Q2 2021 Stem Inc Earnings Call
Greetings and welcome to some second quarter 2021 earnings 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 during the conference. Please press star zero on your.
Telephone keypad as a reminder, this conference is being recorded I would now like to turn this conference over to your host Mr. Ted Durbin head of Investor Relations. Thank you. Sir you may begin your presentation.
Thank you operator.
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 the statements. We therefore refer you to our latest SEC filings. Our comments. Today also include non-GAAP financial measures additional details and reconciliation to the most directly comparable.
GAAP financial measures can be found in our second quarter earnings release, which is on the Investor relations portion of our website.
John Harrington CEO and Bill Best CFO will start the call today with prepared remarks, large Johnson, Chief Technology Officer, and <unk> Patel Chief strategy Officer will also be available for the question and answer portion of the call.
Now I will turn the call over to John.
Thanks, Chad today, we're pleased to host our first earnings call as a public company listed on the New York Stock Exchange, it's been a long journey to get to this point and we couldnt be more excited about the future of the renewable energy industry and <unk> critical role in that ecosystem.
Today, we reported solid second quarter results at the high end of our guidance range for revenue and we're reiterating our guidance for full year 2021 revenue and adjusted EBITDA. This represents top line year over year growth of four X in 2021 Bill.
Bill will give you more details on the Florida on outlook, but I wanted to share with you how stem is focused on extending our leadership position in the high growth smart energy storage market.
Today, there's an inflection point in our market driven by increasing demand for renewables and significant decreases in cost for both renewable generation and battery hardware combined we see these factors, resulting in an energy storage market that is expected to grow by 25 times over the next 10.
In years, leading to a 1.2 trillion dollar market opportunity.
The electric power grid is becoming increasingly decentralized where every customer site has a combination of renewable generation in smart energy storage or solution drives customer value by lowering energy costs, reducing dependency on conventional fossil fuel generation.
And solving the intermittency challenges posed by solar and wind.
Based on our experience scale domain expertise and operational excellence, we believe stems integrated hardware and software solution is the best clean energy storage software platform in the marketplace.
One of our key metrics as assets under management, and we're seeing continued momentum on a whim and pipeline acceleration.
From a market position perspective, stim as one of the leaders in worldwide deployments, we have systems operating or contracted across the U S, Canada, and South America, representing over 1.2 gigawatt hours of capacity, our pipeline, which stood at $1.7 billion at the end of June.
As significant and growing we.
We have also grown our backlog, which consists of executed contracts from $184 million at the end of last year to $250 million at the end of Q2, reflecting an increase of 36% year to date. This drawing backlog gives us increased visibility and confidence.
We will achieve our revenue target for 2021 and provides momentum into <unk> 'twenty 'twenty two now I'd like to discuss our proprietary artificial intelligence enabled platform called Athena our market leading software solution.
We continue to invest in expanding the capabilities of Athena, enabling it to even better optimize energy storage dispatch, our scale and ability to co optimize multiple value streams as highly differentiated Athena benefits from years of experience operating a large install base with over 20 million runtime hours across.
Foster a diverse set of markets battery technologies and multiple use cases.
<unk> and a significant competitive mode for the company. Additionally, Athena continues to get smarter as it processes more data and more markets through powerful machine learning cycles.
Another differentiated aspect of our model is the 100% software attach rates on our hardware sales, providing exceptional visibility to our software revenue, we generate software margin north of 80%, which accrue over 10 to 20 year contracts.
A great example of our differentiation delivering sustainable energy optimization as the electrodes project, where we successfully replaced a competitor software with our Athena platform last year.
All of the 85 sites in this 345 megawatt hour portfolio in Southern California, We're integrated and converted to the Athena platform within 60 days. This spring, we announced that we have improved the electrodes project value to customers and asset owners by 30% on average and in fact.
Our software is enhanced select customer economics by over 100%. We believe this clearly demonstrates our industry leading position as it relates to AI optimizing energy storage for customers savings, while delivering grid services with all the heat waves and other extreme weather events in June and July.
