Good afternoon and welcome to the Stem, Inc. Third Quarter Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions]

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem, and we welcome you to our Third Quarter 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. We therefore refer you to our latest 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 on our third quarter earnings release which is under Investor Relations portion of our website at www.stem.com. John Carrington, our CEO, Larsh Johnson, CTO, and Bill Bush CFO, will start the call today with prepared remarks. Prakesh 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.

Thanks, Ted. Today we reported record, financial and operating results across all of our key metrics: 1. record revenues of $40 million up 4X from the same quarter last year, 2. record pipeline of $2.4 billion up 41% since the second quarter, 3. record contracted backlog of $312 million up 25% since the second quarter, 4. record assets under management of 1.4 gigawatt hours of 40% year-over-year, and 5. $576 million in cash at the end of the quarter. Our momentum continues to accelerate as customers demand our proprietary Athena Software-driven Smart Storage Solutions. We are reiterating our guidance for full-year 2021 revenue and adjusted EBITDA. On today's call, I wanna focus on three things that differentiate us in the market. Number 1, our software. Number 2, our customer focus. And Number 3, our financial position. First starting with software. Let me be completely clear about our vision. It is to expand our position as the leading energy intelligence software provider. We have purposefully built our organization to drive the deepest, most robust artificial intelligence platform in the industry. Larsh will discuss our software differentiation in more detail later in the call. Second on customers. We provide significant value to customers over a contracted period of up to 20 years, both through our AI software and our operational services. And third, our financial profile benefits from strong and growing gross margins driven by our software and customer-focus. The Athena platform drove 8% GAAP gross margin and 15% non-GAAP gross margin this quarter. And Athena will continue to drive our margin expansion. Bill will provide further financial detail later in the call. Before I turn it over to Larsh and Bill let me focus on the second leg of Stem differentiation, our customer focus. Specifically, I will start with Stem 's…

Thanks, John. I think there is a premier energy intelligence software solution in the industry. Athena platform is purpose-built to serve the changing power markets and a de -centralized grid. This requires new solutions and business models to coordinate and optimize distributed generation assets. Whereas traditionally, power flowed from central generating stations in a predictable 1-way direction to demand centers. Today, distributed sources generate power from a multitude of locations and asset types requiring intelligent, flexible, 24/7 management. The grid is also de -carbonizing as individuals, corporations and IPPs and utilities pushed to install wind and solar assets to meet the growing demand for clean power. These new energy resources are enhanced by battery storage and smart software to predict intermittency and provide the balancing factor to ensure reliability and resilience. The sheer number of decisions needed to operate these clean distributed assets will far exceed both human and conventional automation capabilities. Distributed assets need distributed intelligence, and our Athena artificial intelligence platform is uniquely equipped to solve these challenges. Our solution is broad. We provide energy intelligence across a wide variety of markets in the U.S. and internationally. We operate energy storage sourced from over a dozen OEMs in over 75 utility jurisdictions in 200 cities, and we have over 20 million runtime hours on our software, which provides extraordinary insight into value generation for a multitude of customer types. Our solution is also deep. Athena supports 11 in 13 Storage value streams identified by the Rocky Mountain Institute. Most importantly, we continuously co-optimize those value streams in real-time overtime to maximize their economic value for our customers. This is a key differentiator versus our competitors who often only execute on one value stream. Whereas we often start with three or four and add more over time. We are…

Thanks, Larsh. I want to touch on 3 other items before I pass it over to Bill for the financial results. The storage ITC, our views on supply chain and our ESG efforts. On the legislative front, we remain cautiously optimistic that a standalone storage Incentive Tax Credit will be written into U.S. law in the coming months. As you've seen, the most recent reconciliation bill that came out of the house calls for a 30% ITC for 10 years, which includes a direct pay option that could accelerate storage deployment in our key growth markets, including co-ops and meetings. As a reminder, Wood Mackenzie has estimated passage of standalone Storage ITC would increase Stem's total addressable market by up to 25% against their previous baselines. More recently, Bloomsburg New Energy Finance estimated that a standalone ITC would increase storage build-out by 3 x versus the baseline forecast. We've done our own analysis of the ITC on our business, and we believe it will have the effect of opening new markets, but also deepening existing markets. We have already begun targeted outreach to customers that we believe could benefit from the incentive. And we'll continue to engage via webinars, content on Stem University, co-marketing with our partners, and new offerings from our product marketing team. Remember, our plan does not depend on passage of the storage ITC,and it would represent upside to our forecast. Some of our customers are in a wait-and-see mode for the ITC. So if it does pass, we would not expect a material impact on our 2022 results. And then to the supply chain, I'm pleased to report that as of today, we have secured adequate supply to meet demand through the third quarter of next year. We identified supply chain management as a critical risk…

