Q4 2022 Stem Inc Earnings Call
Welcome to the stem, Inc. Fourth quarter 2022 earnings conference call.
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I would now like to turn the conference over to Ted Durbin head of Investor Relations. Please go ahead.
Thank you operator this is Ted Durbin head of Investor Relations at Sterne and we welcome you to our fourth quarter and full year 2022 earnings call before we begin. Please note that some of the statements we will be making today are forward looking these matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements.
Therefore refer you to our latest 10-K and our other SEC filings.
Our comments today also include non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release, we will be using a slide presentation today, our earnings release and presentation on the Investor Relations portion of our website at www dot stem dot com.
John Carrington, our CEO and Bill Burke CFO will start the call today with prepared remarks, Mike Carlson, Chief operating officer, and <unk> Patel Chief strategy Officer will also be available for the question and answer portion of the call and now I will turn the call over to John .
Thank you Chad, ladies and gentlemen, thank you for joining us on the call today, starting with slide three the agenda for the discussion today I will review, our fourth quarter 2020 to results and highlights.
Followed by an overview of our commercial execution and provide an update on the supply chain I will then review our strong operating results and new offerings that demonstrate our technology leadership. Following my remarks, I'll turn the call over to Bill Bush, our Chief Financial Officer, who will discuss our financial results in more detail.
And provide 2023 guidance turning to slide four today, we reported solid fourth quarter results, including record revenue of $156 million, which was three times higher than the same quarter last year. We also reported record bookings of 450.
$8 million, which was two times higher than the same quarter last year.
Our revenue and bookings in the fourth quarter alone were higher than in the entire year of 2021, which is a remarkable achievement over a short period of time.
We achieved these results despite a turbulent environment throughout 2022, including supply chain volatility interconnection and permitting delays cost inflation and solar import declines from the 80, CVD and U F. L. P a restrictions.
Our diversified business model across multiple products and geographies helped the company navigate these headwinds.
As we previewed in our interim update in early January revenue came in within the guidance range and our bookings were well ahead of guidance that we had already raised in the middle of 2022. In fact, if you go back to our <unk> 21 earnings call our bookings ended $50 from higher.
Than our original full year guidance.
The bookings momentum is a testament to our software and services solutions that are differentiated in the marketplace. We're also capitalizing on the tremendous macro tailwind in this industry.
We grew our contracted annual recurring revenue or car, another 7% quarter over quarter to $65 million in the range of our guidance that was also raised by $5 million during our <unk> earnings call.
Focusing on the right side of the page we continued our momentum in email ability with an exciting strategic partnership with charge point I'll discuss more on this opportunity later in the call.
We continue to drive operating leverage as we ramp headcount at a slower rate than our revenue growth, we are implementing technology and processes to control cost and leveraging our infrastructure in India to grow head count in lower cost regions.
We're also staying ahead of the supply chain with capacity contracted through Q1, 'twenty 'twenty four.
Before we move on from this slide I would like to make a couple of comments about our full year results. We faced several headwinds during the quarter and throughout the year, we were negatively impacted by Covid related shutdowns in the fourth quarter in China to address this risk we are undertaking a strategy to diversify and deepen our.
<unk> shifts with battery Oems. In addition, we are leveraging our technology leadership to introduce an offering that provides flexibility for our customers and system design and can help mitigate disruptions at any one supplier on the solar front as previously discussed we were negatively impacted by the lack of.
Panel shipments that resulted from the anti dumping and weaker forced labor restrictions.
Software services revenue was negatively impacted by interconnection and permitting delays.
Bill will discuss the multiple pathways, we have to continue growing gross margin. Finally, we effectively managed expenses throughout 2022 coming in on plan to our guidance for adjusted EBITDA.
In large part because we were prudent in our hiring and are seeing the benefit of our strategy to expand head count in lower cost geographies.
I've charged our management team and our global organization with reaching positive adjusted EBITDA in the second half of this year and we will not waver on that key objective.
Moving to slide five and our continued commercial execution as you can see in the chart in the upper right. We had strong services revenue growth in the fourth quarter up 17% versus the third quarter, which itself was up 9% versus the second quarter. As you know this is the highest margin portion of our business.
And we are focused on driving these revenues higher in 2023 and beyond.
I mentioned our strong.
Bookings quarter, which exceeded full year 2021 bookings. Additionally over two thirds of our full year bookings came from new customers. We expect bookings momentum to continue with the tailwind we are seeing in the industry. As you can see in the lower right chart Wood Mackenzie is now calling for a 40.
6% increase in solar and storage build out in the U S. Primarily as a result of the inflation reduction Act.
We think that the long term visibility provided by IRI will drive strong growth for years to come.
We are pleased to start our first only software project in ISO New England this quarter and expect to do more software only deals going forward. We continue to generate strong recurring revenues from our existing customers as they are willing to pay for the incremental additional value we're creating for them. Finally, we have revamped our sales.
Compensation plan to favor margin over revenue, we expect continued strong growth, but we will focus on the highest margin portion of the value chain, where our differentiated solutions most resonate.
Turning to slide six and an update on the supply chain on the storage side, we have now fully contracted supply through the first quarter of 2024, and we are opportunistically, adding supply on the spot market.
The choppiness in the electric vehicle market along with some project delays appears to have released some excess capacity that is coming into the stationary storage market. We will continue to execute back to back contracts to lock in our customer demand as we add additional supply commitments on.
On the commodities front, we are cautiously optimistic that some of the recent price declines will hold which could improve project economics for customers and increase our addressable market. For example, lithium carbonate prices are down around 20% from their peak in November which is starting to flow into the overall energy.
Storage system price as you know price increases or decreases are complete pass through for step, but we are encouraged to see these lower prices.
And in storage, we continue to progress our unit controller or modular energy storage system strategy.
