I think from that standpoint I think we’re in a good position. Ultimately, the question is going to be how quickly can you collect on that accounts receivable. And I think these are deals that we’ve really restructured such that the velocity of the cash flow is higher. So I think those – it starts at looking at the first piece which is what’s the margin profile of the project, what’s the timeline associated with the project and then what’s the cash flow velocity associated with it? And so we think that we’re going to replace the backlog with projects which are more favorable for the business than those that went away.
Justin Clare: Okay, got it. And then maybe just one more curious on – so it sounds like with the legacy hardware, some of it is being incorporated into development projects. And so wondering what stage are those projects in? Have you signed effectively PPAs for those projects and then are those planned for sale in 2024, and is that a part of your cash flow expectations?
Bill Bush: So the projects are in development. They are expected to be sold this year. In some cases, those projects will — they’ll COD this year, but most will probably COD next year in 2025 and when we think about the cash flow profiles of those they’re definitely going to contribute to cash this year.
Justin Clare: Okay. I appreciate it. Thank you.
Operator: Thank you. Our next question is from the line of Ryan Lee with Goldman Sachs. Please go ahead.
Ryan Lee: Hi, guys. Good afternoon. Thanks for taking the questions. I had to hop around on a couple calls this afternoon, so I might have missed a couple things you said at the beginning. So apologies in advance if these are redundant. On the contracts you cancelled did you specify kind of the range of – you called them low-margin contracts, what’s sort of the delta between what you cancelled and what you are keeping in the backlog, just trying to get a sense of what that kind of threshold is for not hitting your target profit levels.
John Carrington: Yes. Hi, Ryan. This is John. Thanks. Good to hear from you. I think the ones that we consider to be out of scope would be below the kind of gross margin targets that we set for the business and that was one of the thresholds. I think the other important component is we really looked at what kind of installations or total megawatt hours or what other metric you may have that would actually be enough to spread those costs out to make it compelling. To do 15 sites in Des Moines, Iowa is not a great outcome for the company. So that was another lens we looked at, but certainly the contribution margin to align with guidance and then obviously looking at markets where we had critical massive systems. And by the way, that could change.
I mean, if local legislation, state legislation changes, we could go back into that market. I mean, the nice thing about our model is there is a certain flexibility that we have if things change to move very quickly because a lot of these customers have multi-sites in a variety of states and we’re their preferred supplier. So we can go where they need to go wherever the market dynamics change in favor of that contribution margin equation that we mentioned earlier.
Ryan Lee: Okay. Understood. That’s helpful. And then on these hardware revaluations, I think it might be maybe the second time you’ve seen some of this. And then you also cited there’s another $50 million of contracts that could potentially need to be revalued. I mean, non-cash consideration obviously, but still it is impacting kind of the outlook in terms of some of your KPIs that the market and investors follow. So just the thought process around identifying potentially $50 million still left through the balance of this year or early next year. Do you have a high confidence level of being able to remarket those? Is this more of an auditor decision whether you get to actually pull the trigger on taking that out of the numbers or not? Or kind of what’s the thought process? Because it feels like you’re still subject to another headline risk on this number if it does get to a point later this year where you decide you have to take it out of the revenue outlook again.
Bill Bush: So thanks, Brian, for the question. This is Bill. When we looked at the variable consideration, we’re constantly and on a quarterly basis taking a look at all of the potential variable consideration components. So I would say it’s not really an auditor decision. This is a management decision. We just looked at what we saw is the implied value of the underlying projects and how the equipment that we own interplays into that. And did that math, we determined that we were going to need to make an adjustment to that variable consideration. That analysis will continue. The good news is we do have a robust portfolio of projects. Because ultimately, the equipment, while an integral part of any storage project, is not the only way you think about it.
The other question, of course, is what’s going on the revenue side of the project and other factors. So I think the market for the equipment, or say the valuation of the equipment, reflects the current market conditions. So that’s how we did the analysis. And certainly, I wouldn’t disagree with you that there is more risk in that $50 million of remaining equipment. But I think we’ve got a portfolio of projects which we can place it into. And so we’re confident that we can do that.
Ryan Lee: Okay. That’s helpful. And then, just last one for me. So it is a legacy issue. It’s nice to have it out there that you’re kind of capping it at $50 million if it does come to fruition. Could you remind us, some of your peers with lithium and battery prices continuing to remain volatile, they’ve implemented RMI index-based pricing and other strategies. How are you going to market with the pricing and cost management on the hardware side? Because you’re not doing these legacy guarantees anymore. Could you remind us what the strategy is for the larger-scale projects you’re going after now?
Bill Bush: Yes. So you’re absolutely correct. First, we are not issuing guarantees like that anymore. So in the last 23 months, it’s been a little while since we did them. We’ve gotten super short on contracts. Because I think one of the things that we’ve seen in, say, the lithium market, is that there’s been a lot of supply that’s come into the market here in the last maybe six months, and really starting to see the impact of that in the last couple of months. And so battery prices, even though it’s almost become distanced from the lithium index, I don’t know how closely you follow it, but the index has actually increased since March almost 15%. However, battery prices have declined pretty dramatically across all the major manufacturers during that same time period.
And I would say delivery timeframes have gotten probably more aggressive than they have been in the past. So this really, which kind of went into the valuation of the variable consideration conversation that we’re having before. So I think one of the things that we’ve done is we’ve gotten really close with our customers and said, when do you really need the equipment? Which is a difference from maybe a year or two ago, when folks were more than willing just to buy things just to make sure that they had them for when the projects were ready. Now people are kind of holding off and buying when they actually need the equipment. So the good news, I think, for us is that two things are going to happen. One, the battery delivery is going to be more reflective of the current market conditions.