Starting with our financial results, we recognized a record $40 million of revenue in the third quarter, which was at the high end of our guidance range we provided in January and over 4 times versus the same quarter last year and 2 times over the June quarter, the vast majority of growth came from the hardware sales on the BTM and FTM partner projects with some additional service revenue from host customer arrangements. Our GAAP gross margin was $3.1 million or 8% versus a negative $1.7 million or negative 19% in the same quarter last year. This represents our first-quarter positive GAAP Gross margin, reflecting the impact of our long-dated software contracts and hardware momentum. On a sequential basis, GAAP gross margin improved from a negative 1% in the same quarter of this year. Non-GAAP gross margin was $5.8 million or 15% for the quarter up from 8% in the third quarter last year, which benefited from a higher mix of software services revenue, and higher margin hardware deliveries. Sequentially, non-GAAP gross margin increased from 11% in the second quarter of this year as we continue to drive the adoption of the Athena platform. Net Income was a $116 million versus a loss of $19 million in the same quarter last year. That's when is almost completely the result of a large non-cash gain from the warrants issued as part of the star Peak IPO in August 2020. Net loss was $100 million in the second quarter of 2021. And the sequential improvement in the bottom line results is also due to the revaluation of those same public warrants. As we mentioned in our call in August with the announcement of the planned and now completed redemption of the public warrants, we are looking to simplify our capitalization table…

We will now begin the question-and-answer session. [Operator Instructions] [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. And our first question comes from Maheep Mandloi of Credit Suisse. Please go ahead.

Good evening. Thanks for taking my questions here and congratulations on the culture. John, one thing on the visibility you've seen in the end markets here, could you just maybe talk about how your -- and your customer contract somewhat different from other than [Indiscernible]. We were seeing or we're hearing a lot of your [Indiscernible] in the solar industry from dealers over here or push-outs. So if you could just talk about like how was your backlog for your customer is somewhat different than we're here. And just an extension of that, what changes are you seeing for the second half of next year which could impact some of these projects. Thanks.

Sure, Maheep. Thanks for joining the comments. A couple of things. I'd say our channel partner strategy that we've talked about in the past is really important to help us understand exactly the lead times and where we are with those projects. And we've run a very rigorous process of weekly discussions looking at each project aligned with each hardware supplier in that specific geography. So it's a rigorous, literally weekly call with the operations team and E-Staff members, so we're all over this. I'd say on the longer-term projects, those Front of the Meter, that tend to be a little further out, we're also monitoring those on a regular basis. I think the most important part is really the supply chain. And we have secured into the third quarter of 2022, we're starting on fourth quarter as well and I feel very good about where we stand with our suppliers. We've been working with the suppliers for many years. We have a terrific relationship with them. And as mentioned in the minutes ago, I said that we're going to probably be adding a fourth and so we feel like that diversity of supplier is very important and a big part of our success as we look at ensuring delivery for our customers.

Got it, got it. And could you just talk more about that nature of the contracts for the battery needs over here to already have those 12 months and then when do you expect to finalize your Q4 2022 deliveries over [Indiscernible] supply chain visibility?

Yes, we expect to lock down the fourth quarter, certainly before the beginning, if not, maybe mid-January at the latest. We'll probably lock it down this quarter. We get pretty good visibility upwards of 12 months. So Maheep, we feel good about -- as those bookings come in the fourth quarter of this year, it gives us more transparency into what will mean the fourth quarter of 2022. And I'd say from a supply perspective, we feel like there's a pretty interesting oversupply effect coming our way and DNEF has done some work around us. We even make -- there's -- they say it's 586 gigawatt hours in 2021, going to over 2500 gigawatt hours in 2025. That's a 4X expansion and we feel like with the four suppliers I mentioned, we're very well positioned to ensure that we have supply for our customers, both in 2022 and beyond.

I think Maheep, it's also important to note as part of what John 's saying is, we have already secured some supply into Q4. What he's really referencing is the full scope of what we think the forecast will be for that time period. It's not that, that is a zero number, it's just not the full top end of what we would expect to sell.

Got it. Makes sense. And this one 1 last from me and then I'll just hop back in the queue here. If you could just talk about the split of -- in the bookings, the share of Behind the Meter and Front of the Meter, how much is hardware versus software? Thanks.

