Stem, Inc.

Greetings and welcome to the STEM Incorporated First Quarter 2026 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Erin Reed, Head of Investor Relations. Thank you. You may begin.

Thank you, Operator. Welcome to STEM's First Quarter 2026 Earnings Call. This is Erin Reed, Head of Investor Relations. Before we begin, please note that some of the statements we will be making today are forward-looking. These statements involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, we refer you to our latest 10Q, 10K, other SEC filings, and supplemental presentation, which can be found on our Investor Relations website. Our comments today also include non-GAAP financial measures. Additional details and the reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter 2026 earnings release and supplemental materials, which are available on the company's investor relations website. Arun Narayanan, CEO, and Brian Musfelt, CFO, will start the call today with prepared remarks, and then we will conduct a question and answer session. And now, I'll turn the call over to Arun.

Thank you, Erin. Good afternoon, everyone, and thank you all for joining us today. When I spoke with you last during our fourth quarter and full year 2025 earnings call, I framed 2025 as a transformative year and 2026 as the year to demonstrate what that transformation was designed to deliver. One quarter in, I'm encouraged by the progress we're making. Our results are moving in the right direction and we remain on track against the commitments we've set. Q1 is historically the lightest revenue quarter for us and our industry, and yet this quarter we delivered our fourth consecutive quarter of positive adjusted EBITDA. In fact, this was our first ever positive adjusted EBITDA in a first fiscal quarter, supported by strong growth margins and continued growth in core software, services, and edge hardware revenue. This reflects a cost structure and a margin profile that are now increasingly durable. We remain on track across all 2026 financial and operating targets, and we are reaffirming full year guidance across all metrics today. Now turning to an update on our three key priorities for 2026. Our first priority is to drive operational leverage and ensure that the structural improvements we made in 2025 are sustainable and continue over time. Growth margins for the first quarter were, again, very strong. With no battery hardware resales in the quarter, our revenue mix was entirely software, services, and edge hardware, which drove non-GAAP growth margin to 52%. As we opportunistically layer in battery hardware through the balance of the year, we expect margins to naturally compress towards the midpoint of our 40 to 50% non-GAAP growth margin guidance range. Importantly, the underlying software and services margin engine remains strong. On the operating expense side, we continue to maintain what we have characterized as permanent structural efficiency. Cash operating expenses were down significantly year over year and down sequentially versus the fourth quarter of 2025. We remain focused on resourcefulness and driving further efficiency wherever we can while continuing to invest deliberately in the areas that drive longer-term growth. One area where we are seeing meaningful efficiency gains is in AI adoption. Today, nearly 70% of our employee base is actively using AI tools in their weekly workflows with tangible productivity benefits to our customers. Within our development team specifically, AI is accelerating feature delivery and improving triage and operations. These productivity gains are real. and they are helping us do more with a leaner organization. As a result of our strong execution, as well as these achievements and advancements, we delivered $2 million in adjusted EBITDA, our fourth consecutive positive quarter, and our first ever positive first quarter performance. This clearly evidences the operating leverage embedded in this business, and we expect it to expand as we move through the year. Operating cash flow was negative $8 million for the first quarter. This reflects expected Q1 working capital timing and scheduled interest payments. As bookings and billings increase and working capital requirements lessen throughout the year, we expect improvements in operating cash flow and remain confident in our full year guidance range of $0 to $10 million. Now moving on to our second priority, strengthening the core PowerTrak platform. PowerTrak is a critical digital infrastructure platform which enables our customers to go from data to insight to action. PowerTrak generates data at the customer sites with our edge hardware and sends that data to the cloud and ultimately to our power track software platform, enabling our customers to make meaningful decisions about their portfolios and optimize their assets. We added approximately 1.5 gigawatts of solar assets under management in the first quarter, bringing total solar AUM to 37.5 gigawatts, and we drove 2% growth in power track ARR. We are committed to maintaining and extending our market-leading position in commercial and industrial solar asset monitoring, while extending into additional customer segments. And we continue to invest in the platform's stability, performance, and feature depth to achieve these goals. A key part of that investment strategy is a disciplined build-or-buy analysis. Our acquisition of Rikoon, which we announced on April 28, is a direct and strategic move towards building out that platform capability and improving the actionability from insights in data. RIKUN is an Austrian provider of automated spot detection and event management for solar assets. This is a targeted high impact acquisition. a natural capability extension to our platform that we believe has immediate value across our wide customer base. RightPoints technology provides enhancements to power track through automated fault detection and alert prioritization. As our customer base