Q3 2022 Stem Inc Earnings Call
So energy.
As we continue to bring Athena empower track together, we offer customers a powerful combination of number run ranked solutions from a flexible platform that monetize as multiple value streams across customers and assets.
Turning to page seven.
Here, we highlight our results versus some of our key performance indicators, which show the strength and depth of Athena in late August and early September , California experienced a powerful heatwave newly resulting in a power grid collapse.
Energy storage played an important role in stabilizing the grid.
And we executed flawlessly to dispatch our assets during these flex alert days, but.
Beyond supporting the grid, we continue to support our customers to maximize their revenues minimize their costs and advance their sustainability goals.
These accomplishments in key markets, including California, and Ontario highlight the strength and diversity of our technology platform for customers.
And we expect continued outperformance in coming months and years.
Let's turn to slide eight next we want to provide an update on the also energy business and trends, we're seeing in the broader solar industry, where we serve as a market leader in solar asset performance management first we continued to observe pressures for solar developers and securing solar panels and advancing their project timeline.
Particularly within utility scale.
At a high level certain regulatory actions, such as ADC Vd and <unk>.
Impacted product availability.
Bob Schieffer and his team with AE have been nimble. Despite these headwinds and as you can see from the charts on the bottom left we are outperforming the market both in C&I and utility scale.
We have focused our efforts on the C&I business, which has proven more resilient, but our revenues are still down on a year over year basis through the third quarter in both segments.
Looking at the chart on the bottom right. This caught everyone by surprise, including the market research firm Wood Mackenzie at this time last year Wood Mackenzie was calling for a 13% increase in C&I in utility scale installations in 2022.
Based on the updated forecast from September of this year, they are calling for a 47% decrease in 2022.
Looking forward to 2023, we're extremely optimistic market analysts expect installations to more than double and we expect our solar monitoring revenues will rebound sharply next year.
This is shown up in the accelerating increases in our pipeline and from 2024 to 2025, you can see that the inflation reduction act as influenced a structurally higher projected level of installations.
Moving to slide nine next I want to give you an update on our supply chain activity. The procurement team continues to execute a contracted well into the fourth quarter of 2023 against our backlog also in the quarter, we welcomed a seasoned leader Rene Leon as vice president of sourcing and supply chain Rene joins from.
Angie where she was responsible for a multibillion dollar procurement and supply chain organization. We believe there is significant opportunity in optimizing both the supply reliability and cost curve. We are all excited with our leadership she is already bringing to achieve this goal.
Moving to the slides, we're developing Athena unit controller with the goal of enhancing resilience to our supply chain, while providing greater value to our customers specifically the unit controllers decoupled the procurement process for the battery inverter and balance of plant we.
We believe that this strategy will provide significant customer benefits, including improved flexibility of mixing and matching various hardware solutions that.
Our all coordinated and operated by Athena AI and control in particular, we can enable customers to shift configurations based on use case or enable alternative configurations in the event of issues with OEM logistics or pricing ultimately, we expect to drive improved margins.
With additional software revenue at every site, our Athena unit controller reinforces our SaaS strategy end to end from the edge to the core of the Athena cloud.
Lastly, I want to highlight that the unit controller will be domestically manufactured at our Longmont, Colorado facility. This is another example of the synergy and integration progress we discussed at the announcement of the acquisition.
Moving to slide 10 and to share the great progress we've made integrating and also energy we introduced a unified customer experience at Rd, plus the already plus conference, which served as a launch for our product integration included demos and multiple use cases for the combined platform.
<unk> resulted in a significant increase to our pipeline and we continue to see strong commercial demand as a result of new features and product vision, we communicated to our customers and partners.
Our unit controller and related hardware manufacturing processes have been consolidated into the Longmont, Colorado facility, resulting in over 30% savings in Cogs, but also a meaningful reduction in facilities expenses as we exited a high cost location in Burlingame, California.
And now I'll turn the call over to Bill Bush, our Chief Financial Officer.
Thank you John starting on page 12, with our results for the third quarter 2022.
Before I begin as I've noted in prior calls the call that we closed also energy transaction on February one of this year and that will impact the comparability to last year's results.
