Q3 2021 Stem Inc Earnings Call
Our financial position first starting with software, let me be completely clear about our vision is to expand our position as the leading energy intelligence software provider, we have purposefully built our organization to drive the deepest most robust artificial intelligence platform in the industry.
Lars will discuss our software differentiation in more detail later in the call.
On customers, we provide significant value to customers over a contracted period of up to 20 years, both through our AI software and our operational services and third our financial profile benefits from strong and growing gross margins driven by our software and customer focus the Athena.
The platform drove 8% GAAP gross margin and 15% non-GAAP gross margin this quarter and Athena will continue to drive our margin expansion Bill will provide further financial detail later in the call before I turn it over to larger Bill Let me focus on the second leg of stem differentiation.
Our customer focus specifically I will start with films go to market strategy, which leverages, our direct sales force channel partners and our strategic investors to maximize reach across multiple markets. We have had great success with our channel partners in particular, who know our products and capabilities.
And have completed training it stemmed University, our education platform, we continue to expand the breadth and depth of our customer relationships, our breath expanded sharply as we nearly tripled the number of active stem partners versus the same quarter last year and our depth also increased as our average project.
Size has doubled in the last year.
This diversification results in limited customer concentration, we do not expect any one customer will represent more than 10% of our revenue this year versus some of our competitors who are highly dependent on a small number of customers to generate revenue. This broad customer base continues.
To inform our Athena AI platform and different customer segments use cases, and geographies, which enhances our software's competitive moat in the front of meter our FTM market segment, we continue to gain share which contributed to the significant increase in our pipeline this quarter. Additionally, our.
The meter our btn customers continue to grow and our repeat customer metrics are up quarter over quarter and year over year in fact, nearly 50% of our bookings this quarter came from existing customers.
Partners continue to be a source of domestic and international growth, which led to the announcement of our expansion to Chile with our partner and Investor Co pack one of the largest public companies in South America, We expect additional wins from this partnership both in Chile, and the broader South American market.
Moving to some of our key metrics driven by our customer success. Our 12 month pipeline grew by 41% and only 90 days from $1 7 billion at the end of the second quarter to a record $2 4 billion at the end of September we achieved this stellar growth across both.
<unk> and <unk> segments and across multiple geographies.
Drilling down on geographies beyond South America, we've seen tremendous growth of opportunities in the Texas market, which now has the second largest market in our pipeline and was the source of significant bookings this quarter were helping customers garner exceptional economics for storage as the build out in wind and solar has increased market volatility.
<unk>, which has led to strong merchant revenue opportunities. We expect our demonstrated success in generating merchant revenues and ISO new England to translate into multiple markets across the country and Texas is a foreshadow of things to come.
Now moving to our customer contracted results for the first time in company history, we exceeded $100 million in.
Looking for a single quarter, the $104 million was more than double our bookings in the second quarter of this year and nearly triple the bookings in the third quarter of last year again, the Texas market represented a large portion of our bookings and we are optimistic this will continue for several quarters to come.
I am encouraged by our strong commercial prospects in the fourth quarter of this year and beyond like last year, you should expect back half weighted seasonality to our bookings similar to our revenue.
I would like to make some comments related to customer Centricity and lifetime support. This is a core value of stem and we believe highly differentiated we commit to maximize the lifetime value and performance of asset operations in excess of 20 years, a core strength is centered around our AI driven software.
It also extends across our operations group, we add value for customers in several ways. Our deployment team supports logistics engineering and interconnection for dozens of projects at a time our network team implements communications and uses a terabyte of data to automatically monitor asset performance.
And safety and our programs team provides monthly performance reporting and troubleshooting in the rare case, an asset Underperforms. This team also overseas fleet performance, which includes 22000 grid calls from multiple utilities and ISO is year to date.
Unlike some of our competitors, we do not manufacture install batteries. So we're agnostic as to the hardware manufacturer or installation contractor. We worked hand in hand with dozens of EPC and utilities to ensure these projects are installed on time and on budget. Our goal is to align with our customer.
Or use case installation timing and geography, providing maximum flexibility and better project economics. Our developer partners also know that we will not compete with them for future projects, enabling a more collaborative and enduring relationship.
We have purpose built an organization designed to satisfy our customers over the life of their assets. These are seasoned teams with deep power market operating experience and we continue to automate more and more processes to keep our costs low as we scale up our assets under management again.
