Q2 2023 Stem Inc Earnings Call
Thank you for standing by this is the conference operator welcome to just the stem second quarter 2023 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation, there will be an opportunity to ask questions.
To join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference over to Mr. Ted Durbin head of Investor Relations for stem. Please.
Please go ahead.
Thank you operator this is Ted Durbin head of Investor Relations at <unk> welcome to our second quarter 2023 earnings call.
Before we begin please note that some of the statements we will be making today.
They are forward looking.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10-Q and our other SEC filings.
Our comments today also include non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release, we will be using a slide presentation today, our earnings release and presentation on the Investor Relations section of our website at Www Dot com.
John Harrington, our CEO and Bill Burke CFO will start the call today with prepared remarks, Mike Carlson CLO Rakesh Patel, Chief strategy Officer, and Lara Johnson CTO will also be available for the question and answer portion of the call.
And now I'll turn the call over to John .
Thank you Ted good afternoon, and thank you all for joining US today, beginning with slide three we will cover six items today to include our second quarter results commercial traction business updates highlighting our continued execution and technology Advancement said I'm excited to share with everyone Bill.
Bill Bush, our Chief Financial Officer will discuss our financial results as we closed the first half of 2023 and more details on our full year guidance, which we are reaffirming.
Now, let's turn to slide four on our second quarter 2023 results and highlights the.
The <unk> team delivered another strong quarter with revenue of $93 million up 39% versus the second quarter, 2022, which was above the midpoint of our guidance range.
Our higher margin services revenue grew 31% year over year, and 11% sequentially contracted annual recurring revenue or car was up 5% versus the first quarter of 2023.
Lastly, our GAAP gross margin was 13% and our non-GAAP gross margin was 18% in line with our full year guidance.
We are reaffirming full year 2023 guidance, including our continued expectation of achieving EBIT positive in the second half of this year bookings.
Bookings increased by 5% year over year to $236 million were seeing much larger deal sizes as we expand our presence in the front of the meter market segment.
In fact, our average project size is roughly doubled over the last year a great example of our execution in F. T. M will see ammo Rescue award, we announced today and we will cover later in the discussion.
One knock on effect of our success in growing larger scale projects is a more lumpy cadence of bookings from quarter to quarter.
As a result, some deal slipped past quarter close and our bookings in Q2 fell short of our target, but the momentum in recent contract executions and the pipeline for second half gives us confidence to reaffirm our full year bookings target of one four to $1 6 billion the overall demand.
The environment is very strong and we continue to see opportunities to closed significant deals in the second half of this year.
Finally, our AI driven technology Athena continues to receive third party recognition of its differentiation and value. In fact, we've received seven accolades in the past year from respected third parties on our technology and innovation leadership.
Please turn to slide five.
We continue to see solid growth in our high margin services revenue, which was up 11% sequentially. Our software revenue grew 10% sequentially driven primarily by continued storage software revenue growth as well as improving solar growth.
Storage software also benefit from.
Benefited from stronger market participation revenue this quarter.
Consolidated gross margins improved by nearly 100 basis points year over year, driven by an accelerating rate of system commissioning.
<unk> solar revenue growth and increased market participation revenue.
Demand remains very strong for our solutions as customers and partners have better visibility into their project economics now that the IRS has clarified some key provisions in the inflation reduction Act.
Moving to slide six we're proud to announce today that we were recently awarded a significant standalone energy storage project with <unk>.
One of the fastest growing.
Electric cooperatives in the U S. The 313 megawatt hour installation will help their customer balanced power needs, while integrating renewables resources to create a more resilient and responsive power system. Our scope of work includes energy storage hardware professional services and a 20 year.
FEMA contract I'll also note that this project follows on the heels of a separate deployment with <unk> and Holy Cross in Colorado.
That one recently won a top project award with environment and Energy leader. This is another example of our history of execution and a significant contribution from repeat business to our bookings momentum.
