Stem, Inc.

Greetings and welcome to the STEM Inc. First Quarter 2025 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce 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 first quarter 2025 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-Q, 10-K, and other SEC filings, including the supplemental materials, which can be found on our website. Our comments today also include non-GAAP financial measures, Additional details and reconciliations to the most directly comparable gaps in initial measures can be found in our earnings release, which is on our website. Arun Narayanan, CEO, and Doran Hull, CFO and EVP, will start the call today with prepared remarks, and then we will take your questions. And now I will turn the call over to Arun.

Thanks, Ted. Hello, everyone, and thank you all for joining us today. We made significant progress advancing our strategic priorities in the first quarter, with early success evident in our results. But before diving into these results and our outlook, I want to highlight important changes we have recently implemented in how we structure our business internally. Since becoming CEO, a key priority has been implementing organizational adjustments to realize our strategic shift. We have transformed our operating model by establishing four distinct business units that clearly define how we organize and run our business. Our four business units are software, professional services, managed services, and OEM hardware. Each unit will have full P&L responsibility and accountability for their financial performance, including EBITDA and cash flow metrics. This new structure represents an intentional shift in how we manage our business, and we believe it will deliver multiple strategic benefits. It empowers our leaders to make efficient, market-responsive decisions about resource allocation and investment priorities. The new structure also enables more precise tracking of return on investment across our portfolio, allowing us to optimize capital deployment towards our highest growth opportunities. Additional details about these business units are available in our supplemental materials on the IR website. I'd like to once again emphasize that while these business units guide our internal operations, they may differ from external reporting segments. We look forward to sharing more about these changes and their impact in the coming quarters. Directly related to these changes in how we organize and run our business, on April 9th, we announced a targeted 27% reduction in force that we expect to result in $30 million of annual cash cost savings, including an expected $24 million cash benefit in 2025. These reductions were thoughtful and consistent with our software-focused strategy and will preserve our ability to grow software revenue. To that end, we maintain the full strength of our power track team, which is central to our near-term growth strategy. Our changes also preserve our ability to honor commitments to customers across all business areas. This restructuring was a critical step for us to execute on our three key priorities, which I laid out on our fourth quarter earnings call in early March. First, to grow our software revenue with a renewed focus on power track. Second, to reduce our cost structure and drive profitability. And third, to revamp our software development. I'm pleased to say that we have made definite progress on all three priorities. Let's begin with an update on our refined strategy that is focused on growing software revenue. As I mentioned earlier this year, one of the key factors that drew me to STEM was Powertrack's distinctive position and strong reputation in the market. Powertrack is a market leader in the commercial and industrial or C&I segment of solar asset monitoring software. During the first quarter, solar annual recurring revenue, or ARR, was up 10% sequentially and up 24% year over year. These results clearly demonstrate the tangible success we are having in growing our business to provide more scalable recurring and profitable revenue streams. We are continuing to invest in Powertrack to be able to serve smaller utility scale customers which to us generally means in the range of 20 to 100 megawatts. Utility scale deployments are much larger than CNI, and our market share in this segment is modest, presenting significant growth opportunities. We are seeing momentum in utility scale, with nearly triple the bookings in the first quarter compared to the same period last year. We are also investing to grow our software deployment presence in international markets. Managed services, including our storage software Athena, also performed well in the first quarter. We drove storage ARR higher by 4% sequentially and 31% over the same period last year. Our software continues to deliver substantial value and ROI to our customers who continue to face challenges in maximizing the value of their energy storage assets. Our strategic focus for storage is centered on software and services, particularly for brownfield opportunities that enable faster revenue conversion. Additionally, we are experiencing growing momentum in our professional services offering. Our team of industry experts has established themselves as trusted advisors and thought leaders in the clean energy sector. We are excited about this offering because these professional service engagements can in turn drive downstream business development opportunity for our software solutions. Now a discussion of our second focus area, cost savings and profitability. During the first quarter of 2025, we reached several significant profitability milestones. We delivered strong growth margins driven by robust growth across our high margin software, services, and edge device offerings. Additionally, we generated positive quarterly cash flow from operations for the first time in our history. We believe this validates both our refined business model and strategic execution. Importantly, our first quarter results do not reflect the financial benefit we expect to realize from the organizational changes and cost savings we recently implemented. we expect to see improving profitability as we move through the year. Lastly, let's discuss our third priority, our software development revamp. We are focused on protecting and expanding Powertrack success in the CNI market through continuous product refinement, investment in differentiating product capabilities, and responding to customer feedback. We continue to develop our Powertrack EMS software with the goal of entering new markets, such as when projects deploy standalone storage or co-located solar and storage installations. We are excited to soon bring to market software that brings the asset monitoring capabilities we have mastered in solar to both storage and hybrid assets. As part of our portfolio review, we have made the difficult decision to pause on further development of two products, PowerBedder Pro and Asset Performance Management, or APM. Looking forward, our refined software roadmap emphasizes AI integration across our development process and product suite, positioning us to accelerate the delivery of innovative solutions to our customers. As mentioned in the previous call, we are aiming to bring a step change to developer productivity by using generative AI methods in our lifecycle and we will have updates in future earnings calls. I would also like to address the current macro environment. While the clean energy sector faces uncertainty due to evolving economic and regulatory policies, we are maintaining our upward momentum. Today, our booking space and pipeline development remain robust across our core offerings. Our software and service offerings are largely exempt from the current types of tariffs being considered. Some of our offerings, such as power track compatible edge computing devices, will face a limited tariff exposure. These generally pass through to our customers. On the OEM storage resales business, which forms a smaller portion of revenue, we will work with our suppliers and customers to negotiate tariff absorption or diversify to domestic suppliers. With all this in mind, we are pleased to reiterate our full year 2025 financial guidance across all metrics. Lastly, I want to welcome both Vasudevan Guruswamy and Krishna Shivram, who have joined our board recently. They both bring significant energy industry, financial, and technology expertise to the board, and I am glad to have them with us. With that, let me turn the call over to Doran.

