Stem, Inc. (STEM) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by, this is the conference operator. Welcome to the Stem, Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I would now like to turn the conference over to Ted Durbin, Head of Investor Relations. Please go ahead.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem, and we welcome you to our fourth quarter and full year 2021 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 in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are in the 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. Starting with slide three and the agenda for our call. I will briefly review our fourth quarter and full year 2021 results and highlight some of our key accomplishments last year. Then, I’ll discuss the Available Power announcement that we made this morning, and update you on the AlsoEnergy closing and integration strategy. As we have done each quarter, I’ll provide an update on supply chain. I will then pass it to Larsh, who will discuss new initiatives on the Athena platform and the integration of the PowerTrack platform. And then finally, Bill will discuss our financial results in more detail, and review our 2022 guidance and a new metric we will track this year called contracted annual recurring revenue, to help you understand the value of our software contracts. Turning to slide 4. Today, we reported fourth quarter 2021 revenue of $53 million, which was up 184% versus fourth quarter 2020. We more than tripled our revenues year-over-year, and at the midpoint of guidance, we expect to more than triple revenues again in 2022. Fourth quarter bookings were $217 million, 2 times higher than our previous record, and we more than doubled the full year 2021 bookings planned. As we’ve seen across the renewable industry, we experienced permitting and interconnection constraints due to the Omicron surge, which in our case resulted in three projects moving to a 2022 delivery that impacted our 4Q revenue expectations. But we expect to deliver these projects and have included the revenue associated with these projects in our 2022 guidance. We completed the acquisition of AlsoEnergy earlier this month, which is immediately accretive and combines the leading solar monitoring software company, with the leading storage optimization company. This is a transformative acquisition for both companies, and we will share more details later in the call. We’ve continued to make excellent progress on securing our hardware needs for most of 2022. More importantly, we continue to extend our software lead and have added several new geographies and new verticals to our Athena platform. We have booked over $300 million in contracts during the second half of 2021. And based on our guidance, at the end of 2022, we expect to book over $1 billion in contracts in the course of 18 months. Based on our current mix of 60-40 hardware to software split, that represents over $400 million of long-dated high-margin software contracts that will generate strong recurring revenues for years to come. We believe this high-margin multi-year SaaS revenue provides significant operating leverage to our business, and positions the Company for highly visible profitable growth. In November, we issued a $460 million green convertible bond, which was 3 times oversubscribed at a coupon of 50 basis points and was instrumental in the execution of our acquisition of AlsoEnergy. Moving to slide five, today, we announced an exciting series of projects in Texas with Available Power, a renewable developer where we will have exclusive rights to provide storage hardware and software for a portfolio of up to 100 sites. In total, this could become a 1 gigawatt -- 2 gigawatt hour portfolio, which more than doubles our assets under management from current levels on the storage side. We expect the value of this award to exceed $500 million. We expect the first 20 systems or 180 megawatts of energy storage to be commissioned in early 2023. Texas was a big driver of our bookings in the fourth quarter, and that momentum will continue with the Available Power deal. ERCOT now represents the largest market in our pipeline. We are proving how Athena bidder maximizes the value of our customer storage assets in this compelling wholesale market. ERCOT’s market structure with no capacity market leads to big price wins by design. Storage is well suited to capture these price signals and Athena enables our customers to participate both, in energy and ancillary services markets. Additionally, ERCOT is the leading wind energy market in the U.S. and one of the fastest growing solar markets. Smart storage and Athena can help firm these resources to match generation with consumption. Net-net it is really about market volatility and storage’s ability to manage and mitigate this volatility while providing a return to the asset owner. The available announcement is another example of our continued momentum in large scale Front of the Meter or FTM market and the success of our channel partner strategy. Developers value our ability to procure fit-for-purpose hardware at competitive prices to integrate into their portfolio across multiple sites and to deliver optimized wholesale market bidding and dispatch with our Athena bidder application. Our sales in ERCOT follow the same formula we’ve used in other markets for storage. We deliver hardware upfront, and then sell a long dated software contract that helps our customers optimize their assets for the life of the battery. We are not taking any merchant commodity exposure, just earning recurring software revenue over the contract period, which is typically 20 years for FTM. The Available Power win further demonstrates our commercial diversity as our customers span multiple geographies, customer types and use cases continuing to underscore the reach of our Athena platform. Let’s go to slide 6, turning to AlsoEnergy. We are pleased to close the transaction at the beginning of February. AlsoEnergy has the industry leading SaaS platform with their PowerTrack software that monitors and controls 33 gigawatts of solar assets in over 50 countries. They install high-value edge controllers and synthesize data across heterogeneous solar portfolios for a variety of stakeholders, including solar asset owners, O&M contractors, field service providers, and EPCs. We believe the combination of AlsoEnergy’s PowerTrack software and Stem’s Athena platform presents a compelling offering as the storage and solar industries converge. Together, we will be able to drive better economic outcomes for our customers’ projects and accelerate the energy transition. Bob Schaefer, the co-founder and CEO of AlsoEnergy has joined my executive staff and will continue to lead the Also team. Commercially, we we’re excited about AlsoEnergy’s assets under management, customer base and technology. Most of AlsoEnergy’s customers are commercial and industrial or small to medium size Front of the Meter customers, both of which are core markets for Stem smart energy storage solutions. AlsoEnergy’s AUM has extremely low storage penetration, and the two companies only have a 30% overlap in customer relationships. So, we see excellent cross-selling opportunities and our sales teams are working together on targeting these opportunities. Finally, from a financial standpoint, you’ll recall that the AlsoEnergy business generates approximately 60% gross margins overall, and 80% plus gross margins on software with very low churn. In addition to the strong margin profile, they generate a significant amount of recurring revenue from their SaaS contracts. Please turn to slide 7. From an integration standpoint, we started to lay out the groundwork for the combination in January and have now ruled out what we call tiger teams across the companies to drive integration, cross-selling opportunities and alignment. You can see on the right side of this page the guiding principles we’ve established to ensure we are retaining our people, driving operational excellence, while focusing on advancing the significant commercial synergies we’ve identified across the global installed base and pipeline. I spent most of last week at the AlsoEnergy headquarters in Boulder, Colorado, where we hosted our first product summit. I am really excited about the collective talent, opportunities and roadmap we are building together, and the team’s commitment to further extend our software leadership platforms. I believe it’s critical to have a single point of leadership on any integration effort. Thus, we have hired a dedicated Vice President of Integration to ensure alignment, goal execution, and a seamless integration process. We expect to see incremental bookings and backlog growth as we bring the organizations together and execute on our growth initiatives. We will leverage the strength of our combined software offerings to add value to our customers, and customer centricity is a shared core value for both companies. Larsh will spend some time on the software strategy shortly. Ultimately, our goal is to have every solar system Athena-ready and every storage system PowerTrack-ready. Please turn to slide 8. Before I turn it over to Larsh, let me update you all on our supply chain status. We’re pleased to announce we have contracted storage supply well into the fourth quarter of 2022 and expect to finalize our supply agreements by the end of the first quarter. We’re confident that our hardware supply will be fully contracted for 2022, and in the process of matching the best solutions for our contracted backlog at this time. Our supply chain focus continues to be lowest cost, highest quality, and guaranteed supply. We believe this is differentiated, and our customers’ repeat business is a strong indicator of Stem being a trusted supplier that maximizes value for our customers. Outside of the supply chain, we have seen other constraints to system delivery and deployment as we discussed in prior quarters. In particular, permitting and interconnection issues have slowed the deployment of systems. In fact, three projects contributed to the variance from our expected revenue in the fourth quarter of 2021. These projects are now expected to be delivered in the early part of this year. I want to emphasize that these are delays and not cancellations and remain in the contracted backlog. We have observed project delays across our peers in the renewable industry, although we continue to see accelerating demand for our solutions as reflected in our forward expectations of bookings momentum. We have also seen commodity price inflation pressure in our battery supply agreements. And in many cases, we are seeing indexed pricing from OEMs. We are working closely with our suppliers and customers to ensure the project economics still work in this new pricing environment. We will stay disciplined in our margin requirements, and we will not be writing negative gross margin contracts as we have seen from some of our competitors. Lithium carbonate has been a focus for this new indexed pricing. You can see from the graph on the right that BNEF expects prices for lithium carbonate to decrease in the coming quarters and longer term. Analysts similarly forecast declines in key metal inputs, such as nickel and cobalt, which gives us confidence in the long-term downward trajectory for battery prices. We believe this should continue to improve the economics for storage in new geographies and support our commercial momentum. Finally, I want to thank our team, customers and channel partners for another strong quarter and a strong year with revenue up 3x, year-over-year. In addition to the AlsoEnergy employees, we have hired over 100 people in the last year. This is exceptional talent across the organization with deep domain expertise and relevant functions. We remain focused on diversity, equity and inclusion for our candidates and our employees, which is enhanced as we now have a worldwide footprint with employees on three continents, as a result of the AlsoEnergy acquisition. I’m energized by the purpose-driven organization we have built and the substantial competitive position with over 34 gigawatts of global assets and an unrivaled data advantage in our best-in-class AI software platform. We have numerous accomplishments to be proud of in 2021 and confident our talented employees will bring us even more success in 2022. With that let me turn the call over to Larsh Johnson, our Chief Technology Officer. And I will come back with some closing comments.

