multi-year installations. And so, you know, we saw much quicker, you know, when the projects were slow or smaller, we saw a much quicker conversion much like you know say at the end of 20 uh at the end of 20 or one we had 400 plus million 450 million dollars in backlog we did 363 million in revenue this year so pretty you know pretty quick conversion in general but this year and into you know i think going into future years we're just going to we're going to need to build more pipeline because the projects are longer and so from that standpoint I would say, you know, extension, but still pretty significant growth on a year-over-year basis for revenue.

I think the other thing I'd add, Brian, and thanks for the question, is, you know, we do still have some opportunity to convert bookings into this year, so here in the first quarter, so keep that in mind. Okay, fair enough.

Yeah, just on the margins, I know, you know, 22, it sounded like you obviously had some issues that impacted you on the gross margins. You know, you're effectively starting 23 here with the same adjusted gross margin guidance as what you had going into 22. But it seems like some of the headwinds from last year have started to dissipate. So is there some conservatism baked into here? Is there some level of margin leverage that you're not seeing that you would have expected? You know, you've got maybe a little bit more BTM coming back into the mix, supply chains better. And I know, you know, kudos on the operating leverage side of things. I'm just wondering what are some of the levers around gross margin leverage that we could look to here in 23? Because just based on the headline guidance, it doesn't seem like you're baking in a ton.

Well, I think, so in terms of the margins, I think one is, you know, I think we need to be somewhat conservative because the solar part of our business has a lot of margin leverage into it. And though we are seeing some green shoots come out, I mean, you can see that in terms of, you know, we had 8% service growth in the fourth quarter sequentially. We've got, you know, a really nice increase in backlog, 42% year over year. We want to make sure that those numbers are actually there. And because of the, you know, that's a 60% gross margin business in general, if that doesn't materialize the way that we expect that'll much like in 22, that'll have a negative impact on us for 2023. So probably is some conservatism. Um, you know, I think there's to some extent you can always increase the numbers, hard to take them down. Um, and so I think what we'll be doing, you know, as we roll into 2023 is continue to monitor the solar part of our business very carefully. But I think the other thing to consider as well is that the hardware side of the storage part of the business continues to be under pressure. I mean, that is definitely going to, you know, as we move up in terms of project size, the margins on those hardware sales, which unfortunately comes before the software, is going to impact the overall gross margin. So, you know, we kind of went through and tried to, you know, appropriately act, you know, forecast what the mix of those two things would be. And, you know, I think the ultimate answer is going to depend a lot on what the mix turns out to actually be.

All right. Thanks, guys. I'll pass it on. Thank you.

The next question comes from Mahid Mandloy of Credit Suisse. Please go ahead.

Hey, thanks for the question. Just following on the previous question from Brian on margins, it feels like there's probably like a shift out of the EBITDA profitability from after Q2 to now the guidance is second half of 23. I just wanted to understand, is there anything in the seasonality which could be causing that? And any other levels on the EBITDA profitability here would be appreciated.

Thanks. Maheep, no, we're not coming off the second half EBITDA positive in any way, so I'm not sure where you got that indication. So that's not the case.

Gotcha. Now I'll follow up later on on that. And just looking at the guidance and assuming for the backlog and bookings, assuming 60% of it is the hardware here, that kind of implies revenues in 24 could be around $900 million or probably more than that. Does that math make sense? Or is that also kind of impacted by all the or extended revenue recognition you've kind of talked about in the previous question, yeah?

So thanks for the question, Maheep. I think first, of course, we're not given 24 guidance just quite yet. But I would refer you to the data that we gave in the LRP. So from that, you know, we do expect to see 24 revenue grow at those rates. You know, the midpoint in hardware was, of course, 30%, and services would be 75%. I think from that standpoint, we do expect to see growth. And I think one of the places that you saw that in this last fourth quarter is a 17% sequential growth in services. So, I mean, ultimately, the path to EBITDA is going to be paved through services. And we're seeing a lot of very positive momentum from that standpoint. Two quarters in a row, 9%. In the third quarter, 17%. in this quarter of service growth. So we're really excited about that. That's going to be where the gross margin dollars come from. And so I think that'll be something to keep in mind as we go on, not just the big print of what the revenue is, but also what the gross margin dollars shake out to be.