scales and portfolios grow more complex, the ability to surface and triage performance issues faster is increasingly important for our customers to drive meaningful actions at scale. We expect Rikoon's technology will drive customers to do even more work with Powertrack, further establishing our product as the platform of choice for solar asset managers. What's more, this is a small, focused, tuck-in acquisition that we executed opportunistically and will integrate quickly. We look forward to sharing more on the benefits of this acquisition as product integration progresses. Another way in which we make data more accessible for our customers is with Powertrack Sage. Powertrack Sage is now live and available in Powertrack to our broader customer base. The AI Assistant synthesizes live site data alerts and performance analytics into plain language briefings, giving operators, performance engineers, and asset managers the ability to detect, diagnose, and resolve issues faster. The early adoption signals are very exciting. We are seeing consistent daily engagement across multiple customer organizations with integration into their daily workflows. In the future, as more heterogeneous data appears in Powertrack, the capabilities of Powertrack Sage will become more meaningful to our customers. Turning now to managed services. Our managed services business provides software-enabled full lifecycle energy storage services covering design, procurement, commissioning, and the ongoing operation and optimization of energy storage systems typically under five to 20-year contract terms. Managed services brought in approximately $7 million in revenue during the first quarter. Customer satisfaction remains high, and our optimization service continues to exceed the performance targets we have set with our customers. Shifting now to our final strategic priority. building the foundation for accelerated growth in 2027 and beyond, which includes expanding into utility scale deployments, advancing our international footprint, and unlocking new market opportunities. I'm particularly excited about bookings momentum we are seeing in the utility scale segment. Bookings more than doubled quarter over quarter and our pipeline in this segment is the strongest we have ever seen. We book new deals in four different geographies and across various asset types, including standalone storage, solar, and new build hybrid. While PowerTag EMS is valuable across our portfolio, including CNI, it is also a key offering for us to drive expansion in the utility scale space both internationally and domestically. It differentiates us by providing customers with unified controls, cloud monitoring, and portfolio-level visibility. PowerTrack EMS also helps customers extend the value of existing solar assets by adding storage with minimal disruption. PowerTrack EMS has a longer commercial lifecycle than our core CMI business, because of the utility scale in market since it requires more time for commissioning. And we expect these bookings to convert to meaningful revenue in late 2026 and into 2027. Our first part-time EMS bookings from Q4 2025 are developing well and are on track to convert to revenue during the second quarter of 2026. One key Powertrack EMS booking from Q1 I'd like to highlight is with a longstanding Powertrack solar monitoring customer operating two utility-scale sites exceeding 50 megawatts in Hungary. This customer made the decision to hybridize their portfolio and selected Powertrack EMS to manage a new 50-plus megawatt-hour battery system. This is precisely the expansion dynamic we anticipated when we built PowerTrack EMS, an existing customer deepening their relationship with STEM as their assets evolve. It validates both the platform's ability to grow with our customers and the increasing prevalence of hybridization in the European utility scale market. Just last week, we further strengthened PowerTrack EMS with a co-marketing relationship with Nuvation Energy, a North American provider of battery management and energy control solutions. Together, we will market a cell-to-cloud best and hybrid control stack that is exclusively North American designed and manufactured. This collaboration will allow us to deliver real value to our customers as regulatory requirements, including FEOC, tighten. Further, this agreement proves we are on our way to building a robust ecosystem of commercial and product partnerships to extend our reach. On the international front, we continue to build out our European presence anchored by our Berlin office. International revenue represented approximately 5% of total revenue in the first quarter And we expect that proportion to grow as PowerTrack EMS and other utility-scale projects in Europe move through commissioning and into revenue recognition in late 2026 and in 2027. Beyond our core growth drivers, I'd like to briefly update you on the two new offerings we introduced during our Q4 call. Our AI services offering continues to progress with active customer conversations focused on helping organizations identify and implement practical AI use cases that streamline internal processes, improve decision making, and unlock operational efficiency. In parallel, we are exploring how our core strengths in energy optimization software and deep energy market expertise can support data center developers and operators as they navigate rising power costs, grid constraints, and resilience requirements. Both remain important future growth opportunities, and we will share more substantive updates as customer engagements and market validations advance. To close, I want to reinforce our confidence in the rest of the year ahead. Q1 came in as expected. Strong margins, positive adjusted EBITDA, and solid progress on all three priorities. As I stated earlier, we are reaffirming our full year 2026 guidance across all metrics, and I'm confident in our team's ability to execute. With that, I'll turn the call over to Brian.