We believe the <unk> project demonstrates two key trends first we are increasingly competitive in large scale front of the meter storage deployments and secondly, our competitive strength in the cooperative and municipal utility market will continue to drive additional sales momentum in particular, the direct pay provisions.
In the IRA and the recent IRS guidelines are accelerating engagement and interest by several co ops and munis in deploying energy storage, we expect upside to our initial software offering.
The customer expand its wholesale market trading activities. This is a dynamic we've seen in other markets, where we've added services and value for customers over time on the solar side of the business, we're seeing continued strength.
With a 39% year over year increase in backlog in addition to solid growth in services revenue.
AUM.
While the utility scale portion of the business continue to combat supply chain and labor challenges in the first half of 2023, we remain focused on this high growth segment of the market and providing more innovative products and services a solid proof point is the recently announced 304 megawatt wind in Hungary or direct.
But of our focus on this key segment.
Now turning to slide seven regarding our AI technology leadership. The technology team continues to make exciting progress and received global recognition in June our Athena platform was recognized as the winner of best predictive analytics platform and the sixth annual AI Breakthrough Awards a program that honors excellence.
And innovation in multiple AI and machine learning categories. We were incredibly proud to have Athena recognized as a leading innovative software solution driving the clean energy transition.
In July Stim received the top product of the year award in the environment and Energy leaders Awards program, an organization that does it commence excellence and products delivering significant energy and environmental benefits.
These awards recognize what our customers' experience as differentiated economics and sustainability benefits based on industry, leading predictive analytics trained on years of experience operating solar storage btn and <unk> assets in multiple markets and utility jurisdictions. Moreover, these.
Awards clearly highlight the fact that we have built one of the leading clean energy intelligence platforms in the industry as recognized by subject matter experts in the artificial intelligence and software space.
Please turn to slide eight on our utilization of new AI tools into our processes.
There's been a lot of buzz around new and exciting developments in AI and the fact is many AI technologies are not new and certainly not new to stem. These technologies and capabilities have been a foundation of our software and our approach since the company's inception that said our software engineering team is leveraging the latest.
Advancements in generate of AI tools are integrated are integrating advances in AI to enhance our asset management capabilities and enables significant efficiencies and software code development.
This is yet another example of our leadership in bringing artificial intelligence tools to the energy sector.
Earlier this year, our software developers started integrating generated AI tools into their workflow and as a result, our developers have seen up to a 50% improvement in their coding productivity today, we're rolling out this approach across our Dev teams and evaluating additional applications for these powerful tools to accelerate our.
Product roadmap looking forward stem engineers are building a pilot Athena chat bot that leverages, our extensive knowledge base to offer asset operators powerful and flexible prop based tools that enable improved asset performance as well as an early efficient identification.
Of operational incidents these tools will enable operators to accelerate root cause analysis initiate corrective actions and optimize performance.
Asset performance and optimization is anchored in best in class.
And class availability paired with unmatched economic outcomes generate of AI promises to unlock new trading insights for business analysts and energy traders, creating further distance between us and other competitive offerings in the market.
With our coding productivity gains from leveraging AI tools, we anticipate generated and predictive AI to help customers access and subject matter expertise at scale.
Growing our professional services offerings as a key area of our focus and our teams are engaging with several customers to execute on this strategy and now I will turn the call over to Bill.
Thanks, John starting on page 10, with our results for the second quarter of 2023, as John highlighted we reported revenue of $93 million, which.
Which was a 39% increase versus the $67 million, we generated in the second quarter 2022 revenue grew 48% for the six months ended June 30th reflecting the consistent momentum of the business. The second quarter revenue performance was also above the midpoint of our guidance, while most of the revenue growth.
This quarter came from additional storage sales, we also realized significant growth at $5 million in solar sales, representing a 32% year over year growth. We also recognized $16 million of high margin services revenue, representing 17% of total revenue for the quarter and a sequential increase of 11% continuing <unk>.
And this important part of the business.