Gotcha. And then the split of hardware versus software and bookings and backlog 60-40, is that changing for 24, sorry, 23?

No. No, we don't expect that to change. I mean, what will change, though, to be clear, is we'll have more software-only deals in 2023 in the backlog. So you'll see more deals that are, you know, that's particularly true on the largest deals. So, you know, one of the things that, you know, we tried to adjust for in the bookings number in total was the fact that we expected to have software-only deals this year. And that, of course, only represents, you know, call it 40% of the total economic value of the system So the bookings growth is going to be slower on a nominal basis as a result of that. But the KWH or the megawatt hours is going to continue to grow at a very quick rate.

All right. I'll take the rest. Thank you.

Thanks, Mahib.

The next question comes from Julianne Dumoulin-Smith of Bank of America. Please go ahead.

Hey, good afternoon, team. Thanks for the time. Appreciate it. It's nice to chat with you guys here. So with respect to the services, the ProServe and the DevServe, can you guys talk a little bit about the growth of the services business and specifically how you're tracking and maybe some of the data points we're going to see materialize here as signs or roadposts to know that you're scaling here? I know that there have been some other discrete issues here, as we're alluding to in the gross margin mix, but I just want to specifically get back at some of the services side.

Hey, thanks, Julian, for the question. So, I mean, I think the most obvious is going to be what's going on at the top there. Yeah, so that's that 17% sequential growth. And I think that's the kind, you know, those are going to be the high-level signposts that you and the other folks should be looking for is what are we able to do in terms of total service revenue just in general. And so I think that's where we've made a lot of progress. Mike Carlson, who's here with us, of course, today is leading the pro-serve side of the business. And so I think we expect to see, you know, quite a bit of progress from that standpoint. We kicked off that initiative on the storage side of the business this last August. The solar part of the business has been doing that for some period of time. And to the extent that we're able to experience the growth that a lot of the analysts are expecting, i.e. 100% year-over-year growth in solar, you know, we're going to do much better. We did see a little bit of that in the fourth quarter with the solar part of the business. It did grow 8%. which was a nice accomplishment, particularly given the 1% decline in the third quarter. So I think those are going to be the obvious points that you should be looking for as we go on. Do you want to add anything, Prakash?

Yeah. Hey, Julian. This is Prakash. Two points I would make. When Bill was discussing the gross margin accretion strategy, the long-term plan, and John referenced this as well, next month we'll be installing our first modular plan ESS, that comes with services attached to it. We expect a lot more of that unit controller type business to launch services in project modeling, project design, and asset management. And then separately, we expanded our team that advises customers on forecasting for wholesale energy markets. And so both of those, you should start to see either just, as Bill mentioned, growth in services line item or press releases around these customer wins and engagements.

Got it. And then with respect to PJM, just quickly if I can, you know, obviously they have disproportionate interconnection issues. How are you thinking about the confidence in the backlog translating given some of the timeline issues as it pertains to kind of leaning into the PJM? I appreciate the margin comments about PJM, but just some of the interconnect and delay issues that we've seen there. How does that fit with A, your backlog and mix there, and B, how you risk adjust, if you will?

Right now, I'd say the primary focus in the PJM market is behind the meter, where there's a templatized approach for interconnection approvals. We're not chasing very large, highly engineered front-of-the-meter deals. So that's one strategy, and we're leveraging developers and EPC firms that corporate Fortune 500 accounts we're targeting have worked with for quite some time in deploying their solar projects. So it's a different segment of the market. And we've seen a faster pace. And then just context around your question on the backlog, it's still early days. So we just launched it turn of the year. So we don't have a significant component in the backlog just yet to risk weight it. Wonderful. Thanks, guys.