Thanks, Arun, and good afternoon, everyone. Let's walk through the results. As Arun noted, Q1 is historically the lightest revenue quarter for the company, driven by the natural sales cycle of construction projects, which typically begin to ramp into summer and through the end of the year. Total revenue for the first quarter was $29 million, down 11% year over year from $32 million in the first quarter of 2025. The year over year decline was entirely attributable to the absence of battery hardware resales this quarter, and our expectation that battery hardware resale activity will be weighted to the second half of 2026. Core revenue from software, services, and edge hardware was up 4% from the first quarter of 2025. Within that, I want to highlight a few components. Powertrack software revenue grew 16% year over year, reflecting continued strength in our commercial and industrial solar monitoring business and early contributions from utility scale expansion. This is the highest margin recurring revenue in our portfolio, and its growth rate is a meaningful indicator of the health of our core business. Edge hardware revenue grew approximately 1% year-over-year, project and professional services revenue declined 5% year-over-year, and managed service revenue was down 5% year-over-year. First quarter gap gross margin was 38%, compared to 32% in the first quarter of 2025. Non-GAAP gross margin was a record 52% compared to 46% in the first quarter of 2025. The significant margin expansion reflects the increasing mix of software, services, and edge hardware in our revenue base, combined with the structural cost improvements we made in 2025. As battery hardware resale volumes pick up in the second half of the year, Non-GAAP gross margin percentage will trend toward the middle of our 40 to 50% full-year guidance range, but the underlying software and service margins remain strong. Cash operating expenses were down 30% year-over-year and down approximately 10% sequentially. The workforce and cost optimization actions we completed in 2025 and continue to implement into 2026 have become permanent structural efficiency, and the first quarter confirms that characterization. Adjusted EBITDA was $2 million, a $7 million improvement compared to a negative $5 million in the first quarter of 2025. This marks our fourth consecutive quarter of positive adjusted EBITDA and our first ever positive adjusted EBITDA in a first quarter, which has historically been our most challenging quarter for profitability given seasonal revenue patterns. This is strong evidence of the operating leverage that is now entrenched in this business. We ended the first quarter with $37 million in cash and cash equivalents. Operating cash flow was negative $8 million in the quarter, driven primarily by the timing of working capital movements and cash interest expense. I want to be clear about the working capital dynamics. The Q1 outflow reflects timing, not a change in the underlying cash generation of the business. As bookings and billings increase and working capital requirements lessen throughout the year, we expect improvement in our cash position and remain on track to achieve our full year operating cash flow guidance of $0 to $10 million. Turning now to our operating metrics, bookings were $27 million in the first quarter compared to $33 million in the fourth quarter of 2025. The sequential decline is typical for first quarter seasonality. All bookings this quarter came from core software, services, and edge hardware. As Arun noted, utility-scale bookings more than doubled quarter over quarter, which is one of the key drivers of our long-term growth objectives. While we did not have any battery hardware bookings this quarter, we continue to expect up to $40 million in opportunistic battery hardware sales this year. The battery supply is accessible and can be delivered to customers within 90 days. Contracted backlog was $23 million at the end of the first quarter, up 8% sequentially from $21 million at the end of the fourth quarter of 2025. Car was $67 million, flat versus the end of the fourth quarter. ARR was $61.2 million, up slightly from $61.1 million at the end of the fourth quarter. Within that, Powertrack ARR grew 2% sequentially and Managed Services ARR declined 4% sequentially. Managed Services ARR declined modestly, reflecting the impact of a battery supplier bankruptcy, which prevented the renewal of certain recurring warranty management and other services contracts tied to that supplier's systems. Importantly, we continue to provide optimization and other core managed services to the owners of those assets, and associated AUM remains on our platform. Solar operating AUM grew 4% sequentially to 37.5 gigawatts, and storage operating AUM was flat sequentially at 1.7 gigawatt hours. Now turning to guidance. As Arun mentioned, we are reaffirming our full-year 2026 guidance across all metrics. Total revenue of $140 to $190 million, with software, services, and edge hardware expected in the range of $130 to $150 million, and battery hardware resales of up to $40 million, which, as I mentioned, we expect to be weighted to the second half of the year. Non-GAAP gross margins of 40% to 50%, with the range driven by the timing and volume of battery hardware resales. Adjusted EBITDA of $10 to $15 million. Operating cash flow of $0 to $10 million. And year-end ARR of $65 to $70 million. And I will now pass the call back over to Arun for closing remarks.