As John mentioned, we reported record revenue of $100 million.
Which is 150% increase versus the $40 million in the third quarter of 2021.
So have exceeded last years total revenue of $127 million by 64% to the third quarter year to date revenue was $208 million, an increase of 178% on a year over year basis quarterly revenue performance surpassed the Q2 2010 achieved performance of 67.
$1 million or an increase of 49% most of the growth came from hardware sales on MTN in btn partner storage projects and about $17 million from the addition of <unk> energy. We also recognized approximately $14 million of high margin software and services revenue representing 14% of total revenue.
For the quarter.
GAAP gross margin was $9 1 million or 9% up from 8% in the same quarter last year non-GAAP gross margin was $12 4 million from $5 2 million.
Our 139% increase in the third quarter last year due to higher revenues and an increasing mix of software and services right.
This is the third straight quarter of positive GAAP gross margin highlighted by our growing base of our software and services offerings on a sequential basis. This represents a 16% increase in GAAP gross margin, reflecting the strength of our commercial offerings.
On a percentage basis non-GAAP gross margin was 13% in the quarter in line with 13% last year.
Net loss was $34 million.
Versus a net income of $116 million in the same quarter last year that swing is almost completely the result of a large noncash gain in the third quarter of 2021, and the then outstanding common stock warrants. We retired all of those warrants last year and we do not expect significant gains from warrants in the future.
And lastly, adjusted EBITDA was a negative $13 million versus a negative $7 million in the same quarter last year. Adjusted EBITDA was negatively impacted by higher operating costs from additional hiring as we continued to build out our teams and advance our technology roadmap and operational breath take advantage of market opportunities.
Third quarter bookings were $223 million up more than two times versus bookings in the same quarter last year. This was the second highest bookings quarter in the company history.
$600 million of bookings for the nine months ended September 30 is 150% ahead of what we booked in all of 2021 moving from our financial results to our operating metrics on slide 13, our backlog more than doubled year over year from $312 million in the third quarter of 2021 to eight.
<unk> hundred $17 million in the third quarter of 2022 backlog increased 12% on a sequential basis from the period ended June 32022, the largest driver of the backlog increase was the $223 million of new bookings in the quarter offset by revenue recognized during the quarter Some project cancellations and contracting.
We believe the backlog gives us excellent visibility in the short and medium term that is for the fourth quarter 2002 and into 2023 with our expected Q4 bookings in commercial momentum.
We see a path to exceed $1 billion in backlog by year end, giving us significant visibility into 2023 revenue and beyond.
Contracted annual recurring revenue or car ended the quarter at $61 million up 5% sequentially and 42% up since December 31, 2021. This soft our metric highlights the long term high margin revenues, we expect the business to generate.
Our contracted AUM on the storage side grew from one four gigawatt hours in the third quarter of 2021 to two four gigawatt hours in the third quarter of 2022.
That's a 71% year over year increase again, driven by our strong execution on the sales and operations side of the business.
Our operating AUM on the solar asset performance monitoring side ended the quarter at 25, Gigawatts seven gigawatts from the prior quarter during the quarter, we conducted a review to migrate or terminate customers from legacy software platforms that were unprofitable, which caused a sequential decline I will discuss more on the next slide.
We ended the quarter with $294 million in cash and cash equivalents on the balance sheet in the last few quarters, we have strategically deployed some cash to secure storage hardware for our customers and drive greater adoption of high margin recurring revenue. This cash we recycled back to the balance sheet. When the systems are delivered but the net.
Effects has been a use of cash we are evaluating some non diluted financing tools and structures to allow us to continue to deliver energy storage systems for our customers without relying as much on the cash on our balance sheet. In addition, we continue to evaluate inorganic growth opportunities, which would meet our strategic and financial framework and would if successful.
Finance those activities in line with our long term financial targets, which focus on maximizing cash flow generation.
Turning to slide 14, where I'll provide some additional detail on our solar <unk> metric and the implications to the business first a quick history as far back as 2012, but really beginning in 2017 and 2018 also energy acquired multiple solar asset monitoring software platforms and the customers came with them.