The next question comes from Thomas Boyce of Cohen. Please go ahead.

Thanks for taking my questions. Maybe the first one, I'm just wondering if your sourcing strategy has changed at all post-IRA. Have you held back on sourcing anything maybe beyond 1Q2024 in terms of securing domestic production as it comes online? And then maybe as a follow-up there, what do you think it's reasonable to assume for U.S. battery supply to finally be available to late 2024, 2025?

Yeah, so thanks, Thomas. I'd say a couple things. We have contracted supply for 2023 and making progress on 2024. You know, as we've talked in previous calls, we continue to make opportunistic spot market purchases, and I think that's served us well. We'll continue to do that. I think our suppliers know if there's a change in one of their customers, I believe we're one of the first calls and on the American, on the U S content piece, look, we're still a significant customer of Tesla's and we'll continue to work closely with them. They've been a long term partner for us, um, really since by 2013 or so 2012. Um, and as far as new capacity coming online, I think, you know, specifically related to the IRA, I'd say 24 months, maybe a little longer till we see some of that. Um, And we're not really engaging just yet on that focus because we don't have that kind of visibility today on our bookings. So we'll probably start that in the summer, I would guess, as we get more clarity on who's coming in.

You want to add anything, Bill? Yeah. So I would just put a finer point on John's comment. So we are fully booked in terms of contracted supply through the first quarter of 2024. You shouldn't read that to mean that we haven't contracted anything beyond that into 2024. I mean, we've talked about that. in prior calls where we're getting we're going further out and i would i would make the distinction between being contracted and actually having the product on the ground you know we think from a working capital standpoint it's quite better for us to do some contracting so i think that you know but for sure you know we're talking with the folks that have made announcements around the domestic supply side of things but of course you know it's early days for them right i mean there there's no that we're aware of at least nobody's broken ground on a plant yet from a battery perspective, a lot of conversations around panels, inverters, batteries, et cetera. And we're monitoring that our supply chain team is monitoring that very closely. And, you know, to the extent that, you know, one of those groups is able to produce a product here in the U S I mean, it's a, it's a really interesting attribute from the standpoint of domestic content and how it works within the IRA. So it's something that we're very closely monitoring for 23. The primary us supplier for us is going to be Tesla. And then we're going to be buying stuff from Korea and, of course, Japan and China as well. So no real changes in the strategy, other than the fact that obviously the IRA makes us kind of start to talk to some of the folks that we would not necessarily have been speaking with before because they didn't have plans and spots that were interesting to us.

Great, and I appreciate the color there. Maybe just as my follow-up, I just want to check in on the cross-selling opportunities with Also Energy. You know, could you give us an update there and then maybe talk about your approach in kind of parsing through those 40,000-plus CNI sites? And, you know, $6 billion is still a good number to think about, or has that changed at all after the kind of the pruning efforts?

This is – yeah, that $6 billion is a good estimate. We have made some progress. We've analyzed – you know, upwards of 600 sites in a granular detail and have started the customer conversations. One statistic I would point out, about a third of our bookings in the BTM segment last year came from that cross-sell. So we're seeing early momentum there already.

Great, and I appreciate it. Thanks for helping, Kim.

The next question comes from David Peters of Wolf Research. Please go ahead.

Yeah, hey, good afternoon, guys. So just as it relates to the margin profile, can you maybe provide kind of a rough split of what guidance assumes for also energy revenue versus legacy battery hardware and software, just to the extent UFLPA issues linger beyond maybe expectations?

