Stem, Inc.

Good afternoon, everyone, and welcome to the STEM Inc. Third Quarter 2024 Results Conference call. All participants will be in a 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 and then one. To withdraw your questions, you may press star and two. Please also note that today's event is being recorded. At this time, I'd like to turn the floor over to Ted Durbin, Head of Investor Relations. Sir, please go ahead.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at STEM. Welcome to our Third 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 could 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 .stem.com. David Lethby, our interim CEO, and Doren Hall, CFO and EVP, will start the call today with our remarks, and Mike Carlson, our COO, will be available for the question and answer portion of the call. And now I'll turn the call over to David.

Thanks, Ted. Good afternoon and thank you all for joining us today. Starting on slide three with our agenda, we will spend a good portion of our time discussing the results of our strategy review. Doren will then go through our Third Quarter results and updated 2024 guidance. And I will wrap up with some key takeaways. Turning to slide four, as Ted mentioned, our board of directors appointed me as interim CEO about six weeks ago. I also serve as the executive chair of the board. I was one of the early investors in STEM and have been on the board since 2010, witnessing the evolution of STEM and the maturation of the clean energy industry. I'm well-appointed with the company's mission, strategy, and management team, and it's been a pleasure working more closely with everyone over the past six weeks. STEM is a community of driven individuals focused on the success of our customers. It's been a busy few months since our last earnings call, and these last several months have been transformational for STEM. Over the last 90 days, we completed a comprehensive strategy review and announced several senior leadership changes. Looking forward, we are implementing cost-cutting measures to right-size our business operations to align with our new strategy. This review was a collaborative effort between the board's software strategy working group and the management team. This process resulted in an updated and refined business model to drive towards sustainable and predictable revenues, profitability, and scalable expansion. Please turn to slide five. Our new strategy focuses on four key initiatives. First, refining our product and -to-market approach to be centered around software and services. Second, expanding and emphasizing consultative energy services as opposed to hardware resale as our entry point into project-based customer relationships, creating predictable revenue and gross profit that is less dependent on project timing or completion. Third, enhancing our commitment to innovation by leveraging AI to expand and improve our software product's value to our customers as well as enhancing edge device capabilities. And fourth, changing our approach to battery hardware. This means offering hardware procurement as a service and sometimes directly procuring for our customers, but only when it meets strictly defined criteria. As we implement these strategic initiatives, we remain committed to our defined path forward while allowing for necessary adjustments along the way. This year, the unpredictability of project timelines for utility-scale storage hardware persisted, prompting a strategic shift to reduce our reliance on this revenue stream. These timeline challenges resulted in significantly lower than expected bookings, revenue, and accounts receivable collections. We expect our refined strategy to accelerate the growth of more predictable revenue from software and services. Through our consultative energy services offering, we aim to generate revenue earlier in the project lifecycle, independent of potential interconnection or permitting delays. Positioning services as a gateway for software sales. By emphasizing our software and services offerings, we believe that we also have a clearer path to gross margin, expansion, and profitability. Finally, by updating our approach to battery hardware, we expect to see improvements in the company's work in capital management. To execute our refined strategy, we have a team of talented leaders. I'd like to highlight two of them, Matt Tappen and Jake Berlin, both seasoned professionals with deep industry experience. Matt, who joined us at STEM three years ago, has been leading our software business for the past 18 months and will continue to do so. He brings a robust background in strategy and corporate development with a focus on the energy transition. Meanwhile, Jake Berlin, the current leader of energy services, has nearly two decades of experience in the energy sector, developing and delivering service solutions for a wide range of clients. Both Matt and Jake are reporting to Doran Hull, our new executive vice president and chief financial officer, who joined STEM in early September. Doran has more than 25 years of global finance and management experience, providing leadership and strategy and operational efficiency in the growing clean technology industry. He most recently served as executive vice president and chief financial officer of Amoresco, a customer of STEM, where he led the company's financial strategy in capital management. He was also responsible for the company's SAS and consulting-focused business units, as well as overseeing its off-grid solar business. Doran has deep financial and business experience, strong strategic acumen, and proven leadership success. Mike Carlson, our COO for the last two years, will continue to focus on delivering products and services to our customers on time and on budget. Albert Hoefeldt, our recently announced CTO, who has also been with STEM for over two years, will focus on our AI-enabled software product development. With such an experienced team of leaders, we are confident in our ability to drive innovation and achieve our strategic goals, ensuring success and growth for our organization. I