Ally Athene has supported the grid by dispatching over 500 megawatt hours of energy on multiple days in North American markets in response to thousands of calls on our sides Athena is automatically fulfilling virtually 100% of those calls across 18 utilities today.
Day, Athena is actively monetizing 11 of the 13 energy storage value streams described by the Rocky Mountain Institute wheel of storage for customers utilities and market operators, while providing functionality that includes peak demand management real time energy arbitrage capacity payments and <unk>.
Ancillary services like frequency regulation and backup power Athena Optimizes these different value streams within customer specific and market specific constraints, such as solar ITC compliance battery life and regulatory targets like meeting greenhouse gas requirements for the S Chip program in California.
Born yet.
Athena is also executing in Massachusetts with its fully automated energy dispatch platform called Athena bidder, where this past quarter student began AI automated bidding into the ISO new England energy and frequency regulation market using real time price forecasting algorithms at the same time Athena is.
Optimizing for capacity obligations long term battery life solar ITC compliance and Massachusetts Smart program compliance energy markets are only getting more complex and Athena thrives on that complexity.
Now I'd like to discuss our view on market demand our bullish outlook is driven by the strong demand pull for our services from multiple end markets, particularly corporate independent power producer I P. P electric co op utility and community of choice markets on the corporate side, we are partners with multiple fortune 500 comes.
And he's like home depot, and U P S and we've delivered significant value above and beyond our original contracts to this key group of customers. We expect additional sales to corporates as they expand in new markets and become even more environmentally focused driving a higher mix of renewable energy they understand the value of storage.
And the differentiation that Jim brings and we expect further growth as we expand this customer base with regards to the I P. P cooperative and community choice markets, we see a great opportunity to leverage our buying power hardware expertise and software optimization to generate compelling value for these customers. We are currently person.
Doing co op projects in 26 States and we recently installed a 14 megawatt hour project for a co op in Arkansas, which is our fastest front of meter deployment in company history. We will continue to demonstrate the value of skin storage solutions to the co op and CCA markets in the second half of 2021 and.
We expect additional momentum in 2022.
It's worth noting that the vast majority of our sales come through our partner channels, which is a powerful way to extend our reach while minimizing our customer acquisition costs. We also continue to see momentum with the Stim University online platform, where over the past six months, we have onboard at over 450 affiliates.
Across over 180 companies for a total of 1100 professionals, who are credential to execute customer contracts and service deployment specialists.
We look to increase our sales in the fast growing front of the meter or F. T. M market. It is our partner channel that will allow us to access those larger projects in markets. We have grown quickly in markets like Massachusetts. In fact as at the end of June Athena manage 52% of the energy storage assets active in the wholesale.
<unk> energy ancillary services and forward capacity settlement markets in Massachusetts. This capacity represents almost 20% of the continuous storage facilities in six states comprising the ISO new England market as reported by that system. Operator. These strong results demonstrate our speed to market.
And the effectiveness of our Athena platform underscoring our confidence in continued momentum and growing share of the F. T M market <unk>.
Shifting to the policy and regulatory front, we've been encouraged with the support from the White House and Congress recognizing the importance of enacting a standalone storage incentive tax credit or ITC. The president specifically included the Standalone ITC and its American jobs plan and it is included in the house screen App.
And the Senate Finance Committee as clean Energy for America Act among other bills in Congress, while the situation is fluid we believe a standalone ITC will be included in the pending reconciliation package and according to wood Mackenzie a passage of a standalone storage ITC would increase stems total.
Addressable market by up to 25% against their previous baselines policy actions like first quarter 'twenty to 'twenty two demonstrate the macro tailwind of distributed generation resources, which will only increase the value of storage as I said, it's across the country rollout their implementation plan Fortunately.
Many states are not waiting on Washington, D C, specifically, Connecticut, Massachusetts, New York, Virginia, and others are seeking to accelerate adoption of smart energy storage. The same holds true in international markets, such as South America, and Europe, where the EU Green Act will drive the continent to become carbon neutral by 2050.
