Stem, Inc. Price & Performance (STEM)

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. We therefore refer you to our latest 10 ks filing other SEC filings and the supplemental materials, which can be found on our website. Our comments today also include non GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found on our earnings release, which is on our website. Arun Narayanan, CEO Doran Hull, CFO and EVP start the call today with prepared remarks. Then we will take your questions. And now I'll turn the call over to Arun. Thanks, Ted. Good afternoon and thank you all for joining us today. I'm excited to join STEM at a critical juncture for the company and the industry. It is a pleasure to speak with you all today on my first earnings call since joining Stem. In my first five weeks as CEO, I've spent time with our customers, partners and employees. Even in this short period, I'm convinced that we have the foundation to build a truly great software company.

I'm honored the boat chose me to lead the company into its next chapter.

As part of the diligence process that I undertook, before I joined the company, I evaluated the overall financial potential of the company, and also the underlying ingredients talent, technology, and vision to make my decision. Looking at the company's competitive positioning, and the broader industry's outlook, it's clear to me that the software centric strategy announced in the fall of twenty twenty four is the right plan for the company's future financial success and growth. I see strong offerings from STEM Stem.

A clear market need, and the opportunity to leverage emerging technologies like AI to address real customer challenges. That's laying the foundation for our path to profitability.

Over the course of my career, I have built and grown digital businesses across multiple industries around the world. The common thread throughout my experience has been launching innovative software products harnessing data analytics to improve workflows and customer productivity. And leading complex high impact change management initiatives driven by technology adoption. At the core of my experience, is an understanding of the key drivers of a software business, and the broader ecosystem of B2B software. Driving revenue growth securing major customer deals, and sustaining profitability have been key achievements. I also have a strong understanding of the foundational technologies needed to build software at scale, and modernizing our own software development processes. Innovating and introducing digital solutions to traditional And so a lot of my experience is also centered around change management. I believe software is mission critical for virtually every industry including renewables, but it means embracing a new way of doing things. Software also needs to be combined with human expertise and an intense focus on the customer value proposition. Which brings me back to STEM Stem. I see opportunities for us in every direction. I'll highlight a few. First, customers. We have a strong loyal base of 16,000 solar and storage customers and at the same time that market is continuing to grow.

Second, [indiscernible] Most importantly, Power Track, which has the trifecta of a solid domestic market share, generates high gross margins and has growth opportunities both domestically and internationally. And the third opportunity is people, We bring deep subject matter expertise to every engagement.

Despite our strength, I fully recognize and acknowledge the challenges we face. Our financial results in the recent quarters have been disappointing and we are taking concrete steps to improve those results. This has been a key focal point for me And in my initial few weeks, I've identified three priorities. Number one, we will grow our software revenue with renewed focus on Power Track, Number two, we will reduce our cost structure. And thirdly, we will revamp our software development. First, as I have spent more time with customers and our team, I'm particularly impressed with PowerTrac, 13 of the top 16 commercial and industrial solar asset owners in The U. S. Have standardized on Power Track And today, we announced that Summit Ridge Energy has standardized on Power Track across its fleet of 200 solar sites, totaling five fourteen megawatts. I'm also especially excited about our international opportunities with Power Track, where we see significant growth potential in largely untapped markets. In January, we announced that Miovolt, one of the largest asset owners in Hungary, will standardize on Power Track for a four eighty four megawatt solar portfolio. We earned 70% to 80% gross margin on the Powertrack software and a high margin on associated offerings.

Such as 50% gross margin on our professional services tied to Power Track installation and commissioning and 30% to 40% on Powertrack Edge devices. This is a high margin business with large and growing annual recurring revenue. Also relatively short cycle. Unlike our legacy managed services for storage, the time between a booking and software revenue is often less than six months. And you can see this reflected in our 2025 guidance where we expect continued strong growth in our software and edge device sales this Second, on cost savings, from an operational perspective, we expect additional cost savings of more than 20% in 2025.

Above and beyond the 15% reduction that we discussed on the third quarter call.

I believe that we will achieve these savings through a combination of factors eliminating operational inefficiencies, streamlining our corporate structure and lastly, empowering our management teams with control over and responsibility for operational decisions. Third, on our software products and roadmap, we will do the following. Revamp our software development, refine the product roadmaps and increase the use of AI in our software development and in our products. We expect these changes will have limited or no impact on our customers. Before turning things over to Doran, for a detailed discussion of our financials and outlook, I want to emphasize the strong partnership we've already built. Doron will be a key leader in driving our transformation into a high growth profitable software company. With that, let me turn the call over to Doran. Thank you, Arun.