This ongoing support is differentiated from many of our competitors, who often provide a one time installation with limited follow up services are ongoing software driven asset management.
Item line, we believe we provide extraordinary customer service, which drives higher gross margins.
And strong customer satisfaction and loyalty today nearly half of our business comes from repeat customers with that let me turn the call over to Lars Johnson, Our Chief Technology Officer, who will discuss our differentiated software offering.
Thanks, John Athena is the Premier energy intelligence software solution in the industry. Our Athena platform is purpose built to serve the changing power markets in a decentralized grid.
This requires new solutions and business models to coordinate and optimize distributed generation assets.
Whereas traditionally power flowed from central generating stations and a predictable one way direction to demand centers today.
Distributed sources generate power from a multitude of locations and asset types, requiring intelligent flexible 24 by $7 million.
The grid has also decarbonising as individuals corporations in Ipp's utilities.
Pushed to install a wind and solar assets to meet the growing demand for clean power.
These new energy resources are enhanced by battery storage and smart software to predict intermittency and provide the balancing factor to ensure reliability and resilience.
The sheer number of decisions needed to operate these clean distributed assets will far exceed both human and conventional automation capabilities distributed assets need distributed intelligence in our Athena artist artificial intelligence platform is uniquely equipped to solve these challenges.
Our solution has broad we provide energy intelligence across a wide variety of markets in the U S and internationally, we operate energy storage source familiar with a dozen Oems and over 75 utility jurisdictions in 200 cities and we have over $20 million runtime hours on our software, which provides extraordinary insight and the value generation for <unk>.
Two customer types.
Our solution is also deep Athena supports 11% and 13 storage value streams identified by the Rocky Mountain Institute most.
Most importantly, we continuously co optimize those value streams in real time over time to maximize economic value for our customers.
This is a key differentiator versus our competitors, who often only executed on one value stream, whereas we often start with three or four and add more over time.
We are continuously expanding and improving our offerings and introducing new features on our Athena SaaS platform supports continuous software updates that reliably deliver new features across the fleet on at least a weekly cadence. This intellectual property is protected by 2020 patents copyrights and several trademarks.
Last month, we introduced new advanced applications for wholesale energy markets Athena.
I think the supervisor, which provides customers and partners asset performance insights with real time visibility into how our senior managers and monetize of energy assets to ensure the lowest total cost of ownership and the theater bidder, which incorporates an owner's asset strategy and continuously generates market bids to maximize wholesale market revenues.
We are fulfilling significant demand for these applications as we continue to expand our presence operating front of the meter assets in wholesale energy markets.
Let's focus on our co optimization capability for a couple of these FTE on sites that went live in Massachusetts. This year for the first time Athena bidder automated day ahead, and real time energy market participation, along with capacity and frequency regulation services of hybrid solar plus storage assets and ISO new England.
Athena continuously forecast solar generation, the battery stated charge energy and frequency regulation prices market options and incentive goals with this information that optimizes executing millions of scenarios per hour to determine the best operation for each site and then automatically generates bids for each market interval over the coming.
In hours and days Athene.
I think it continuously tracks real time conditions and cleared bids to better inform this nonstop real time trading activity.
I am pleased to report that our first system is already performing 16% better than the initial forecast.
Lastly, we aggressively deploy these systems to maximize returns for our customers.
This was no small feat and involve working with the ISO new England to ensure these new hybrid systems were operating properly with the market. Our deep domain expertise is differentiating and we will continue to work with grid operators on Max.
Maximizing the benefits of energy intelligence.
Our customers are delighted with our performance and our partners are starting to deploy these extraordinary solutions to new markets in the U S and abroad, we are targeting Athena bidder for use in multiple large markets in the U S. Focusing initially on ERCOT PJM and California.
Foundation of our successes intelligent energy storage, but we continue to build out robust additions in other areas. We constantly strive to provide new functionality for Athena to meet the needs of the grid and our customers needs such as E mobility.
For example, we recently announced a pilot project with Penske to optimize their heavy duty electric truck charging in southern California Athene.
I think it predicts from vehicle charging will spike the site's electricity demand and uses the stored battery energy to generate electricity savings and minimize demand charges. So im starting to pilot. Our solution has decreased Penske is peak energy demand by 40%. We also help penske optimize their energy tariffs and secure incentive funds from multiple state aid.
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It's worth noting that we displaced a competitor that was not able to provide the software required and Penske is delighted with the performance of Athena.