Thanks, Arun. I'll start with a quick review of our first quarter 2025 financial performance. Overall, our quarterly results were in line with the expected cadence of our 2025 guidance that we announced on our last quarterly call. Total revenue was up 27% year over year, driven by strong growth across the business. Importantly, software revenue was up 17% versus Q1 2024, reflecting continued strong performance from power track and increased storage software activations. We generated a record GAAP gross margin of 32% and our non-GAAP gross margin of 46% was close to an all-time high. The significant margin expansion versus prior years evidences the value of our refined strategy focused on higher margin software and services revenue while reducing our reliance on battery hardware resale. Adjusted EBITDA for the quarter improved versus Q1 2024, not only driven by margin expansion, but also by continued operating cost discipline. We generated $9 million of operating cash flow, which as Arun mentioned, is the first quarter of positive operating cash flow. We think this milestone proves that the company is on the right strategic path. Additionally, we generated just over $2 million in net cash during the quarter, growing our cash balance to $59 million at quarter end. We plan to remain disciplined with our dedication to cash conservation, margin improvement, and working capital usage. Turning to our operating metrics, as we announced during our fourth quarter earnings call, we have introduced enhanced operating metrics that should provide stakeholders with better visibility into the key drivers of our financial results. During the first quarter of 2025, contracted backlog and CAR both increased sequentially, largely due to solar bookings. Total bookings were lower sequentially due to slight seasonality in this metric. We generally see heavier bookings in the second half of the year. We saw solid growth in solar ARR and AUM and in storage ARR versus the fourth quarter of last year. Storage AUM sequentially declined slightly because we removed the AUM associated with PowerBidder Pro, which we are deemphasizing as Arun discussed previously. Now on to guidance. Today we are pleased to reaffirm across all metrics the 2025 guidance we announced last quarter. As Arun said, our revenue performance and expectations for 2025 remain solid despite recent economic policy changes and uncertainty. At this point, we see no discernible slowdown in deployments by our customers. Our backlog is solid and we have good visibility on ARR and revenue growth, thanks in part to our enhanced focus on driving the newly announced business units. From a margin perspective, We expect to pass through any tariff-related impacts to customers while preserving our target margins. Regarding our adjusted EBITDA and operating cash flow outlook, we are on track to meet our targets. Our recent cost optimization efforts, including the targeted workforce reduction, are expected to yield immediate and lasting financial benefits. These efforts are expected to generate $30 million in annual cash cost savings with 24 million of that benefit realized this year. While our headcount reduction was 27%, we expect to achieve dollar savings in the high 30% range, substantially exceeding our initial target of 20% that we talked about last quarter. And lastly, on liquidity, we believe our solid cash position provides us with sufficient runway to execute our business plans. As Arun discussed in April, we implemented a new business unit structure. As part of these changes, we plan to enhance our financial transparency through segment reporting. We think that this increased visibility will provide our investors with deeper insights into the value propositions and performance drivers across our different business lines. The organizational changes mark a significant milestone in STEM's evolution in support of the strategy shift announced last fall, positioning us to drive stronger financial discipline, accelerate smart decision making, and ultimately deliver enhanced shareholder value through more focused execution. While we expect to provide insight to investors on the financial performance of these business units, the formal segmentation in our financial reports may differ slightly. Finally, We issued our definitive proxy statement last week and set our shareholder vote for June 4th. As we mentioned last quarter, we have asked shareholders to approve a reverse stock split of our common stock. This reverse split is intended to allow us to regain compliance with New York Stock Exchange listing standards. Now I will pass the call back over to Arun for closing remarks.