While we are optimistic about incremental policy supports our plan does not depend on passage of the storage ITC, rather it represents upside to our forecast.
Now I'd like to address some of the supply chain and inflation questions that are top of mind in the market of late.
Looking upstream we continue to monitor the global supply chain issues that emerged during the Covid pandemic last year and have cascaded through multiple industries, including ours.
We saw some of these constraints coming at the end of last year and in January we took proactive steps in securing our supply needs to meet our revenue commitments for 2020. One. We also continue to monitor COVID-19 impacts on utility interconnection approval processes and timing that could impact our ability to deliver product.
And drive a U N. We run a robust sourcing process each year and as part of this we evaluate multiple suppliers across a variety of metrics. Our operation team leads an extensive process to ensure our suppliers are meeting commitments. In addition, the product teams confirm the supplier roadmap aligns with our specification.
<unk> and market needs.
From an internal process standpoint, we have weekly meetings with my senior management to review hardware supply, including granular alignment by hardware system and supplier to contracted projects I am confident this level of rigor has served the company well and more importantly, our customers looking forward we've started a contra.
For supply as our current bookings begin to provide more visibility into 2022, given our scale multi year relationships with suppliers and proven execution in the market. We have generally been able to secure supply when and where we need product through.
Through our concerted efforts, we have made good progress on diversifying our supply chain over the last few years, whether that is around the specific number of Oems the geographies, we source from or the battery Chemistries. We deploy this diversity enables us to be nimble and responsive in the event of an issue with a single supplier trade tariffs.
Or other events, such as Covid induced shortages, our customers value, our multi vendor fit for purpose approach to sourcing hardware.
Forward, our balance sheet allows us to negotiate better pricing and terms from our suppliers. Additionally, we can opportunistically procure extra capacity when it becomes available and we are actively engaged in those conversations bottom line, while we do see some risks around supply chain issues. We are confident we have implemented.
Sufficient monitoring controls and optionality to mitigate those risks moving to our people strategy. We've assembled a terrific team to date I want to highlight some of the things we're doing to enhance our leadership position and meet the market demand for our products. We are aggressively recruiting exceptional talent in our software.
Operations and commercial functions as the first pure play Smart energy storage company to go public we're attracting top talent, including software developers data scientists operations experts and sales leaders. In addition to competitive compensation and a culture of diversity and inclusion we.
For our team members the unique opportunity to make an impact with sustainable innovation that will define the energy markets of the future Lastly, before I turn it over to Bill I want to personally thank everyone, who helped us get to this point, specifically our employees customers channel partners suppliers advisor.
<unk> Board members and investors again, I am very excited about the future of this industry and the value that stem brings to our customers and our part in Decarbonising. The economy with that let me turn the call over to Bill.
Thanks, John starting with our financial results, we recorded $19.3 million of revenue in the second quarter, which was at the high end of the guidance range. We provided in January and about 4.5 times versus the same quarter in 2020. The vast majority of the growth came from hardware sales on FTM partner projects with them.
Additional revenue from house customer arrangement, our GAAP gross margin was negative $100000 versus negative $1.7 million in the same quarter last year non-GAAP gross margin came in at $2 million or 11% for the quarter up from 5% in the second quarter last year, which benefited from a higher <unk>.
A software service revenue and higher volume.
Net loss was $100 million versus the $19 million net loss in the same quarter last year that swing is almost completely the result of a large noncash charge for warrant issued as part of the Star Peak IPO in August 2020.
Lastly, adjusted EBITDA was a negative $8.6 million versus a negative $7.5 million in the same quarter last year as a result of the additional head count as we continue to invest in our software and operations workforce to go after this rapidly growing market.
Turning to our operating metrics, our 12 month pipeline grew to $1.7 billion as of the end of June that's up 21% from the end of the first quarter 2020. One we are seeing a lot of new opportunities in the F. T M space, which contributed to two thirds of the growth in the pipeline as our sales force focuses on that market.