In the last few years also energy fully consolidate several of those platforms and initiated that process, but others are migrating customers onto the core powertrain platform. Today, we have two legacy platforms, but we would call non core where we have not fully migrated all of those customers on to powertrain.
You can see from the chart on the bottom left side that the customers of these noncore platforms only account for about 5% of the total also energy.
Which itself is a subset of our total corporate HR.
But those noncore software applications accounted for a disproportionate amount of our solar monitoring.
As you can see in the chart in the middle.
This quarter, we conducted a review of those two legacy systems, and we decided to phase in both al and are working to migrate customers over to powertrain.
Some customers are choosing to migrate over but others terminate their contracts with us which drove the large drop in AUM versus the second quarter. Today. We estimate we have about three five gigawatts of AUM Theyre still on these legacy systems and expect about half of that eventually we'll move to power track.
I want to emphasize that terminating these platforms will be accretive to gross margin. Despite the potential loss of AOR as.
As part of this process. We also conducted a review of our billings relative to AUM and decided to remove customers.
Russia, and Ukraine due for obvious reasons have not been paying their bills in recent months I want to emphasize that we do not expect these terminations to having material effect on our recurring revenue in effect, we're shutting down platforms that have had a much lower ASP per megawatt and that have a negative contribution margin to the business.
You can see from the bottom right chart that this is not just a financial decision. These systems have many dispose features which are hard to maintain and have some security challenges associated with them.
We expect to retain a significant portion of the customers that are on these noncore systems and will want to come to power track. These.
These customers will gain the benefit of a more robust and secure system.
Lastly, it's important to recognize that this change in AUM does not have a material impact on the $6 billion retrofit opportunity David.
Highlighted in our Investor and Analyst day in September that retrofit analysis looked at core powertrain.
We focus on high impact States, like California, Massachusetts, and New York.
So should have no material impact on our ability to cross sell storage into the Austin energy solar asset base.
Bottomline AUM drop because we are shutting down some legacy unprofitable platforms. We do not expect this to have a material impact on our recurring revenue and in fact shutting them down should increase our contribution margin, which help us to drive to our EBITDA positive Bill as we emphasized in our analyst day and given the choice between optimizing the presence.
Jason of operating metrics and increasing free cash flow, we will always choose the latter.
Finally on slide 15, we are reaffirming our guidance for revenue in the range of $350 million to $425 million.
For the full year non-GAAP gross margin of 15% to 20% and adjusted EBITDA in the range of negative 20 to negative $60 million for revenue. We are confirming the full year revenue guidance top line for the business continues to be lumpy based on the increased importance of the FTF business and it's large hardware.
non-GAAP gross margin, we expect to trend towards the bottom end of the range. This is really a function of the higher mix of storage hardware versus software and services. This year. The biggest driver of this mix shift is the weakness in the solar monitoring business that <unk> already discussed.
Energy is outperforming the industry, we expected a greater contribution from that high margin software and services business and we are seeing this year as we've seen in prior periods, where the business was slowed by regulatory impacts we are confident that the solar business will bounce back next year in fact, while project push we have not seen any.
Real cancellations and our pipeline continues to grow significantly.
Might that margin profile, we expect our adjusted EBITDA to come in closer to the midpoint of our range, that's driven by cost control and we have been prudent in our head count additions and shifted our hiring to lower cost locations on bookings.
We are lifting the bottom end of the range to $850 million, but keeping the top end at 950 as our Salesforce continues to exceed expectations and lastly, we are maintaining our car guidance of 65% to $85 million with that let me turn the call back to John for some closing remarks.
Thanks, Bill turning to slide 16, we have strong confidence in our business performance and reaffirm our full year guidance. Despite the challenging macroeconomic backdrop customers view energy and sustainability, our strategic imperatives.
Their energy bills continue to rise we are experiencing significant growing interest in our energy storage and solar monitoring solutions consistent with our focus on achieving budgetary.
<unk> targets looking ahead into the fourth quarter and into 2023, we continue to see an improvement in pricing power as reflected in the increase in gross margin profile of our contracted backlog separately, our strategic supply chain activity positions us to serve as a critical partner to corporates and renewable.