Thanks, Doran. In closing, I want to directly address our team, our customers, and our investors. First, to our team. We have recently undergone significant organizational changes, including a difficult but necessary 27% reduction in our workforce. To those individuals who have departed STEM, we are grateful for your contributions. To our current team members, I recognize this period of change creates uncertainty and challenges. Your resilience, professionalism, and unwavering focus on customer success during these changes has been remarkable and is part of what attracted me to STEM in the first place. Second, to our customers, we remain committed to providing you with superior software and services that maximize the value of your storage and solar assets. We are doubling down on our commitment to enhance the features and functionality of our software products to deliver the insights and performance you need. Our financial position is getting stronger and we are all well positioned to grow with you throughout the market cycles. Lastly, to our investors, we are appreciative of your support and trust in the company and that you are standing with us. We are now better positioned for sustainable growth. We believe that our refined product focus on our core software and services, along with our streamlined organization, strengthen our path to profitability. With our industry-leading solutions and dedicated team, I remain confident in STEM's future. With that, operator, let's open the line for questions, please.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question is from Justin Claire with Roth Capital Partners.

Hey, guys. Thanks for taking the questions. I just wanted to start off here just on the bookings environment and how that's evolving. So given the tariffs, just wondering, you know, how is your ability to secure, you know, new storage bookings for U.S. projects potentially being affected? And then I'm just thinking through for customers that might not have batteries in the U.S. right now, Are your customers looking to contract, whether it's for, you know, batteries that would be sourced domestically from Southeast Asia or even potentially from China? Just wondering if it's, are people in kind of a wait-and-see mode, or are you still seeing contracting in the current environment?

Thanks, Justin. It's Doran. I'll try to take a stab at this one first, but I'll open by saying you mentioned I guess it's just kind of a reminder as far as looking at the overall guidance for the year. The OEM hardware sales, like the battery transactions you're talking about, are not a significant component of the business going forward. So while we're continuing to have really active dialogues with the customers that we've got in our backlog and those who are close to PO, we're looking at all of the volatility and what the tariffs may end up looking like, et cetera. And we've been in direct contact with probably the three major OEM providers that we've been integrating with and spending quite a bit of time on what the tariffs will look like. However, when I look at our overall plan for the year, the cadence of those types of POs at this point in time really impacting our outcomes, at least not at this stage. I don't think I can get into the nuances of particular countries or particular directions at this point, but of course, as you know, we deal with both domestic and Chinese players there.

Right, right. Okay. I guess what I'm trying to get at is you may not be selling the hardware yourself, but if There's a limited supply of hardware. It might be a tougher environment for you to contract the software for storage projects. And so I guess I'm wondering if that's being affected. And then I guess it's possible it could be affected on the solar side as well, but maybe to a lesser extent. Maybe could you talk about that in regards to solar and storage?

I'll tackle both of those. So the plan for 2025 is largely driven by activations of things that we've already got in the kind of call it contracted backlog or in CAR where, you know, our managed service offerings are just really dependent upon activations. These are projects that batteries are already on the ground and where, you know, they're going through the process of finalizing construction, commissioning, et cetera, and that's really kind of what we're looking at for 2025 on the storage side for managed services. When you move into solar, we, as you intimate, have not noticed a real slowdown there in terms of our bookings. Bookings have continued to be strong. We are constantly out there talking to customers, as you know, and we're not really seeing a significant impact there. And as you know, The systems, first of all, software and services doesn't really hit tariffs. But really what we're talking about here is the pace of deployment. And the pace of deployment, we haven't seen slow down at this point in time at this juncture. Our customers are still developing new projects. They're still mapping out construction of new projects. And our edge device and software solution is something that comes kind of at construction time. It's a very small line item in the overall construction cost, and we feel very comfortable that if we do end up with some tariff impact, we'll be able to pass along those costs to our customers without much resistance.

Justin, this is Arun. Can I just add one piece to it? I mean, I would like you all to just maybe think about our software as something that adds value to our customers' operations, and there's always an opportunity for us to continue to sell additional value added components into that customer account as well. So activations and deployments in new deployments is one dimension, but continued engagement with the same customer is perhaps another dimension to think about as well.

Got it. Okay. One more just on the comments that you made in the prepared remarks. It sounds like you expect improving profitability quarter by quarter. this year. Just wondering if you could share a little bit about more what the drivers are. So are you anticipating primarily the improvement to come from the OPEX reductions that you've announced, or do you see revenue growth or potential gross margin expansion as we move through the year?

Okay, just to take a stab at it before I hand over to Dorian as well. There are dimensions to it as well. One is the nature of revenue and the fact that the cyclicality pushes the revenue towards the second half of the year is one piece that affects operational profitability quarter by quarter. But then the other piece obviously is the way we are looking at managing operating expenses as well as opportunities that we continue to look at in that space beyond the reduction in force and trying to bring efficiency to everything that we do.