Thanks, John. On slide 9, we provide an overview of how we will converge the technology roadmaps of Athena and the AlsoEnergy PowerTrack platform to grow our customer base and extend our joint capabilities. Today, these market leading offerings support API-based integrations, delivering value to our mutual customers who own hybrid solar plus storage sites. And in the near term, we are focusing on enhancing the user experience in streamlining project time to value with integrated user management, consolidated edge equipment, and data integration to deliver our customers a single pane of glass that enriches their combined solar and storage portfolio management. As we execute this roadmap over the next couple years, Athena will emerge as a common platform, hosting an ecosystem of applications across vertical asset classes and markets, building on the world’s largest repository of clean energy operations data acquired from a decade of experience across over 41,000 sites. We believe it would be difficult, if not impossible, to replicate the accumulated AI training data that sharpens our machine learning and software operations covering a combined 34 gigawatts of solar and storage assets. Our shared vision is to empower clean energy asset owners and operators to scale their businesses by leveraging AI-automated, data-driven operations enabled by Athena. And on slide 10, I want to highlight another example of a vertical offering that is extending the Athena platform into the fleet electric vehicle management space. In December, we announced a partnership with ENGIE, which involves deep integration of Athena software with their fleet electric vehicle charging infrastructure. This announcement builds on work we have been doing with partners and customers such as Penske, Amazon and UPS, which is opening an additional $4 billion of addressable market for Athena solutions in the eMobility sector. Our software offerings will enable superior energy cost and resiliency management, building on Athena’s integration with fleet charging operations. Integrating the storage dispatch capabilities of Athena will seamlessly avoid peak utility charges, while providing detailed data for corporate customers, who score their GHG impact of their fleet electrification. From a financial perspective, this is an additional software-as-a-service application at an additional fee, which is increasing our share of wallet and expanding the distributed energy resources we will leverage for future upside, market participation and revenues. And with that, I will hand it over to Bill to wrap up the financial section.