Our GAAP gross profit was $12 million and GAAP gross margin percentage was 13% up from 12% in the same quarter last year.
non-GAAP gross margin was $16 million up from $11 million, 45% increase in the second quarter last year due to higher sales and improved margins on a percentage basis non-GAAP gross margin was 18% in the quarter up from 17% last year due to higher services gross margins we can.
To execute on our initiatives to achieve greater operating leverage and drive down our cash opex as a percentage of revenue, we expect cash opex as a percentage of revenue to be less than 25% for the full year of 2023, as we continue to access lower cost geographies and focus on cost discipline.
We continue to scale for growth with our with a focus on system enhancements to allow for increased productivity and tighter integration across our worldwide workforce.
Since the acquisition of <unk> energy, we've increased our head count in India by 50%, providing significant operating leverage.
Net income was $19 million versus a net loss of $32 million in the same quarter last year. The year over year change was primarily driven by a one time $59 million gain on the extinguishment of debt due to the repurchase of a portion of the company's 2028 convertible notes in the second quarter of 2023.
Adjusted EBITDA was a negative $9 million for the second quarter versus a negative $11 million in the same quarter last year as we remain on track for our full year adjusted EBITDA guidance, including our continued expectation to achieve positive adjusted EBITDA in the second half of 2023.
Cash exiting the second quarter of 2023 was $138 million down from $206 million in the prior quarter sequential.
Sequential changes in cash was driven by outflows of approximately $102 million for purchases is a.
Battery hardware it will soon convert to revenue upon deployment during a very active delivery cycle, primarily expected in the second half of 2023.
We continue to closely monitor and manage our receivables, which increased this quarter, we expect our receivables balance to normalize in the coming quarters.
These outflows were partially offset by approximately $105 million of net proceeds from the net deleveraging green convertible senior notes offering completed in April of 2023.
Together these factors led to a net reduction in cash of approximately $68 million based on our current forecast, we expect to exit the year with no less than $150 million of cash and cash equivalents. This forecasted increase in cash throughout the second half of the year is driven by higher adjusted EBITDA plan collections and accounts receivables and it.
<unk> operating leverage. In addition, we are seeing improved pricing and payment terms with our supply chain partners and expect the utilization of cash to further decline as we continue.
These negotiations for supply in 2024 and beyond.
Turning now to slide 11 for a look at our operating metrics.
Backlog increased to 88% year over year and increased 10% on a sequential basis to $1 4 billion.
The largest driver of the backlog increase was a $236 million of bookings in the quarter.
End market customer demand remains strong and we are confident in our ability to continue to deliver strong results. Our AUM on the storage side of the business grew from three five gigawatt hours at the first quarter of 2023 to $3 eight gigawatt hours gigawatt hours in the second quarter of the same year, that's a 9%.
Driven by our strong commercial.
Our operating AUM on the solar asset performance monitoring side of the business ended the quarter at 26, Gigawatts up 400 megawatts or approximately 2%.
The solar industry in particular, the supply chain is beginning to recover and the increase in AUM is evidence of this momentum I also wanted to highlight that we've been successful in migrating customers from our legacy applications onto our core power Tech platform.
Turning now to slide 12, and our 2023 guidance.
As John mentioned earlier.
We are reaffirming our guidance for the full year 2023, we're focused on converting backlog to revenue continuing to improve our operating leverage while reducing working capital usage. We have organized the company to achieve our goal of achieving are reaching EBITDA positive in the second half and believe that the continued execution by our teams and the strengthening customer demand.
<unk> will support that goal.
With that let me turn the call back to John for some closing remarks.
Next bill wrapping up on slide 13, with our key takeaways, we closed the second quarter and first half of 2023 with strong execution and financial performance revenue was above the midpoint of guidance with robust momentum across the following four bullets on the slide strong end market demand with several large projects executed and in our <unk>.
<unk>.
Double digit quarterly growth in services revenue with a significant projects services and software only deals in the pipeline.