That we discussed in our last earnings call. This offering will enable customers to mix and match various hardware combinations with an ability to swap batteries and inverters ultimately decoupling our customers from some of the supply chain volatility that we have seen in recent years importantly, we will still maintain.
Gain control of the edge hardware solution customers and partners are very excited about this offering and we expect to install our first pilot modular E. S. S next month.
Please turn to slide seven where we will discuss our technology leadership, we performed well in 2022 on the technology and operations front overall, we experienced a 33% and grid calls across the fleet without impacting customer Bill reduction expectations. Athena now has 30.
1 million runtime hours across multiple markets use cases and hardware devices. Our machine learning algorithm continues to improve as it is exposed to more data and more markets, which extends our competitive moat, we continue to support our customers and the grid in several core markets.
<unk>.
In California, we saw a 20 X increase in grid calls during December and January tied to the atmosphere River weather patterns, along with the extreme high gas prices in Southern California, Southern California Edison called on the Stim network almost continuously as we provided over 60.
<unk> per day for those months, our virtual power plant delivered the equivalent of several gas, peaking power plants and became a vital capacity option for utilities and grid operators.
<unk> also continued to exceed our commitments, 8% above baseline for the key S chip incentive program.
New England, we continued our exceptional performance with the fleet generating 76% more revenue than forecasted we had a 94% accuracy in predicting coincident peaks, which will be an important differentiator in the PGM market that I'll discuss in a moment and we have been over 200 megawatt.
What hours into the forward capacity market auction. This spring that will take effect in 2026.
Finally in ERCOT, our first sites will begin trading in the wholesale market in 2023, we announced in December our first four projects with Rex storage Holdings, a joint venture between <unk> energy partners, and independent developer and Excelsior energy capital, a leading investment fun right.
<unk> says made a substantial equity commitment to ERCOT storage, which could fund dozens of new projects.
Let's move to slide eight and our new partnership with charge point charge point as a leading electric vehicle charging infrastructure company, which has followed a similar path of innovation and market leadership is stem founded in 2007 charge point has grown to over 200000 ports Center management focused on charging both.
Personal and fleet vehicles, our partnership will focus on the confluence of fleet electrification in the grid still will provide battery hardware and software to coordinate onsite demand with the grid charge point will provide the charging solutions together, we can help accelerate electric vehicle adoption enhanced.
Customer economics increased grid, resiliency and reduce greenhouse gas emissions collectively we will leverage the $5 billion of funding incentives from the national Electric vehicle infrastructure program or nervy that went into effect in fourth quarter 2022.
We estimate the nervy program could offset up to 80% of project cost where available and further we estimate the IRA will provide another $9 billion of incentives and tax credits in the markets, we're focused driving additional benefits for our customers.
In total we expect E mobility to comprise around half of our behind the meter our BPM sales in three years, we have already booked several EV charging deals and the charge point announcement will help jumpstart our progress in this exciting market along with our previously announced partnerships with angi in ABB.
Next please turn to slide nine and our entry into the PJM market for energy storage PJM is the largest competitive power market in the world at around 150, Gigawatts, which is three times larger than the California grid. It spans 12 states plus D C and the <unk>.
Average industrial customer load is almost eight times larger than in California.
We started selling our storage solutions in PJM for several reasons, one rising transmission charges you can see over the last nine years transmission charges have more than doubled for most of the major zones. This is raising electric bills for commercial and industrial customers driving them to renewable energy.
<unk> like solar and increasingly storage secondly, new state incentive programs are increasing the returns on storage and finally, the IRA in particular, the storage ITC, which has opened many new markets to retrofit storage onto existing solar installations are instead.
<unk> base from also energy gives us a significant advantage in this regard we think PJM is an ideal market expansion opportunity as customers will benefit from athene is ability to co optimize multiple complex value streams in.
In addition, we have a strong track record of predicting coincident peaks in other markets and that will be a key value driver in PJM as well. This is a differentiated offering that is accessible with our best in class AI capabilities because of the additional value we will add for customers, we expect to charge up to <unk>.
The percent higher fees for Athena. Thank you and now I will turn the call over to Bill Bush, our Chief Financial Officer.
Thank you John starting on page 11, with our results for the fourth quarter and full year 2022.
But please recall that we closed the also energy transaction on February one 2022, which will impact the comparability to last year's results.
As John mentioned, we reported record revenue of $156 million.
Which was a 194% increase versus the $53 million in the fourth quarter of 2021 and more than we recorded in all of 2021.
Most of the growth came from the storage hardware sales on FTM partner projects and about $18 million from the powertrain platform.
We also recognized approximately $16 million of high margin software and services revenue, representing 10% of total revenue for the for the quarter full year 2022 revenue was $363 million, an increase of 186% over 2021 for the quarter, our GAAP gross margin was $13 million or <unk>.
Positive, 8% up from a negative 3% in the same quarter last year.
For the full year GAAP gross margin increased from 1 million to $33 million.
Turning to slide 12.
Fourth quarter non-GAAP gross margin was $17 million up from $3 million in the fourth quarter from last year due to higher revenues on a percentage basis non-GAAP gross margin was 11% in the quarter up from 5% last year, our margins benefited from a greater share of high margin software and services revenue for the full year.
2022, non-GAAP gross margin came in at 13% up from 9% last year.
We came up short of our 15% to 20% non-GAAP gross margin guidance driven by a higher mix of hardware than we expected.
Our storage software revenues also increased more slowly than we expected due to the continued permitting and interconnection delays at our prayers experienced while.
While the solar side of our business underperformed from a revenue standpoint in 2022 with relatively flat revenue versus 2021. The business continues to generate high gross margins ending the year at 60% is well positioned to take advantage of the expected snapback in the solar industry.
Our solar backlog increased 42% on a year over year basis, giving concrete evidence of a rebound in our solar results.