We're in discussions to expand our relationship with Penske and we are also actively exploring EV partnerships with multiple parties and.
In addition to E mobility, we are supporting customer trends to electrification, including managing peak power requirements for newly electrified loads and providing resiliency in backup power solutions that minimize the greenhouse gas impacts of traditional backup generators.
Over time, we want to extend our leadership position as the world's Premier decentralized power plant operator, delivering intelligence for the energy transition.
Looking ahead, our roadmap includes expanding our software capabilities across a broader spectrum of our customers' assets driving further assets under management on the Athena platform. As an example, we are seeing demand from front of the meter developers to source greater scope in stem and we intend to drive both organic and strategic activities.
Serve the needs of this segment.
Ultimately our success comes from our people and we are fortunate to have amazing software engineers and data scientists that are passionate about tackling some of the toughest challenges in AI and energy.
Power market volatility and complexity is increasing as more intermittent distributed resources into the grid.
Thrives on this complexity and our software team loves making the complex easy in helping lead the grid transformation.
We are attracting terrific talent to tackle these challenges and we will continue to invest in our people and tools to ensure we keep our competitive edge.
With that let me turn it back over to John.
Thanks, Lars I want to touch on three other items before I pass it over to bill for the financial results the storage ITC, our views on supply chain and our ESG efforts on the Legislative front, we remain cautiously optimistic that a standalone storage incentive tax credit will be written into U S law.
Coming months as you've seen the most recent reconciliation bill that came out of the house calls for a 30% ITC for 10 years.
Which includes a direct pay option that could accelerate storage deployment in our key growth markets, including co ops and munis as a reminder, wood Mackenzie is estimated passage of Standalone storage ITC would increase <unk> total addressable market by up to 25% against their previous baselines.
More recently Bloomberg, New energy finance estimated that a standalone ITC would increase storage build out by three times versus the baseline forecast we've done our own analysis of the ITC on our business and we believe it will have the effect of opening new markets, but also deepening existing mall.
<unk>, we have already begun targeted outreach to customers that we believe could benefit from the incentive and we will continue to engage via webinars content on stem University co marketing with our partners and new offerings from our product marketing team remember our plan does not depend on passage of.
Storage ITC and it would represent upside to our forecast some of our customers are in a wait and see mode for the ITC. So if it does pass we would not expect a material impact on our 2022 results.
And then to the supply chain I am pleased to report that as of today, we have secured adequate supply to meet demand through the third quarter of next year, we identified supply chain management is a critical risk at the beginning of this year and our entire management team has been focused on securing adequate supply at competitive prices to meet our.
Customer needs as a reminder, our supply purchases match, our contracted demand you could see how much we have grown our backlog and these new supply agreements ensure meeting customer commitments for next year.
Our supply chain strategy continues to focus on diversification across vendors and technologies, we plan to add a fourth vendor to supplement our three core hardware manufacturers. Our vendors are also diversifying their upstream suppliers. We have good line of sight to meeting our supply needs and continue to engage.
With them at a deeper level to further understand any supply chain constraints, we are seeing some inflation in our supply agreements, but the impact has been small and we have been able to pass through the bulk of any cost increases in order to protect our margins on the customer front, we have not seen a material change in project timing.
<unk> for the first half of next year for developers relative to the solar supply chain disruptions, we may see some potential timing risk to projects in the second half of next year, but we will continue to closely monitor the situation with our partners. We are also seeing some delays related to interconnection and permitting this is directly core.
Related to Covid staffing issues, we will engage directly with utilities and permitting agencies to help our partners mitigate any timing delays.
In addition, I want to update you on our continued focus on ESG, we are developing processes to systematically measure and report on the impact of our systems and decarbonising the grid as well as driving engagement from our employees partners and suppliers.
These efforts are led by our director, Laura Tyson, who chairs our nominating governance and sustainability Committee, we will update you on the great progress, we're making on this front in the coming quarters. Finally, I want to thank our team for another strong quarter with our growing backlog steady execution and exciting new.
<unk> offerings, giving us tremendous momentum going into 2022 and beyond with that let me turn the call over to Bill Bush, our Chief Financial Officer.
Starting with our financial results, we recognized a record $40 million of revenue in the third quarter, which was at the high end of our guidance range. We provided in January and over four times versus the same quarter last year and two times over the June quarter. The vast majority of growth came from the hardware sales on the DPM and FTM partner projects with some.
Additional service revenue from host customer arrangements are.