Yes, from a booking standpoint, 80% of our bookings in the third quarter were Front of the Meter. And Texas was a large part of our pipeline expansion, particularly around Front of the Meter. The pipeline, as we go forward, looks to be about 75% Front of Meter. We feel like we're making great progress on that front and getting into new geographies. The second part of the question you had on that was on software.

Yes, [Indiscernible] versus [Indiscernible] yes.

There Maheep, and this is Bill Bush. We're starting -- as I mentioned in my comments, we're starting to see a shift towards a heavier weight on the software side, which is a great long-term problem for us in the fact that that generates more deferred revenue gives us more predictability on the revenue side of the equation. So we're starting to see a heavier emphasis on software as a component of the total bookings value.

Got it. Thanks, John, Bill. Jump back in the queue.

Thank you.

The next question comes from Biju Perincheril of Susquehanna. Please go ahead.

Thanks. Good afternoon and congratulations on a nice quarter. And, maybe just following up on the bookings and the nice pick-up that you're seeing here. Can you talk about maybe some of the new markets, and new projects that you were seeing interest from and how is any of this -- should I think about as acceleration on some of the

projects that were expected to be booked into next year? Or are these incremental to some of the guidance that you gave in January?

You want to take it Prakesh? Sure. I'd say we continue to see accelerated demand across our major markets, which include California, Texas, Arizona, and broadly the northeast of the U.S. In the last quarter, we also announced an expansion of our partnership with Copec and announcing the first virtual power plant (VPP) contract in that geography with -- in Chile. Incidentally, you may have seen at the COP 26 Energy Minister of Chile announced that they're going to double their commitment to deploy storage by 2 gigawatts by 2030. We continue to see South America as a strong market for us and then separately, we're looking to partner with our investors across the globe, including in Europe, U.K., being a specific focus. As well as in Asia and Australia, and we we'll have more to talk about that in coming quarters.

Great. Thank you.

Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Thanks for that piece On the quarter and the both Being that Give us a seasonality. comments you made, fair to [Indiscernible] that Q4 bookings will [Indiscernible] sequentially versus Q3?

I couldn't pick up all of that, Brian, I apologize. I think it was a little choppy as you railed through.

Seasonality of Q --. Go ahead. Maybe try it again, Brian because --

Sorry, I'm on speaker. Is that a little bit better? Okay. Thanks, sorry. Sorry for the technical difficulties. Just a question on the bookings, you mentioned you're expecting typical seasonality, so bookings should be up remaining in Q4 versus Q3 as they average the year? Well, I don't think we're necessarily going to give that projection, but we do expect strong bookings in the fourth quarter. It is typically our largest revenue quarter. Bookings tend to follow that, but it's -- I don't think I would say it's going to be more or less, I would just expect a strong number.

Okay. Fair enough. And then I appreciate some of the mix comments you made around the bookings this quarter, more software versus hardware obviously it has implications near-term versus medium to longer-term. Having -- having that as a backdrop, should we be anticipating revenue into next year being a tad softer? Just given the rev-rec timing, hardware versus software, but then margins being on the higher end? And then related to that, in the quarter, software margins we're a little bit light of expectations. Hardware seem fine. Anything going on there and what's the trajectory we should expect as we move into next year?

Yeah, I think as we mentioned, we're going to be providing guidance on the 2022 side of the world in the mid-February timeframe. I think we will have a lot more details to share there as it relates to the back-end or the 2022 year and how the revenue might split between hardware and software at that time. I think in to your question, in terms of the margins, as I think we've consistently said, I mean the software margins are significantly stronger than the hardware margins. The more software we're recording, we should see an increase. All things to be equal in increase in the gross margin. As the Company rolls out. We -- I think we've said that pretty consistently, I think through the pipe deck almost a year ago now, we showed on a non-GAAP basis, gross margin increasing. And as we add more, as we always say, like stacking a software contracts, as we stack more of the software contracts on top of each other, that should be reflected in a higher gross margin.

If I may add Brian. It is our first positive GAAP GM ever. So we're excited about that. We're tracking towards the 16% gross margin for -- to our plan. And in fact, we do think that longer-term, as Bill said, the higher software mix will drive higher gross margins and it's also mentioned that we're rolling out the next year plan in February.

Okay. Fair enough, guys. I'll take the rest offline. I appreciate it.

Thank you.

Our next question comes from Sean Milligan of Williams Trading, please go ahead.