Justin, it's Doran. I would only add that that ability to really hone in on margins and operating expenses on a business unit by business unit basis is now much more clear for us going forward with the four business units.

Got it. Okay. All right. Thanks, guys.

Thanks, Justin.

Our next question is from Thomas Boyce with PD Catlin.

Appreciate you taking the questions. Maybe the first one, just on the brownfield opportunity that you highlighted in the prepared remarks, you know, it's kind of a way to sidestep, you know, interconnection, congestion, and things that have been, you know, plaguing me. the energy sector at large. Are there specific geographies that you're targeting first, or I'm trying to get a better understanding of maybe the size of that opportunity?

So, this is Doran. I'll tell you, geographically speaking, I think that we've got some core geographies where we operate our managed service platform. As you've seen our assets under management continue to grow, what we're seeing is a lot of opportunities for the market shifting and changing providers in those particular cases. There's not a single geography where that is jumping out as being attractive. I think it's a little bit more broad-based, but it is very much connected to these geographies where we are already operating. Managed services as a business line requires you to, one, like a company, to step up and stand up a platform, a rock, the services individuals who need to be actually working the software tools in order to actually bring value to the customers. And the more volume we have running through in terms of megawatt hours, gigawatt hours, the more profitable that business line is going to become. And those brownfield opportunities, therefore, really do present a good opportunity for us. And we are, you know, we don't have anything in particular to announce today, but we are, you know, pursuing a number of situations in that area.

Great. I appreciate that.

Just one other dimension on it is managed services and brownfields is one thing. If you look at PowerTrack and the ability to deploy into PowerTrack, There are remarks that you've made maybe to think about it in three groups. One group is the CNI group or the CNI segment which is growing and our dominating market share in that space. What we can do in the utility scale space as we bring PowerTrack EMS online as well as the ability to grow internationally into other markets as well sort of helps us look at the overall picture.

Understood. Appreciate that. Maybe my follow-up or my second question is just, could you speak to the nature of the power bidder pro contract, you know, the kind of removal from NASA's under management? Was this from customers where essentially, you know, discontinued, you know, active development for the product that they elected not to continue? And then, you know, I just wanted to better understand maybe the rationale for de-emphasizing that product. Is it just the It's difficult to differentiate market presentation software. It's competitive and maybe not worth the time and attention. Just really interested for your thoughts there.

Thomas, this is Arun. You've mentioned many of the contributing factors in your question itself. As we look at a software strategy, we want to make investments based on the overall growth potential and our ability to execute and actually deliver that growth on a period-by-period basis. So looking at all of those factors, we think it's best for us to focus on power track and associated offerings, and that's what we're doing.

And this is Doran. I'll just add from a financial metric perspective, as you're looking at the numbers, you'll probably notice a slight decrease in the assets under management on the storage side. The PowerBidder Pro contracts are fairly low ASP, and therefore we actually continue to increase our ARR uh despite the fact that we actually pulled those uh pulled those systems out so that also speaks to some of what arun was talking about there got it no appreciate it thanks i'll hop back into our next question it's from dylan matano with wolf research yeah hi good afternoon um i just want to start with the uh

the cost reductions that were announced during the quarter. Can you just clarify to what extent were those reductions already contemplated when you originally issued 2025 guidance?

Sure. This is Doran. I'll just start with the quick comparison is that what we talked about in the last call was a 20% reduction in run rate end of 24 OpEx that we were mapping out. What we actually did was quite a bit higher than that as a result of the ultimate decisions that we made to realign the business units and realign our staffing accordingly. So, you know, while we talked about 27% by headcount, the dollar reduction there was close to, you know, high 30s percentage. And when you kind of compare that to the 20% before, Clearly, we've kind of gone above and beyond. That's purely financial look.

Gotcha. Okay, thanks. And then for my follow-up, just looking at gross margins for the quarter, I mean, obviously some outperformance relative to guidance. Can you just give a little more color around specifically what kind of drove that this quarter? Was it a revenue mix between hardware and software, or how should we think about gross margin kind of trending through the rest of the year?

So I think we've talked about guidance. This is Doron. We've talked about guidance in terms of what our growth margin will look like. Obviously, Q1, we came in above the non-GAAP gross margin range that we've got for the year. I think we're, of course, making some conservatism in there to ensure that we respond to the nature of today's macro environment. But at the same time, the straight answer is product mix. So less OEM hardware in the mix. higher software and edge device with higher margins. And that's the change in strategy. That's the change in business model. And that's the way we expect to see things moving forward.

I would go back to what we are focused on. We're focused on selling those higher margin offerings, and that's what you're seeing as a result in the earnings reports.

Great. Thank you very much.

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.