Continued recognition by third parties of our best in class, Athena AI capabilities and high confidence and the cadence of cash inflows exiting the year with a strong balance sheet and positive EBITDA expected in the second half of 2023 in summary, we reaffirm our full year 2023 guidance.
With that I want to thank our key stakeholders, our customers our channel partners, our suppliers and shareholders when I reflect about how far we've come it's all about the global team at <unk>.
A big Thank you for the continued execution and commitment to our success, we have a lot to be excited about for the balance of the year and continuing to execute on our mission and values and now let's open the line for questions. Please.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear tone acknowledging your request.
Youre using a speakerphone please pick up your handset before pressing any Keith to withdraw your question. Please press Star then two.
The first question comes from James West with Evercore ISI. Please go ahead.
Hey, good afternoon, everyone.
Hey, James.
John I'm curious you went to a little detail here on the.
The roadmap for Athena.
Leveraging your gender AI, which we see a lot of companies doing but you guys are kind of first year and then storage.
The area that was it.
George.
Could you maybe elaborate on that product roadmap that you highlighted are these new applications are they enhancements to additional applications.
Kind of what's the what's the framework and how are you thinking about that.
That road map.
Yes, Hi, this is large Johnson, let me, let me take a stab at that.
Generative AI was actually going to be a terrific complement to the products that we currently offer and leveraging the experience we have with predictive analytics and <unk>.
What you see in degenerative cases, often that sort of that box function that helps the human operator that helps the human administrator of a system to understand defects or performance questions analyze.
<unk> issues and that sort of thing and as mentioned, we also see that helping the trading operators who are using.
Predictive.
Analytics, and our automated bidding and trading.
Capabilities to optimize market performance and so forth. So this digital assistant if you will is the is the best use case that we see today for generative AI I think there are probably going to be many more but that's certainly where we're focused today.
Okay, that's very helpful. Thanks.
And then maybe one for bill with the guidance kind of unchanged, despite a pretty solid or above guidance at.
At least for revenue in the second quarter or is this just a matter of the guidance is pretty wide and you're being conservative here or did things slip into the next year or is there anything to be aware of.
The guidance staying the same.
Thanks for the question Jami I think that we're in a good position.
I think.
Which is what we said in the past the first two quarters are the lighter from a revenue standpoint quarters.
And we've still got quite a bit a ways to go for.
For the year and so I think we feel pretty comfortable in the midpoint of $600 million on the revenue side, and we feel quite comfortable with that number.
Okay understood. Thanks, guys.
Sure.
The next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions.
Dose on the solid execution here.
I guess first question.
I would have is just around the.
The timeline for reaching positive on adjusted EBITDA I know that's been a big focus of.
The team here throughout this year and into the into the second half of the year. So.
Didn't know if you had at this point in the year better visibility around the eight O tracking to that in <unk> or just any general updates around that.
The progress toward toward that target.
So thanks, Brian for the question this is bill.
I mean, as we've mentioned a couple of times on this call I mean, we're very comfortable with the guidance in terms of achieving that EBITDA positive in the second half.
I would say I think we're on a good track for that in terms of a lot of things that we've done generally with the business, where we talked about an increase in head count in India, So really a lot of cost control and cost maintenance.
We've done a lot of work in terms of the underlying say really.
The systems of the business such that we can be as productive as possible. There's been a lot of work done and just in terms of making sure that our processes are in the best possible position and were fortunate and that the commercial side of the business is doing really well. There's just a lot of really solid end market demand for the company that.
It was yes.
Shown in the bookings of last year, almost $1 1 billion in bookings for the full year and at the midpoint. This year, we're saying, one 5% and Thats of course.
<unk> of some of the additional software only contracts that we're going to do so yes.
So we think that we're in a great position in the second quarter. The second half is the much bigger part of the year, 75% of the revenue.
From that time and so when you when we look at where we are from a cost standpoint.