Net loss was $35 million versus $34 million in the same quarter last year and lastly, adjusted EBITDA was a negative $10 million in the fourth quarter versus a negative $12 million in the same quarter last year adjusted EBITDA improved as we continued to drive operating leverage in our business.
For the full year adjusted EBITDA was a negative $46 million versus a negative $30 million in 2021, our adjusted EBITDA results were within our guidance range of negative 20 to negative $60 million. So despite weaker than expected gross margins, we were able to meet our EBITDA guidance and that's due to cost controls.
In particular, when we saw the slowdown in the solar business.
Begin to develop in the spring, we met and we manage the pace of our hiring we will continue to take the same conservative approach. This year to ensure we achieve our goal of achieving our EBITDA positive in the second half of the year.
Fourth quarter bookings were $458 million up more than two times versus bookings in the same quarter last year and a new quarterly record. This was the highest bookings quarter.
Quarter and in the company's history in the $1 $1 billion of bookings for the full year is up 153% from 2021.
Moving from our financial result results to our operating metrics on slide 13, our backlog more than doubled year over year from $449 million in the fourth quarter to $969 million in the fourth quarter of 2022.
The backlog increased approximately 19% on a sequential basis from the third quarter of 2022, the largest driver of the backlog increase was the $458 million of new bookings in the quarter offset by revenue recognized as well as $137 million contract cancellation that we disclosed in early January .
Nearly $1 billion of backlog gives us good visibility into 2023 and 2020 for revenue.
We also no longer report the 12 month pipeline is a key metric in 2023, the business has matured to the point, where we believe backlog is a more important indicator of our commercial outlook and does not have the volatility of the pipeline metrics.
Lifeline was sequentially flat in the fourth quarter, mostly due to the strong conversion of pipeline into bookings during the quarter.
Our contracted AUM on the storage side of our business grew from one six gigawatt hours in the fourth quarter of 2021 to two five gigawatt hours in the fourth quarter of 2022, that's a 56% year over year increase driven by our strong commercial momentum.
Our operating AUM on the solar asset performance monitoring side of our business ended the quarter at 25, Gigawatts relatively flat to the third quarter customer additions were largely offset by by churn, including on the spin down of the legacy platform that we discussed last quarter, we expect solid growth in solar AUM in 2023.
As the industry recovers contracted annual recurring revenue or car ended the quarter at $65 million up 7% sequentially. We are pleased we are able to grow car during the quarter. Despite the contract cancellation again, a testament to our commercial success.
And software differentiation.
We ended the quarter with $250 million in cash on the balance sheet, we will continue to deploy our cash to fund operational investments, including securing storage hardware for our customers. These funds will come back to the company in the form of service fees hardware margin and a long term recurring software fee.
Will remain prudent in our use of cash within risk limits established by management and overseen by our board of directors.
Turning to slide 14, and our 2023 guidance.
Starting with revenue, we expect to recognize between $550 and $650 million of revenue in 2023 to the right you can see the seasonality we expect for revenue during the year similar to prior years. It is back half weighted driven by the timing of the delivery of batteries.
We expect more ratable growing service revenue throughout the year.
We expect non-GAAP gross margin of 15% to 20% versus the 13%. We reported in 2022. This improvement reflects a higher mix of software and services revenue, including from the solar side of the business.
Bookings, we expect to contract between one four and $1 $6 billion this year, representing a 40% plus growth year over year.
With our EBITDA focus in mind, we have revamped our sales compensation plan to focus on margin as well as revenue we will focus on the highest margin opportunities, where we can drive differentiated economics for our customers and first step.
We expect adjusted EBITDA in the range of negative <unk> 35 to negative $5 million versus negative $46 million in 2022.
This improvement is driven by higher margins and a continued focus on improving our operating expense leverage more importantly, we expect EBITDA positive in the second half of 2023, and then lastly, we are introducing car guidance, we're expecting to exit 2023 at a run rate of between 80 and $90 million. This is a function of our bookings growth.
Including some software only deals we're pursuing in core markets.
I would like to provide some context into some key uncertainties, we considered in developing our guidance.
Storage supply chain constraints impacted our Q4 results with manufacturing logistics delays at one of our key suppliers delaying delivery of product against our contracted backlog to mitigate this situation. We have pursued both commercial and technology driven solutions, including Onboarding additional suppliers and building domestic supplier relationships.
A recovery in the solar supply chain is critical to the achievement of our gross margin targets, we're seeing green shoots with the pace of panel deliveries accelerating across top tier developers and customers and this should stabilize the contribution from mall strategy.
Our backlog for solar APM was up 42% exiting Q4 2022, so we are cautiously optimistic.
Gross margin expansion, we have multiple shots on goal, which I will discuss on the next slide.
On slide 15.
We expect meaningful accretion in gross margin for 2023 as a result of several factors and key initiatives by aligning the compensation of our sales team. Our gross margin achievement, we've seen a market improvement in the gross margin within our backlog as we exited 2022. In addition, our CEO Mike Carlson has focused on accelerating the pace of system commissioning through the <unk>.
Rigor and focus he is bringing in pushing interconnection and permitting processes in partnership with our customers, we expect to roughly double our app, our operating assets under management in 2023, and this will contribute high gross margin software services as our software contract terms to begin upon commissioning.
We expect a recovery in the solar asset performance business, driven by a return to growth in the solar industry.
You can see from the graph on the left most solar industry expect that the impact of the U F. L. P. A panel deliveries to be resolved in the first half of this year and the long term we were rolling out several service offerings targeting enhanced monetization of activities, we've already been providing our customers as we have built a leadership position in the growth of the industry.
Yes.
This includes project modeling project design and asset management offerings tied to the introduction of our modular Esf's strategy, which we expect to begin to deliver in the first half of 2023. Additionally, we expanded our team of energy market experts last quarter as we rollout services for wholesale energy forecasting and program management for the MTM Mark.