Project developers and most importantly, we continue to drive commissioning of our deployed systems as seen in the accelerating high margin services revenue.
As we close out the year and into the coming years, we will be guided by a focus on maximizing future cash flows.
On page 17 to wrap up we're excited by our strong commercial and operating momentum heading into the second half of 2022 with record revenue above the high end of our guidance.
And record bookings of $600 million year to date, representing 150% year over year growth.
We continue to be recognized by our customers with validation by third party research firms as a market leader across both the energy storage and solar asset performance management.
In the quarter Frost <unk> Sullivan highlighted the strength of our technology platform ranking us number one in digital platforms for renewable energy and battery storage optimization.
We are pursuing a strategy to enhance resiliency in our supply chain for the benefit of our customers with the introduction of the unit controller strategy and our teams are driving operational rigor and activating systems to accelerate high margin services revenue.
We introduced a unified platform integrating Athena empower track in the quarter and.
And we continue to advance the vision of one team as we consolidate manufacturing and driving focus on operating leverage through expanding the also in energy and skim organization in India.
In summary, we are optimistic on the trajectory of the company and achieving EBIT positive in the second half of next year and we're within striking distance of executing a $1 billion of bookings volume this year.
In closing we are proud of the platform. We have built over the last 12 years, which wouldn't be possible without our people stem and also energy have built the leading clean energy intelligence platform through the innovation collaboration and rigor that come from our talented employees, we are attracting the best talent with <unk>.
Deep domain expertise critical as we facilitate the clean energy transition.
We are reiterating our guidance and very well positioned for 2023, a year, we fully expect solar to rebound driving further combined strength with the power track MLP in a unified software solutions.
With that let's open the line for questions. Please.
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And our first question comes from Brian Lee.
Your line is open.
Hey, guys. Good afternoon, thanks for taking the questions.
Yes, starting off.
The line of sight to exit 'twenty, two with a $1 billion of backlog, that's super encouraging and appreciate the.
Forward looking data point, there can you give us a bit more around kind of expectations for mix of that hardware software <unk> and then.
Kind of what the implications would mean for.
The margin profile across that backlog.
Hey, Thanks, Brian for the question appreciate it so I think that in general we are starting to see BPM bookings become a more predominant piece of the backlog.
Though still smaller I mean, we're still definitely weighted towards FTM, which of course has those lower.
Hardware margins associated with it.
The other thing Thats happening that we're seeing in general though is that the margin and this is where alan's team has really been super successful as <unk> been able to drive the gross margin at those.
Bookings higher than what we've seen in the past so what that would mean is better gross margins on the software components better gross margins on the hardware. So of course, though as I mentioned <unk> is still in general a low gross margin.
Provider for us and probably will be for.
For the foreseeable future.
Okay.
And then just my second question.
Related to the backlog here, if I look last year.
Coming into this year, you had I think about $450 million of contracted backlog.
This year, you're talking about basically double more than double of that entering into the new year.
How should we think about backlog conversion because clearly you converted a lot of last year's $4 50, and then you got to.
Revenue guidance, which you're reiterating here, which will put you kind of in that high threes low fours, if you execute well.
What does that $1 billion of backlog exiting 'twenty two.
Kind of what sort of context should we use in terms of conversion or how should we be thinking about your.
And your ability to translate that over the next 12 months.
So I think first I'd say that in February we're going to give 'twenty three guidance that we'll be able to provide a lot more color.
At that point in time, but in general one of the things that and I think we've talked about this in the past is that the implementation dates anthos systems is extending and so I think we've said in the past.
The <unk> system was anywhere from six to nine months, that's definitely getting closer to a year. These days and STM systems, which were as fast as a year in the past now are much closer to 18 months and in some cases, even longer so the benefit of having that big backlog of course, you get a lot of visibility into 'twenty, three and 'twenty and into 'twenty four.
And so that's really how we're able to predict where we think we're going to be it's definitely buttressing our ability to create what we think is a defensible and executable business model.
That we present to you guys and so we will have a lot more on that in the February timeframe.
Alright, Okay I'll follow up offline thanks, guys.
Thanks, Brian .
And our next question comes from David Peters.
Your line is open.