We booked $45 million and projects in the quarter and have booked $96 million in the first half of 2021 versus $58 million in the first half of 2020 that represents a 66% increase reflecting the strength of our commercial offering.
Our backlog increased 13% sequentially to $250 million at the end of June and up from 36%.
From the year end 2020, as John mentioned that $250 million backlog gives us increased visibility and confidence that we will be able to achieve our revenue target for 2021 and provides momentum for continued growth in 2022.
Our backlog represents signed contracts that we expect to convert to hardware revenue for the near to medium term and software revenue for the next 10 to 20 years. In contrast, our pipeline metric represents potential revenue from specific opportunities, which have a reasonable likelihood contract execution within 12 months.
And then our last major metric our contracted assets under management, which grew 9% between the first and second quarters 1.2 gigawatt hours equivalent to energy for approximately 240000 homes.
It's broad scale indicates the long term strength of the business and we think that contracted.
The best metric to track our software end market participation revenue potential.
Every quarter and every year, we are stacking 10 to 20 year recurring revenue software contracts into the model with north of 80% gross margin. These contracts recorded as deferred revenue give us tremendous momentum and confidence in the long term earnings power of the business, which will increasingly be driven by software that installed base also.
Present upside optionality in the form of market participation our grid services revenue. So when markets are regulations change, where there with our installed base of software to capitalize our new high margin value streams for our customers with shared upside for Stan.
Turning to guidance as John mentioned, we are reaffirming our guidance of $147 million of revenue for the full year 2021 and negative $25 million of adjusted EBITDA as we discussed in our January analyst day, we expect to recognize 20% to 30% of our full year revenue target in the third quarter and fit.
50% to 60% in the fourth quarter, driven by normal seasonality of the sales and customer installation cycle. It's important to note over time, the seasonality were flattened as software becomes a larger part of our revenues and gross margin.
We expect operating expenses to continue to grow primarily driven by head count in order to invest in growth initiatives.
With respect to our capital structure, we closed our merger transaction on April 28, which put close to $500 million in cash on the balance sheet with no debt and Jumpstarted, our plans to grow the business manage our supply chain and consider inorganic opportunities. We will continue to take steps to simplify our capital structure following the merger.
Action three examples of which include number one in mid June the pipe shares from the merger transaction were registered in became freely tradable and had been sold into the marketplace in an orderly way too in late June we exchanged all of the $7.2 million private warrants outstanding for $4.7 million common shares at favorable terms to the company.
And third there are $12.8 million warrants outstanding which are redeemable by the company beginning August 20th pursuant to the terms of the warrant agreement the company intends to redeem those warrant.
We think that these steps will increase our trading liquidity, but reduce dilution for existing shareholders and in the case of the warrants will reduce variability on our income statement by eliminating the noncash charges associated with them. We will continue to evaluate opportunities to simplify our capital structure, while maintaining financial flexibility to support our growth.
Lastly, I want to Echo John's comments and thank all of the people who helped us get to this point. We appreciate their partnership and we are enthusiastic about the trajectory of the business and with that let's open the lineup for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Your line is in the question queue.
You May press Star two.
Question from the queue.
Think of equipment it may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Mike.
That's credit Suisse. You May proceed with your question.
Hey, good evening and thanks for taking our questions.
First one just on the margin side.
Could you just broadly talk about how should we think about margins in the near term.
As you kind of thought about secured all the required batteries for the.
Just wondering if there's any impact from shipping cost, which has been plaguing some of.
The companies in the supply chain. So just wondering margins for the second half on 2022.
Yeah. Thanks for the question. This is bill Bush, yeah, so breaking that down into two pieces I mean, we think the second quarter. The margins there really reflected some of the early early entry FTM projects, which had a little bit lower margins than what we are seeing currently longer term, we think that the software.
It does of course drive the mix and that's going to drive higher gross margins.
We've talked about over a number of calls.