will now pass the call over to Doran. Thank you for that introduction, David. As David mentioned, I was a STEM customer while at Amoresco. I was also a customer to many other energy storage companies, and STEM has always stood out amongst them. The quality of STEM's products and strong customer focus have long been differentiating factors. On the solar side, the Powertrack brand is the industry standard for CNI developers, and for storage, STEM's Athena software and subject matter expertise also stands out. The leadership team that David described combined with the immense talent throughout STEM's ranks makes me very excited about the opportunities ahead. In implementing our new strategy, we will be focused on growth, but also on increasing operating leverage to maximize profitability. We're looking at ways to optimize our capital structure to fit this new strategy as well. As David said, in addition to my CFO role, I oversee the software and services groups, which takes me back to the refined strategy that David outlined. I'd like to take a moment here to dive deeper into the four key strategic initiatives we have identified. Following our strategy review, we refined our -to-market approach to lead customer relationships through our consultative energy services, innovative software, and advisory procurement services offerings, rather than battery hardware resale. Slide 6 illustrates how this shift allows us to engage with customers earlier in their project life cycles. Previously, we would step in after a project had been de-risked and the customer sought hardware procurement, integration services, and a software provider. Now, we will collaborate with developers from the outset, offering services to support a portfolio of potential projects. This change enables us to recognize revenue earlier and reduces our dependency on the success of individual projects. We anticipate these services to generate gross margins in the 30 to 50 percent range. Our service-based relationships provide opportunities to upsell STEM software and edge devices. We have found that most service providers don't have access to in-house software products and capabilities like we offer, so we expect strong cross-selling pull-through. We generally earn 30 to 40 percent gross margins on our edge hardware and 70 to 80 percent gross margins on our software. Slide 7 outlines the three key reasons we expect to win business with our service offerings. First is market experience. We can bring dozens of clean energy subject matter experts to our clients, along with over 35 million runtime hours on Athena. This leads to smarter initial designs and more efficiently managed systems. The second is technical expertise. We have vetted and worked with every major solar and storage OEM. We are hardware agnostic and we continuously evaluate vendors and technologies, new and old. This helps our customers maximize flexibility while minimizing costs and risks. Third, software capabilities. In addition to offering our broader STEM software to customers, our team leverages specialized internal software tools to generate data-driven insights for our customers. Even though our service offerings are relatively new, we are not entering this business for the first time. Slide 8 outlines some great examples of how we have provided a multitude of services for a variety of our customers across different deployment types. Despite our stronger push into services, the core of our strategy revolves around software. Slide 9 shows our three key software products, all powered by our industry-leading Athena platform. PowerBidder Pro uses our deep AI expertise to provide high-accuracy market forecasts and bid optimization for our customers, while still giving them control over their power trading strategies. PowerTrack APM extends and enhances on our industry-leading PowerTrack platform for solar and add storage functionality. PowerCore EMS provides technical energy management between the edge and the cloud. Many of you were able to get a demo of the PowerTrack APM software at the RE Plus Conference in September. We had fantastic feedback from customers on the product and continued to push forward on what we think will be an industry-leading technical and financial monitoring tool. This software will allow users to dive deep into the device-level data and elevate analytics all the way up to the portfolio level. My last point on our new strategy relates to our future approach to energy storage hardware, which is shown on slide 10. As you are aware, we have had mixed results over the years from our resale of third-party battery hardware. Going forward, we intend to lead with procurement services to advise our customers on hardware selection rather than directly purchasing battery hardware on their behalf. For some customers who want a full-service solution, we will continue to resell battery hardware, but only when the opportunity satisfies strict terms, including profitability metrics and cash flow thresholds. That said, we will honor our commitments to our existing customers with