We will update you on the progress and uptake of these offerings in the coming quarters bottom line, we will manage the business prudently to address risks in our plan and continue to drive to EBITDA positive in the second half of the year.
With that let me turn the call back to John for some closing remarks.
Thanks, Bill on page 16 to wrap up we are committed to achieving EBIT positive in the second half 2023, our financial progress is supported by the very strong demand we are seeing from customers as they face rising energy costs and as the full impact of the inflation reduction act fuels market.
Growth.
We closed 2022 with $1 1 billion in bookings, representing a 153% increase from the prior year. Our technology team is best in class driving new market expansion and enhancing gross margins, we launched our offerings into PJM, the largest competitive global power market.
And are enhancing the economics of sites and K. So with Athene is unmatched co optimization in wholesale energy trading capabilities. In addition, we continued to make inroads into the fast growing electric vehicle market with the partnership we announced with charge point.
All these activities set us up to drive double digit annual software services growth and enable the company to achieve significant growth in adjusted EBITDA. Finally, I want to recognize our diverse global team for the outstanding performance and looking forward to meeting the commitments we have outlined today, we have world class.
Employees products and customers with that let's open the line for questions. Please.
Okay.
Yes.
Thank you we will now begin the question and answer session joined the question can you you May Press Star then one on your telephone keypad, you only have a toe in acknowledging your request.
Using a speakerphone please pick up your handset before pressing any key.
To withdraw your question. Please press Star then two.
The first question comes from Brian Lee of Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon. Thanks for taking the questions I just first of all on the guidance for revenue.
The backlog position I'm, just kind of curious what's your assumption around backlog conversion I would've thought you'd be in position to do.
Higher than kind of the revenue guidance here of $600 million at the midpoint. So are you seeing backlog converting more slowly or is there something with respect to mix, that's maybe not turning over as quickly as you would've thought just given the overall.
July numbers seem to be bigger.
Give you more coverage than sort of the revenue guidance you are providing and then I had a follow up on the margins.
Perfect Hey, Brian Thanks for the question, so yeah, and I think in terms of the backlog is converting slower and I think we've talked about this in the past as we're taking on larger and larger projects those tend to be they tend to be FTM first and then second they tend to be multiyear installations and so we saw.
Much quicker.
Projects were slow were smaller we saw a much quicker conversion much like say at the end of 'twenty.
End of 'twenty, one we had 400 plus million $450 million in backlog, we did $363 million in revenue. This year, so pretty pretty quick conversion in general, but this year and then two I think going into future years, we're just going to we're going to need to build more pipeline because the projects are longer and so from that standpoint I would.
Extension, but still pretty significant growth on a year over year basis for revenue.
The other thing I'd add Brian and thanks for the question is we do still have some opportunity to convert.
Bookings into this year. So here in the first quarter, so keep that in mind.
Okay fair enough.
Yeah, just on the margins I know you know 22, it sounded like you obviously had some issues that impacted you on the gross margins.
You're effectively starting 'twenty three here with sustained adjusted gross margin guidance with what you had going into 'twenty, two but it seems like some of the headwinds from last year. It started to dissipate. So is there some conservatism baked in here or is there some level of margin leverage that youre not seeing that you would've expected because my understanding.
Your standing is.
You've got maybe a little bit more bcm coming back into the mix supply chain better.
And I know you kudos on the operating leverage side of things, but just wondering what what are some of the levers around gross margin leverage that we could look to here in 'twenty three cuts.
Just on the headline guidance it doesn't seem like you're basically all the time.
Well I think so.
So in terms of the margins I think one is I think we need to be somewhat conservative.
Solar part of our business has a lot of margin leverage into it and now we are seeing some green shoots come out I mean, you can see that in terms of the year, we had 8% service growth in the fourth quarter sequentially. We've got really nice increase in backlog of 42% year over year, we wanted to make sure that those numbers are actually there.
And because of the you know thats, a 60% gross margin business in general.
That doesn't materialize the way that we expect that much like in 'twenty, two that will have a negative impact on us for 2023, So probably has some conservatism.
So I think there is to some extent you can always increase the numbers hard to take them down.
And so I think what we'll be doing as we roll into 2023 is continuing to monitor the solar part of our business very carefully but I think the other thing to consider as well is that the hardware side of the storage part of the business continues to be under pressure I mean that is definitely going to you know as we move up in terms of project size the margins.
On those hardware sales, which unfortunately comes before the software is going to impact. The overall gross margin. So we kind of went through and tried to appropriately Act.
Forecast, what the mix of those two things would be and I think the ultimate answer is going to depend a lot on what the mix turns out to actually be.
Yes.
Alright, Thanks, guys I'll pass it on.
Thank you.
The next question comes from Mohit men Loy of Credit Suisse. Please go ahead.
Hey, Thanks for the question and then just following.
Following on the previous question from Bryan on margins.
It feels like probably like a shift of.
Shifting to EBITDA profitability.
From Q2 to now the guidance is second half of 'twenty three.
Just wanted to understand is there anything nbc's novelty, which could be causing that.
And any any other levers on the EBITDA profitability I appreciate it thanks.
Yeah.
No we're not coming off the second half EBIT positive in any way so I'm not sure.
Where you've got that indication.
So that's not the case.
Got you know I'll follow up later on on that.
Just looking at the guidance and assuming a for the.
Backlog and bookings assuming 60% of it is the.
The hardware here.
That kind of implies revenues and 24 could be at around 900 million of probably more than that does that math makes sense.
That also kind of impacted by all the.
The delays or extended revenue recognition kind of talked about in the previous question there.
So thanks for the question Heath I think first of course, we're not giving 'twenty guidance just quite yet.
But I would refer you to the data that we gave him the AARP. So from that we do expect to see 24 revenue grow at those rates and the midpoint and hardware was of course, 30% and services would be 75. So I think from that standpoint, we do expect to see growth and then I think one of the places that you saw.