And we look at what we're what we're expecting from a revenue standpoint, we're very confident that we can meet that goal and I would add Brian we've got I think very solid visibility into the existing bookings that are scheduled for delivery in the second half.
The hardware secure its ready for delivery and.
The cadence on that weekly.
Mike Carlson, leading the process with the deployment teams so.
We feel we feel good about the second half guide.
<unk> said, obviously reaffirmed it.
Okay, Great I appreciate that color and.
Maybe since <unk>.
John you did bring it up this has become a bigger and bigger theme across that renewables tech landscape. This year.
A reversal of last year, where everyone was talking about inflation and shortages now we're talking about.
What do you have an inventory when can you take advantage of hardware cost deflation and the like and so I know you guys have hardware.
Pretty much secured through next year, if I recall, what the opportunity here as you look into the supply chain to start benefiting from hardware cost deflation trends on the battery side.
When did that start showing up in your numbers and how does that kind of manifest would that be the ability to.
Did you drive higher volumes or are you going to be able to maybe get some margin capture on the hardware side, just how you're thinking about it and maybe the timeframe for that.
Yes.
I'd say a couple of things on that as we mentioned in the previous call. We spent a fair amount of time in China with a variety of different suppliers and I think we with our modular ESF strategy will enable us to be maybe more competitive on that front. We certainly know the working capital will come down as well, Brian So we like that equation.
I would say that the deflation piece it depends on your delivery timeline, you see a little of that right now lithium is kind of bouncing around but.
And in aggregate our view is we want to make sure with the highest quality suppliers that can prove low cost roadmap and we feel like we are.
Working with some very good suppliers, we do think we'll see improvement of terms that we had in the past.
I think that would probably reconcile more into 2024.
It would maybe in the second half of this year, but.
But we are getting a few different spot deals coming in so you could see some of that Fisher still.
Okay I appreciate that so it does sound like in 24, you can start to benefit from some of that even in the even in the first half of the year.
We'll see I mean, I would just think that we have a good line of sight of what we need hardware now for the back for the second half. So next year, we're starting to have more and more of those discussions. So I don't want to commit that youre going to see a significant deflation and our margin flip next year, we'll talk about that in the first quarter, but.
As we see it today.
Do feel like next year could be yours, following could be more compelling.
The terms that we've had at this point.
Brian . This is bill one thing I also wanted to mention to you mentioned or you said it in your question that we will have been fully contracted out through 2024, we actually are not fully contracted through 2024, so to the extent that we see a near term price reduction we'd be able to take advantage of that so as you know the second half of the year is where were buying and buy.
And placing most of our batteries so it's an opportunity for us to capture.
To the extent the price decreases do come through.
To capture some of that for ourselves and our customers.
Okay. That's great I appreciate that additional color I'll pass it on thanks guys.
Thanks, Brian Thank you.
The next question comes from Thomas Boyes with TD Cowen. Please go ahead.
Thanks, Rob and thanks for taking the questions maybe first.
Your focus for storage as the U S space, but I wanted to talk about the appropriate internationally.
Given the large solar award in Hungary.
You're targeting other countries in Europe , specifically, given the net zero and dishwasher.
Yes, Dennis Thanks for the question a couple of things on that front.
We said at times in the past be maybe the best International market will be the U S. As it stands because of the inflation reduction Act. We are closely monitor in Europe , we do have a team there that led this Hungary win.
Out of Berlin, So, we're well positioned I think as that unfolds and we're not opposed to going international but we just feel like really the U S is our primary focus during the second half and obviously, we'll update our plans on the international expansion going into next next year, but we do have a decent sized team that are very.
Very deep, particularly around the solar side, and we're coming up to speed on the on the storage side. So we're monitoring it if there's an opportunity we'll go wherever the best opportunities are and we just got to see how that unfolds.
Great appreciate it and then.
My follow up could you just talk about maybe the composition of the bookings for this quarter were there specific markets.
That has shown strength.
But you could highlight.