Thanks, Larsh. First, I will review the results of the fourth quarter and the full year 2021. And then, I will discuss a new metric we are calling, called contracted annual recurring revenue or CARR. Lastly, I will review our 2022 financial guidance. Starting with our financial results on slide 11, which does not include the financial results of AlsoEnergy. We recognized a record $53 million of revenue in the fourth quarter, which was up 184% versus the same quarter last year. The vast majority of the growth came from hardware sales on FTM and BTM partner projects with additional software and service revenue from our operating fleet. As John mentioned, some of our partners and customers experienced interconnection in permitting delays that negatively impacted our revenue in the fourth quarter. Importantly, these are not project cancellations, and we expect to realize the revenue in the coming quarters. While we have so far successfully managed the supply chain and logistics challenges, the Omicron surge stopped project progress at several sites due to the unavailability of labor, in particular for permitting and interconnection approvals. Our operations teams used their experience and relationships in these markets to help partners advance their project timelines. We see improvement as utilities and permitting agencies return to more normal operations in this quarter. Our GAAP gross margin was negative $1.6 million or negative 3% versus $0.9 million or 5% in the same quarter last year. Non-GAAP gross margin was $3.3 million, up from $2.5 million in the fourth quarter last year, due to higher revenues. On a percentage basis, non-GAAP gross margin was 6% in the quarter versus 13% last year. Our margins were negatively impacted by a mix shift due to project delays in the fourth quarter, but there is also impact from hardware gross margins, specifically in the FTM segment. However, we expect these issues to subside as we move through the year and we drive more high-margin service revenue. As you’ll see in our guidance, we expect total gross margin to be in the 15% to 20% range for 2022, collecting the growing share of revenue from software and services. Net loss was $34 million versus a loss of $101 million in the same quarter last year. That swing is almost completely the result of large non-cash charge in the fourth quarter of 2020 from the warrants issued as part of the convertible note financings from 2019 and 2020. We retired substantially all of those warrants in April 2021, and we do not expect significant charges like that in the future. And lastly, adjusted EBITDA was a negative $12.4 million versus a negative $5.1 million in the same quarter last year. Adjusted EBITDA fell because of higher operating costs from additional hiring, personnel related expenses, costs associated with public reporting and related expenses as we continue to build out our teams and advance our technology roadmap to take advantage of market opportunities. Moving from our financial results to our operating metrics on slide 12, our pipeline more than doubled year-over-year from $1.6 billion in at the end of 2020 to $4 billion at the end of 2021, and grew 67% just between the third and fourth quarters of 2021. Our business development teams continued to develop multiple new markets and customers, and deepen relationships with existing. Our contracted backlog grew counter-seasonally to $449 million. That’s up 44% from $312 million at the end of the third quarter and more than doubled the backlog at the end of last year. The biggest driver of the backlog increase was $217 million of bookings in the quarter offset by revenue recognized during the quarter, as well as some project cancellations and amendment, primarily driven by the early termination of a program in NYSERDA. It’s important to recognize that this cancellation is a relatively unusual result. Cancellations have not been frequent or substantial in our history, and we do not expect them to become so in the future. Our sales team again set a new quarterly bookings record, which is 58% more than was reported in all of 2020, a testament to our leading software and hardware solution. This backlog gives us the excellent visibility into our expected 2022 revenues. Long term software revenue is the backbone of the backlog and represents approximately 40% of the total booking, and importantly does not include the impact of market participation. These bookings represent the foundation for predictable high-margin service revenue. Our contracted AUM grew from 1 gigawatt at the end of 2020 to 1.6 gigawatt at the end of 2021 or 60%, and sequentially grew almost 14%, again, driven by our strong bookings momentum. We ended the year with $921 million in cash on the balance sheet before the cash payment associated with the AlsoEnergy transaction. We financed the $695 million purchase price with 75% cash and 25% stock. Next, I want to spend a few minutes talking about the new software metric, which we think will showcase the importance of the Athena network and services that we offer our customers to drive long-term value. Please turn to slide 13. Starting with the Stem energy storage business, our software drives exceptional economics for our customers. Athena automates everything, including reducing costs, increasing revenues, complying with regulatory incentives and constraints, and minimizing greenhouse gas emissions. Our broad market reach and scope allows us to co-optimize multiple value streams in real time and over time to maximize economic value for our customers. We also provide exceptional customer support for the lifetime of the renewable asset from development, monitoring and control to performance reporting and troubleshooting. As these markets evolve, we can roll out additional services to enhance our customer’s economics for additional fee. AlsoEnergy brings the same expanding revenue opportunity and value-add to the solar side of the business, which is why they have been so successful in growing their market share and recurring software revenues over time. While we enter 10 and 20-year contracts for Stem energy storage optimization services, the real value comes from the historically low churn across the Athena and PowerTrack platforms, which is in the low-single-digits. Today, we are reducing a new metric, contracted annual recurring revenues or CARR, which captures that dynamic. CARR represents the annualized contracted software and services revenue at a point in time, and CARR will grow as we sign additional software contracts. We generate 80%-plus gross margins for -- on software for both Athena and PowerTrack, and we expect those margins to continue as we add more assets. We mentioned our third quarter call that our mix had started to shift between software and hardware in the value of our contracts on the storage side, from 70% hardware and 30% software a couple years ago to 60-40 hardware-software split currently. The big driver for margin improvement is the incremental fees that we’re able to charge for software and the additional value added services that we’re bringing to customers. Power markets are becoming more complex. Customers need us to optimize additional value streams, and we are able to charge higher fees for those services. Similarly, AlsoEnergy has been able to increase its annual fees as it becomes more embedded with its customers. Lastly, remember that our storage contracts contain clauses where we can earn additional market participation of grid services revenue as opportunities arise. This is pure upside optionality for us. We have assumed the middle of that market participation and our revenue guidance, as market conditions have continued to favor distributed assets, we could see meaningful upside to our numbers. For example, in Massachusetts, we are already outperforming our initial expectations by 16%. Key message here is that we believe this high-margin multiyear SaaS revenue provides significant operating leverage to our business and positions the Company for highly visible profitable growth. Lastly, I will discuss our guidance. Turning to slide 14. First, we are introducing 2022 revenue guidance of $350 million to $425 million. All of our guidance reflects 11 months of AlsoEnergy operations as we closed that transaction on February 1st. At the midpoint of the range, there’s a 200% increase in revenue year-over-year. As John mentioned, we have had tremendous commercial momentum, which drove significantly higher bookings than we expected in 2021. We expected much of that hardware component of the bookings will translate to revenue in 2022 and the software thereafter. Second, we are introducing a new guidance metric, bookings, which we have historically reported on but not guided on. We expect to contract between $650 million and $750 million in bookings this year, representing another significant 50-plus-percent growth year-over-year. At the midpoint that translates to approximately $325 million of long-term service contracts, all carrying 80%-plus gross margins. Bookings and backlogs are key leading indicators of revenue. And if we are able to meet our bookings goals for next year, it will set us up well for 2023 revenue and build on a substantial base of long-term reoccurring SaaS revenue. Third, we are introducing our adjusted EBITDA guidance between negative $20 million and negative $60 million. We expect to generate strong gross margins in the 15% to 20% range in 2022, but we are seeing some cost inflation impacting our storage hardware margins. Importantly, we are investing in our growth through expanding our software offerings in markets, which is reflected in the more than $1 billion in bookings over the period of July ‘21 to December ‘22. While we are currently looking to improve our operational efficiency and margins, we believe the long-term margin profile the Company will reflect the accretive effects of our long-dated and low-churn software contracts. We’ll also continue to invest for growth in the business. And so, you’ll see our operating costs increase this year as we open up new markets and add new features to the Athena and PowerTrack platforms, as Larsh detailed earlier. We are also introducing seasonality guidance for revenue and bookings. Similar to previous years, we expect approximately 75% of the revenue in the back half of the year, while we expect a flatter bookings trajectory across this year as compared to last. And lastly, we are introducing guidance for our new metric CARR, where we expect to exit 2022 at a run rate between $60 million and $80 million. That represents a minimum 200% increase year-over-year and 80-plus-percent high-margin service contracts. For modeling purposes, you should assume some lag between CARR and the actual revenue recognition on the P&L because of the timing between contract signing and system commissioning when the software goes live. We think CARR along with our low churn is a good indicator of long-term strength and operating leverage of the business. Let me turn the call back to John for some closing remarks.