That in this last fourth quarter is a 17% sequential growth in services. So I mean ultimately the path to EBITDA is going to be paved through services and we're seeing a lot of very positive momentum from that standpoint, two quarters in a row, 9% in the third quarter, 17% in this quarter our service gross.
So we're really excited about that that's going to be where the growth gross margin dollars come from and so I think that'll be something to keep in mind as we go on not just not just the big print of what the revenue is but also what the gross margin dollar shake out to be.
Yes.
Got you and then.
Hardware as a sofa and bookings and backlog 60, 40th the changing for 'twenty four 'twenty three.
Now, we don't expect that to change.
I mean, what will change though to be clear is it will we'll have more software only deals in 2023.
Backlog, so you'll see more deals there, that's particularly true on the largest deals so.
One of the things that we tried to adjust for in the bookings number in total is the fact that we expected to have software only deals. This year, so and that of course only represents call. It 40% of the total economic value of the system. So the bookings growth is going to be slower.
On a nominal basis as a result of that.
Kwh or the megawatt hours is going to continue to grow at a very quick rate.
Got it all right I'll take the rest clearly thank you.
Thanks Mohit.
The next question comes from Julien Dumoulin Smith of Bank of America. Please go ahead.
Hey, good afternoon. Thanks for the time I appreciate it.
Nice to chat with you guys here, so with respect to the service as opposed to having the Dev. So can you guys talk a little bit about the growth of the services business and specifically, how you're tracking in and maybe some of the data points, we're gonna see materialize here.
As signs or road posts to know that you are scaling here I know that there've been some other discrete issues here as were alluding to on the gross margin mix, but I just want to specifically get back at some of these.
On the services side.
Hey, Thanks, Julian for the question. So I mean, I think the most obviously is going to be what's going on at the top there, yes, so thats, 17% sequential growth.
That's the kind of those kind of meet the high level signposts that you that you and the other folks should be looking for is what are we able to do in terms of total service revenue just in general.
That's where we've made a lot of progress Mike Carlson, who is here with US of course today is leading the pro serve side of the business and so I think we expect to see.
Quite a bit of progress from that standpoint, we kicked off that initiative on the storage side of the business.
Last August .
Solar part of the business has been doing that for some period of time and to the extent that we're able to experience the growth that a lot of analysts are expecting I E, 100% year over year growth in solar we're going to do a much better we did see a little bit of that.
In the fourth quarter with the solar part of the business. It did grow 8%, which was a nice accomplishment, particularly given the 1% decline in the third quarter. So I think those are going to meet the obvious points that you should be looking for as we go on go on everything Yeah, Hey, Julien. This is per test two points I would make when bill was discussing the.
Gross margin accretion strategy the long term plan.
And John referenced as well as next month will be <unk>.
Stalling our first modular yes that comes with services attached to it.
We expect a lot more of that unit controller type business to launch services and project modeling project design and asset management, and then separately, we expanded our team that advises customers on forecasting for wholesale energy.
Markets and so both of those you should start to see either just as Bill mentioned growth in services line line item or press releases around these customer wins and engagements.
Got it and then with respect to PJM just quickly if I can you know obviously they have disproportionate interconnection issues. How are you thinking about the confidence in the backlog translating given some of the timeline issues as it pertains to kind of leading into the PJM I. Appreciate I appreciate the margin comments about PJM, but just some of the interconnect and delay issues that we've seen there how does that fit with your backlog and mix there.
B, how you risk.
Risk adjusted if you will.
Yeah right now this is <unk> again, right now I'd say the primary focus in the PJM market is behind the meter where there is a <unk> approach for interconnection approvals, we're not chasing very large.
Highly engineered front of the meter deal said that that's one strategy and we're leveraging developers and EPC firms that corporate Fortune 500 accounts were targeting have worked with.
For quite some time in deploying their solar projects. So it's a different segment of the market and we've seen a faster pace, but.
And then just add just context around your question on the backlog, it's still early days.
We just launched it turn of the year. So we don't we don't have it.
Anything in component in the backlog just yet to risk weighted.
Wonderful thanks, guys.
The next question comes from Thomas Boyes of Cowen. Please go ahead.
Thanks for taking my questions, maybe the first one I'm just wondering if youre sourcing strategy has changed at all post the.
Held back on sourcing anything maybe beyond <unk> 2024.
Sure.
Domestic production as it comes online and then maybe as a follow up there what do you think it's reasonable to assume for U S battery supplier to finally be available between 'twenty late 'twenty four 'twenty five.
Yeah. Thanks, Thomas I'd say, a couple of things we have contracted supply for 2023, and making progress on 2024.
As we've talked in previous calls we continue to make opportunistic spot market purchases and I think that served us well and will continue to do that I think.
Our suppliers know if theres a change in one of their customers I believe we're one of the first calls and on the <unk> on the U S content piece look where it's still a significant customer of teslas and we will continue to work closely with them they've been a long term partner for us.
Really since probably 2013 or so 2012.
And as far as new capacity coming online I think.
Specifically related to the IRA I'd say 24 months, maybe a little longer can we see some of that.
And we're not really engaging just yet on that focus because we just we don't have that kind of visibility today on our bookings. So we will probably start that in the summer I would guess as we get more clarity on who's coming in you want to add anything bill Yeah. So I would just to put a finer point on John's comments. So we are fully booked in terms of.
Contracted supply through the first quarter of 2024 that you shouldnt read that to mean that we haven't contracted anything beyond that into 2024, I mean, we've talked about that.
Calls, where we're getting we're going further out and I would I would make the distinction between being contracted and actually having the product on the ground. We think from a working capital standpoint, it's probably better for us to do some contracting so I think that but for sure. We're talking with the folks that have made announcements around the domestic supply side of things.
But of course, it's early days for them right. I mean, there is no that we're aware of at least nobody has broken ground on our plants yet from a battery perspective.