Thank you, Brian. I'd like to leave you all with three key takeaways from this quarter. First, the transformation we undertook in 2025 is delivering results. We achieved positive adjusted EBITDA in our historically weakest quarter with record high software margins and a cost structure that is both lean and durable. This is not a one-time achievement. It's the foundation we're building on. Second, our core business is strong and growing. PowerTrack software revenue grew 16% year over year. Our new products, PowerTrack EMS and PowerTrack Sage, are gaining real traction with customers. And the Raccoon acquisition demonstrates our disciplined approach to extending our platform capabilities where it matters most. Third, we are making tangible progress on the growth initiatives that will drive through 2027 and beyond. Utility-scale bookings more than doubled quarter over quarter. Our international footprint is expanding, and our partnership with Nuvation positions us to capitalize on the growing demand for secure, domestically sourced energy infrastructure. We said 2026 would be the year to demonstrate what our transformation was designed to deliver. One quarter in, we are doing exactly that. We have the right strategy the right team, and the right momentum. We are executing with discipline, investing with purpose, and we remain confident in achieving all our full-year commitments. I want to thank our customers for their continued partnership, our team for their exceptional execution, and all of you for your support and engagement. With that, I will ask the operator to open the line for questions.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we pull for our first question. The first question comes from Justin Clair with Roth Capital. Please proceed.

Hey, good afternoon. Thanks for taking our questions here. So I wanted to just start out on bookings. So you had mentioned utility scale bookings had doubled quarter over quarter. And so just wondering if you could speak to what drove the strength there. Is that new customer wins? Is it expansion with existing customers? Are you seeing larger product sizes? And then also, just where are you seeing the most traction with utility scale customers in your portfolio? So which products or services are you seeing the most uptake for?

Justin, it's good to hear from you. This is Arun. It's largely driven, I would say, by PowerTrack EMS. PowerTrack EMS is the key differentiator that allows us to provide our customers in the utility scale space with solutions. It brings unified control. cloud monitoring, as well as portfolio-level visibility to our customers. And I think this is what's extending their ability to engage with us beyond solar projects into these utility-scale projects. Now, also, one more thing. We have PowerTrack SCADA, which is another product that we offer for monitoring and control in utility-scale solar projects as well. We have a team based in Berlin. The team is working very hard, and they have done a great job in doubling bookings. There are two, maybe, examples I can cite. In the last quarter, we spoke about EveryRay, which was a German customer that was a 100-plus MWh project. And then in the prepared remarks, we referred to a Hungarian project that went through hybridization that was 50-plus MWh deal as well. And overall, I think we remain confident that this Conversion continues. The first EMS bookings from the Q4 2025 cycle, we expect to start seeing that as revenue starting in Q2 of 2026. So we remain very optimistic on this, Justin.

Okay. Got it. Appreciate that. And then just wanted to ask on our track, so we did see pretty good growth, I think 16% year-over-year revenue growth for that. Though we did see the ARR was flat sequentially. And so just wondering how we should think about the cadence of ARR growth as we move through the balance of the year here, given your target of 65 to 70 million at the end of the year. And then just what are the drivers that could potentially enable you to get to the higher end of that target?

Yeah, Justin, I can answer that as well. PowerTrack ARR was up 12% year-over-year, 2% sequentially, and this moderate sequential growth in PowerTrack ARR is just due to seasonality. We expect ARR to ramp up throughout the remainder of the year, and the majority of our ARR growth, as usual, will come from PowerTrack CNI customers. There will be some PowerTrack EMS, and utility scale deployments in the ARR, but it won't be a significant portion of ARR this year. And we're very focused and we continue to drive ARR across our business over the long term. And as I said earlier, we're pleased to reaffirm our guidance of $65 to $70 million for ARR.