Hey, Dave, thanks for the question. So as you can see from the various pieces, from the standpoint of also energy for 2022, for us, on a consolidated basis, they did about $58 million or so in revenue. They did more than that, of course, in 2022. We just didn't consolidate January. We expect to see strong growth there. You look at any of the Wood Mac data, you know, they're presenting 100% growth. And I would say I don't think we're going to see 100% revenue growth in the company. but we do expect to see significant growth from that part of the business. I mean, if you look at most of the publicly available data around solar, we should see anywhere from 20% to 40% growth in that business. And so a lot of it is going to be how quickly does UFLPA, how quickly does the anti-dumping rules, do those come back? I mean, there's been some chatter amongst businesses you know, various congressmen that you've probably seen that they're going to roll back, you know, the work that Biden had done. And that obviously, if that happens, that'll obviously have a negative impact. So it's stuff that we're going to be monitoring very carefully. Like, as I mentioned before, I mean, our backlog is up 42% on a year-over-year basis. And so as we look at, and this is, and so I'll make a fairly large distinction between backlog on the solar part of the business and backlog on the storage part of the business. the solar backlog turns into revenue pretty quickly, six months or less. And many of it is like three to four months. And so it's able to churn pretty quickly. So we feel like if those projects are able to move forward in the way that we've, you know, the way that we're seeing from our partners and what we're hearing, you know, we're pretty optimistic that we're going to have a really nice year on the solar side of the business. It really is. It's positioned to snap back. I mean, I think we've talked about that even as early as last summer when we were seeing you know, some of the early slowdowns as a result of the anti-dumping. And, you know, kind of really harkened back, you know, to the 2016-2017 time period when solar really kind of took it, you know, kind of had a tough period as well and then snapped back really strong in the next period. So we'll have to see, which is why in part why I think we're a little bit conservative in terms of the gross margins and some of the revenue growth is that we want to actually have that, you know, turn into revenue and gross margin as opposed to just having good feelings about what's going to happen.

Yeah, I'd add a couple of quick points as well, David. Number one, the RFQs that we've seen year to date are up 2x versus 2022. So it feels strong coming out of the gate. And I'd also highlight that as we talked in the last earnings call, their solar asset performance management business exceeded market growth last year, and we expect more of the same this year.

No, thanks. That's helpful. I appreciate all that color. My follow-up, then, is just wondering if you can provide a sense of where things stand today with interconnection requests timing broadly, just trying to see if it'd be possible to kind of parse out where the car metric could be for 2023, if that bottleneck were to ease some, and kind of just what you assume, I guess, for 2023.

Chris, you want to start? Maybe Mike can jump in.

Yeah, I'd say, you know, so far we're seeing status quo around interconnect conversion of delivered hardware. We have undertaken, and I'll hand it to Mike Carlson, our COO, to talk about some of the initiatives, but we are taking a very rigorous approach to driving that faster, and that was kind of what prompted Bill to mention, you know, we're looking to double our operating AUM this year. Mike?

Yeah, so this is Mike Carlson. What we're doing, it's kind of a two-pronged approach on the everything related to getting these assets into the field and obviously interconnects a big piece of it. But internally, we put a lot more, I guess you'd call it rigor around project management as these assets are secured by us and then getting into the field for our developer owners. And then turning that same focus of project management to our partners and So they are aware of and leveraging every opportunity they can move that forward with the interconnect progress if that's what's holding them up. And what we want to make sure is as we get through that backlog or that bottleneck of interconnect that we fundamentally don't have any direct control over, but we've got the expertise and knowledge of how to move through it as rapidly as possible. We don't lose any other time to moving these assets into the field and getting them commissioned and online. So that's really the focus we expect. We won't definitely solve the problem, but we'll improve on the performance of it as we go forward. Great.

Thank you.

The next question comes from Joseph Osha of Guggenheim Partners. Please go ahead.

Thanks very much. Kind of following on the previous question, you all have talked a lot about projects that are out there on the storage side that show up in your contracted AUM that aren't interconnected and they're not generating revenue. And we kind of got in the sense that there would be at some point a nice sort of step up as those things came online and started to generate service revenue for you. So my question is as follows. Can you quantify maybe in gigawatt hours, how many projects are in this contracted storage AUM you have that aren't interconnected? And give me some senses to, you know, how much of that might manage to make it into operation in 2023. And then I have a follow-up.

