Stem, Inc.

Thank you for standing by. This is the conference operator. Welcome to the STEM fourth quarter and full year 2023 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 zero. I would now like to turn the conference over to Mr. Ted Durbin, head of investor relations of STEM. Please, go ahead.

Thank you, operator. This is Ted Durbin, head of investor relations at STEM. Welcome to our fourth quarter and full year 2023 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 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 press release. We will be using a slide presentation today to discuss our results. Our earnings press release and presentation are on the investor relations section 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, COO, and Prakash Patel, Chief Strategy Officer, will also be available for the question and answer portion of the call. And now I'll turn the call over to John.

Thank you, Ted. Good afternoon, everyone, and thank you for joining us today. Beginning with slide three, our agenda today will cover fourth quarter and full year highlights, outline our 2024 guiding principles, and provide several business updates. Bill will then discuss our financial results and introduce our 2024 guidance. Please turn to slide four on our fourth quarter and full year 2023 results and highlights. Starting on the left side of the page, we recognized $4.6 million of adjusted EBITDA. This is our first quarter of positive adjusted EBITDA in company history and meets a critical milestone goal we set for ourselves in 2022. We accomplished our goal through revenue and gross margin growth and ongoing operating expense discipline. For the quarter, our GAAP gross margin was 7% and non-GAAP gross margin was 13%. For the year, GAAP gross margin was 1% and non-GAAP gross margin was 15%, which is in line with our guidance. We also continue to grow our high margin recurring revenue with CAR up 39% year over year and in line with the guidance range that was increased by 9% at the midpoint in November. Fourth quarter bookings brought us to just over $1.5 billion for the year, again, in line with guidance. Lastly, our operating cash flow improved significantly in the second half of 2023. up $35 million in the fourth quarter of 2023 versus fourth quarter 2022 based on improved profitability and better working capital management. This is a metric we will highlight throughout 2024. Moving to the Q4 highlights on the right side of this slide, our commercial momentum has continued, having signed approximately 800 megawatt hours of software-only contracts since the start of the year. That is a nearly 15% increase and our contracted storage AUM in just the first two months of 2024. Today, we announced a contract with Mercuria Energy Trading, our first PowerBidder Pro win, and we continue to receive numerous accolades for our leading software platform, Athena. Our customers continue to recognize and value our differentiated offerings, as indicated by our high retention rates and top net promoter scores. In December, we published a white paper that demonstrated through backcasting simulation that STEM outperformed competitive software offerings by 28% on average. Customers chose their energy storage partner based on this performance, and we are excited to further evidence our superior software offering. Importantly, we expect to generate at least $50 million of operating cash flow in 2024. I'll leave the details on guidance to Bill, but this positive cash flow and measured investments is a key reason why we expect to grow our cash balance this year and are confident we will not need to issue equity to fund operations going forward. Now let's turn to slide five to discuss our three guiding principles for the year ahead. First, cash flow generation. In 2024 and beyond, we expect to generate positive, growing free cash flow. We will achieve this by meeting our revenue and margin targets with continued discipline in our operating expenses and reducing our working capital intensity. And again, we do not expect to issue equity to meet our plan. We believe building a business that can fund operating expenses from free cash flow is a critical goal in the maturation of our company and differentiates our business strategy and market opportunity across the sector. Second, build software services revenues. Later, we will talk about our momentum on software-only wins, but we are also focused on converting our contracted software revenue into annual recurring revenue. As Bill will detail later, we have a significant amount of gross profit potential as these systems come online. We have also retooled some of our leadership team with a sole focus on professional services and software-only opportunities. Professional services drive high-margin revenue earlier in the installation process, and is a service customers want STEM to provide. Achieving our growth targets for software services is a strategic imperative across the organization, and we expect to provide mid-year updates on our progress. Third, we will extend our technology leadership position. We plan to continue innovating Athena through the acceleration of software product launches into markets where we have a differentiated advantage, such as public power entities. Generative AI and our India Center of Excellence are both enabling accelerated software development productivity. This global development platform delivers daily releases of software code at high velocity for our customers and enables new products for market expansion. We executed on most of our key commitments in 2023 and are confident in our 2024 plan. We are proud of achieving positive adjusted EBITDA in the second half of 2023 and hitting our gross margin, bookings, and car targets. In addition, through disciplined management of operating expenses, we are on track to reach our cash OPEX target in 2024, one year earlier than our 2022 Analyst Day forecast. In fact, last year, we decreased our average wage expense by 31% while nearly doubling our contracted backlog year over year. Let's turn to slide six on our commercial traction. STEM's leading software solutions continue to resonate with a range of customers. As previously mentioned, we have signed approximately 800 megawatt hours