Thanks, Bill. Wrapping up here on slide 15 and our key takeaways. Our significant momentum on bookings and Athena expansion will drive momentum in 2022 and expect continued strong growth as we saw in 2021. We will maintain our focus of delivering high-value software and services to our customers, which will drive higher margins and higher mix of software revenues. We will continue to build a substantial contracted backlog with an expectation of a $1 billion in bookings across 2021 and 2022. Over the years, we have invested purposefully in our software, our people and extending our leadership position. We’ll allocate capital in 2022 to extend that leadership. With the addition of AlsoEnergy, we have built the leading clean energy intelligence platform across over 34 gigawatts in 50 countries. And you will see us monetize the value of the platform as we offer the most tested, most comprehensive solution in the industry. We will continue to add features and functionality to Athena as we enter new markets in the U.S. and internationally, and as we move into new verticals like EV charging and GHG optimization, but we will also remain prudent on our capital allocation to generate the highest return on investment. As we scale up, our revenue mix will shift from hardware to software, which will increase our margins and cash flows. Bottom line, we expect strong operating leverage as we amortize our fixed cost over a growing revenue stream of long-term, high-margin SaaS revenue. We are focused on tracking our progress on this front through reporting on the contracted annual recurring revenue metric that Bill outlined. We are very bullish on the growth of this industry and our competitive positioning. And we will execute in 2022 to deliver on our commitments. 2022 will be another exceptional year and set up our growth trajectory for 2023 and beyond. With that, let’s open the line for questions, please.