Our GAAP gross margin was $3 1 million or 8% versus a negative $1 7 million or negative 19% in the same quarter last year. This represents our first quarter positive GAAP gross margin, reflecting the impact of our long dated software contracts and hardware momentum on a sequential.
Basis, GAAP gross margin improved from a negative 1% in the same quarter of this year non-GAAP gross margin was $5 8 million or 15% for the quarter up from 8% in the third quarter last year, which benefited from a higher mix of software services revenue and higher margin hardware deliveries sequentially non <unk>.
GAAP gross margin increased from 11% in the second quarter of this year as we continued to drive the adoption of the Athena platform.
Net income was $116 million versus a loss of $19 million in the same quarter last year that swing is almost completely the result of a large noncash gain from the warrants issued as part of the <unk> IPO in August 2020, net loss was $100 million.
In the second quarter of 2021, and the sequential improvement in the bottom line result is also due to the revaluation of those same.
Laurence as we mentioned in our call in August with the announcement of the planned and now completed redemption of the public warrants were looking to simplify our capitalization table and eliminate the large swings in income and expense due to the derivative securities as of the end of September there are no more warrants outstanding. So we do not expect these types of charges in the future.
And lastly, adjusted EBITDA was a negative $7 2 million versus a negative $7 9 million in the same quarter last year, adjusted EBITDA improved because of higher gross margins.
Partially offset by additional head count as we continue to build out our teams to take advantage of market opportunities.
EBITDA improved 16% on a sequential basis from a negative $8 6 million, reflecting the continued top to bottom strength of the quarter.
Turning to our operating metrics, our 12 month pipeline grew to $2 $4 billion as of the end of September.
It's up 41% from the second quarter of 2021, our pipeline grew in multiple markets and both in MTM and btn are.
Our backlog increased 25% sequentially to $312 million at the end of September and up 70% from the year end 2020 that $312 million backlog provides momentum for continued growth in 2022 and.
As John mentioned, our backlog growth was driven by record quarterly bookings of $104 million, partially offset by revenue recognized during the quarter, our bookings growth reflects strength in existing markets and the entrance into several new markets, which we expect will have significant commercial impacts in the coming quarters, our bookings more than doubled relative to.
The $45 million from the second quarter of this year and almost tripled versus $37 million in the third quarter of last year, reflecting the strength of our commercial offerings with this quarterly performance, we eclipsed the $200 million Mark for the first time and exceeded total bookings from 2020 of $137 million with one quarter left to go.
One note on the backlog recall that it represents the nominal value of contracted hardware and software services. We previously expected a hardware software mix of around 70 30, but in many of the recent FTM deals display has been closer to 60 40.
That's a good long term trend, we generate 10% to 30% gross margins on hardware versus 80% plus on software, but under GAAP rules, we can only recognize the pro rata value of our software contracts every year and our contracts range from 10 to 20 years that trend will result in more deferred revenue on the balance sheet in the near term and create a.
More predictable revenue stream in future quarters to keep these trends in mind as you think about modeling our revenue relative to our backlog.
And then our last major metric our contracted assets under management, which grew 40% year over year to one four gigawatt hours that this broad scale indicates that the long term strength of the business and we think AUM is the best metric to track for software market participation revenue potential.
Turning to guidance as John mentioned, we are affirming our guidance of $147 million of revenue for the full year and negative $25 million of adjusted EBITDA. We continue to expect to recognize $50 to 60% of our revenue in the fourth quarter driven by normal seasonality of the sales and the customer installation cycles.
And we do expect to see seasonally stronger bookings in the last quarter of the year similar to this quarter.
We intend to provide our full year 2022 guidance when we report our fourth quarter results in mid to late February.
This quarter, we continued to take steps to simplify our capital structure as we move forward from our April merger on August 28, we announced the redemption of all $12 8 million public warrants outstanding holders exercised $12 6 million warrants at a purchase price of $11 50.
Which generated gross proceeds of $145 million to the company. The remaining 147000 warrants were redeemed for one penny each and as of September 21, there are no more trading warrants on the balance sheet. Additionally, with regards to working capital and as we have said in the past the company has made and plan to continue to make significant.
Investments are secured battery capacity to fund future growth.
As a result as of the end of September we held $576 million in cash and liquid investments on the balance sheet and no debt.
We continue to use cash to lock in supply for future quarters as well as use our strong balance sheet to drive the adoption of Athena in key markets with our partners.