With respect to the shipping costs, that's a relatively small amount of our cost relative to the system itself. So while they are increasing we have seen that although I would also mentioned we think that that's a short term dislocation issue.
We haven't we haven't been negatively impacted by that so far but it is but you are right they have been increasing over time.
Got it no that's helpful.
With regards to the behind the meter in front of the meter project.
Could you maybe talk about the mix of those hardware sales or revenues in Q2, and what you have in the backlog and as part of that just wondering probably on the Sun.
Talk about your go to market strategy for the front of the meter market something that you have already seen new England in Massachusetts.
How to think about your market share growth in other markets what could drive that thanks sure. So I'll start with the first part and then probably John and per cash will jump in on the go to market strategy component, but as far as the bcm versus F. T. M. M hardware deliveries most of the hardware deliveries that you see rolling through.
The income statement these days and in this last quarter are on the in the F. T. M segment historically, the BPM sales were run through Spv's, and we didn't technically sell hardware through those particular structures Oh.
Over time, we do expect to deliver more btn and we haven't given the mix percentages between the two are historically btn versus F. T M hardware sales.
And I'll, let John weigh in on that next week, John Carrington, There I had a couple of things I'd say that one of the really exciting parts of what we're doing in the front of the meter side is if you look at Massachusetts, particularly it's a market we weren't even 18 months ago and as mentioned in the prepared remarks.
We have 52% of the energy storage assets active in the wholesale markets that Athene is managing so we feel very good about our advanced our efforts in the front of the meter side and again when you think about the whole ISO new England market, it's 20% and that's a six state.
Ecosystem as you well know I would also add that we're continuing to look at a variety of things to accelerate that roadmap and that could come in the form of you know looking at opportunities from an athene, a roadmap standpoint, and inorganic type of plays but we will certainly continue to invest in data scientist and that software.
Shipment team, but we do feel like it's a great spot for US we are really feeling confident in our trajectory.
Trajectory on that space, and we expect to see more and we'll continue to update everyone as the as the momentum continues.
Thanks, and I'll jump back in the queue. Thanks.
Yes.
Our next question comes from the line of <unk>.
Parents zero right now.
Sir you May proceed with your question.
Hi, Thanks.
Thanks for taking my question.
Can you talk about it.
Very nice increase in the <unk>.
Pipeline.
Can you just talk about maybe the.
Your outlook for bookings rest of the year and how we should think about the.
Backlog.
Would there be any seasonality to how the bookings come in I would I thought there would be but any color you can add there would be helpful. Sure.
And again, thanks for the question, we have put out as part of our guidance range on the bookings side and from a seasonality standpoint, certainly backend loaded which again matches the previous years' history, but third quarter is 20% to 30% from a revenue standpoint and fourth quarter is.
50% to 60% of our plan as mentioned by Bill and we reaffirm the full.
Full year revenue target from our contracted backlog, it's it's really exciting because as I've mentioned again in the prepared side is that we were at $184 million of contracted backlog at the end of 2020 and through the end of the second quarter were $250 million, which is a 36%.
Year to date increase so we're continuing to see contracted backlog grow and we're obviously seeing nice growth around our pipeline of 12 month pipeline.
You know it was $1.7 billion, which was up from $1.4, Billion% to 21% increase so feel good about both key metrics and you know I think.
That momentum continues throughout this year from everything we can tell.
Got it and then with success.
Success, you have had with the electrical projects.
Are you seeing.
Additional opportunities for.
Conversions of some of the existing facilities and and also is there.
Is it an opportunity for converting some of the <unk>.
Storage projects that maybe you didn't have.
Software attached with it.
Getting new software.
Services.
I mean, I'd say at the aggregate, we're definitely seeing more incoming around software only type of opportunities I think part of it's been driven by our balance sheet and the fact that it was.
Venture backed company pre this outcome, we really at times, maybe had a couple of years of runway. When you were talking about 20 year deals with developers it was a bit challenging that has gone away. So we're seeing significant amount of incoming and look our view is we'll continue to sell hardware as long as it's economical.