Yeah. So, Joe, thanks for the question. I appreciate that. At this point, we don't break out the specifics of that, so it's difficult for me to give you exact numbers. But I think one point you can definitely take into account is that we do expect operating AUM to double this year, and so on the storage side of the business. And I think that is a great indicator that, as you said, I think there is a bit of a backlog of projects, which we believe that we're going to be able to turn on. And I think that, you know, as we look at the, you know, the future, and I think Mike talked a lot about this already, you know, how we're going to do that. How are we going to speed up the conversion from, you know, from a deal when it goes from a booking to equipment delivered to the system actually being operational? And I think that, you know, because that's really, as we all know, that's when the software kicks in. That's where, you know, and that's the highest gross margin part of the business. And so for us, it's a huge focus. of making sure that that process is happening as quickly as possible.

Okay. And have you shared what the actual operating AUM number is?

We have not. Okay.

But just to follow on that then, if your operating AUM is doubling and you're bringing additional projects, you're executing on additional projects, And it's, I think, reasonable if you look at your car and what the annualized run rate of your service revenue is right now. I guess I'll ask the question the way a lot of other people have asked it. Why is this service revenue number not going up a lot more? Why is it not doubling?

Well, it is growing at 75% rate. So I think that's pretty significant growth when you look at the total business.

Not to belabor it, but you put an end-of-year 2023 car metric of whatever it is, 80 to 90, and you're at 65 currently. So I guess I'm trying to understand why that car number, which is a reasonable bogey for the deannualized software and services run rate, why that's not going up more, given what you're saying about adding to the operating base.

Well, so CAR wouldn't increase as a result of operating assets first. So I think that's an important distinction. CAR is the contracted amount. So that, you know, CAR is going to increase based on the amount of software on it, you know, say that is attached on an annual basis to a particular contract. The software number, you know, that we recognize as revenue in the business is tied to the operating assets. And so that's where I'd say, like, When you look at the growth rates that we've had so far, 9% in the third quarter, 17% in the fourth quarter, that's where you're seeing the actual operating assets being able to generate actual revenue and then gross margin. So CAR is an indicator of what will happen, not what has happened. And so when I say, hey, operating assets are going to double, that means that we're going to have a faster conversion of CAR into ARR than what we've had. So that's the distinction that I would make.

Okay, I'll take it offline, but I think that the $64,000 question here is what is the software and services runway going to be by the end of next year?

Well, I think I would say the way I would answer that is a 75% growth rate on what we've currently reported. You know, that's the number that we've talked about is like the services are going to grow at a compound rate across the three-year time period at 75%. So if you look at what the services number was for 2022, we expect that number to grow at 75% in 2023.

Okay, thanks. That's very helpful.

The next question comes from Biju Parancharil of South Carolina. Please go ahead.

Hi, thanks for taking my question. So I guess my question was also related to CAR and sort of when I sort of look at compare your CAR to asset center management, it's been pretty stable through last year. But when I look at the guidance, it seems like there's a step down in that direction. how much of AUM is translating into CAR. I guess is that related to project size, or is there anything going on in the software attach ratio?

It's not that everything we sell has all hardware has 100% software attachments. Really, the dynamic that's happening, and Bill mentioned this in his discussion, is we're selling and winning much larger front-of-the-meter deals, and some of those are expanding beyond 20 years in term. And so when you see the average length of the software terms expand, that's bringing down the per-year car conversion.

