Stem, Inc. (NYSE:STEM) Q3 2023 Earnings Call Transcript

Stem, Inc. (NYSE:STEM) Q3 2023 Earnings Call Transcript November 2, 2023

Stem, Inc. misses on earnings expectations. Reported EPS is $-0.49 EPS, expectations were $-0.18.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Stem Third Quarter 2023 Earnings Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Ted Durbin, Head of Investor Relations for Stem. Please go ahead.

Ted Durbin: Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our third quarter 2023 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 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 portion of our website at www.stem.com.

John Carrington, our CEO, and Bill Bush, CFO, will start the call today with prepared remarks. Mike Carlson, COO; and Prakesh Patel, Chief Strategy Officer, will also be available for the question-and-answer portion of the call. And now I will turn the call over to John.

John Carrington: Thank you, Ted. Good afternoon, and thank you all for joining us today. Beginning with slide 3, our agenda will cover five items; our third quarter results, technology leadership and product announcements, and our commercial traction. Bill will then discuss our financial results. Now let’s turn to slide 4 on our third quarter 2023 results and highlights. In the third quarter, we recorded $134 million in revenue, up 34% versus third quarter 2022. Revenue this quarter was negatively impacted by nonrecurring adjustments that Bill will discuss later in the call. We set a record for bookings of $676 million; the 3x bookings growth performance drove our contracted annual recurring revenue or CAR, up 43% versus the third quarter of 2022, and up 17% sequentially.

Adjusted EBITDA came in near breakeven at negative $900,000 versus negative $13 million in the same quarter last year. Adjusted EBITDA reflects an adjustment to exclude an exceptional reduction in revenue. With strong revenue growth, solid margins and continued cost control, our path to profitability continues to improve. We continue to expect achievement of positive adjusted EBITDA in the second half of this year, a goal we committed to during our Investor and Analyst Day in 2022. Today, we announced an exciting new agreement with SP Energy. We will offer software and services for up to 10 gigawatt hours of storage deployments across North America. This partnership underscores our focus on growing service revenue. At the core of our value proposition to gigawatt scale developers like SP Energy is our AI-driven technology, Athena, which continues to receive third-party recognition for its differentiation and value.

Finally, we’re announcing that we expect to achieve full year adjusted EBITDA positive in 2024 without the need to issue additional equity. This is a key milestone as we move to free cash flow generation and we’ll outline more specifics in our full year earnings call in February. Please turn to Slide 5. In Q3 2023, we far exceeded our guidance for contracted bookings coming in nearly 2x our guidance and the highest quarter in company history at $676 million. The booking strength was largely driven by our entry into the bulk power system scale of the front of the meter storage business this year, particularly in the municipal and cooperative customer segment. Industry analysts expect US public power and co-ops will represent over 20% of future storage deployments, and we are well positioned to serve this market.

Our solar backlog also grew significantly, up 41% year-over-year. For both businesses, we are driving consistent strong gross margins, a testament to the differentiation of our solutions. We saw a 32% increase in storage AUM this quarter to 5 gigawatt hours. We have nearly doubled our storage AUM in the past year, a remarkable achievement by the team and another measurable differentiation of the STEM solution. Solar AUM also had the third consecutive quarter of healthy growth with new customer additions more than offsetting the roll-off of some of our legacy low margin contracts. This execution resulted in strong car growth, up nearly $13 million in a single quarter. Additionally, we are raising our car guidance for this year. In-market demand remains very strong.

Falling equipment prices for both solar and storage are improving project economics for our partners. The recent clarity on some key tax incentives also remains a major tailwind for the industry. Overall, we have seen several industry analysts come out on a key debate in our sector regarding the impact of higher interest rates. And from our perspective, we can confirm their assessment that project returns are generally higher despite the increase in interest rates. We ship data from Level 10 Energy, PPA price tracker validates 100% plus increase in power purchase agreement prices from 2020 through 2023. Demand continues to be robust, and the focus by developers and asset owners is on finding ways to accelerate project timelines. Our successful project track record paired with our industry leading software and services is particularly well suited for this market environment.