Yeah, Hey, Thomas This is bill so I think Theres a couple of space a spot that continued to be strong areas for us and I would kind of coming east to west and this is on the storage side and I'll talk about solar in a second after that but certainly the new England area, and New York, Massachusetts.
Those are areas that have really done quite well for us here in the past of course, Texas is a major market that we're very involved and we're starting to see some activity in the Midwest in Illinois, and some other places in that area and then of course, California.
As of the MAGE for US those are the major storage markets and even as I say that one of the biggest bookings that we had this this quarter was in Colorado.
So.
I think that we're pretty happy with the way solar or excuse me storage in general is spreading across the country and I think we'll be the beneficiary of that having been able to move demonstrated movement across.
Large number of geographies on the solar side, we continue to see a lot of strength across the U S and even into some of the international markets with a particular focus on Europe .
Hungry booking or the hungry sale is a good is good evidence of that and so I think with that we're going to continue to do well there.
Got it maybe just sneak one more in there just because you had mentioned, Massachusetts, I know that you've had some pretty impressive market share there for the past 18 months can you maybe talk just what's driving that specifically.
Yes.
I mean, most simplistically the mass smart program. This drove describing that so the Commonwealth of Massachusetts passed that program now call. It two years ago, maybe a bit more and that market continues to be really strong and in the same way and I think New York is reflective of that as well where there is a program that was that was put forth. It was <unk>.
<unk> by the legislature and Youre starting to see.
Significant activity by companies like a good example of that is <unk>, which is one of our significant customers very focused on installing battery storage systems in urban areas with a focus on New York City. So I think you're just going to continue to see a lot of deployments across markets.
That that need to have.
Energy at the point, where it's being used as distributed energy resources or <unk>, I think you'll see more and more of that as we go.
Perfect. Thanks again.
Mhm.
The next question comes from Sean Milligan with Janney. Please go ahead.
Hey, guys good quarter I.
I was hoping that you could talk a little bit about the outlook for.
Software only contract awards over the back half of the year, obviously when you look at the.
2025 guidance that is out there.
You would expect an uptick in software only awards and you mentioned it when you brought up.
$1 5 billion bookings number bill, but just trying to get an understanding of how you think that evolves for you here over the next kind of.
Six months.
So thanks for the question.
I'll, let Mike jump in on this as well can see it's kind of in his area.
Yes, I think that one of the things that we're going to see in this kind of rolls out at that modular esf's solution youre going to see more software only contracts that we sign in a lot of that is because as we move up the size curve and we've talked about this in the past many of our customers already have say D C block relationships and so.
We are less involved in the purchase of that equipment than maybe we had been in the past and I think that's a reflection of the maturation of the market in general and so I think youre going to see more and more of that I think.
Gross well into our controls.
Background very similar to what we do on the solar side of our business, where nobody's really calling us asking us to procure panels for them.
Example, or Inverters. So I think it's the melding of the two businesses don't know Mike if there's any.
I agree and I think the other thing is we.
Once this July one some of the software and services or Mike or getting a lot of feedback from the market, both greenfield and brownfield that are looking to.
Either retrofit, what's already out there for and optimize performance or as Bill said there are certainly no.
Put the supply chain into various subcategories and by vertically focused solution. So this gives us the opportunity to make sure we're maintaining where the market goes we've got that opportunity on both sides and we're.
We're positive on the initial we've been.
Just 30 days into it but the initial responses from some of the discussions have been good.
Great. Thanks, and then.
John you mentioned market participation revenue during the quarter.
Obviously I know it wasn't.
Doesn't seem like it was over the meaningful but.
I think that thats upside to kind of the long term guidance that <unk> given right. So.
I was hoping you could talk a little bit about maybe percentage of assets or something that are participating in markets, where youre seeing upside from that revenue stream and then maybe what the outlook is for that.
Moving forwards.