Got it. That's helpful. And then I think on the last call you sort of mentioned the – you're starting to see the btm mix uh come up a bit i think in your pipeline so can you give us sort of an update you know where you stand now where the recent bookings are you are you still sort of that you know for the bookings in the 90 10 ratio or have that moved yeah we really have viju and and thanks for for the questions so

One of the, certainly one of the things that we've seen is that larger FTM or our ability to win larger FTM deals. So what that, what that tends to do in terms of the bookings. And then of course the backlog is that we sit heavily towards FTM projects. So we are absolutely increasing the, both the percentage and absolute values of the BTM side of our business, but it's, it's a smaller part. It just, those are just smaller projects by their very nature. they're not going to grow in size nearly as fast as the FTM projects. And so I think one of the things, you know, one of the benefits of the integration of also energy and STEM has been a recall, I'll call it refocus on PTM. And we, I think, are going to continue to invest in that area. It's where, you know, it's where STEM got started years ago. And I think it's a market which we can do very well. And it has better, as compared to FTM, it has better margin attributes to it. Not necessarily the same term. The terms of the FTM deals are longer, but the margins both on hardware and software are a bit better. And it's also, you know, within the context of our classifications, all the EV businesses in BTM. And so that, you know, we've talked pretty consistently about the ability, because we're delivering customers more value, that we'll be able to drive higher software attach rates and actual dollars. So we're really excited about the BTM or behind the meter side. I think it's going to be, you know, a nice growth area for us, but it's always going to, you know, just because of the absolute size of the projects, it's always going to get a bit swamped by what we're doing on FTM.

It's certainly more incoming than we've had in the past because you post IRA in particular, the corporates. I think we've discussed this in the past as we're seeing Fortune 100s coming to us asking to look at 200 sites. across the country, and we're trying to operationalize that process to enable that. Got it. Thank you.

The next question comes from Justin Clare of Roth Capital Partners. Please go ahead.

Yeah, hi. Thanks for taking our questions. So the first one here, just wanted to ask, If you could give us a sense for how much of your revenue for Q4 was the 80% gross margin software sales and how that was split between your battery software and your solar monitoring software. And then looking into 2023, are you expecting that 80% margin software revenue to drive the vast majority of your services growth? Or is there a meaningful contribution from the one-time kind of services sales?

So thanks for the question. I think the first point I would mention is that all of the recent additions in software in terms of revenue are at the high gross margin rate. So that's 100% what's going on there. And mostly that's because of the way we shifted our model from a structured finance model to a straight buy-sell model. We did that now a couple of years ago. So everything over the last three, four years has been – that's added into the services line has been the high-margin software. So from that – we don't – then your other question, what's the breakout? We have not done that yet. Likely we will in the future, but at this point we're not breaking out those individual components. Also, energy, of course, you can see from the tables that are in the back of the PowerPoint deck, which I posted, you can see kind of what the software and hardware component of that business is, which we think is what makes it particularly interesting and what's driving that 60% gross margin across that business.

Okay, great. Thanks. And then just one more. Contracted storage AUM up, I think, is about 4% sequentially in Q4, but you had very strong bookings in the quarter. So just wondering if you could better help us understand why the contracted AUM didn't move upward more significantly. Did you see any meaningful customer cancellations of battery storage software contracts, or was there maybe a higher mix of solar monitoring bookings, any additional color will be helpful. Thank you.

Sure. And again, so we had a, you know, so we did $460 million in bookings in the quarter. Unfortunately, we had a rounded $140 million cancellation. So that definitely tamped down the growth in that particular metric. Okay, gotcha. Thank you.

The next question comes from Avi Senha of Northland Financial. Please go ahead.

Yeah. Hi. Thanks for the question. Just trying to understand the PGM market. It's interesting that you get into that. So maybe you can just give some idea on what percentage of 2023 revenue comes from that. I'm trying to understand. You know, what it takes for you to break in a new market and, you know, in a new area. So maybe you can provide some color, like how that market you expect to unfold in 2020, 2024, 2025, something like that.