[Operator Instructions] The first question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. Kudos on the nice bookings and revenue outlook here. I wanted to ask the first question, I guess, on the margins here. Maybe if you could give us a bit more bridge. I think you said AlsoEnergy is doing 60% gross margin overall. So, at the midpoint of guidance, it implies there about half your gross profit dollars for 2022. And that means core Stem is doing maybe about a 10% gross margin. I think you guys originally had a target to be like mid-20s in 2022. And you were also 10% to 20% throughout all of ‘21 before 4Q. I’m trying to reconcile the sharp drop off here. I know you mentioned a number of different parts. But, can you maybe help bridge a bit and maybe quantify if you can, kind of where we were targeting before for core Stem and kind of where we’re ending up here with, if my math is right and implied kind of 10% margin?

Yes. Thanks, Brian. Good to have you on the call. I appreciate the question. I’d say, first and I’ll turn it over to Bill. But, we’re really not providing consolidated -- or separated guidance. It’s all consolidated, and we don’t want to break it out for each company’s performance. But Bill, if you want to address some of those points, we can maybe tackle a few of those items that Brian asked.

Yes. No -- so, thanks, John. Brian, I appreciate the question. So I think, as John said, I think in the future, we won’t be breaking out the two divisions of the Company that way. But I mean, I think your basic math is pretty correct. I think, the issue that we are focused on is the continued bookings of the Company, and the focus there is making sure that the software is what’s driving the long-term value of the Company. So, it’s possible that we’ll see lower margins in the near-term, but ultimately -- and that’s why we rolled out the CARR metric. I mean, I think that’s the -- I think we’ve said pretty consistently in the past that we think backlog is a great short- to medium-term reflection of what the revenues will be. CARR is going to be a great reflection of what software is going to be, as we mature. And so, I think what we are thinking about is the growth in the CARR. So, it’s going to be -- depending on -- you take the midpoint, it’s about a 3.5 times growth from what we experienced in 2021. That’s what’s really going to lay the foundation for long-term in terms of really positive gross margins. So, I think that’s the way that we think about it more than anything, to the extent that we’re going to invest in the near-term to get those sales. And so, I’ll remind you that, we did more than 2x the bookings in ‘21 as what was potentially even thought of. And again, we are talking about another 50% here, and we’ve got projects like the Available Power deal that we talked about today, that’s going to be worth almost -- or should exceed $500 million in bookings. So, it’s really kind of setting ourselves up for not just this year, but ‘23 and beyond.