the projects in our backlog. Now moving to our third quarter results and updates, which are outlined on slide 12. Revenues were $29 million, a sharp decline year over year, driven by lower hardware resale revenue. On the flip side, we reported a strong gap gross margin of 21% and a record non-gap gross margin of 46%, which reflects a much larger contribution from high margin software and services revenue. As you recall, we issued certain hardware contract guarantees in 2022 and early 2023. This quarter, we reduced the value of receivables associated with those guarantees to zero on the balance sheet. We impaired the remaining receivables by a little over $100 million and also adjusted revenue by $5.6 million. We do not expect further material negative impact on our financial statements as a result of these guarantees. On the operating side, we successfully brought our first asset with Mercuria online this summer, and we continue to see strong commercial momentum with the PowerBidder Pro product. In the third quarter, we increased ARR by over $3 million, split roughly evenly between solar and storage assets. We delivered a record amount of edge devices from our facility in Longmont, Colorado, and we reported strong growth in software revenues, 10% quarter over quarter and 19% year over year. The bar charts on slide 13 show that even though total revenue fell on a year over year basis, solar revenue growth remained strong, up 19%. Growth in solar revenue and a higher mix of services revenue led to strong growth in gross margins. We reported record services revenue, $22 million this quarter, up 33% year over year, which included a little over $5 million of Devco revenue. Adjusted EBITDA and operating cash flow declined slightly on a year over year basis due to lower gross profit dollars from battery hardware resales. The operating metrics on slide 14 show that backlog fell slightly since the second quarter as we recorded relatively low bookings of $29 million. On the other hand, CAR grew by $2 million during the quarter. On the assets under management front, we had a slight uptick in storage AUM by about 200 megawatt hours and growth of about 1.6 gigawatts for solar during the quarter. Growth in both cases was driven by new contract additions and continued low churn. Now on to slide 15, which outlines our revised 2024 guidance. Starting at the top with revenue, we are lowering our full year revenue guidance to a range of $135 to $155 million. This largely reflects the push out of storage hardware resale revenue. Our software and services revenue streams are still roughly on track for the year. That lower revenue forecast translates into lower gross profit dollars for the year, but a higher gross margin percentage. The lower gross profit dollars are driving the reduction in our adjusted EBITDA forecasts as well as lower operating cash flow. We have lowered our bookings forecast to $100 to $500 million. We have left a wide range here because we are working on some large deals that could transact in the fourth quarter. The lower bookings should also drive a lower level of expected CAR at the end of the year. Finally, before I hand it back to David for closing remarks, I want to talk about the implications of our new strategy for the future financial profile of STEM, highlighted on slide 16. First, over the long term, we anticipate a lower overall revenue base, but much more predictable revenue growth. Additionally, we expect our gross margins to be significantly higher. The total contract value of our bookings will likely be lower due to two main factors. First, a reduction in battery storage hardware resales within our bookings. And second, a gradual shift towards shorter duration software and service contracts on the storage side, ranging from three to five years compared to the historical 15 to 20 year contracts. We will still have some variability in our revenue in 2025 and 2026 based on the timing of delivering battery hardware out of our backlog. Again, we are upholding our existing customer commitments, but over the long term, we expect a lower contribution from hardware resale revenue. Second, we have moved quickly to reduce our operating expenses to reflect our new strategy. We expect to reduce our run rate cash op-ex by around 15% between now and the end of the year. Most of the reductions will come from headcount tied to some of our old business lines, alongside reductions in other discretionary spending. In short, we are laser focused on driving the company to profitability. Third, we are evaluating the financial and operating metrics the company will use to measure and manage performance going forward. Expect to see some corresponding changes in our reported metrics for 2025, including guidance metrics that align with software and services centric businesses. We will be looking to provide investors and analysts with useful information, enabling them to better evaluate the company. As usual, we will provide 2025 guidance during our fourth quarter call. With that, let me turn the call back over to David.

