Stem, Inc.

in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. 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. Welcome to our second quarter 2024 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 can cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10Q 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 section of our website at www.STEM.com. John Carrington, our CEO, and Bill Bush, CFO, will start the call today with prepared remarks. And now I will turn the call over to John.

Thanks, Ted. Good afternoon, and thank you all for joining us today. Beginning with slide three in our agenda. We will cover our second quarter results, business updates, and recent commercial performance. Then Bill will discuss our financial results in greater detail. Now let's turn to slide four on our second quarter 2024 results and highlights. Our financial results in the second quarter were disappointing. We recorded $34 million in revenue, substantially lower than expected, primarily due to unforeseen extensions of project timelines. This was caused by certain customers' project financing delays and extended interconnection approvals. We are seeing project delays impacting the broader industry. The shortfall was largely in storage hardware revenue, although our high margin software and services revenue was mostly in line with our expectations. Bookings in the second quarter were $25 million. Our recent strategic expansion into the large-scale storage market has resulted in significantly larger average deal sizes with increased variability and increased project complexity. This has protracted our sales cycle and negatively impacted our bookings in the first half of 2024. These projects were also impacted by the delays stemming from customer project financings, particularly tied to USDA funding. As we will discuss in further detail today, GAAP gross margins were 28% and non-GAAP gross margins were 40%, representing a double digit percentage point improvement relative to Q2 2023. Both GAAP and non-GAAP gross margins were significantly up year over year due to the lower than expected hardware revenue in the quarter. Contracted annual recurring revenue, or CAR, was up 20% versus the second quarter of 2023, but relatively flat versus the first quarter of 2024 due to low bookings. And lastly, operating cash flow was negative $12 million this quarter, a $154 million improvement over the same quarter last year. We were revising guidance to reflect the push out of planned project timelines, which Bill will provide more details during his portion of the call. Turning to the right side of the page, despite these headwinds, we remain confident in the underlying business fundamentals. We continue to drive operating leverage with relatively flat year over year adjusted EBITDA results, despite a 63% decline in revenue year over year. This operating leverage is the result of an accelerated pace of software activations in the quarter, continued strong growth in solar asset performance management, and importantly, a shift towards a greater mix of software services revenue. We made significant progress converting PAR to annual recurring revenue or ARR. We deployed over 300 megawatt hours of storage assets this quarter, which combined with solar added approximately $3 million of ARR. That includes our 40 megawatt hour deployment in Arizona, along with a substantial portion of our 313 MWh project with Amoresco in Colorado, a great example of our focus on muni, co-ops, and shift to larger projects. Lastly, we continue to advance our software roadmap, with significant progress in advancing next-generation offerings for our optimization, asset management, and edge solutions. This technology platform positions the company for continued acceleration of ARR as customers standardized on our software services offerings. And this should continue to drive operating leverage and improved cash flow generation in future quarters. On the next two slides, we'll take a deeper dive into factors currently impacting STEM. Let's go to slide five. Over the past two years, we've focused on the public power segment as these customers value the full stack of our offerings, including the need for sophisticated software to help them manage load growth in their service territory. Since we made this strategic shift, we've built about 15% market share in public power, the fastest-growing segment of the large-scale FTM market. However, we did not anticipate the recent delays in our customers' receipt of USDA funding. Specifically, we have seen munis and co-ops rush to secure the USDA's PACE and New Era financing vehicles, which has created a bottleneck on the review and distribution of this funding. In turn, this bottleneck has significantly impacted our project timelines and pushed out customers' ability to contract projects, which impact our bookings and hardware delivery, impacting our revenue. This is the primary driver in our decision to adjust guidance for the balance of 2024. I would like to emphasize that none of the projects we built our guidance around in one queue have been canceled. Some projects are awaiting contracting, and some are waiting on scheduling of hardware delivery. New projects continue to enter the pipeline and existing public power pipeline deals are being evaluated for upsizing due to improved economics from USDA financing and lower battery prices. Please turn to slide six for discussion of the factors impacting our results and our action plan to address these issues. On the left-hand side, you can see