Okay. I mean, that’s fair enough. I know you guys have a mix shift story here medium to longer term that’s more software, Athena gets embedded at these higher margins. You are obviously going to see some margin expansion. But just in the near-term, there is still going be a relatively high hardware mix. And I think you guys had talked about it 10% to 30% hardware gross margin. I mean, if you’re doing 10, is there something here to suggest that maybe, we should structurally be thinking about a lower hardware gross margin and eventually you see the mix shift help you get consolidated margins up, but you are not going to see the sort of 10% to 30% gross margins on hardware anymore? Just trying to figure out if this is a temporary supply chain, logistics issue or if this is maybe more structural on the hardware side.

No, I guess, I’m not sure I would use the word structural, but I mean, I think we have consistently said that the larger FTM projects carry a lower gross margin. When you think about those larger developers, versus the -- say the “smaller ones”, the primary difference is integration. And the integration being does that company have a supply chain relationship or procurement department? To the extent that they have that, and you’re doing -- deals that kind of come into the multi 100 millions of dollars, gigawatt size range, they tend to have relationships, which means that some of the value added services that we would normally bring to say, maybe a VTM project just isn’t required. And so, as a result of that, you’re going to see lower gross margins on the hardware. That’s just what it is. However, the more important thing is you’re still signing a software contract, which is super high gross margin contract, which is going to layer in over a long period of time. And so, I think irrespective of what the hardware margin is, I think, one of the things that we really thought about and which frankly drove the decision to acquire AlsoEnergy was the gross margin profile on the software and services. And so, that’s really where we’re focused long-term. I mean, to the extent that the hardware suffers in the near term, well, then that’s -- we think that’s a great trade off for a 10 to 20-year contract with super low churn, so it even goes beyond that. And so that’s really kind of what -- always thought that way. We’re starting to do more software-only deals as well, which is kind of along that same path. And so, we think that the software continues to differentiate itself from other competitors in marketplace. And I think that’s really where in the end where we’re going to be.

Yes. I mean, I think in the opening remarks, Bill mentioned -- as Bill mentioned, Brian, I think it’s important to underscore that the $1 billion of bookings does represent $400 million of software total contracted value. So, there’s just exciting leverage around the hardware piece, even if that gross margin is somewhat minimal. And as Bill mentioned, we’ve focused or we’ve actually modeled the decline in margins around the hardware piece and much more of a software left, which we continue to see.

Yes, makes sense. I know the medium to long term path is there and you guys have laid it out. I just -- I do want to be cognizant that in this market take the near term, tactically speaking, does matter a lot to investors. So just want to be cognizant of kind how the path forward is on the overall margin profile. Maybe just switching gears, and then I’ll pass it on, on the Available Power deal, it sounds like a great win for you guys. I just wanted to dig in and understand the dynamics just to make sure we’re on the same page. The $500 million opportunity, that is just for Stem, or does that include what AP would also be potentially earning from this? Just wanting to know what’s your split versus their split. And then, if we assume the 180 megawatts of the 1 gigawatt opportunity, early 2023 commissioning, I suppose that means it’s $90 million of revenue. Do you see all of that in 2023? And is it all software or is there some hardware embedded in that $500 million? Sorry, I know there’s a lot going on in that question.

I’ll take a run at it, Brian. Yes. So, it’s -- the number that you mentioned of the 500-plus is Stem. From a perspective of how we’re thinking about this, we have on the bookings line assumed in 2022 approximately a $100 million. And we’re trying to unpack a little bit how quickly we can get this executed. We would expect the majority of it to be in 2023. And I think the best answer is as we proceed and start to get more clarity on the plan tranches, we’ll obviously update you and everyone on how that’s coming together. What I do like about it is the ERCOT market tends to be a little bit higher throughput than some other markets related to installation. So, we’ve talked about permitting and interconnection issues. That’s probably the highest velocity market we’re in, which is great because it’s our largest pipeline market as well as kind of what -- as we talked about even last quarter. So, I think there’s a lot of value we can bring with our solution coupled with probably quicker velocity -- or higher velocity on installations.

The next question comes from Maheep Mandloi with Credit Suisse. Please go ahead.