Hey, good afternoon everybody.
Just on the pipeline, 29% growth sequentially was pretty substantial and I guess evidence of what.
It means for you guys can you first just give a breakdown of kind of how that stands batteries, where solar monitoring and then just confidence in converting.
These into contracted customers right do you see the historical conversion rates changing at all versus.
What you had experienced previously just given the sheer size of the pipeline is so much bigger at this point.
Thanks, David I'll start and Bill can jump in look you are right. The pipeline has significantly improved and we see that being driven.
By the IRS, certainly as well as more markets opening.
You rightfully you had highlighted that the growth has been significantly we're seeing it really across the board in the U S. ERCOT, Texas continues to be strong and.
As alluded to in the solar side, which you mentioned.
Total year 2022 has been impacted by some of the things that Bill noted in the remarks around <unk>.
Other other situations related to the regulatory side.
We look for a strong next year on that front and as Bill mentioned as well, we'll circle back on that in our in our next.
Our February call, we look forward to the 'twenty to 'twenty three side of the business and I'll go through one or anything else on the pipeline side, Yes, I mean, I think one of the things that we are definitely seeing Dave that you alluded to is pipeline growth off the IRA and so that that's everything I think.
Analyst day, we talked about.
Higher level of calls and call.
Conversations.
We pointed to our ability to cross sell into the energy pipeline and of course, as we mentioned in prepared remarks.
Reduction in the AUM it does not impact that so we still expect to be able to sell a significant amount of storage into that 41000.
Primarily C&I customer base that Bob and his team.
But in general I would say at a high level.
Much like we've talked about in the backlog the pipeline is still weighted towards the FTM side, $75 25, STM and btn.
And it's in it's.
Generally coming out of the states, where we're doing a lot of work, New York, Massachusetts, California and of course, Texas.
And then with some green shoots in other places that.
<unk> been successful in large part where Bob and the team have built a pretty impressive.
AUM base.
Okay.
Second question is just on the gross margin guidance for 'twenty, two I understand you're at low end.
I think mostly just some some project delays on the also energy side of the house, but.
I just want to confirm are you expecting to see any kind of knock on effect into 'twenty three from from the FTM hardware shifts or anything like that.
I want to clarify what the expectation is for next year if any.
No I think I think actually the knock on effect is going to happen on the other side of this is we really expect a big pop out of the solar side of the business I mean I think.
That's been that was displayed in the slides I think we actually talked about that in.
And calls in the past, where we think solar has been admittedly.
Admittedly slow I mean, I think it's just that's just the way the market is worked out and we think that theres going to be a really interesting snapback and we're well positioned to take advantage of it and that really are numerous positive lead to us because it is all in the software and services business. I mean, if you look at the business model that Bob and the team built.
Looking at a 60 plus percent gross margin or contribution margin and so it doesn't take a lot for that to have impact and of course this year, it's hurt us the wrong way.
Pretty obvious but next year, we're really thinking that that's that's kind of a pop in our in our favor. So we're we're excited for 'twenty three from that standpoint.
We've got a growing base of car and that means that there is more going to be more software.
We're going to be E systems that we're going to be operating and generating really high gross margin product off of that so I think 23 is going to be well positioned all consistent with what we talked about in September which was a high CAGR on the south and the software and services side.
Great. Thank you.
Thank you.
And we have a question from Mike <unk>.
Hi.
Your line is open.
Hi, there this is David Benjamin for.
Thank you.
You talked about that.
Services.
CAGR can you talk a little bit about.
Give some color around how you see that going into 2023.
Yes, thanks for the thanks for the question.
In between what the comments I, just made and certainly those that we made in New York I mean, we're really bullish on what software and services is going to be able to do for this business in 'twenty three.
The business model is predicated upon us being able to deliver those services, they're super high margin to generate a lot of cash flow.
When you think about what we did from the AUM standpoint, we took that number down, but we're actually it's going to.
Cash flow driven reason and so I think one of the things that we've done as a business in general and you can see that through the operating leverage as well the operating expense leverage we're super focused on where we are from a cost standpoint, and from where we are from a margin standpoint, and so as we look at where we're going to be.
