Welcome to the Stem, Incorporated Second Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I'd 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 second quarter 2022 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. 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 on the Investor Relations portion of our website at www.stem.com. John Carrington, our CEO; and Bill Bush, CFO, will start the call today with prepared remarks. Larsh Johnson, Chief Technology Officer; Bob Schaefer, President of AlsoEnergy; and 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 3 in the agenda for our call today, I'll review the second quarter 2022 results and highlights, including our increased guidance. Then I'll review our solid commercial execution and discuss how we are expanding the markets we serve. I'll share our initial views on the Inflation Reduction Act and provide an update on how we're managing our supply chain. Finally, I'll talk about how we are accelerating market enablement through technology innovation. Following my remarks, I'll turn the call over to Bill who will discuss our financial results in more detail and provide further color or revised 2022 guidance. Turning to Slide 4, today we reported strong second quarter 2022 results, including record revenue of $67 million, which was nearly 2.5 times higher than our second quarter 2021. Revenue came in 5% above the high end of our guidance range for the quarter, while margins and EBITDA were in line with our expectations. The team executed across the board on key metrics and demand continues to be very strong on a year-over-year and sequential basis. Based on the strong start of the year and visibility into the second half, we are raising our 2022 guidance on two of our key metrics, bookings and contracted annual recurring revenue or CAR. For bookings, another record performance, and we are raising our guidance from a range of $650 million to $750 million to $775 million to $950 million, which is more than a 20% increase at the midpoint. Regarding CAR, we are raising the range of our exit rate guidance from $60 million to $80 million to $65 million to $85 million. As Bill will discuss, we are reaffirming our full year 2022 guidance on our three other key metrics, including revenue, non-GAAP gross margin and adjusted EBITDA.…

Thanks John. Starting on Page 11 with our results for the second quarter 2022. Before I begin, recall that we closed the AlsoEnergy transaction on February 01 of this year, which impacts the comparability to last year's results. As John mentioned, we reported record revenue of $67 million, which was a 246% increase versus the $19 million in the second quarter of 2021. The quarterly revenue performance surpassed the Q4 2021 performance of $53 million or an increase of 26%. Most of the growth came from the storage hardware sales on FTM and BTM partner projects and about $14 million from the addition of AlsoEnergy. we also recognized approximately $13 million of high margin software and services revenue representing 19% of the total revenue for the quarter. First half revenue was $108 million an increase of 246% on a year-over-year basis. Our GAAP gross margin was $7.7 million or 12% versus a slight loss in the same quarter last year. This is the second straight quarter positive GAAP gross margin highlighted by the growing base of our software and services offerings. On a sequential basis, this represents a 33% increase in GAAP gross margin, reflecting the strength of our commercial offerings. Non-GAAP gross margin was $11.3 million up from $1.5 million or a 665% increase in the second quarter last year, due to higher revenues and an increased mix of software and services revenue. On a percentage basis, non-GAAP gross margin was at 17% in the quarter versus 8% last year, an increase of just over 2X. Our margins benefited from a greater share of high margin software and services revenue. That 17% margin is squarely in line with the 15% to 20% guidance for 2022 we initially provided in February. Net loss was $32 million versus a loss of…

Thanks Bill. Turning to Slide 14. To wrap up, we're excited about our strong commercial and operating momentum heading into the second half of 2022, with record revenue above the high end of our guidance range and record bookings up 5X year-over-year. Our technology differentiation continues to drive growth in contracted annual recurring revenue and supports our pricing power with customers. We are raising our guidance for bookings and CAR for the year and reiterating our guidance on other key metrics, which again, do not include any upside from the Inflation Reduction Act. We continue to build a strong and inclusive culture at Stem with the launch of two new employee networks in the quarter focused on LGBTIA plus, and Women in Leadership. We are committed to building the best workplace in our communities and the broader industry. In addition, the integration of the AlsoEnergy acquisition is preceding well, and we expect to detail initiatives on driving commercial synergies and operating leverage as we drive a focus on profitability in the forthcoming Analyst Day, as Bill mentioned on September 28 in New York city. With that, let's open the line for questions, please.

[Operator instructions] The first question comes from David Peters with Wolf Research. Please go ahead.

Yeah. Hey, good afternoon, everybody. Congrats on the update. First question I have is just on the revised guidance for booking specifically. Can you talk a little bit on where you're seeing the increased momentum relative to initial expectations? Is it being driven primarily by FTM or anything available, power related and then just related to that, what ISOs are you seeing the most success in?

Yeah. Hey Dave, this is Bill. Thanks for the question. Appreciate that. So I think much like we've talked about in prior quarters, the FTM segment of the business is growing very rapidly and that's where we're seeing -- we continue to see the most momentum there, although we are starting to see some initial -- see on the FTM side, some initial opportunities and on the AE side, as we come out of the AC any competitive component with the government. So I think we're really seeing it across the business, but the biggest impact is clearly on the FTM side of the business.

And ISO-wise it's ERCOT.

Yeah.

Certainly is the strongest still.