Yeah, we don't really break it out specifically I will say the outlook I think we will continue to be strong. It is interesting youre seeing more grid operators utilities, others that want to poll from these assets. So I think it's just kind of a learning curve, but.
We're really it's not a material portion of the software revenue. Although it is very strong gross margins, 80% plus so we're excited about it we'll continue to update.
Everyone on the calls on how we're doing there, but I would say that.
I think the general fact that its being utilized more as very positive and it's what we expected the assets to be used for all the way back when we did our roadshow. So it's good to see it getting some traction.
And then one more if I can sneak it in.
You guys kind of gave an expectation for cash at the end of the year.
That obviously follows that.
Couple of robust quarter in terms of revenue and <unk>.
I was hoping you could kind of refresh us on how maybe working capital should trend throughout a year. So like looking into the first half of next year do you.
We start seeing the benefit of those.
<unk> revenue in terms of.
Flowing through the working capital lines.
Trying to get absolutely yes.
Yes, absolutely I mean, we've been building receivables here for a little bit.
Grew again this quarter and we would expect to start seeing the benefit of those sales really over the next six to nine months and so that's how we feel pretty confident because we more typically the cycle has been that we will be collecting cash in the first half and spending it in this year I think what we're going to flip that a little bit and we're going to collect more cash.
In the second half.
And then maybe what were we had before which gives us the ability to still build receivables while maintaining the cash balance. So I think we're feeling pretty confident about about that we are looking very closely to our customers in terms of the payment cycles and we feel good that that that number.
We can meet that number and potentially even beat it.
Great. Thank you everyone.
Mhm.
The next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, good afternoon, guys Cameron lochridge actually on for Julian.
Look I wanted to just go back to the question I was just asked actually just about working capital and how we should think about it sort of 24.
Presumably.
Just given the revenue ramp.
Climbed by your guidance your long term guidance.
We should probably see a.
And even bigger uptick in just working capital investment in the front half of 2004. So just kind of maybe walk me through or walk us through how you're thinking about that.
And again like inventories are up.
$150 million ish $140 million this year in the first half when we think about something larger than that in the first half of 'twenty four.
No we definitely would not expect to see that I mean, I think one of the things that.
I should have said thanks for the question too but.
One of the things I think that we've talked about and this is where the modular esf's comes in is that the.
<unk>.
The terms and conditions under which those sales will be made will be very different than what the traditional business has been so we're kind of morphing the way capital will be used in the business. So that it's more efficient and that effectively will need less cash to run the business going forward. So we're which is why we started that initiative.
Thats why in part it's why it's quite popular with some of our customers and so when you look at the numbers. We have said that we expect hardware, which is the primary user of working capital to grow to 30% rate, which means that for 2024 hardware, it's probably going to have a slower rate of growth and it did.
This year across the three year span, yes. This year, we're going to grow hardware.
Looked at the numbers youre going to grow we're going to grow a hardware by quite a bit I mean last year, we were a little bit over $300 million and we're going to do around $500 million. This year, so you're going to see call. It 60% 60 odd percent growth in hardware sales. We don't expect that for next year, and so that say that slowing rate of growth will do two things one I think.
It'll allow us to take advantage of better hardware margins.
And sell relatively less hardware to do it. So I think when we think when we think about the working capital side of the business. We would expect we would not expect that kind of numbers that you are talking about in terms of inventory growth and so as a result, we should be able to maintain our cash balances into 2024.
Okay.
Got it that's helpful. Thank you very much.
And then just flipping over to to software and thinking about margins. There are margin progression can you just kind of walk us through.
Broad strokes, how the software versus services margins look today.
On a relative basis to each other and how you expect that to trend in the back half into 'twenty four.
Sure. So straight software margins today are at 80% plus and they've been that way for quite some time the services margins trend lower than that they are in more in the 40% to 50% range, depending on whether you're talking solar storage, but still obviously quite good margins and I think you can see the sequential growth that we have.