of software-only storage contracts in ERCOT and CAISO, two of the fastest growing regions for energy storage. We see this momentum as validation of our differentiated software strategy as Athena consistently delivers significant outperformance relative to competitors. We've seen multiple proof points of consistent customer satisfaction. Retention rates are at all-time highs with solar at 99.2% and storage at 98.5%. Additionally, we are proud to announce consistently great net promoter scores of 68 for storage and 62 for solar. These scores represent above average likelihood of customers willing to recommend STEM. Please turn to slide seven. In September, we introduced PowerBidder Pro, a full-featured energy trading toolkit for asset owners and traders. Today, we are announcing that Mercuria will be our first PowerBidder Pro customer. This software-only agreement will support bid optimization for their first ERCOT energy storage systems. Mercuria will have access to real-time performance metrics, industry-leading analytics, and customizable trading strategies. Mercuria is a leading independent energy and commodity group operating in over 50 countries with over 1,100 professionals. They are developing a 20 gigawatt renewable energy portfolio and directing more than 50% of their investments into the energy transition. PowerBidder Pro offers a scalable solution in line with Mercuria's renewable development strategy to seamlessly manage trading strategies across an entire footprint and across different power markets. I would note that this was a competitive process where STEM again exceeded all other offerings with robust, differentiated economics and granular control of energy storage assets. We are also announcing that we recently signed a PowerBidder Pro contract for a portfolio of assets controlled by two community choice aggregators in California. This is our first utility scale software only deployment in CAISO. This win highlights the momentum we continue to see in the public power, municipal and co-op space as we noted last quarter with STEM building to an approximate 15% market share in this fast growing segment of the front of the meter market. In both cases, our software will be integrated into existing assets which underscores our focus on turning contracted revenue into annual recurring revenue as quickly as possible. Please turn to slide eight. In ERCOT, our data science team has demonstrated Athena delivers best-in-class performance as evidenced by our white paper published in December 2023. We showed through backcasting simulation that STEM outperformed competitive software offerings by 28% on average and as high as 90% in one case. We see two reasons for Athena's outperformance. First, highly accurate price forecasts. We generated 53% higher revenue than naive strategy that assumes historical prices persist in the future. ERCOT is an energy-only market with high price volatility, so advanced forecasting capabilities are essential. STEM is a market leader with a significant data advantage that has sites operating across multiple geographies. second advanced optimization our ai driven solution takes into account thousands of individual variables and constraints to optimize across both day ahead and real-time energy markets and different ancillary service products athena continuously co-optimizes across all market products as their values change over time. Again, our experience and data advantage allow us to consistently improve our optimization algorithms, leading to superior asset performance. The white paper is published on our website and details a rigorous methodology to conduct these simulations, ensuring adherence to ERCOT market participation rules with capacities ranging from 10 megawatts to 100 megawatts across a diversity of electrical zones. It's worth noting that STEM's program management team, which adds a human in the loop, could enhance the automated results. I encourage everyone to download the white paper from our website to learn more about our analytical processes and performance. Our data science team has content showcasing our technology offerings for the ERCOT market, public power, and solar plus storage, among others. Moving to slide nine. Looking ahead for the balance of 2024, we continue to see positive macro tailwinds. Demand for energy storage and solar remains robust, catalyzed by sustainability initiatives, the Inflation Reduction Act, decreasing battery prices, and improved project economics. Over the last year, we have seen the solar business return to double-digit growth with four consecutive quarters of revenue and AUM growth. Solar software has performed increasingly well, and remains in high demand from customers. As a market leader for energy storage and solar asset performance management solutions, we expect this robust demand will continue to drive strong, high-margin software revenue in both solar and storage. Energy storage hardware costs continue to decline, driving better economics for our customers and increased overall TAM and demand for our services. In the US, we are encouraged by the domestic supply continuing to ramp up and note that 38 battery gigafactories are either operational, under construction, or planned for construction. We believe that the U.S. domestic content provides compelling opportunities for improved project economics and are pursuing a vendor-neutral strategy to offer our customers access to top-tier suppliers without committing volumes to any single supplier. We are seeing favorable conditions in the supply chain with battery cell manufacturers potentially entering the market to offer integrated hardware solutions. We expect this will drive increased competition and better hardware costs and terms. This benefits our customers' project economics, enhancing our market opportunity, and enabling geographic expansion. In addition to federal incentives, we are seeing more and more states introduce mandates for energy storage. including recent mandates in Maryland, New Mexico, and Michigan, which are targeting multiple gigawatt hours in each market. Overall, the macro environment remains favorable for STEM, and we're excited to expand our software and services leadership position. I'll now turn the call over to Bill.