Thank you, Dorn. Before covering our key takeaways, I'd like to comment on the status of our CEO search. While I am passionate about the future of STEM, I have no plans to be the permanent CEO. Since September, the board and an executive search firm have been engaged in the search for our next CEO, looking at both internal and external candidates. Today, the search remains ongoing, but we hope to identify the new permanent CEO by the end of this year or sometime shortly after that. I intend to remain chairman of the board once the new CEO is in place. Now let's turn to page 17 for our key takeaways. Our strategy review is complete. We've moved into the implementation phase. And while we might make slight adjustments along the way, we are moving decisively to focus on software and services growth. This will drive more predictable revenue, higher gross margins, and improved profitability. We will continue to invest in our industry-leading software and technology platform, which will drive differentiation and commercial success. And we will lead our storage efforts with services, emphasizing hardware resale. This will bring forward when we collect revenue from our project-based work and improve our capital profile, as well as continue to grow a channel for software sales. In closing, I want to thank the STEM employees for their continued strong execution to support our customers, despite significant changes in the business and leadership over the last several months. The strength of our offerings ultimately depends on the strength of our people, and we believe that we have some of the best in the business. With that, operator, let's open the line for questions, please.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touchtone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from James West from Evercore ISI. Please go ahead with your question.

Thanks, and good afternoon, David and Doran. I think the first question for me is really around, you've had a lot of changes here in the last couple of months, management, strategy, all of the strategy to me seems like kind of the evolution of where the company was already headed into much more of a staff and services business model anyway. But I'd love to hear just kind of as you, as both of you being, especially both of you are new in your seats, and I know David, you don't intend to stay in that seat, but I'd love to hear kind of the feedback you're getting from customers, what the, what you're hearing, obviously employees have been good, what you're hearing from customers around kind of this strategic shift and some of the management changes that have happened.

Thanks, James. This is David. We think the customer response has generally been very positive as they're increasingly sophisticated in the way they buy their storage hardware, and it's viewed increasingly as a commodity that's available from multiple sources. So I don't think it'll affect our storage hardware customers, and to repeat what we've said elsewhere, we'll continue to support those customers if they want us to procure the hardware for them.

It won't be

a requirement of the relationship going forward. And our 16,000 or so plus solar customers have been very receptive of the new strategy as it reassures them that our primary focus on software improvements will continue, and we'll be able to enhance our products and give them some of the enhancements they've been asking for us to optimize their assets.

And I guess maybe to add on to that, David, what are the enhancements that they're asking for in the software product? What are the critical things that they'd like to see, more R&D, more focus on going forward?

I'm going to pass this off to Mike Carlson, but this

has been a

big focus of ours to make sure we prioritize and schedule a product roadmap that fits the market needs.

James, this is Mike. We've obviously got a host of interests from the customers and what they want to see, but they probably bundle into three distinct areas. That is one more capability round, just the user information flow and the ease of access to information. Number two is around the predictive, and we're looking at leveraging advanced AI for that predictive information flow into the asset, particularly in its operating characteristics. And then third is the automated warnings and resolution process and getting more integrated work process into the platform that automates more of the focus of what they intend to use the software to provide. Those are probably the three categories of information that they're looking for. Then when you get into the storage optimization, obviously there's a financial modeling that goes along with that as well.

Right. Okay. That's very helpful, Mike. Thanks for that. Thanks guys for the questions.

Thanks. Thank you, James. Our next question comes from Thomas Boyce from TD Cowan. Please go ahead with your question.

Appreciate you taking the questions. Maybe just first, as you move deeper into the procurement advisory services space, is the intention to continue to leverage the modular ESS solution that you had, or is that something that's not as to remain given the new path?

Yeah. This is Mike again. Absolutely. The modular component, and we've talked a little bit about in the deck, you'll see a reference to the Power Core EMS, which is part of that solution. That's a big component of whatever that hardware platform is and the connectivity into the cloud services. So that modular edge device will continue to be a major part of that overall architecture and strategy.

Yeah. Thomas, just to clarify, this is Doran. I would say it is important to distinguish between the edge device hardware and the battery hardware, OEM battery resale when considering what we're talking about here with the strategy. The edge devices are a critical component of our strategy going forward. We have dominant market share here in solar, and as Mike described, that modular offering is really, really important. It's really the large ticket OEM hardware resales that we're going to be focused on working through the backlog and providing the procurement advisory services on.