And both the solar and storage services over the last few quarters and so we continue to book more and deliver more value there for our customers, but we don't see margin decline or decretion in any of those any of those aspects. So we're quite confident that we're going to continue to increase the amount of services.
And software that we're able to sell to our clients and that's of course, one of the main drivers of our ability to achieve EBITDA positive is continuing to increase the amount of services that we do at any point in time.
Perfect Alright, guys. Thank you that's all from me I'll turn it back.
Absolutely. Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Kashi Harrison with Piper Sandler. Please go ahead.
Everyone. Thanks for taking the questions. This is luke on for Kashi.
As far as the software service revenues it looks like the year over year growth.
It dropped down to about 30% compared to 47% in the first quarter.
I'm wondering if there's any sort of interconnection issues that could potentially be going on here and how we should be thinking about that in the back half of the year.
Yes interconnection continues.
To be a problem Luke I mean, I think that.
I think you see that in a couple of different aspects of the business certainly one on the project side of the business, where we've invested some capital and getting projects into NTP. We've seen some slowdowns there and I think that's been particularly true in markets like New York, and Texas, where we've seen just in general slowdowns and I think.
I think one of the things we've consistently said, which is that interconnections havent gotten better but they haven't gotten much worse I think probably in New York, They did get a little bit slower and so that's definitely going to have an impact on us over time.
There was a new rule that was passed in New York and there have been a couple of situations. There that are giving some of the regulators pause.
And as a result of that timeframe.
Time frames are going to be impacted by that but I would say in large part I mean for us we're going to continue to be able to increase that the total amount of services and software that we sell in at any point in time so.
I think yeah.
I've been in renewables now for almost 15 years and I was chuckling with colleague the other day complaining about interconnections and thinking that's been the same problem for the last 15 years. So I think one of the things is certainly impacting us as success of renewables being installed in any particular geography at any time so.
That's something that we continue to work and are.
With our various partners on the regulatory side.
Folks that are that are working with the local agencies to do what they can to improve.
The tariffs.
Tariffs associated with interconnection, but it's definitely an issue has been for a long time and probably will continue to be.
Okay. Thanks.
Thanks for that that's helpful. And then on the hardware gross margin side I know you said, you're kind of looking to do less of that but you also mentioned projects are getting bigger so how should we think about the push and pull between larger FTR projects, but also trying to be less involved with the FTM projects.
Yes, that's really where the modular USS comes in.
That's exactly the push point right there is as the systems get larger.
More than likely we will not be supplying the D. C blocks to those projects and that those developer partners are what we would call is basically fully integrated and that they have.
Sourcing mechanisms and sourcing relationships. So what we're going to be doing is selling control selling software and potentially selling burgers and less easy blocks.
Okay.
Thanks, I will pass it on.
Perfect. Thanks for the time.
The next question comes from Payless <unk> with Northland Securities. Please go ahead.
Hey, guys good quarter.
Just wanted to speak a little bit about the PJM market and how are you guys seeing that playing out in 'twenty four 'twenty five.
Sure.
How has that progressed.
The PJM market is one where we're focused on the ATM or solutions for the commercial industrial segment.
There's strong demand there.
Fact that energy prices have ticked up.
Higher.
Generally a greater focus by corporates around driving energy efficiency. So there's good demand there but.
It's not a major component of our overall pipeline or bookings mix at the moment.
Sure. So just as a follow up since you spoke about distributed energy resources.
Wondering if.
Stems products on open the ADR certified.
That is relevant to you.
Yes, very much so and we have a number of open ADR connections with our utility partners that are part of our DPP operations. So very often this summer during some of these heat waves, we've been using open ADR signals from utilities to dispatch the virtual power plants that we operate with storage for a number of different utilities around the country.
Sure.
Thanks.
Yeah.
This concludes the question and answer session I would like to turn the conference back over to John Carrington for any closing remarks. Please go ahead.
I want to thank everyone again for joining us on our second quarter 2023 earnings call and we look forward to speaking with you during our third quarter earnings call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yes.
Yes.
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