We will continue to evaluate different opportunities to strengthen our capital structure, while maintaining financial flexibility to support our growth.
Finally, I want to expand on the third leg of our differentiation, which is our financial model our business model generate strong and growing gross margins, we expect to generate around 16% gross margin on a non-GAAP basis for the full year 2021 and year to date, we have generated close to that figure we do not engage where we considered lower margin active.
<unk> like construction or field services in fact, we expect our gross margins will blend up over time as our high margin software services become a larger portion of our revenue stack.
Our go to market strategies intentionally asset light, which keeps our capital expenditures low we do not intend to own and finance assets on balance sheet on a long term basis, rather we will sell those through our partner channel the ultimate more natural asset owner and our model should allow us to scale, our AUM and revenues at a much faster pace.
Then our operating expenses, combining growing margins low capex and moderate opex growth, we expect to generate significant free cash flow as we scale the business.
Bottom line, we are confident we have the right operating and financial model in place to differentiate ourselves in this growing market with that lets open the lineup for questions.
We will now begin the question and answer.
Sure.
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At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question comes from Linda.
Kelly of Credit Suisse. Please go ahead.
Hey, good evening, thanks for taking our questions here I guess.
And some of the culture.
John maybe one thing on the.
On the.
The visibility you're seeing on the end markets could you just maybe talk about.
Our yard.
And customer contracts somewhat different from other than the industry.
We're seeing or hearing lot of your solar.
Solar industry.
From dealers over here or push outs. So if we could just talk about them.
Your box over your customer is somewhat different over here.
<unk>.
Just an extension of that.
What.
Changes are you seeing for the second half of next year, which could impact some of these projects. Thanks.
Sure Manny Thanks for thanks for joining the comments.
Yes couple of things I'd say, our channel partner strategy that we've talked about in the past is really important to help us understand exactly the lead times of where we are with those projects.
We run a very rigorous process of weekly discussions looking at each project align with each hardware supplier in that specific geography. So its a rigorous literally weekly call with the operations team of E staff members. So we're all over this I would say on the on the <unk>.
Longer term projects those front of the meter that tend to be a little further out. We're also monitoring those on a regular basis. So I think the most important part is really the supply chain and we have secured.
Into the third quarter of 2022, we're starting on the fourth quarter as well and feel very good about where we stand with our suppliers.
We've been working with the suppliers for many years, we have a terrific relationship with them and as mentioned.
The minutes ago, I said that we're going to probably be adding a fourth.
So we feel like that diversity of supplier is very important and a big part of our success as we look at ensuring delivery for our customers.
Got it got it and then can you just let me just talk more about that nature of the contracts for the battery needs of our guests with its already have those 12 months and then when do you expect to.
Finally, Q4 2022.
Deliveries.
<unk> chain that visibility.
Yes, we expect to lockdown, the fourth quarter certainly before the.
Beginning if not maybe mid January at the latest we'll probably lock it down this quarter, we get pretty good visibility.
Upwards of 12 months, so we feel good about as those bookings come in in the fourth quarter of this year. It gives us more transparency into what will be in the fourth quarter of 2022, and I'd say from a supply perspective, we feel like there is a pretty interesting oversupply.
That's coming our way and <unk> has done some work around this behemoth.
Data say, it's 586 gigawatt hours in 2021 going to over 2500 gigawatt hours in 2025, so thats, a forex expansion and we feel like.
With the four suppliers I mentioned, we're very well positioned to ensure that we have.
We have supply for our customers both in 2022 and beyond.
I think it's also important to note as part of what John saying is we have already secured some supply into Q4. So what he's really referencing is the full scope of what we think the forecast will be for that time period.
So it's not that that is a zero number it's just not the full top end of what we would expect to sell.
Got it no that makes sense.
Just one last one for me and let me just back in the queue. Here. If you can just talk about the split of.
And the bookings or the shadows for behind the meter in front of the meters.
How much is hardware versus software. Thanks.
Yes from a bookings standpoint, 80% of our bookings in the third quarter were front of the meter.
And Texas was a large part of our pipeline expansion, particularly around some of the meter.
The pipeline as we go forward looks to be about 75% front of meter.
So we feel like we're making great progress on that front and getting into new geographies.
The second part of the question.
You had on that was software.
Yes.
Yes.
And they're in the heap and this is bill.
We're starting as I mentioned in my comments, we're starting to see a shift towards a heavier weight on the software side, which.