Hey guys, thanks for taking my questions. First, a little bookkeeping question, but on the service revenue line, is that 100% software-related revenue or is there another component to that?

That is 100% software revenue.

Okay, great. And then just bigger picture. Some of the players that are involved in residential energy storage market are now starting to talk about grid services and just curious I think when you came probably be at the de -stack, maybe you talked about an opportunity set there down the road. But just trying to get your thoughts on that market as it develops also.

Yes, Sean. We're -- we obviously are cognizant of the growth in the residential market. I think we're pretty focused on putting more software into various markets. and I think that if [Indiscernible] poses an opportunity for us, we would certainly go in that direction. The nice thing about the Athena platform is we feel like it's highly translatable to a variety of markets, a variety of energy assets. researchgate. net/scientific - contributions/Andrzej - Horban -39138636ssets, and so we're not opposed to doing it, it's just as it been top of the list at this point. Lash you want to add anything to that or?

No, I think that's right. I think we have the opportunity to help to drive different kinds of assets into virtual power plants. The scalability and the capability of the Athena platform would lend itself to doing that. But as John pointed out. We've heard from cash pay a lot of things that we're focused on right now and that's just not at the top of the list yet.

Okay. Great. Thank you-all.

And I think I'd add one other thing, Sean. When you look at capacity of grid services, the -- if that's your focus and the utilities are certainly looking for that in grid operators, it takes a lot of houses to do the CNI or other things that we're doing. So from a customer acquisition costs stand point we feel like the CNI behind the market's compelling, as well as it provides a lot of functionality for the grid operators and utilities.

One of our typical customer sites in the CNI space is several 100 homes. That has high leverage for the utilities if we can get one of those commercial customers as opposed to having to get hundreds of homes. But it's still worthy to think about the volume of homes that are installing batteries. And so we're not ignoring it by any sense, but those commercial customers are little hanging fruit.

Okay. And then just one more, I guess. When you talked about the standalone ITC for battery storage, just trying to think about the adoption there because I guess in theory you could deploy Athena more quickly into that segment. and maybe what's modeled in terms of the revenue being seasonally heavier in the second half of the year like that could change that dramatically, I would think, correct?

I'd say that it's included in the house reconciliation, 30% for 10 years, as you know. I would -- we have not included this in our plan to this point. And some of the numbers we hear, 25% upside from a TAM perspective with Wood Mackenzie. We get 3X with B and ENF, but our view is 2023 and beyond. It's probably more likely as far as upside in a significant manner. And a lot of it's going to be when it's passed quite frankly and what's in the ITC. We're bullish about it occurring, we like what we see. We have lobbyist we speak to obviously in Washington, they're very supportive and bullish around this, so we're excited about it, we think it's the -- certainly the right direction for the industry. And look, I think the Build Better Back Act really recognized as energy storage as a critical missing piece to accelerating the clean energy transition. And by including ITC for energy storage, it'll just accelerate that. We feel good about it occurring. And again, I want to underscript it's just not been included in our long-range planning in any way.

Okay. I guess my question was more like If they were to go through, do you think that deployments into that would kind of have the same seasona lbearings that your current business does or would it be different? And maybe that's just -- it's just too early to tell.

I think it probably is a little early to tell, but more than likely they are still, at the end of the day, these are tax advantaged investments, and they are generally going to track the tax calendar as opposed to something else. We would expect to see that, but I don't think we have enough information to say really one way or the other at this point.

Great. Thank you guys.

Thank you.

[Operator Instructions]. And the next question will come from Brett Castelli of Morningstar. Go ahead.

Yes. Thanks for taking my questions. Just first one on -- in terms of balance sheet and the $576 million of cash. Just curious in terms of priorities there. You mentioned stirring supply, but curious maybe beyond that?

Well, I think the supply is for sure front and center, particularly given all of the news that you see these days around that particular topics. We spend a lot of time in -- our procurement team has spent a lot of time making sure that we've got the equipment that we think that we need. But as we've also said, we are interested to be acquisitive, and we'll see where that goes. But those are probably the two most primary uses of cash over the longer-term, as well as just basically funding the business principally on the technology side.

Okay. And then in terms of the pipeline and that $2.4 billion, 12-month pipeline, are you seeing any software-only opportunities than that or is that pretty much all hardware across software at this point?