As a reminder, we do not have any direct interest rate exposure by virtue of our fixed rate debt, which have maturities into 2028 and 2030. Please turn to Slide 6, highlighting our technology leadership. We are pleased to be recognized once again by a third-party for our technology leadership earning the sustainability product of the year award from the business intelligence group. These awards highlight products designed to help companies improve their sustainability objectives. On the commercial side, our technology solutions continue to resonate with customers in multiple markets. In New York, specifically the Bronx, we helped NineDot Energy bring the first energy storage system into service. We are co-optimizing multiple value streams for our customers in New York and building on the coincident peak prediction expertise we developed for other markets.

This is another example of our ability to rapidly scale Athena at low incremental costs as we enter new markets. Between NineDot and some of our other partners, we expect to have over 700 megawatt hours under Athena control in the New York market over the coming years. Additionally, Athena is supporting NineDot Energy with customers including Starbucks, who is the anchor subscriber to the Pelham Gardens project, monetizing sustainable energy credits in New York. The system is operational and currently generating energy credits. In our solar asset performance management offering, we introduced a new application, Event Manager, which helps our customers resolve downtime issues on their assets. In the last year alone, we have onboarded over 1 gigawatt of assets to Event Manager.

ERCOT, our data science team has been refining their forecasting and optimization algorithms, including what we believe is one of the leading day ahead and real-time price forecasting engines in the market. Based on our modeling, we believe PowerBidder can offer a 10% to 40% uplift in revenue for assets in Texas versus competitive offerings in that market. Please turn to Slide 7. With the launch of PowerBidder Pro, we are introducing a new software tool for energy professionals to manage their clean energy assets. The product targets asset owners, traders, and power purchase agreement off-takers, a segment of customers we believe are underserved by current offerings in the market. PowerBidder Pro empowers these customers with active asset control.

Our customers can take charge of bespoke trading strategies, tailored risk management tools and use our forecasts or input their own market forecast. We have seen strong initial customer interest for this offering with multiple gigawatt hours in the pipeline. Moving to Slide 8. Today, we’re excited to announce a significant technology and commercial alliance with SoftBank Energy. This partnership is an example of our focus on growing high-margin software and service revenue. Under the terms of the agreement, we will offer our modular ESS solution and related software services to SB Energy across their 10 gigawatt hour plus project development pipeline in North America. SB Energy is one of the leading utility scale renewable developers, and we are proud to partner with them to advance their vision of generating 24/7 renewable energy at gigawatt scale.

In addition, we are collaborating to integrate our industry-leading Athena AI into the SBE digital platform. This will include the development of additional applications such as control and optimization of long-duration energy storage. Importantly, we view this partnership as a template for additional engagement with asset owners, project developers and energy trading firms to drive a programmatic approach for growing high-margin service revenue. On to Slide 9. As we highlighted last quarter, the municipal utility and electrical cooperative segment represents an attractive market for Stem. In particular, these entities are very focused on enhancing the reliability of their power networks and are seeking to drive decarbonization and greater engagement with their members and in customers.

In late 2022, we leveraged our winning playbook of investing early in an attractive market where we can drive differentiation through our unique software and service capabilities. We accomplished this by onboarding key stakeholders in the muni and co-op market with preferential access to Stem’s deep supply chain relationships. Bill will discuss the financial details of these arrangements, but at a high level, this engagement has resulted in nearly $1 billion of contracted bookings in the last 12 months with our position in the market going from zero to over 15% market share based on expected deployments in 2024. US public, power and co-op market is expected to represent over 20% of all future energy storage deployments and is forecast to represent the fastest-growing segment of the FTM market through the end of this decade.

We expect to continue our leading momentum in this exciting segment with engagement on multiple gigawatts of bulk power system projects. Stay tuned on more wins here. And now, I’ll turn the call over to Bill.

Bill Bush: Thanks, John. Starting on page 11 with our results for the third quarter of 2023. As John mentioned, to gain a foothold in the bulk power system market, we offered certain strategic partners’ preferential access to Stem’s supply chain network. In certain cases, we offer a guarantee that the value of the purchased hardware would not decline for a certain period of time after purchase generally six months. Additional details on these arrangements are provided in our earnings release and Form 10-Q filed by the company. The company accounts for such guarantees is variable consideration and update its estimates of variable consideration each quarter for facts or circumstances that have changed from the time the initial estimate and as a result, the company recorded a revenue reduction of $37.4 million during the three and nine-month period ended September 30, 2023.