Which is a great long term problem for us and the fact that that generates more deferred revenue, giving us more predictability on the on the revenue side of the equation. So we're starting to see a heavier emphasis on software as a component of the total bookings value.
Got it thanks, Sean telephone jump.
Back in the queue.
Thank you.
Our next question comes from Joe <unk>.
Sure.
Caller. Please go ahead.
Thanks Sai.
Afternoon, and congratulations on a nice.
Quarter end.
Maybe just following up on the bookings in <unk>.
Tim.
Pickup that youre seeing here.
Can you talk about.
Maybe some of the new markets and new projects that you are seeing interest from.
Is any of this.
Think upon us acceleration of some of the projects that were expected to be booked into next year.
Or are these sort of incremental to some of the guidance that you gave in January.
And we'll take that sure.
Yes, I'd say, we continue to see accelerated demand across our major markets, which include California, Texas, Arizona and broadly the northeast of the U S. In the last quarter. We also announced an expansion of our partnership with codec and then announcing the first virtual power plant contract.
In that geography.
In Chile.
Incidentally, you might have seen at the cop 26.
The energy Minister, Chile announced that Theyre going to double their commitment to deploy storage.
Two gigawatts by 2030, so we continue to see South America is a strong market for us and then separately.
We're looking to partner with our investors across the globe, including in Europe.
<unk> specific focus as well as in Asia, and Australia, and we'll have more to talk about that in coming quarters.
Okay great.
Thank you.
The next question comes from Brian.
Goldman Sachs. Please go ahead.
Hey, guys.
Thanks.
And on the <unk>.
No.
Okay.
Being a leader.
Please.
Given the seasonality comments main fair to assume that Q4 bookings.
Sequentially versus Q3.
I Couldnt pick up all of that Bryan I apologize I think it was.
Little choppy as we round through seasonality Q.
Maybe try it again Brian.
Hi, Ed.
<unk> got a little bit better okay.
I am sorry.
Sorry for the technical difficulties.
Just a question on the bookings.
Bookings you sort of mentioned you're expecting typical seasonality so bookings should be up again in Q4 versus Q3 as you exit the year.
Well I don't think we're necessarily going to give that projection, but we do expect strong bookings in the fourth quarter. I mean, it is typically are.
Our largest revenue quarter.
Bookings tend to follow that but I don't think I would say, it's going to be more or less I would just expect a strong number.
Okay fair enough.
And then I appreciate some of the mix comments you made around.
The bookings this quarter more software versus hardware, obviously, it has implications near term versus medium to longer term.
Having having that as a backdrop should we be anticipating.
Kind of maybe revenue into next year being a tad.
Softer just given the Rev Rec timing hardware versus software, but then margins being on the higher end.
Then related to that I guess, just in the quarter software.
We're a little bit light of expectation hardware seem fine anything going on there and sort of what's the trajectory we should expect as we move into <unk>.
Into next year.
Yes, I think as we mentioned, we're going to be providing guidance on the <unk> side of the world and the mid February timeframe. So I think we will have a lot more details to share there.
As it relates to the Bakken or the 2022 year and how the revenue split between hardware and software at that time I think into your question.
The margins I think we've consistently said I mean, the software margins are significantly stronger than the hardware margin. So the more software we're recording.
We should see an increase all things vehicle and increase in the gross margin.
As the company rolls out so we I.
I think we said that pretty consistently I think through the pipe deck.
Almost a year ago now we showed on a non-GAAP basis gross margin increasing.
And as we add more as we always say like stacking of software contracts as we stack more of the soccer suffered contracts on top of each other that should be reflected in our higher gross margin.
Yes, I would add Brian.
It is our first.
Positive gap Jim ever.
So we're excited about that we're tracking towards the 16% gross margin for two our plan and in fact, we do think that longer term as Bill said, the higher software mix will drive higher gross margins and.
As also mentioned, we look forward to kind of rolling out the next year plan in February.
Okay fair enough guys.
I'll take the rest offline I appreciate it.
Thank you.
The next question comes from Sean Milligan of Williams trading.
Please go ahead.
Hey, guys. Thanks for taking my questions.
First a little bookkeeping question, but.
On the service revenue line is that 100% software related revenue or is there another component to that.
That is 100% software revenue.
Okay, Great and then.
Yes.
Bigger picture.
So some of the.
Players that are involved in the residential energy storage market are now starting to talk about grid services.
Just curious.