Our customers typically want the fully wrapped solution hardware and software, but in our model contemplates hardware throughout so but largely won't you want to jump in with ease off well I. Just think we're definitely seeing the interest in the software performance and applying that to our assets that people may have either already owned or want to upgrade.
But I think the proof will be in the ability to secure software contracts for customers, who have assets, where they are procuring the equipment directly and building new projects incorporating the Athena software capabilities in their pro forma.
Great. Thank you.
Our next question comes from the line of Brian Lee with Goldman Sachs. You May proceed with your question.
Hey, guys. Good afternoon, thanks for taking the questions.
I had to hop on a little bit late so I apologize if you've already covered this but on.
On the contracted a U N. It seems like you're tracking ahead of targets you had laid out for the year. Prior just wondering if you had an update on guidance there.
It also you cited in the press release 345 megawatt hour edition this quarter I think that's bigger than the overall quarter on quarter increase. The wondering also something maybe fill out of your contract at a U M base. This quarter and then what might've drove that.
Yeah, I think so thanks for the question, Brian I think the 345 Youre referencing is the electrodes portfolio as opposed to an increase I mean, the total <unk>.
Total AUM grew by about 100 megawatt hours over the quarter from from Q1 to Q2 went from one one gigawatts to one point too. So I think you're I think we're just kind of getting a little bit of a mixed metaphor in there in terms of which projects you are referencing long term, though we do see continued growth in the AUM.
You know I think in terms of providing guidance on that particular number we haven't really done that so it will probably stay away from that right now.
But expect to see continued growth there I mean, that's really as we have has said multiple times, that's really where we see them.
Yes, the business growing at it.
Lays out on a long term basis, where we think the software only product is going to go in software and software deliveries over time as.
As you know as John referenced we think that the marketplace is getting more complicated thats, where <unk> seen it really shows its strength and when will you know when those markets get more complicated we'll be there with our customers to be able to take advantage of and drive additional revenue both to the customers, but also to ourselves.
Okay fair enough.
And then on the I guess a question on the contracted backlog and ended up in the new bookings this quarter.
You've had a pretty consistent.
Run rate of new bookings to start the year here.
But there is I think a fairly significant ramp in the top line expectation that you had in the original model out to 2022, so you're.
I'm wondering if we should be.
Anticipating a fairly large acceleration at some point you know kind of second half either through seasonality or based on some of the contract timing constructs, you're you're seeing in the pipeline or what sort of gives you comfort that.
Yeah, there's a there's sort of a step up as we as we head into maybe the back half and into 2022 around some of the revenue.
Expectations here thanks, guys.
Yeah, and so I think as John mentioned I mean, this is definitely a seasonable business, we do expect quite a bit of growth on the backside of the year.
Yes. So we are right now I mean, if you say if you compared bookings first half this year versus first half last year.
We're substantially ahead of last year, almost 66% higher than last year and in fact, if you look at again year over year, we booked about 70% first half this year as compared to last year in total so we're feeling like we're on the right trajectory in terms of setting ourselves up for 2022.
You'll recall when we went to the analyst days and such we talked about the growth in the backlog and how that gave us visibility towards the back end and in the analyst day in January I think was January 16th or 17th timeframe. We had about we had 100% of the 2021 revenue in backlog at that time, I'm, not saying that we'll have.
That same number this year, but thats the kind of business that we're trying to put together one with high visibility over long periods of time again rolled back into this 10 to 20 year suffer contracts long term visibility of earnings growth and gross margins.
Alright that makes sense, thanks, guys I'll pass it on thanks.
Profit.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. John Harrington for closing remarks.
Thank you Lauren and thank you everyone for joining us on our first earnings call.
We're very focused on meeting our commitments to investors and pleased with our strong execution in the first half of this year and the momentum we're carrying into next year. All of this is underpinned by our strong bookings performance operational excellence and the Athena platform, which drives compelling margins and long term recurring software revenue.
My team and I are here to help with any follow up questions and look forward to speaking with you next quarter.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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