Got it. Okay. Great. And then just one more I wanted to ask on the margins here. So we just see the power track non-GAAP gross margins, they continue to move higher in Q1. I think you're at 75% versus 69% a year ago, 71% in Q4. So just wondering if you'd just speak to the improvements that we've seen there, what's been the biggest driver, and then how we should think about the margin profile as you continue to scale that business. Is there further potential for margins to move higher?

Yeah, thanks, Justin. This is Brian. I'll take that one. Yeah, I mean, we are always reviewing the supply chain and the macro environment for our power track products. So, you know, you're seeing good growth in a couple ways. One, you know, our AUM is increasing, and so that is a kind of traditional SaaS product that, you know, gains leverage as we get more volume, which is always great, and that's going to improve margin. But also, you do see us, you know, as we watch the environment and the supply chain this last year, we have been able to increase pricing modestly where we've needed to, kind of, you know, between tariffs and other things that have kind of driven that environment. So, you know, as the volume increases, you'll continue to see margins push up on that space. And then you're always know, we're always watching for places where we can increase pricing or need to increase pricing on our customers. And that's what's going to drive that kind of to keep improving.

Okay, got it. Appreciate it. Thank you.

Thank you. This concludes the equity research questions. I'd like to turn the floor to Aaron for retail investor questions at this time.

Thank you, Operator. We have a few questions here. Firstly, relating to cash flow. With 2026 operating cash flow guided from zero to 10 million, what are the key levers that give you confidence that STEM can reach positive operating cash flow for the full year 2026?

Yeah, this is Brian again. I'll grab that one. As Arun stated in the call, Q1's negative operating cash flow was really driven by a combination of expected higher working capital requirements in Q1 and it being our traditionally lowest kind of billings and revenue quarter. When you look forward, we expect that bookings and billings will increase with our seasonality when you look at this business and how it operates. And we also expect reduced working capital requirements through the rest of the year. And the combination of that will allow us to build cash going into the second half of the year. I think it's important to note, you know, cash operating expenses have really been optimized to the business and the size today. I think you can see that in the evidence when you see that, you know, cash operating expenses were down 30% year over year and another 10% sequentially. So, you know, with that, we were able to achieve positive EBITDA in our lowest revenue quarter for the first time, which is great. And I think, you know, you're just fundamentally seeing that we need significantly less cash to run this business with the new operating discipline that we have in place. So I think that's what really gives us the confidence to reiterate our guidance on all our metrics this year.

Thanks, Brian. The next question is on the recent acquisition of Raccoon. Why did you acquire Raccoon and why now?

I think this is Arun. I'm very excited that Rikun is joining STEM and I want to take this opportunity to welcome all of the Rikun employees to STEM. Rikun's technology provides significant enhancements to power track through automated fault detection and alert prioritization. What this means is as our customer base scales and portfolios grow more complex, the ability to surface and triage performance issues faster is increasingly becoming very important to customer retention and satisfaction. This acquisition directly supports our 2026 priority of strengthening our core power track business. And we saw an opportunity to bring in a proven, already deployed technology rather than build it from scratch. And this brings additional value to our existing customer base, as well as it's a differentiator as we try to acquire new customers. So we're very pleased that Raikun is joining us.

Thanks. This will be the last question, and it is related to AI. Where is STEM's AI capability creating measurable value for customers today, and how does that translate into retention, expansion, or new customer wins?

Look, I'm always excited about AI, and I would say that our ability to bring AI to life and to bring value to our customers maybe can be thought of in two different ways. The first way is how we embed AI into our products. AI is baked into Powertrack as Powertrack Sage, and this AI assistant provides customers with more fluency to interpret their site data. It expands Powertrack users beyond the technical users that we have, and it does so by providing plain language briefings to non-technical users. Secondly, we also impact customer value by using AI internally. especially if you think about our development team, their usage of the AI tools, it allows them to accelerate feature delivery. It improves triage in our operations. It allows us to roll out updates more quickly. And ultimately what this means is we reduce friction for our customers.

Thanks, Arun. This concludes the retail investor questions. Turning back to you now for closing remarks.

I want to thank everyone for joining our first quarter earnings call. And we look forward to speaking with you next during our second quarter 2026 earnings call this summer. Thanks, everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.