No, we definitely see software-only opportunities as well, and that tends to be more on the larger side of the FTM projects. And I think as we've said in the past, our customer base are really our partners, solar development partners. Tend to vary fairly significantly in terms of sophistication. And so the,-- the larger projects tend to be driven by much more sophisticated counterparties, who in some cases actually have procurement departments themselves as it relates to batteries. And so in those cases its more likely see as a software-only. And in fact, the biggest deal of the Company's ever done, the electrodes deal. Now almost a year ago, 345 megawatt hours of battery capacity is a software-only contract. We certainly have history associated with those deals, and ultimately as we've always said as well, AUM is the best measure of this business long term. And so we're really driving software only deals, drive AUM. We don't need to have the hardware to accomplish our business goals. We'll take them both ways and we will just continue to advance in the markets that we're active in.

Got it. And maybe last one on the standalone Storage ITC. Can you remind us in terms of your business today is it mostly solar plus storage or you -- or what percentage is already storage only [Indiscernible]

Really, it's been a historical transition and we started as a storage only player. And about, I'll say 2.5 years ago we started seeing more and more solar plus storage, which is really the predominant amount of the contracts that we signed these days. Although that's not -- that's also turning a little bit as well because you see some of the markets, particularly the Texas market, is the area where we saw a lot of storage only deals this last quarter. So there's really an ebb and flow to it. I t's hard to say exactly what it's gonna be, but we're active on both sides. And from our standpoint, the types of services that we provide are not really substantially different. It's really just a question of whether or not there's a solar system attached, which generally is going to increase the complexity, which we've always said, the Athena thrives in complexity. We like those sorts of installations.

Great. Thanks. Thanks for that.

Our next question comes from Joseph Osha of Guggenheim. Please go ahead.

Hello. This is actually Hilary on for Joe. And I had two questions for you guys on e-mobility pilot, which sounds super exciting, so congratulations. First off, just hoping you could speak to the ability in terms of how big the growth driver that might be kind of near to midterm. And then secondly, I think you mentioned that you had actually beat out a competitor for this contract. And not sure if it's too early to say, but I was wondering if you could share any early feedback from conversations with some of these additional customers and if you're finding similar results where there's no real competitive offering, if -- or perhaps, the competitive dynamic there is a little different. Thank you so much.

Hi, this is Larsh. Let me talk a little bit about the project and how we got the opportunity there. There was a system integrator and battery supplier that provided the actual battery equipment for this project. And then there are a number of DC fast chargers that were part of the project that Penske have put in place for this particular location. And when it came time to put some of the operating requirements together, it became clear that the software available from the OEM wasn't going to be able to do some of the things that were needed. So that's when we got the opportunity. This would really be called another software-only deal in this EV mobility space. The nature of the system and the operation here is designed to show how the battery can protect the demand charges that our customers might face for such a large EV charging facility, as well as to make sure that the interconnection and required capacity from the grid TI is not going to be exceeded even though you're putting in these large fast chargers, which can really drive tremendous drops from the grid. So the batteries is there to help mitigate both the costs as well as the actual electrical power capacity at that site and what we're showing now is we've been able to do that to the tune of dropping that particular peak load by 40%, which really makes it easier for people to install fast chargers more quickly with our [Indiscernible] and the utility upgrades, as well as protecting them from cost exposure related to demand charges, including other operating characteristics like time-of-use charges and some of the different incentive programs that were helping this particular customer work with. Maybe Prakesh, you want to talk a little bit about some of the market?

Sure.

Dynamics?

Yeah. One of the things we're seeing in the market, that command for EV charging infrastructure and the build-out of fleet operators in that space is well covered by many of the research houses. And it seems that the demand we're seeing aligns with how they're forecasting growth there. But the other piece that we think is missing and we're working to quantify is the impact of increased electric vehicle penetration on the grid that utilities are facing. It's really a dynamic similar to what you might experience during COVID with everyone on your block using internet, and you have a slowdown in your services. Similar effect is happening on the electrical grid as more Teslas and other electric vehicles are entering neighborhoods and we're seeing many utilities pull forward their capex for things like distribution upgrades or other solutions to ameliorate that. And we're engaged in dialogue with these utilities and these are unanticipated or previously planned network upgrades, which are being pulled forward. We haven't seen that picked up in some of the research industry reports, but we think that's an important trend that could accelerate potential demand here.

Good, thank you.

This concludes our question-and-answer session, I would like to turn the conference back over to John Carrington for any closing remarks.

You bet. Thank you for joining us on our third quarter earnings call. We are certainly pleased with our strong execution in the first 3 quarters of the year and the momentum we're carrying into this quarter and next year. And we look forward to speaking with you during our fourth quarter earnings call in February. Thank you all again.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.