On behalf of the STEM team, we're excited to have you on board. Today, I'll cover three key Stem.

Our fourth quarter and full year 2024 results, 2025 guidance, and then updates to our operating and financial metrics. Starting with the fourth quarter, results were largely in line with the expectations we outlined during our Q3 call.

We continue to expect battery hardware resales to decline over time, as we focus on driving recurring software and services revenues. Total revenue was down significantly year over but software revenue was up 6% year over year driven by continued strong performance from Power Track, and increased storage software activations.

As Arun mentioned, are seeing success for Power Track among larger customers and internationally. GAAP gross margin was down sequentially due to a one time impairment of deferred services related to OEM warranty services that hit total services cost of goods sold. Non GAAP gross margin was down sequentially in the fourth quarter, but up year over year.

In general, our gross margins are influenced by the mix of battery resale revenue and software and services revenue. Adjusted EBITDA and operating cash flow declined on a year over year basis due to lower gross profit dollars, from reduced battery hardware sales. On liquidity, we ended the year with approximately $58,000,000 of cash. As I'll discuss shortly with guidance, we expect operating cash flows to improve 2025 including some working capital releases related to OEM hardware that we have already seen hit in the first quarter.

This quarter, we recorded some one time adjustments to our current assets approximately $38,700,000 in the aggregate related to AR reserves, impairment of inventory and hardware deposit forfeitures with certain suppliers. Turning now to our operating metrics. Contracted backlog, [indiscernible] were down sequentially as we adjusted our backlog to reflect repricing of OEM hardware [indiscernible] the elimination of delayed projects. Operating ARR was up 3% versus the third quarter and up 19% year over year. Driven by storage activations and steady powertrab growth.

Now moving to our 2025 guidance.

Starting with revenue, we expect to recognize between $125,000,000 and $175,000,000 of which approximately $120,000,000 and $140,000,000 is expected to come from high margin software edge device and services revenue. We expect up to $35,000,000 of the remaining balance to be driven by battery hardware resales. In general, software, edge device and services revenue is expected to be roughly ratable over the balance of the year with some slight back end seasonality. I understand that many analyst models were anticipating significantly higher battery resale revenue. We're taking a prudent approach to this portion of the business given our strategy [indiscernible] And some of the policy and funding uncertainties in the market. We expect battery resale revenue to be heavily weighted toward the back end of the year with gross margins in the 5% to 10% range. We expect non GAAP gross margins of 30% to 40% roughly in line with our gross margins in 2024.

Higher battery hardware resale revenue would cause our gross margin percentage to trend lower although we would benefit from more gross profit dollars. We expect adjusted EBITDA of negative $10,000,000 to positive $5,000,000 and operating cash flow of zero to $15,000,000 As Arun mentioned, we expect to reduce run rate cash OpEx by more than 20% during 2025 relative to our 2024 exit rate to achieve these targets.

As I mentioned, during the first quarter, we expect working capital to also drive an improvement in operating cash flow.

For the first time, we are providing guidance on operating ARR. Our revised strategy is built on driving recurring and predictable software and services revenues and we see ARR as a key metric for tracking our progress.

Which is also in line with other publicly traded software focused businesses. With that in mind, we expect 15% ARR growth at the midpoint from year end twenty twenty four to year end 2025. With a range of $55,000,000 to $65,000,000 As we continue to evolve our business in line with our new strategy, we are rolling out new and redefined metrics. That we believe will help stakeholders better understand and forecast our results.

Commencing with the first quarter twenty twenty five earnings call, we will be making several adjustments which are outlined in detail in our supplemental materials. Key among those are changes to reported backlog, [indiscernible] and ARR and storage operating AUM. We are redefining backlog as all contracted hardware and professional services revenues where we have a fully executed purchase order from a customer. Backlog will exclude software and software related managed services that revenue will be captured in CAR and ARR. We plan to disclose a consolidated ARR will include a breakdown of solar and storage. Much like backlog, CAR includes ARR and future revenues where we have a fully executed purchase order from a customer. Finally, we will begin disclosing storage operating AUM. Our storage software revenue generally commences when a system is activated. So this metric gives you better visibility into our revenue generating AUM. Finally, as you know, we received a notice from the New York Stock Exchange in August 2024 that we were out of compliance with listing standards due to our average share price falling below $1 over a thirty day trading period.