A lot of conversations around panels, inverters batteries et cetera, and we're monitoring that our supply chain team is monitoring that very closely and to the extent that one of those groups is able to produce product here in the U S. I mean, it's a really interesting attributes from the standpoint of domestic content and how it works within the IRR. So it.
We are very closely monitoring for 'twenty three.
Primary use supplier for us is going to be Tesla and then we're going to be buying stuff from Korea and of course, Japan and China as well so.
So no real changes in the strategy and other than the fact that obviously the IRS makes us kind of start to talking to some of the folks that.
We would not necessarily have been speaking with before because.
Because they didn't have plants in spots that were interesting to us.
Great and I appreciate the color there maybe just as my follow up.
Just wanted to check in on the cross selling opportunities with also energy could you give us an update there and then maybe talk about your approach to kind of parsing through those 40000, plus C&I sites.
6 billion still a good number to think about it or has that changed at all after the kind of the pruning efforts.
This is <unk> 6 billion is a good estimate we have made some progress we've analyzed.
Upwards of 600 sites any granular detail and have started the customer conversations one statistic I would point out about a third of our bookings in the BPM segment last year came from that cross sell so we're seeing early momentum there already.
Great and I appreciate it thanks.
Okay.
Okay.
The next question comes from David Peters with Wolfe Research. Please go ahead.
Yeah, Hey, good afternoon, guys. So just as it relates to the margin profile can you maybe provide kind of a rough split of what guidance assumes for also energy revenue versus legacy battery hardware and software just to the extent you F. L. P a issues.
Linger beyond maybe expectations.
Hey, David Thanks for thanks for the question.
So as you can see from the various pieces from the standpoint of also energy for 2022.
For us it's kind.
On a consolidated basis, they did about $58 million or so in revenue. They did more than that of course in 2022, we just didnt consolidate January we expect to see strong growth there.
You look at any of the woodmac data, they're presenting a 100% growth I don't and I would say I don't think we're going to see 100% revenue growth in the company, but we do expect to see significant growth from that from that part of the business. I mean, if you look at most of the.
The publicly available data around solar we shouldnt see anywhere from 20% to 40% growth.
In that business and so a lot of it is going to be how quickly does U S. L. P. A how quickly does that.
Anti dumping rules of those come back I mean, there's been some chatter amongst various congressmen that you've probably seen that theyre going to roll back the work to Biden had done and that obviously if that happens that will obviously have a negative impact so the stuff that we're going to be monitoring very carefully.
As I mentioned before I mean, our backlog is up 42% on a year over year basis, and so as we look at and this is and so I'll make a fairly large distinction between backlog on the solar part of the business and backlog on the storage part of the business the solar backlog turns into revenue pretty quickly.
Six months or less.
Many of it is like three to four months and so it's able to churn pretty quickly. So we feel like if those projects are able to move forward in the way that we the way that we're seeing from our partners and what we're hearing.
We're pretty optimistic that we're going to have a really nice year on the solar side of the business really is its position to step back I mean, I think we've talked about that even as early as last summer when we were seeing yes.
Some of the early slowdowns as a result of the antidumping.
And you know kind of really harken back to the 2016 2017 time period when.
Solar really kind of ticket.
<unk> had a tough period as well and then snapped back really strong in the next period. So we'll have to we'll have to see.
And which is why in part why we I think we're a little bit conservative in terms of the gross margins and some of the revenue growth is that we want to actually have that turn into revenue and gross margin as opposed to.
Having good feelings about what's going to happen I'd add a couple of quick points too as well David door number one.
RF Skus that we've seen year to date are up to X versus 2022, so it feels strong coming out of the gate.
I'd also highlight that as we've talked in the last earnings call.
The solar asset performance management business exceeded market growth last year, and we expect more of the same this year.
No. Thanks, that's helpful. I appreciate all that color and just my follow up then is just.
I'm wondering if you can provide a sense of where things stand today within our interconnection requests timing broadly just trying to see if it'd be possible to kind of parse out where the car metric could be for 2023, if that bottleneck where to east and kind of just what you assume I guess for 23.
But if you want to start maybe Mike can jump in yeah, I'd say, so far we're seeing status quo around interconnect conversion.
Delivered hardware, we have undertaken and I'll hand, it to my Carlson, our CEO talk about some of the initiatives that we are taking a very rigorous approach to driving that faster than that that was kind of what prompted bill mentioned, we're looking to double our operating AUM this year.
Yes, it does.
Mike Carlson.
What were doing kind of a two pronged approach on on everything related to getting these assets into the field. Then obviously interconnects. So a big piece of it but internally we put a lot more I guess you'd call. It rigor around project management as these assets are secured by US and then getting into the field for <unk>.
Our developer owners and then turn turning that same focus off project management to our partners. So they are aware of and leveraging every opportunity. They can move that forward with the interconnect progress if that's what's holding them up and what we want to make sure is as we get through.
That backlog or that bottleneck of interconnect on the.
Mentally don't have any direct control over but we've got the expertise and knowledge of how to move through it as rapidly as possible. We don't lose any other time to moving these assets into the field and getting them commissioned and online.
Really the focus we expect we wont definitely solve the problem, but will improve on the performance of it as we go forward.
Great. Thank you.
The next question comes from Joseph Osha of Guggenheim Partners. Please go ahead.
Thanks, very much kind of following on the previous question you all have talked a lot about projects that are out there on the storage side that show up in your contracted at AUM that arent interconnected and are not generating revenue.
We've kind of gotten the sense that there would be at some point a nice.
Sort of step up as those things came online and started to generate service revenue for you. So my question is as follows can you quantify.
How maybe in gigawatt hours, how many projects are in this this contracted stewards AUM you have.
Orange interconnected and give me some sense as to how much of that might manage to make it into operation in 2023, and then I have a follow up.
Yes, so Joe Thanks for the question I appreciate that.