I understand. When I was referring to the modular ESS, I was talking about the decoupling with the inverter and the DC block. So that sounds like that's the de-emphasis on that and more on the edge device, correct?

Exactly. That's a continued component of the strategy that gives that optionality that we talked about prior.

And then just for my follow-up on bookings, is it safe to say then for any additional bookings heading into the end of the year that they will be under kind of this, again, the new strategy and they would be software in nature and hardware would not be significant component of that?

So between now and the end of the year, I think it's fair to say it's going to be both. As we talked about, there's the potential for us to opportunistically and as a customer requires it to do this hardware resale if it's satisfying all the criteria. I've laid it out pretty heavily internally about profitability, cashflow metrics, coming accompanied with the software. So I expect that to be a continued theme, even on some of the things that are, as you look at that range in the bookings forecast, obviously there's some things in there we've been working on for a while. And so we don't want to really just kind of suddenly back away from that. And one of the reasons I'm here, Stem was focused on the customer. We want to keep focusing on the customer. We want to be able to deliver what they're expecting. But I do expect us to satisfy those criteria and you will see a combination of some hardware and software between now and the end of the year. And really, frankly, that's why the range is so wide.

Understood. Now, I appreciate the clarity there. And if I could just squeeze one more in just for my own edification, the switch from like 15 to 20 year contracts to three to five, is that because of the de-emphasis of hardware that won't be attached to it? And it's just that the nature of that market is on shorter duration contracts. Like what is the mechanism there?

Yeah, this is Mike again. And the primary drive of that is the change, you know, the focus of software and software SaaS agreements, probably industry standard is closer to that three to five year. That's what our solar business model has been. It's really responsive to the customer. That long 20 year commitment is directly tied to the OEM hardware warranties that, you know, they want that extended confidence of asset performance. And that's why we're decoupling those and you'll see that change in contract duration as a result.

Perfect. Really appreciate it. Thank you.

Once again, if you would like to ask a question, please press star and one. Our next question comes from Justin Claire from Roth Capital Partners. Please go ahead with your question.

Hey guys, thanks for taking the time here. I wanted to just follow up on the prior question here on the shorter duration contracts, three to five years versus 15 to 20. Was wondering if the annual revenue expectations for these contracts are changing at all, or if it's just length of the contract. And I think you have to consider the offering that you're providing here as well in the fact that you're engaging with the customer earlier. So maybe you can just speak to the potential change in the revenue opportunity.

So Justin, I think one thing I've been looking at closely here is the way that we price our software. And we are going to consider that very closely. However, I would say based on the business that we've got in front of us, probably not a lot of change in the annual revenue numbers, not anything really material. It's really all about just running into shorter contracts because of the customers looking for, again, trying to offer them flexibility there.

Okay. Got it. And then when we consider like the services opportunity, the fact that you're engaging earlier, is there a larger revenue opportunity there that could be more of one-time opportunity as opposed to an ongoing contract?

Absolutely. It's going to be a mix. There are a number of engagements called site assessments, forecasting assignments, you name it. We have a variety of different types of services that we've outlined. And many of those are engagements that might be one-time, two-month, three-month, six-month assignments where our subject matter experts are helping customers work through particular items that they need to sort of check off to help de-risk their projects. And the customer base there are folks who just aren't equipped internally to handle that type of work. So they really look to us as the experts. But yeah, there will be a mix of that as well as some of the longer-term service contracts that we'll be offering.

Okay. Got it. That's helpful. And then just one more, wanted to ask if you could update us on the outlook for storage software activations. Any chance you could give us an idea for where ARR could be when you exit 2024 or the timeframe in which you can convert all of the car to ARR? That'd be helpful.

Yeah, Justin. Appreciate the question. It's something we've talked about in the past. I think this cadence between time frame from CARR to ARR is something that we're taking a close look at. And we'll probably talk more about when we report the full year instead of our metrics for 2025. It's not something we're in a position to disclose today.

Okay. Got it. Appreciate it.

Thanks. And ladies and gentlemen, with that, we're going to end the answer session as well as today's conference call. We thank you for joining. You may now disconnect your lines.