<unk> and 'twenty three we're really focused on that 65% to 85% CAGR for the software and services business, that's what's going to drive the company to the position, where we think that we're going to be which is cash flow positive in the second half of 'twenty three.
Yeah.
Great.
Mike sorry.
Sorry to jump in.
And the policy between Cogs.
Just on the battery procurement side.
What are you seeing for 'twenty, three and 'twenty four.
Bus few months kind of talked about competition from the <unk> program.
This gives them the latest thoughts.
Okay.
Yeah. Thanks, Rajeev good to hear from you I would say that on the supply piece were contracted well into the fourth quarter of next year and I would say some projects even into 2024, particularly around the Bts supply we are.
Going into 2024.
That's an area that we're excited to have supply locked in because we do as bill mentioned, a moment ago to see some nice growth around bcm.
One of the things that we're watching closely with just the logistics piece is the fourth quarter. So a lot of activity a lot of export and import so just from a port standpoint, we're monitoring that.
Obviously doing everything we can to.
To make sure our product is expedited and gets here on the timelines that we expect them to.
Got it.
Q4 growth.
Yes.
Correct, that's right sorry.
Yes, I mean, I think one other thing.
Mentioned Mickey May have been in New York was that we're definitely if you'd asked that question six maybe 12 months ago, We would've said, yes, we're relatively short.
<unk> less than a year out we're now buying 18 months and more.
From an expectation of installation.
Installation, so it's definitely which is one of the things we highlighted in terms of the balance sheet that we are using the balance sheet to be able to secure supply. We think that's commercially differentiating for our for ourselves and a benefit to our customers.
So we're definitely.
<unk> to develop relationships with suppliers as John mentioned the unit controller, that's certainly part of that as well, where we're doing other things rather than buying just batteries.
Our <unk> energy storage systems, and so I think it's really it's an opportunity for us to expand what we're doing and make sure that we've got enough product.
At the right time, and the right orientation for our customers.
Got it no appreciate it thank you.
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And we have a question from Brett constantly.
Your line is open.
Yes, hi, Thank you maybe just sticking on that same theme Bill I think you mentioned in the prepared remarks.
The potential use of financing tools.
Sure hardware can you can you elaborate on what may be you're you're contemplating there.
Sure. So right now our financing tools are somewhat limited.
Generally cash.
And then of course, we're working terms with our primary suppliers one of the things that we've been working on is bringing in some non dilutive.
Structures more than likely a revolver of sorts.
We're able to increase the amount of product that we're able to secure for customers. So what we're trying to use.
<unk> leveraged the balance sheet into.
A debt structure evolving capital facility something like that.
That would allow us to secure a higher level of supply today.
Got it.
Okay.
And then my follow up is just can you touch on working capital dynamics as the business maybe shifts to more software only deals it seems like that that could be a pretty material tailwind.
For working capital, but maybe when do you is.
Is that correct and then when do you expect to see that.
Materialize.
Thank you Ken I think Youre right I think but I would also say that one of the things that's going to be true about this business for a while as we're selling we're going to be selling hardware and hardware in and of itself.
<unk> working capital whether.
Even where the working capital facility, we're going to have to put some cash out for that so we would expect a declining amount of capital for the acquisition of hardware, but we are pretty much in any model I mean, I think we provided some guidance.
Split between software and services and hardware growth, we're still expecting to see hardware growth in the business, which means that you're going to need some sort of support to be able to do that.
Even with the expected declines in price you are still talking about a pretty darn big number.
So I think what we're going to continue to do is look for alternatives than what we're doing today and make sure that our balance sheet has the ability.
To be able to support our customers and make sure that as I mentioned that product shows up when they need it.
Got it thanks Bill.
Sure.
And we have no further questions in queue.
Okay.
<unk> I want to thank everyone for joining us on our third quarter 2022 earnings call. We look forward to speaking with you during our <unk> call in February of 2023. In addition to full year and four quarter fourth quarter results, we'll provide guidance as mentioned here today for the full year of 2023. Thanks again.
Everyone.
Yeah.
That concludes today's conference call. Thank you for joining and have a pleasant thing.
The host has ended this call goodbye.