The company does not intend to provide such guarantees and customer contracts going forward and does not expect that the future revenue reduction, if any, with regard to the guarantees outstanding as of September 30, 2023, will be material. In short, this was an exceptional offering that has allowed us to enter and quickly build a leadership position in an attractive market segment, where we have executed almost $1 billion of contracted bookings in the last 12 months. And now, on to the financial results. Revenue was negatively impacted this quarter by the $37.4 million reduction in revenue, I just referenced. Adjusted EBITDA and non-GAAP gross margin have been adjusted to exclude the impact of such revenue reduction. Adjusted EBITDA was negative $900,000 in Q3, keeping us on track to achieve our goal of being adjusted EBITDA positive in the second half of this year.

Achieving adjusted EBITDA positive is a critical profitability milestone for us, and we remain laser-focused on this goal. We continue to drive operating leverage with strict cost controls and optimization strategies. We continue to stay disciplined on operating expenses and reaffirm the cash OpEx as a percentage of revenue for 2023 will be less than 25%. Turning now to slide 12 for a look at our operating metrics. Backlog increased 125% year-over-year and increased 35% on a sequential basis to $1.8 billion. The largest driver of the backlog increase was a record $676 million of bookings in the quarter. End market customer demand remains strong, catalyzed by the continuing clarification of the Inflation Reduction Act and an improved supply chain and hardware price environment.

Our AUM on the storage side of the business grew from 3.8 gigawatt hours in the second quarter of 2023 to 5 gigawatt hours in the third quarter. That’s a significant 32% increase driven by our strong commercial movement and customer demand for Stem Solutions. Our operating AUM on the solar asset performance monitoring side of the business ended the quarter at 26.3 gigawatts, up 300 megawatts or approximately 1%, our third quarter of sequential growth. The solar industry continues to show signs of recovery evidenced by growing AUM and the backlog growth of 41% year-over-year. Turning now to slide 13 and our 2023 guidance. Full year revenue guidance has been adjusted downward dollar-for-dollar sole year’s results of the $37.4 million reduction in revenue.

We expect to trend towards the lower end of our full year non-GAAP gross margin guidance. We are raising fiscal year 2023 CAR guidance by 9% at the midpoint, a steady increase in CAR positions us well to grow high-margin software and services revenue in 2024 and beyond. In addition, we expect continuing strong growth in service revenue driven by expected commissioning of systems and a result of partnerships such as the one we announced today with SP Energy. We are tightening the range for full year adjusted EBITDA guidance to negative $25 million to negative $15 million. We still expect to achieve our goal of being adjusted EBITDA positive in the second half of 2023. We define that as the sum of the third and fourth quarters being adjusted EBITDA positive, so with the third quarter in the books, we have confidence that we will be adjusted EBITDA positive in the fourth quarter of this year.

We continue to expect to exit the year with more than $150 million in cash and cash equivalents on the balance sheet. As previously stated, we expect to achieve full year positive adjusted EBITDA in 2024. We see this goal as a key achievement in our corporate maturation. We will provide more details on our 2024 guidance on our fourth quarter and full year earnings call in February 2024. With that, let me turn the call back over to John for some closing remarks.

John Carrington: Thanks, Bill. Wrapping up on slide 14 with our key takeaways. Third quarter momentum driven by strong end market demand, resulting in record bookings growth, significant storage backlog, AUM and CAR growth, solid solar asset management growth and execution, our software and services deal execution underscored by the SPE agreement. Athena continues to add additional value for solar and storage customers with new products in multiple markets, and the muni co-op momentum continues with $1 billion in contracted bookings in the last 12 months. We reiterate our expectation to achieve adjusted EBITDA positive in the second half of 2023, and finally, we’re excited about the tremendous opportunity in front of us with the expectation that we will achieve full year adjusted EBITDA positive in 2024 and beyond.

With that, I want to thank our key stakeholders, employees, customers, channel partners, suppliers and shareholders. And now, operator, let’s open the line for questions please.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brian Lee with Goldman Sachs. Please go ahead. We will come back to Brian Lee. The next question comes from Thomas Boyes with TD Cowen. Please go ahead.