I think when you came public we introduce bank, maybe you talked about an opportunity set there down the road, but just trying to get your thoughts.
On that market as it develops answer.
Yes, Sean.
We obviously are cognizant of the growth in the residential market I think we're pretty focused on putting more software into various markets and I think that if resi poses an opportunity for us we would certainly go in that direction. The nice thing about the Athena platform is we feel like it's.
Highly translatable to a variety of markets a variety of <unk>.
Energy assets and so we're not opposed to doing it it's just.
Has it been top of the list at this point and Lars you want to add anything to that or not.
And I think Thats right I think we have the opportunity to help to drive different kinds of assets into virtual power plants, the scalability and the capability of the Athena platform that lend itself to doing that.
As John has pointed out and you heard from free cash we have a lot of things that we're focused on right now and that's just not to hit the top of the list yet.
Okay, great. Thank you all.
And I think I'd add one other thing Sean when you look at <unk>.
Capacity and grid services.
If that's your focus in the utilities are certainly looking for that and grid operators.
Takes a lot of houses to do the C&I or other things that we're doing so from a customer acquisition cost standpoint, we feel like the C&I behind the market's compelling as well as it provides a lot of functionality for the grid operators and utilities.
One of our typical customer sites in the C&I space is several hundred homes. So that's high leverage for the for the utilities. If we can get one of those commercial customers as opposed to having to get hundreds of homes, but it's still early to think about the volume of homes that are installing batteries.
So we're not ignoring it by any sense, but those commercial customers.
The low hanging fruit.
Okay, and then just one more I guess.
When you talk about the stand alone.
Fee for battery storage.
Just trying to think about the adoption there because.
I guess in theory, you could deploy Athena more quickly into that segment and maybe what's modeled.
In terms of.
The revenue being seasonally heavier in the second half of the year like that.
Change that dramatically I would think correct.
I'd say that look it's included in the house reconciliation.
30% for 10 years as you know I would.
We have not included this in our plan to this point.
Look some of the numbers we here 25%.
Upsides from a Tam perspective, with wood Mackenzie, we get three X would be any Nf, but our view is 2023 and beyond is probably more likely as far as upside in a significant manner and a lot of it is going to be.
When it's when it's passed quite frankly and whats in the the ITC, we're bullish about it occurring we like what we see we have lobbyists, we speak to obviously in Washington, they're very supportive and bullish around this so we're excited about it we think it's certainly the right direction.
For the industry and <unk>.
Look I think the build better back act really recognized as energy storage as a critical missing piece to accelerating the clean energy transition.
By including ITC for energy storage will just accelerate that so.
We feel good about it occurring and again I want to under script. It's just not been included in our long range planning in any way.
Okay. I guess my question was more like if it were to go through do you think the deployments.
Into that would kind of have the same seasonal.
Variance at your current business does or would it be different and maybe that's just it's just too early to tell.
I think it probably is a little early to tell but more than likely they are still at the end of the day. These are tax advantaged investments and they are generally going to track the tax calendar as opposed to something else.
We would expect to see that but I don't think we have enough information to say really one way or the other at this point.
Okay, great. Thank you guys.
Thank you.
Again, I would like to ask a question. Please press Star then one.
And the next question will come from Brian Velie of Morningstar. Please go ahead.
Yes, thanks for taking my questions.
Just first one on in terms of the balance sheet and the 576 million of cash just curious in terms of priorities there.
You mentioned securing supply, but curious maybe beyond that.
Well I think the supply is for sure.
Center, particularly given all the news that you see these days around that particular topics. So we spent a long time and our procurement team has spent a lot of time, making sure that we've got the equipment that we think that we need but as we've also said we are interested to be acquisitive and.
We'll see where that goes but those are probably the two most primary uses of cash over the longer term.
As well as just basically funding the business.
Principally on the technology side.
Okay, and then in terms of the pipeline the $2 4 billion talking about pipeline are you seeing any software and only opportunities in that or is that.
Is that pretty much all hardware plus software at this point.
We definitely see software only opportunities as well and that tends to be more on the larger side of the FTM projects.
I think as we've said in the past.
Our customer base are really our partner's solar development partners tend to vary fairly significantly in terms of sophistication and so the the larger projects tend to be driven by much more sophisticated counterparties, who in some cases actually have procurement department themselves as it relates to batteries and so in those cases.