As we explained in our earnings press release, our Board of Directors has approved subject to a stockholder vote a potential range on a reverse stock split which would bring us back into compliance with NYSE listing standards.

Now I will pass it back to Arun for closing remarks.

In closing, I want to thank the Stem employees for their continued strong I remain bullish on the strength of Power Track's growth and associated margins. I also believe that we can effectively manage our cost structure. The strength of our offering ultimately depends on our people and I believe we have some of the best in the business. With that, operator, let's open the line for questions, please. Certainly. We'll now be conducting a question and answer session. Our first question is coming from Thomas Boyse from TD Maybe just first one from me. It was just around power better, which wasn't in your prepared remarks. I was just kind of wondering if you could comment on that offering and maybe how you think that product fits into your overall broader strategy that's led with Power Track.

Okay. Thank you very much for your question. [indiscernible] The software strategy pivot that we announced in the previous quarter obviously has us looking at a variety of technologies that we that we would build to address different market needs.

Power BI Desktop Pro is part of that. [indiscernible] And currently, we have one customer looking and using it actively we are evaluating additional use cases and we continue to search for new customers as That's helpful.

And then maybe could you just walk us through for the elimination of some of the delayed projects that was in the backlog, What are the reasons for those projects being delayed? Is it just continued challenges around those projects getting interconnection or the developers there not being able to secure transformers or just cost overages from UPC wage increases? What was kind of the impact there?

I appreciate you answered the question before I actually have a chance to answer the question. The truth is it is a little bit of a kitchen sink. We haven't seen any new factors kind of enter into the [indiscernible] But this was a process whereby we felt like a number of these bookings were feeling stale.

The developers were having continued delays. Facing increased development costs associated with delays in interconnection and permitting etcetera. And are taking the conservative step to clean that up.

Got it. And if I could just sneak one more in.

Just for the battery hardware resale, for $35,000,000 for this year, do we think about more of like a steady state ongoing if something is just always kind of on offer or in 2026 or something, does that eventually just move to zero and kind of phases out as the new strategy So in looking at and when we start talking about backlog with POs issued, what we're doing with hardware is we are going to pivot to this opportunistic it meets all the financial criteria, particular situation where we can carry through software services, revenue and attach that to hardware deals we may continue to see some element of hardware going forward. However, it is certainly not the focus that it was. So I wouldn't necessarily place a run rate on it In the sense that we're giving kind of this almost zero to $35,000,000 for 2025 We'll give similar indications if we see numbers that are going to be very different from that in the same cadence as we did for 2025. Excellent. And I appreciate the questions. Keep in mind that keep in mind that the margin there is relatively low. Our focus here is on prop [indiscernible] those that are opportunistic chances to increase gross profit dollars and bring cash in the door they don't represent the long term strategy of the business to build recurring software and services revenues.

Understood. Got it.

Thank you. Next question is coming from Justin Claire Stem Hi, thanks for the time here.

So I wanted to start out just with the new metrics And so I'm looking at Slide nine here where you have the bookings, dollars 38,000,000 contract and backlog, dollars 21,000,000. And wondering if you can just help us understand a little bit more of the difference between if we look at Slide 13, we see $38,000,000 of bookings contracted backlog of $1,200,000,000 So is this difference that the new metrics represent fully executed purchase orders and that's the gap Maybe just help us walk through the difference here.

Yes. I think we did go through the exercise of reducing the back under the old definitions even through some of the contracts that were that were somewhat stale. But when we look to the new metric, it is really focusing in on that fully executed purchase order criteria for purposes of treating something as a booking or going into the backlog. Again, the backlog, the contracted backlog metric combined with the CAR metric are intended to give you full visibility on all of our revenue sources that are coming into the company in the future. And therefore, you'll see contracted backlog containing anything related to hardware, and anything related to kind of one time nonrecurrent [indiscernible] whereas car will contain everything related to recurring software and services.

I see. So the contracted $21,000,000 does not include include recurring revenue and therefore software, is that right?

That's correct. That's absolutely correct. We're segregating that between car and contracted backlog. Same rule, in order to be included we have to have an executed PO.