Thanks for taking the questions. Nice booking as well. Maybe just on 2022 revenue guidance to begin with. Just wanted to understand how much of the revenue guidance is from AlsoEnergy. I know you guys talked about like $53 million-plus run rate last year and growing 20%, 25% of that range year-over-year. Is that kind of a right framework to think about that split between core stem and AlsoEnergy?

I’m sorry, Maheep. You broke up there a little bit towards the end. Could you say that again?

I just wanted try to understand the break-up of AlsoEnergy revenues and Stem revenues for -- just looking at the guidance you guys gave during the AlsoEnergy acquisition. It ran it from $53 million in revenues, right, in 2021 and growing off that base. Could we assume, like somewhere around $65 million, $70 million of revenues from AlsoEnergy 2022?

Yes. I think that’s certainly in the ballpark.

Got you. Thanks for clarification. And…

There will be -- just to clear that up. So, you’ll see within the Qs and Ks, there will be some segment reporting around that too. So, you’ll be able to track that going forward on the revenue line item.

Got it. So, it just looks like majority of that recurring revenue guidance, which you’re giving, is AlsoEnergy and probably around $15 million, $20 million of the software services business, right?

In terms of the CARR projections you mean or something else?

Yes…

I wouldn’t characterize it that way. I mean, so we’re guiding to a $60 million, $80 million exit rate in 2022. I think a lot of that is going to come from Stem side of the house or what we would describe as the older side. So, we love the Also business. It’s not growing quite as quick as, say, the storage side of the business. So, still very profitable, creative, like we’ve always talked about, but not likely going o see the kind of growth that you’ll see. And that’s really driven by the Front of the Meter side of the storage business. I mean, that’s really, what is the fastest growing piece. I mean, I think, neither the Behind the Meter segment on the storage side, nor the solar plus storage for the solar side -- you’re going to see $500 million deals getting signed. So, think about -- sign a couple more of those and the growth numbers kind of change pretty dramatically.

Got you. That makes sense. And then the other question, just on the guidance here for revenues. Can you talk about, like what drives the lower end and higher end of that range? Is it like some specific customer projects you’re waiting on or just any color on that would be helpful?

Yes…

We’re really building a margin safety, I think kind of given the global macro environment, but I would highlight the fact that he said, even at the midpoint, it’s 3x growth year-over-year. But Bill, go ahead and jump in.

Yes. No, I was going to say that we have -- as you, as you know, we have pretty good visibility to projects. And so, there’s a number of big projects -- just like this year, there’s a number of big projects that we’re looking at having a PTO for 2022. And so, we took a conservative view as to what we thought could happen. We, of course -- there’s a lot of question marks around the supply chains just generally, and we’ll see how that rolls out. But, we’ll definitely continue to update you guys over time, as the year goes on. I mean, as we sign other large deals, like the one we announced today, those are going to have a -- we’ve kind of talked about the lumpiness of the business and those sorts of deals as nice as they are. I mean, John mentioned it’s $200 million of long-dated software contracts. That hardware piece, I mean that $300 million in hardware, is going to naturally drive some lumpy results within the business. So, we’ll keep a close eye on that and keep you updated.

Got you. And just last one from me, and I will jump back in the queue. So, on adjusted EBITDA margin, just wanted to understand, like when should we expect return to that breakeven, or back to that kind of target which, you guys laid out previously for ‘22, ‘23? I understand some of that you think some of the operating expenses increase because of expansion, but when do you expect kind of a return on that expansion investment?

Bill, you want to take that?

Sure. So I think it’s important to note that the EBITDA -- or EBITDA and obviously the OpEx investments are really generating some pretty interesting results. So, if we wanted to solve for a EBITDA number, we could pair back the OpEx. And you can see that, right? I mean, we’re guiding -- kind of on a combined basis, OpEx is going to be around a $100 million this year, 2022. And, we’re guiding to a minus $20 million to minus $60 million EBIT. So, if we were trying to solve for EBITDA, we could pair that back and have a positive number. But I think what that wouldn’t do though is position us for those types of contracts that are like we announced today. And that’s really -- so when you see the growth in the business this year, that came from investments in new markets, and that has none or touchstones throughout the business, there’s sales people, there’s data science, there’s understanding the market structure there. So, there’s a lot of work that goes into those sorts of things. And so, it’s definitely a little bit more complicated than you might expect. And so, as a result, we kind of feel like that there’s an interesting market opportunity ahead of us in a number of markets, some of which, we’ve talked about Texas a little bit. And I think that’s really where we’re going to continue to invest to be able to generate those long-dated service contracts. I mean, when you -- John mentioned the bookings trajectory, $2 billion -- or $1 billion over 18 months starting in July of 2021 through the end of next year, that’s $400 million of software contracts. And so that -- but that comes with an investment to be able to get to that. And that’s really where we think to the extent that we have to invest in this near-term, that’s going to pay off in the long.