Yeah, I can, I'll start if you want to jump in. So first of all, one of the things that we did a few years ago is align with channel partners through distribution. And that gives us a very interesting footprint across the country. So as we look at new markets, we have distributors and partners in those areas already. So that kind of CAC concern that you would have is eliminated through that. The other piece is our software platform through Athena is highly translatable into new markets very quickly. So we believe we have the right technology offering for the market. We believe we have the commercial force to go in and execute in that market. And I just think that Our ability with Athena to co-optimize in a variety of complex value streams, as we've proven out in many markets, is highly applicable in PJM. And certainly our Coincident Peak track record has been very good if you look at some markets like Ontario. So just some of our past experiences, we believe we can execute in that market very effectively. And when you look at the size of that market, being so much larger than California. Our execution here in California has been very strong, market leading, market share over the past few years. And then you look at some of the higher costs from a transmission standpoint. It's a really compelling opportunity for the company.

I would just add, this is Prakash, that we are optimistic about this market. The value that we can create for corporate customers in that geography is tremendous. We are tempering our expectations around what gets installed in 23, just given some of the interconnection timelines that you see in PJM. It's not exactly the case in behind the meter, but we want it to be conservative there. But certainly seeing significant interest in the pipeline and early bookings as well.

Got it. Sure.

So just one more as a follow-up. As we see more hardware, I mean, hardware part of the business, continue to get a bit more struggling part of it. So as you, as you make move, uh, towards, uh, more of the software part. So how do we look at the trajectory here as you, as the business transitions more and more towards the software only, I guess, I mean, you know, when do we consider the business to be software only and what the trajectory looks like?

I'm not, I didn't totally understand your question, but if, if I, if I understood, right, you're asking. what's going to be the long-term distribution of hardware and software on contracts? Is that fair?

I was thinking like more as the business heads on, you know, fast forward, you know, a few years, is it not like more and more towards getting more software-only business? And are we heading towards that if that's the case?

Yeah, we think software and services is definitely going to be a bigger part of the business. I mean, and I think that is, As we've discussed, as we move up the size graph in terms of how big of size projects that we're working on, it's less and less likely that we'll supply the hardware, which is all around the project that Mike is leading on the unit controller, the unified system that we're working on and are going to ship here this quarter. So I think longer term, it's going to make sense for companies to probably do procurement for themselves on the batteries. The larger projects, the smaller ones, we think that won't be the case. And that's why I said earlier on when I talked about the bookings growth on an absolute basis, $1.1 billion in 2022, obviously a slower growth rate in 2023 when comparing those two time periods. And I think over time, you're going to see more and more of that. I mean, it's an exciting part of the market for us. It's a much more capital light, which we've always talked about. It'll be easier from a working capital standpoint if we're not taking all of that battery or the economic value onto our balance sheet. So it's definitely something that you should expect to see growing as the business matures.

Maybe we can assume that 25, 26, could that be our software-only business, or that's too aggressive?

I think we're still going to be selling hardware. I mean, I don't want anybody to hear that commentary and think like, oh, they're not going to be selling any hardware. I think where we're not going to be selling hardware is on the very largest projects. So make a distinction between those two things. There's, you know, like last year, we recorded over $300 million in hardware sales. I don't think that number is going to go to zero anytime soon. And, you know, with the forecast that we've given for 2023, you know, you're looking at a number north of $500 million in terms of hardware sales. So It's definitely not a business which we think is going to go to zero. It's just going to go, I think it's going to mature, and that the larger projects with a more, you know, with a developer that what I would call would be fully integrated that has procurement capabilities, we're not going to be buying hardware for them. But for many of these other partners that we're working with today, we will be.

I would add that the amount of our developer standardizing on Athena is growing significantly. So I think even if they do that, we continue to see them having a need for software, so the Athena platform is ideal. And to echo Bill's comment, we are seeing many more software-only deals building in the pipeline with our commercial team, and so I'm bullish on that front as well.

Thank you, sir.

This concludes the question-and-answer session. I would like to turn the conference back over to John Carrington for any closing remarks.

Sure. I want to thank everyone for joining us on our fourth quarter and full year 2022 earnings call. We look forward to speaking with you during our one-cue call, and again, thank you all for joining.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.