More likely see is a software only and in fact, the biggest deal. The company has ever done the electrodes deal now almost a year ago 345 megawatt hours of battery capacity is a software only contract. So we certainly have history associated with those sorts of deals and ultimately as we've always said as well.
AUM is the best measure of this business long term and so we're really driving software only deals drive AUM and we don't need to have the hardware to accomplish our business goals. So we'll take them both ways.
Just kind of yes, we will continue to advance in the markets that we're active in.
Got it.
And maybe maybe last one on the Standalone storage ITC can you remind us in terms of your business today.
Is it is it mostly solar plus storage.
Or what percentage is sort of already store in Shanghai.
So again, so really I mean, it's kind of been a historical transition and we started as a storage only player and about I'll say, two two and a half years ago, we started seeing more and more solar plus storage, which is really the predominant amount of the contracts that we signed these days, although that's not that's also turning a little bit as well.
Because you see some of the markets, particularly the Texas market is an area, where we saw a lot of storage only deals this last quarter. So.
Theres really an ebb and flow to it.
So it's hard to say exactly what it is going to be but we're active on both sides.
Yes.
From our standpoint, the types of services that we provide are not really substantially different and it's really just a question of whether or not there.
The solar system attached, which generally is going to increase the complexity, which we've always said.
<unk> horizon complexity, so we like those sorts of installations.
Great. Thanks.
Yeah.
Right.
Our next question comes from Joseph Osha of Guggenheim. Please go ahead.
Hello. This is actually Hilary on for Joe and I had two questions for you guys on the email.
It sounds as if right.
So congratulations.
First off just hoping you could kind of speak to.
Ability in terms of having been credits kind of of that IP kind of near to mid term.
And secondly, I think you mentioned that you had actually piano compete against for that contract and not sure. If it's too early to say, but I was wondering if you could share kind of any early feedback from conversations with some of these additional customer and can if youre finding similar results, where there is no real competitive offering perhaps.
Hello, Thank you so much.
Yes, Hi, this is Lars let me talk a little bit about the project and sort of how we got.
The opportunity there there was a system integrator in the battery supplier that provided the actual.
<unk> equipment for this project and then there were a number of D C.
Fast Chargers that were part of the project with Penske and put in place for this particular location.
And when it came time to put some of the operating requirements together it became clear that the software available from the OEM wasn't going to be able to do some of the things that were needed. So that's when we got the opportunity. So this would really be called another software only deal in this EV EV.
E mobility space.
And the nature of the system and the operation here is designed to show how the battery can protect the demand charges.
Customer might face for such a large EV charging facility as well as to make sure that the interconnection and the required capacity from the grid tied.
<unk> is not going to be exceeded even though you are putting in these large.
Fast Chargers, which can really drive tremendous.
Draws from the grid so the batteries there to help mitigate both the cost as well as the actual electrical power capacity at that site and that we're showing now is we've been able to do that to the tune of dropping that particular peak load by 40%, which really makes it easier for people to install.
Fast Chargers quick more quickly without having to go through utility upgrades as well as protecting them from cost exposures related to demand charges.
Including other operating characteristics like time of use charges.
Some of the different incentive programs that we are helping this particular customer.
With.
So maybe for cash you want to talk a little bit about some of the market sure.
And one of the things we're seeing in the market.
The demand for EV charging infrastructure and the build out of a fleet operators in that space is well covered by many of the research houses.
It seems that the demand, we're seeing aligns with how they're forecasting growth there, but the other piece that we think is missing and we're working to.
Quantify.
Is the impact of increased electric vehicle penetration on the grid that utilities are facing it's really a dynamic similar to what you might experience during COVID-19 with everyone on your block using Internet and you have a slowdown in your services and a similar effect is happening on the electrical grid as more Tesla is another inlet.
<unk> vehicles are.
Entering neighborhoods and we're seeing many utilities pull forward their capex for things like distribution upgrades or other solutions to ameliorate that and engaged in dialogue with these utilities and these are unanticipated or previously planned network upgrades, which which are being pulled forward. So we haven't seen.
That picked up in some of the research.
Industry reports, but we think that's an important trend that could accelerate in a potential demand here.
Okay.
This concludes our question and answer session I would like to turn the conference back over to John Carrington for any closing remarks.
You bet. Thank you for joining us on our third quarter earnings call. We are certainly pleased with our strong execution in the first three quarters of the year and the momentum we're carrying into this quarter and next year and we look forward to speaking with you during our fourth quarter earnings call in February. Thank you all again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.