Okay. Got it. And then just one more, looking at the same Slide nine, the storage operating AUM, going from 800 megawatt hours to 1.8 gigawatt hours through the course of 2020 some pretty significant growth there. We didn't see a corresponding jump in the software revenue associated with storage. Wondering if you could just help us understand why we didn't see that increase? [indiscernible] I think we had One time kind of reduction in fourth quarter software revenue associated with the SPE deals that probably caused that disparity. I think that's probably the best way to answer that question.

Okay. I appreciate it. I'll pass it on. Thanks, Justin.

Thank you. Next question is coming from Amit Thacker from BMO Capital Markets. Your line is now Hi, good afternoon.

Just two questions for me. The cash and equivalents of $56,000,000 I was just wondering if you could kind of level set us on kind of what's the minimum amount of cash you guys can kind of kind of go forward with the 2025 plan, before you have to think about external financing?

So the cash balance at the end of the year, I think as we've put forth in the guidance, that we expect operating cash flow to be kind of somewhere between $0 and $15,000,000 for the year. I mean, what that means is that cash balance is sufficient to keep us going. We're not facing any huge cyclicality associated with that. And I think as I mentioned in my comments, we've already seen some releases on working capital that was tied up in some of the OEM hardware. Deals. So we feel comfortable with where we're sitting. Doron, if I can add to that. I think in line with that just to make sure that we continue to be operationally diligent on costs. I think reduces our fellow squeeze and keeps us running with that cash margin.

Okay, understood. And then, I'm not going to belabor this point, but I just Going back to Slide five and the change in the backlog, I think at the end of your strategic review sometime in November, the backlog was $1,600,000,000 and here is expected to $1,200,000,000 and appreciate some of the commentary earlier and some of the verbiage here, but like was the backlog not scrubbed as part of the strategic review? I guess trying to Has the kind of the Operating conditions continued to change amongst the kind of segment of of developers that you target I'm going to I'm going to stick with the sort of so post strategic review, we did do some some significant additional scrubbing in the backlog and that was kind of where I was commenting some of the deals that we decided to just kind of pull When you think about our funnel of business, that that business isn't necessarily going away. It's just simply that we didn't feel confident in keeping it in the backlog. And then the next step was actually removing a number of projects that are continue to be under discussion, but the PO issuance is pending and we made the definitive change to the definition of backlog as POs issued which meant removing those as well.

From the backlog. Those two things in combination would probably be the biggest items to bridge what was the old backlog to what is the new backlog. And I think going forward, my expectation is to be able to provide you with a more predictable number using that [indiscernible] fully executed PO metric.

So I'm sorry, just and sorry, this is a silly question, but of the the updated backlog figure for year end 2024, can we surmise that all of that has POs issued against it?

Bear with me one second. The updated backlog for [indiscernible] You're talking about the $20,000,000 the $21,000,000 or are you talking about the No, the $1,200,000,000 on Slide five. The $1,200,000,000 does not have That is the backlog under the old definition. Not the new definition. Okay.

Got it.

All of that, I think you said about $21,000,000 with POs issued. Got it. Thank you. Understood. Thank you. Next question is coming from Dylan Massaro from Wolfe Research.

Hey, good afternoon, everyone. And welcome, Arun. Hi. Just want to kind of go back to the 2025 outlook So when I kind of take a step back and I look at the revenue and [indiscernible] it like kind of lines up pretty similarly to 2024 actual, So I guess if you're kind of bridging 2024 and 2025, would you say those kind of operating cost reductions are the big driver of the delta and just kind of give us an idea of specifically where can you kind of find some of those savings?

Yes, I can talk to it a little bit.

So One thing that you referred to is the operational cost savings and trying to make sure that we eliminate some of the inefficiencies that might exist For example, some of the software applications might be duplicated or some of the tools that we might use be using are quite expensive. But we also want to try to bring some of the other costs down our software development production in runtime cloud computing costs, for example. So these type of operational efficiencies will help us on the one hand. But on the other hand, we continue to be quite focused on growth. And this is a growth story centered around Powertrac. And other software applications that we have. So that's the combination of the two things that we're trying to achieve. Okay. Thank you. And then as a follow-up, apologies if I missed this, but Can you just kind of speak to what your expectations are for seasonality for 2025 in terms of both revenue and EBITDA?

So the software and services is fairly ratable with a little bit of back half seasonality to it. The hardware piece, the $35,000,000 you should expect that to be toward the back half of the year. Possibly even Q4.

Okay. Thanks. I'll take the rest of my questions offline.

Thanks.