Thomas Boyes: Great. Appreciate you taking the question. Maybe just a quick one on the customer contract guarantee. I just want to make sure that I understand how it’s structured because I know this is something we saw in the first quarter of this year as well. Originally, I thought the revenue adjustments could be made all the way up until the first quarter of next year. So is there a floor in place in that structure that we’ve already reached just given the declines in within garment pricing market, or did you elect to recognize the maximum amount of exposure this quarter? Just want to make sure I understand why there shouldn’t be any material changes after, say, the 30th of September? Thanks.

Bill Bush: Yes, this is Bill Bush. Thanks for that question. So the contract that you’re referencing is actually somewhat different than what we adjusted for this quarter. In fact, that contract is, as you mentioned, tied to the price of lithium. These contracts were not. And so there are significant differences between those. These effectively had a remarketing rate associated with them which we’ve now taken what we believe to be the full downside risk associated with them. So we don’t expect any material change after this transaction. And in fact, we expect to be able to move on from these contracts in their totality within the first quarter of 2024.

Thomas Boyes: Got it. Appreciate the clarity there. And then maybe I obviously enjoyed kind of going through the PowerBidder Pro Demo at RE plus that was earlier this year. Maybe could you just talk a little bit more about how the customer response has been thus far? You know, what the timing expectation is for the PowerBidder Pro? And then what’s the go-to-market deployment strategy? Is this going to be something that you’re primarily in focus — on with new customers? Or is there something in place as a way to go back to existing PowerBidder users and kind of convert them over to Pro?

Mike Carlson: So thanks for the question. This is Mike Carlson. As far as where we’re at the initial response, we launched it in September we had great response at the show at RE plus and then correspondingly, a number of specific opportunities as we put it in front of customers. At a high level, the response we got is exactly what they’re looking for and not able to find in other opportunities they consider. We’ve got proposals out in the field, some which early indications are that they’re going to move forward beginning of second quarter of 2024. So we’ll have product release at the end of this year. Production expected in the first half of next year. As far as our go-to-market strategy with it, obviously, we’ve got an existing customer base that is considering expanding their own capabilities beyond our service offerings that we would then continue to add Bidder Pro solution to.

And then obviously, a whole new market that doesn’t want to look at our managed services. They’ve got their own trading desk, their own risk management, and this is opening up that opportunity to bring them into our portfolio of customer base.

John Carrington: Prakesh, do you want to talk about the bulk power side, may be?

Prakesh Patel: Yes. One thing I’d add — this is Prakash Patel, is that this offering is very well suited for gigawatt scale what we call bulk power system in the front-of-the-meter segment. Because these customers or asset owners are typically more sophisticated, have a need for greater control as you’re dispatching very large systems into the power grid. And a lot of the functionality involves bespoke trading strategies, enabling greater control, better risk management. So it really compounds with some of the things that John talked about earlier in the momentum we’re having with new co-ops and broadly at the larger FTN scale.

Thomas Boyes: Excellent. And I appreciate the color there. If I could just sneak one more in just on the same vein. For the 10% to 14% potential uplift that was referenced on slide 6, was that for the plain vanilla power bidder? Or is that the Pro version, I wanted to know?

Bill Bush: Yeah, that’s the core Athena optimization engine. So that’s across either offering. It’s really our ability to optimize these assets. The Powerbit or Pro, what that allows is customers to further tweak certain risk metrics or their views of forward energy forecasts and the like, but it’s available to everyone.

Thomas Boyes: Got it. Thanks again. I appreciate it.

Operator: The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Brian Lee: Hey, guys. Thanks for including me in the question queue here. I had a couple. Maybe the first one just on the announcement this afternoon, SP Power, the 10 gigawatt sounds pretty robust, especially in the context of what they’ve done to date as well as what you’ve deployed to date. Can you give us a sense of I guess, the near-term or medium-term impact of that relationship, kind of how quickly do you think you can get volume deployments with them? And also maybe sizing kind of the magnitude of the opportunity. I would imagine the entire 10 gigawatts is convertible, but how are you thinking about it when you’re framing the opportunity?