And because the batteries are purchased closer to their installation dates, you should see a speeding up of car to ARR, which is exactly what happened in the first quarter here. So I think one of the things that we’re trying to do is really kind of shift the business from where we were. I mean, depending on how long folks have been following the company used to be really a straight BTM company. And now we’re really we’ve changed both the model of moving to FTM, but also the type of FTM that we that we pursue. And so I think one of the things that we’re you’re going to be seeing from us is quicker conversions from bookings to hardware revenue events and quicker from car. You know, when, basically when that that hardware is delivered to when the actual software starts working.
And so I think for us, that’s really our strategy is shortening those timeframes such that there’s quicker conversion from a booking to revenue and particularly on the software side.
John Carrington: And I think from a contract level, we’re about 40% for 2024. So about right, Bill. Sorry, Ryan, go ahead.
Ryan Lee: No, I was going to say I appreciate all that color and the additional percentages are helpful to thank you, John.
Operator: Thank you. Next question comes from the line of Joe Osha with Guggenheim Partners. Please go ahead.
Joe Osha: Hi, there. Thanks for fitting me in. I want you know, we kind of talked a lot of numbers around, but I wanted to see if I could just make sure I understand it. Now you’re talking about exiting the year at a car of 115 to 130. We talked a lot about car to air conversion. So what should that 115 to 130 reflect in terms of an hour annualized run rate at the end of the year?
Bill Bush: I don’t think we’ve given that specific guidance, Joe. So I think I’m going to stay away from that. That answer. So I’ll apologize and go to your next question.
Joe Osha: All right. Is there can we assume that the rate of conversion is going to improve? I know there’s been lots of can you give us the signposts at least. Right. Because I think one of the challenges here is that we do see the car metric moving, but the hour is not. And you’ve chosen to talk a lot about on this call about how the conversion is improving. So what kind of signposts can you give us to at least try and make a guess at that on our own?
Bill Bush: Well, I think we had so in the fourth quarter presentation, we had a slide around car and air where we kind of laid out, you know, kind of didn’t give specific numbers, but certainly graphically showed kind of where things were. And so I think one of the things that we have seen generally is, you know, around when we had the ninety one million dollars, which was, of course, the car number as of the end of twenty, twenty three, about half of that was IRR or so. And so I think one of the things that we’re trying to do is get that number higher as a percentage. And so the numbers that John gave you or gave the call a few moments ago, give credence to the fact that there is an increasing rate of car to air conversion.
Joe Osha: Second question, and you showed us quite a nice improvement in terms of the amount of working capital tied up in receivables, sequential weights down to like 240. Just kind of wondering, given how everything you’ve talked about in terms of trying to improve the velocity cash and so forth, could we see the number trend back to like where it was in ’22, where it was like 95 million and 144? Are we going to free up a significant amount of additional cash here? Should I still think about this receivables number bouncing along in the kind of low to mid 200s? How should I think about that going forward?
Bill Bush: Yes, I think we’ve been pretty transparent about that receivables number. I mean, last quarter it was just over a little bit over 300 million. And I think we talked in the call like we expected to be able to reduce that number by around $100 million and return that cash to the balance sheet. So that’s really that’s the target for us. I mean, I think depending on what time of year you’re talking about, I think probably a number between kind of $175 million and $225 million receivables is probably the right number for us, depending on what period of time you’re talking about. I mean, that’s an important distinction, but I mean, for sure, we got a little heavy on the receivable side. And our goal is to reduce that one of the questions that we get a lot is like, hey, do you have to raise cash?
And I would I consistently answer that by saying we’ve got to collect our receivables and that will be the way that we raise cash. So, yes, I think we saw the first spots of that this quarter. Net of the adjustment that we’ve been talking about receivable did decline by around $30 million. AP came down as well. And so I think we’re going the right direction from a cash generation standpoint. And we feel we feel really confident that we can make that $50 million number that we laid out for the year.
Joe Osha: Yes. And I wasn’t casting versions. I was just trying to understand.
Bill Bush: None were taken.
Joe Osha: And that’s helpful. So 175, 525. That’s kind of that’s helpful. Thank you. Yes. And then my last question is we hear a lot. And I think we’ve some questions you’ve called alluded to. We’re hearing a lot about Sungrow, Canadian, some of these guys showing up with combination. You know, inverter solutions and customers self-integrating as well. Are you all seeing that? And I’m curious, does that potentially represent an opportunity for you guys? And as you think about the software only part of your businesses more of these Chinese guys show up and sell directly.
John Carrington: Yes, Joe, John here. I think it’s an opportunity for us. Some of the names that you’ve mentioned, certainly we’ve they’re either existing suppliers to us or ones that would have a need for the Stem system. Modular ESS is a good example that could integrate into their offering. So I think you’re on the right track. And I think the breadth of the Athena platform is being recognized by these OEMs. And so we’re excited about that opportunity.
Prakesh Patel: Joe, this is Prakesh. One of the others, and you highlighted this with the Chinese OEMs, is there’s increasing cybersecurity and national security concerns by a lot of grid operators. And it presents a good opportunity for us to partner with these OEMs to use our software, where a U.S.-based company can guarantee NERC, CIP, other compliant standards and have no we’ve worked with utility. Actually, the first largest utility contract of any storage provider was Stem. So we have a lot of credibility. There’s a lot of opportunities for us as a result.