At this point, we don't break out the specifics of that so it's difficult for me to give you exact numbers, but I think one point you can definitely take into account is that we do expect operating AUM.
AUM to double this year and so on the storage side of the business and I think that is a great indicator that as you said I think there is a bit of a backlog of projects, which we're able we believe that we're going to be able to turn on and I think that as we look at the future and I think Mike talked a lot about this already how we're going to do that how are we going to speed up.
The conversion from <unk>.
From a deal when it gets from a booking to.
Equipment delivered to the system actually being operational and I think that because thats really as we all know that's when the software kicks in that's where that's and that's the highest gross margin part of the business and so for US it's a huge focus.
You have making sure that that process is happening as quickly as possible.
Okay and have you shared what the actual operating AUM number is.
We have not.
Okay, so but just to follow on that then if you're operating a AUM in Dublin, and you're bringing additional projects you're executing on additional projects and it's I think reasonable if you look at your car and what the annualized run rate of your revenue. Your service revenue is right now.
I guess I'll ask the question the way a lot of other people have asked me why why is this our service revenue number not going up a lot more why is it not doubling.
Well it is growing at 75% rate, so I think thats pretty significant growth.
When you look at.
The total.
Okay.
Not to belabor, it but you put a car.
And end of year 2023 car metric or whatever it is 80 to 90.
And you're at 65 currently so I guess I'm trying to understand why that car.
That card number which is a reasonable bogey for the annualize softwood services run rate why that's not going up more given what youre, saying about adding to the operating base.
Well, so car wouldn't increase as a result of operating assets first so I think that that's an important distinction car is the contracted amount. So that car is going to increase based on the amount of software on it.
That is attached on an annual basis to a particular contract.
The software number that we recognize as revenue in the business is tied to the operating assets and so that's where I'd say like when you look at the growth rates that we've had so far with 9% in the third quarter, 17% in the fourth quarter, that's where youre seeing the actual operating assets being able to generate.
Actual revenue and then gross margin so car.
It is an indicator of what will happen now what has happened.
So when we think when we when I say, hey, operating assets are going to double that means that we're going to have a faster conversion of car into <unk>.
And what we've had so that that's a distinction that I would make.
Okay I'll take it offline, but I think the 64000 dollar question here is what is your software and services run breaking to be by the end of next year.
Well I think I would say the way I would answer that is a 75% growth rate on what we've currently reported.
So that's.
That's the number that we've talked about it as like the services are going to grow at a.
Compound rate across the three year time period at 75%. So if you look at what the services number was for 2022, we expect that number to grow at 75% in 2023.
Okay. Thanks, that's very helpful.
Yes.
The next question comes from BG pairing Cheryle of Susquehanna. Please go ahead.
Hi, Thanks for taking my question so.
I guess my question was also related to car and sort of.
When I sort of look at it.
Compare your car to asset management, it's been.
Pretty stable.
Last year.
But when I look at the guidance it seems like it.
Stepped down in that.
How much.
Yeah.
It's translating into car.
Yes.
I guess it is.
Is that related to project site or if they're paying.
Going on the tough to attach.
Ratio.
It's not that everything we sell has all hardware has a 100% software attachment really the dynamic that's happening and Bill mentioned this in his discussion is where.
Selling and winning much larger friends of meter deals.
And some of those are expanding beyond 20 years in term and so when you see the average length.
Software terms expand.
That's bringing down the per year.
<unk> conversion.
Yes.
Got it that's helpful.
And then.
On the last call you sort of mentioned the.
Yeah.
You are starting to see the btn mix.
Come up with data I think in your pipeline. So can you give us sort of an update.
Where do you stand now what are the recent bookings.
Are you still sort of stat.
The bookings in that 90 10 ratio.
Or has that moved.
We really have <unk> and thanks for the questions.
No.
One of the certainly one of the things that we've seen is that larger FTM, nor our ability to win larger FTM deals. So what that what that tends to do in terms of the bookings and then of course the backlog is it weighted heavily towards FTM projects. So we are absolutely increasing both of the <unk>.
<unk> in absolute values of the DCM side of our business.
Right.
It's a smaller part it's just those are just smaller projects by their very nature. They are not going to grow in size nearly as fast as the FTM projects and so I think one of the things you know one of the benefits of the integration of also energy and stem has been a re I'll call a refocus on PGM and we I think are.
To continue to invest in that area, it's where it's where stem got started years ago and I think it's a market, which we can do very well and it has better as it compared to FTM. It has better margin attributes to it.
Not necessarily the same term.
Terms of the MTM deals or longer but the margins both on hardware and software are a bit better and it's also within the context of our classifications all of the <unk> businesses in DCM and said that yes, we've talked pretty consistently about the ability because we are delivering customers customers more value that will be able to drive higher.
Software attach rates in actual dollars. So we're really excited about the btn, our behind the meter side I.
I think it's going to be a nice growth area for us, but it's always kind of just because of the absolute size of the projects, it's always going to get a bit swamped by what we're doing on FTM certainly more incoming than we've had in the past because you post IRA and particular the corporate so I think we've discussed this in the past as well.
We're seeing fortune, one hundreds coming to us asking to look at 200 sites.
Across the country, and we're trying to operationalize that process to enable that.
Okay got it thank you.
Okay.
The next question comes from Justin Clare of Roth Capital Partners. Please go ahead.
Yeah, Hi, thanks for taking our questions. So.
First one here just wanted to ask.
If you could give us a sense for how much of your revenue for Q4 was the 80% gross margin software sales and how how that will split between your battery software in your solar monitoring software and then looking into 2023 are you expecting that 80% margin.
Software revenue to drive the vast majority of your services growth.
Is there a meaningful contribution from the one time cost.
Services sales.
So thanks for the question I think the first point I would mention is that all of the recent additions and software in terms of revenue are at the high gross margin rate. So that's 100% what's going on there and most of it is because of the way we shifted our model from <unk>.