Thank you. Next question is coming from Joseph Osha Gruenhagen Partners. Your line is now live. Hi, thanks for taking my question.

I'm trying to understand competitively how I should think about Power Track and how it's positioned relative to the software offerings from the tracker companies in particular because they talk a lot about at least some of the the functionality you're talking about here. So is Powertrac directly competitive? With the offerings from Array and Next Tracker or should I think of it as more complementary? Thank you. Hey Joe, it's Doran. I'll take a first stab at that. The tracker companies are largely focused on front of the meter. That's kind of step one.

Right. [indiscernible] optimization of tracking software is I believe it's going to be case by case, but we do not believe our front of the meter edge device and software solutions are in direct competition with what the tracker companies are doing necessarily. The large market share that we have, as you know, is in the behind the meter. And so we as we see the front of the meter as growth engine for Powertrac and the related edge devices, I think that we'll we're likely to see that expansion irrespective of whether we're going after fixed tilt, or tracker type of applications, as you know, that trackers aren't on every utility scale application, especially when you look in Europe. And so so I think it's going to be circumstantial in some instances, but broadly speaking, think what we're offering is to a bigger market than what the tracker software is trying to go after.

And maybe you can talk to that, Don. Just to supplement the intention of your question though, which is the differentiation in the competitive space. The ability for Power Track to sort of solve the problem holistically, getting the data from the edge devices, the data connection needed to make the edge device come online and the ability to do analysis as well as making sure that the software works as expected that whole lifecycle is very unique and that is a significant differentiation for Powertrac. That we have.

So should I just amplify that a bit, obviously, behind the meter is behind the meter, but when I think about front of the meter, I should think about Power Track perhaps hitting more like commercial scale systems or this is something you're going to go try to sell to kind of 200 megawatt solar farms or or what?

I think our sector for the low hanging fruit for us on the front of the meter, Joe, is going to be the kind of anywhere from call it 20 to 100, not the 200 or 500.

Okay. Thank you very much. Thanks, Joe.

Thank you. Next question is coming from Kashy Harrison from Piper Sandler. Your line is now live. Good afternoon and thanks for taking my question.

So maybe first one for me.

Is on the twenty twenty five guidance. If I'm looking at this I think just gross profit less EBITDA looks like cash OpEx is about $55,000,000 But if I look at Page Slide 14, 4Q cash OpEx is $36,000,000 So that implies a pretty big drop from what you were doing in 4Q to what you're expecting in 2025. So can you maybe just help us reconcile how to bridge the gap and then and maybe how to think about the cadence of OpEx over the course of 2025. So first, I think that in 2024, there's certainly some non cash OpEx to consider when you move to 2025, I would say that with an overall expectation of decrease as we continue through the year we'll see our run rate continue to go down. Versus perhaps what we might see in Q1.

As we've talked about the moves that we're going to make in order to increase operational efficiencies those will continue to roll out internally here over the course of the year. So you would see naturally the run rate drop over time.

Got it.

Okay.

And then maybe a follow-up.

In terms of In terms of scale, you have 1.8 gigawatt hours here on on the storage side and gigawatt on the solar side.

I guess, how do we think about the ability of this company to to grow because certainly at these levels, you're EBITDA neutral. But to get to like $100,000,000 of EBITDA, for example, how do we think about the the level of scale that's required here and then the go to market associated with that?

Look, you're asking questions a little bit out in the future, going back to the software strategy or the software centric strategy that was announced last quarter, The growth for software comes with a different type of scaling. It's not linear. And the ability for us to use the investment to build differentiated IP and then deploy it into different markets comes with standard established models that you are already familiar with. [indiscernible] sales, we will incur costs in support, but not in manufacturing the software itself. We do have reliance on edge boxes, so that will complete the overall supply chain that we would need to to scale. But I mean, it's a great question and to that point, amazing. And that's the journey that we're on. And I think that, Kash, we will have to continue to communicate about the the growth of the business in front of the meter versus behind the meter because obviously, A, it's and the amount of revenue per per megawatt is a little bit different when you look at those sectors and that's growth engine we expect to to continue to try to push on the power truck side as especially as well as new products is out into that the European market, the front of the meter market.

And so we'll continue to keep our eyes on those metrics operating AUM. But again, one of the reasons why we're focused on operating AUM is because That's kind of really where the revenue comes. Got it. Thank you. Thank you. We've reached the end of our question and answer session. And ladies and gentlemen, that does conclude today's teleconference webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.