the three key issues we are facing today. financing delays, interconnection delays, and the policy-driven risks. These issues are prevalent across the renewable space. On the right side, we list the actions we're taking to address these issues. We are diversifying our customer base, deepening our supply chain to include more optionality, and engaging with U.S. manufacturers of batteries and policymakers. Importantly, we are laser-focused on controlling operating expenses and are evaluating additional plans for driving efficiency across the organization. As our gross margin performance in the second quarter indicates, we can drive significant operating leverage through accelerating software activations and product launches. Despite that, we are building plans to deliver EBITDA positive at a meaningfully lower revenue level. To be clear, we anticipate these push projects to continue in our backlog but are committed to delivering positive operating cash flow regardless of the impact of factors outside of our control. Our software-only offerings also continue to gain traction, which I will discuss in a moment. Now, moving to slide seven for an update on our progress against guidance. As a reminder, in 2024, we focused on three key business and financial targets, cash flow generation, building software and services revenue, and extending our technology leadership positions. First, our operating cash flow continues to improve, up $154 million versus the second quarter of last year. We continue to make solid progress on reducing our working capital intensity and our net working capital has steadily decreased for five consecutive quarters. Second, our software revenue grew again this quarter, up 3% for storage and 1% for solar versus the first quarter of this year. We converted $3 million of CAR to ARR and will provide more details on this progress on the following slide. Third, we are enhancing our technology stack with new features across our existing products and advancing new products such as Powertrack APM, which will launch in the fourth quarter of this year. At the REplus conference in September, we will provide the latest product demonstrations of PowerBidder Pro, Powertrack APM, and our energy management system or EMS offerings. Now let's turn to slide eight for a closer look at our software development progress in Q2. Since the beginning of this year, we've stepped up our focus on driving a high velocity software development cadence. Our teams have advanced significant new product features and enhancements across our key product areas, including enhanced simulation tools for energy storage projects, continuing the work to deliver our next generation power track APM offering, and integrating with hardware OEMs to offer customers unparalleled flexibility in the design and modularity across their energy storage and solar projects. The key takeaway here is that we are expanding our technology leadership, and these additions to our high margin software services should continue to fuel increasing annual recurring revenue and improved operating leverage. Please turn to slide nine. During the second quarter, we made substantial progress in growing our solar and storage annual recurring revenue, or ARR. On the storage side, we brought 334 megawatt hours of assets online. We deployed assets across a diversity of markets, customers, and use cases. We activated new regions like Indiana and more than 289 megawatt hours of utility scale projects were deployed with co-ops and public power sector customers. increasing the company's growing foothold in that space we deployed five of eight assets for amaresco in colorado and expect to bring the remaining systems online imminently this quarter storage deployments are equal to more than five percent of our total contracted aum and a significant increase in arr we continue to optimize storage assets for both front of the meter and behind the meter customers across a variety of use cases including energy capacity and ancillary revenue optimization and utility bill optimization. In total, we activated $1.7 million of high margin storage ARR in the quarter. As we've highlighted in prior quarters, more than half of our contracted annual recurring revenue has not yet reached software activation at customer sites we believe this is a significant source of earnings power as these customers achieve interconnection approvals which we expect to continue to drive our industry-leading gross margin performance our solar business continued its consistent growth we added another one million dollars of arr in the second quarter we believe our solar business is an important source of delivering predictable growth and profitability through its large active base of ARR today. Let's turn to slide 10 to take a closer look at the positive trends in that business. We remain a market leader in CNI solar asset performance management, with steadily growing high margin revenues for software, services, and our edge hardware device. Our customer satisfaction remains high, driving low churn, and we see significant growth potential internationally. where we have a lower market share today, but significant recent customer wins pointing to an untapped opportunity for growth. Our focus on large and more sophisticated customers has allowed us to consistently gain share and outperform market growth rates. As you can see on the right side of the page, we have grown our ARR significantly with nine of our top 10 customers over the past year. With that, I will now turn the call over to Bill.