<unk> finance model to a straight buy sell and we did that now a couple of years ago. So every everything over the last three four years has been met.
<unk> added into the services line.
Has been the high margin.
Software so from that time, but we don't and then your other question yes.
<unk>.
What's the breakout.
Have not done that yet.
Likely we will in the future, but at this point were not breaking out those.
The individual components.
And also energy of course, I mean, you can see from what.
From the tables that are in the back.
Of the of the Powerpoint deck, which got posted you can see kind of what the software and hardware component of that businesses, which we think is what makes it particularly interesting and whats driving that 60% gross margin across that business.
Okay, great. Thanks, and then just one more.
<unk> storage.
I think it's about 4% sequentially in Q4, we had very strong bookings in the quarter. So just wondering if you could better help us understand why the contracted didn't move upward more significantly did you see any meaningful customer cancellations own battery storage software contracts or was.
There may be a higher mix of solar monitoring bookings any additional color will be helpful. Thank you.
Sure.
Again, so we had so we did 400 call it $460 million in bookings in the quarter. Unfortunately, we had a call it rounded to $140 million cancellation, so that definitely tamped down the growth in that particular metric.
Okay got it thank you.
Okay.
The next question comes from Avi Sinha of Northland Financial. Please go ahead.
Yeah, Hi, Thanks for question, just trying to understand the PGM markets investing that you can get into that so.
Maybe maybe you can just give some idea.
And what are some pains.
Thank you Tito and your comments were that I'm trying to understand.
And what it take for you to break into new market and.
In the new area. So maybe you can provide some color on like how is that market do you expect to unfold in 2009 peak on your 425 something like that.
I can I'll start with cash if you want to jump in.
So first of all one of the things that we did a few years ago is aligned with channel partners through distribution and that gives us a very interesting footprint across the country. So as we look at new markets, we have distributors and partners in those areas already so that kind of tack concern that you would have is.
<unk> through that the other pieces are software platform through a sina is highly translatable into new markets very quickly. So we believe we have the right.
Technology offering for the market. We believe we have the commercial force to go in and execute in that market and I, just think that our ability with Athena to co optimize in a variety of complex value streams as we've proven out in many markets is highly applicable in PJM and certainly.
Our coincident peak track record has been very good if you look at some markets like Ontario. So just some of our past experiences. We believe we can execute in that market very effectively and when you look at the size of that market being so much larger than than California, and our execution here in California has been very.
Strong market, leading market share over the past few years and then you look at some of the higher cost from a transmission standpoint, it's really compelling opportunity for the company.
I would just add this is for cash that we are optimistic about this market value that we can create for our corporate customers in that geography is tremendous we are tempering our expectations around what gets installed in 23, just given some of the interconnection timelines AUC and PJM is not exactly.
<unk> the case in behind the meter, but we wanted to be conservative there.
But certainly seeing significant interest in the pipeline and early bookings as well.
Got it.
So I just just one more follow up.
As we see more hardware.
Hardware products business, continuing to get little bit more struggling part of it. So as you as you make a move towards more of the software part so how do we look at the project Green here.
This transition is more and more toward the software only I guess.
When do we can see out of the business can be software only and what that trajectory looks like.
I'm not I didn't totally.
Totally understand your question, but if I.
If I understood right, you're asking what's going to be the long term distribution of hardware and software.
On contracts is that fair.
Yes, I was thinking like more as the business heads on.
Fast forward three years, it's not like more and more towards getting more software only business and are we heading towards Gary that's the case.
So yes, we think software and services is definitely that would be a bigger part of the business I mean, and I think that is as we've discussed as we move up the size graph in terms of how big of size projects that we're working on is less and less likely that we will supply the hardware, which is all around the project and Mike as Lee.
Adding on the unit controller.
Unified.
Our system that we're working on and are going to ship here. This quarter. So I think longer term, it's going to make sense for companies to probably do procurement for themselves in the batteries.
The larger projects the smaller ones, we think that wont be the case, but that's why I said earlier on when I talked about the bookings growth on an absolute basis $1 1 billion in 2022.
Obviously, a slower growth rate in 2023, when comparing those two time periods and I think over time, you're going to see more and more of that I mean, it's an exciting part of the market for us it's a much more capital light, which we've always talked about <unk>.
Easier from a working capital standpoint, if we're not.
Taking all of that battery or the economic value on to our balance sheet. So it's definitely something that you should expect to see growing as the business matures.
Maybe we can assume that 25, great. Thanks, good that'd be a software only business or that's too aggressive.
I think we're still going to be selling hardware.
We want everybody to hear that commentary I think like Oh, they're not going to be selling any hardware I think we're we're not going to be selling hardware is on the very largest projects.
So make a distinction between those two things as theirs.
Last year, we recorded over $300 million in hardware sales I don't think that number is going to go to zero anytime soon and with the forecast that we've given for 2023 Youre looking at a number north of $500 billion in terms of hardware sales. So it's definitely not a business, which we think is going to go to zero. It's just going to go I think it is going to mature and that the long.
As your projects was a more with a developer that what I would call as the fully integrated that has procurement capabilities, we're not going to be buying hardware for them, but for.
For many of these other partners that we're working with today, we will be I would add that the.
Amount of our developer standardizing on Athena is growing so I think even if they do that we continue to see them, having a need for software. So the Athena platform is ideal.
And to Echo Bill's comment we are seeing many more software only deals building in the pipeline with our commercial team.
So im bullish on that front as well.
Sure.
Thank you Sir.
Okay.
This concludes the question and answer session I would like to turn the conference back over to John Carrington for any closing remarks.
Sure I want to thank everyone for joining us on our fourth quarter and full year 2022 guidance.
<unk> call, we look forward to speaking with you during our <unk> call and again, thank you all for joining.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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