Should we expect similar OpEx run-rate in ‘23 as well, then?

Similar in terms of the growth from ‘21 to ‘22 or…?

Either $100 million or that in growth from ‘21 to ‘22, either way...

Yes. I think we would expect so because most of our OpEx is headcount-related. So it’s not -- we’re not doing non-personnel-related investment really on the OpEx line.

Got you. All right.

Yes. I think what you will have in ‘23 though, I mean, too is a much larger base of CARR as a result of those investments.

Right, some operating leverage kicking in, right.

Exactly. That’s exactly what we’re thinking.

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

Thanks for taking my questions. Maybe one more on the margin side. So, I understand, at least to some extent the hardware business is a means you aim for -- for you, which is really growing the software business. And can you talk a little bit more about, on the hardware side, what is your margin threshold? And also, at current environment, how much is the higher input cost on the hardware side are you able to pass along to the customers?

Yes. And thanks for the call, Biju. Good to hear from you. I’d say a couple things on the supply chain piece. Number one, we have seen some softening around the shipping costs, they are moderating. And as we talked about in the last call that oversea kind of freight fees, we were able to pass those on. I think what we’re seeing now is some index pricing ideas that we outlined in the opening remarks. And we are working through that with our suppliers, primarily focused on lithium carbonate and that represents a little over half of the build. So obviously, that’s why they are focused on that. So, we’ll have to kind of play through as far as, do these projects continue to pencil? Does the ESS supplier opt to pass on the volume. And we’ve kind of got a standing invite from our suppliers that if projects fall away, to give us a call because we think that our momentum and bookings and everything else we have been talking about today will continue. So being long hardware may a good spot to be. But again, we feel very good about where we are today. We are confident we’ll get our total 2022 supply contracted. And as these commodity index pricing come forward, we’ll see how it plays out. I mean, that chart in the deck that we put together, BNEF feels like from kind of today to 2025, there’s this peak to trough of down 65% as an example on that lithium carbonate side. So, they are forecasting some reduction in raws, and I think that’s accurate. And we believe that helps us open up more markets and potentially drives hardware margins. But I think as Bill’s outlined pretty clearly during the call, our focus is really on driving more and more software and recurring revenue and high gross margin.

That’s helpful. And anything you can say about the margin threshold you have in -- on the hardware side for new business?

I mean, we really -- we have a pretty thorough process, Biju, that we go through on any large deals. Our sales team has a threshold. If it goes below that, they’ve got to come to me and Bill, and then we decide what we want to do. And so, we haven’t really outlined that publicly. But rest assured, our interest is not to take negative margin deals as we’ve seen from some of the competition out there. And that’s not a focus for us. But I would also say that it’s a very tight process that goes on, on a weekly basis, and as needed, if it’s more than weekly. So, we’re all over it, much like we were on the hardware piece, and assuring our 2021 supply, and as we feel like 2022. I don’t know, Bill, if you have anything else to add on that front.

Yes. I think one of the things that’s important to note is we are more -- ever more leaning towards the FTM side of the house. I mean, we’ve talked about 80-20, that number is getting higher on the FTM side. And as you go back to the guidance of almost two years ago now, we talked about margins in the 10% to 30% range more closer to 10 on the FTM side, and that’s kind of what we’re seeing. So, I think that though it’s elongated plan, we’re still kind of operating somewhat close to it. Other than the kind of the mixed percentages that we talked about, that we’re leaning more heavily towards FTM. I don’t think we could have predicted way back then that Texas would become the market that it has, but the good news is that we’re there in force and we’re happy to be. So, I think the, you know, I think on the BTM side still growing, good margins, but definitely maybe more impacted by the pandemic. Because that tends to be more on the Fortune 500 side of the house.

[Technical Difficulty] FTM mix, you still needed the software business that has the same margin, whether it’s FTM or BTM?

Exactly. I mean, ultimately, I think as we’ve always said, and I think most have agreed, this is a software story. It’s not a sale of somebody else’s hardware story. It’s really what the differentiating component of Stem is the platform. That’s always been true. And I think that’s going to continue to be true in the future.

This is all the time that we have for questions today. And I would like to turn the conference back over to John Carrington for any closing remarks.

Thank you, Susan, and thank you all for joining us on our fourth quarter and full year 2021 earnings call. We are very-pleased with the strong execution in the fourth quarter and our full year 2021, and the momentum that we have carried into 2022. So, we look forward to speaking with you during our first quarter earnings call. And again, thank you all for joining.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.