Although newly the ISO is also quite strong as well. So really those two primary markets.

Thanks for that. Does the bump up in bookings, obviously just knowing that this drives revenue next year and so on, does that accelerate or change the thinking about at all when you guys might expect to see EBITDA inflect positive?

Well, I think for sure that the growth in bookings does and will relate and create revenue opportunities. I think one of the things that we do see as well is that those FTM projects tend to take a little bit longer and that those are really 18 months and up these days where, I think when some of the initial guidance that we gave a while back was more like say in the 12 month range. So we will see that. So we're starting, effectively in this second half, we'll start to see actually deals that will hit in 2024 as opposed to 2023. And then of course will, drive all the software aspects that we've talked about. So, that's all good news from that standpoint. And I think that in general, as it relates to the EBITDA, what we'll do is in the Analyst Day call or Analyst Day meetings, excuse me, in New York, we'll get some additional guidance around that then.

Okay. last one, if I could just with respect to the IRA, obviously need to pass, but just wondering if you had any initial thoughts on what this would mean specifically for Stem's pipeline, and then as it relates to AlsoEnergy's solar AUM, how quick could you move to retrofit, some of those solar sites with batteries and would there be any limitations just from a supply standpoint? Thank you.

Yeah, David, thanks. Couple things, look, we're obviously very supportive of the Inflation Reduction Act. I think as I said, in the prepared remarks, it will certainly drive strong job growth, obviously a renewable expansion. I think US manufacturing, which is also becoming more and more significant light of some of the things that are going on at a global level and clearly significantly more storage with the standalone ITC included. And I'd say that we need to get the final details of how this rolls out. We certainly see TAM upside. And if you look at some third parties there ranges all over the place, the low end is 20%. I think one of the things that we've talked about before is, we have been talking to our customers about, when this occurs, what we would do with them and when you think about C&I Fortune 500 in particular, there's a lot of activity in markets that were maybe on the edge that become highly economically viable in light of this. So we have been talking to them for some time, and there's a variety of other customers who are in the process of having discussions on. I am really excited and think it's highly differentiated. The fact that we now have AlsoEnergy as part of the family and the reason for that is they're 41,000 sites that they currently are managing. And these are existing customers. Obviously we know who they are, we know the system size, the location and the production. So it's a perfect kind of lead sheet for us to go and address. So we're excited about that. We think it's highly differentiated and a very strong competitive mode that we will execute as soon as this is finalized.

The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey guys. Thanks for taking the questions kudos on the nice execution. I guess first question would just be around the bookings momentum appreciate the color around the mix and where you're seeing that strength. But, you're not raising guidance metrics for 2022 and I think Bill just mentioned some of these bookings or even set for delivery into 24. If I heard that right. So is the sort of composition of bookings as you think about cadence changing here, are you seeing more long dated bookings?

So, Brian, thanks for the question first, let me clarify one comment there. What I was saying is the bookings in the second half could be into 2024, not bookings that would've been in the first half. Just so that we're super clear on that point. But as far as you know, and that's of course why we're not changing, because say the 2022 revenue guidance, because those are more than likely a sale that's happening, particularly in the front of the meter side sale that's happening in 2022 is likely not going to create revenue during that same time period. But, as far as the, say the philosophy of the business, I think that's where it gets super interesting is that the bookings growth really, determines what's going to happen longer term for us. And that's really, so we're kind of locking in and that's where the CAR metric comes in. And so you're starting to lock in long term long dated software contracts during that time period.

Okay. Fair enough. And then just second question on the gross margins, encouraging to see the uplift here this quarter. Can you talk about some of the puts and takes on the margins? Is this sort of where we should expect things to trend if not, maybe higher through the rest of the year?

Well, of course, our guidance is 15% to 20%. So we're right -- we're right in the middle of that. We're pretty comfortable where that is. I think the big impact for us longer term, or even say shorter term is going to be our ability to break some of those log jams in the permitting and interconnection side of the business. And we have a lot of projects that are set up to start, effectively start operating as soon as we can get through those log jams. And so I think that over time you're going to see more and more software revenue rolling into the P&L and so we would expect that software, really services line item to grow quite significantly over the coming years.

Okay. Fair enough. Thanks a lot, guys. I'll pass it on.

The next question comes from Mohit Manrai with Credit Suisse. Please go ahead.

Hey, good evening and congratulations on the nice quarter here. Maybe just quickly on the revenue, could you just like talk about the drivers on that end? Is it mostly the ASP increase you talked about or is there anything, any pull forward you saw from Q3, Q4 over here as well?

Yeah, so I think and thanks for the question Mohit. I appreciate it. So the revenue, is going to be tied into hardware sales. That's where, when you get the biggest bang for the buck from a top line perspective. And so that was really where from the standpoint of where we outperformed during the quarter at the top line revenue level, it would be there. Now as it relates to, kind of, was it a pull forward or not? I would say really not. I don't think that we did or at above the high end of the guidance, but we are affirming the full year. So I think that we're in pretty good shape from where we are from that standpoint.

Got you, and then probably just on the previous question here, from Brian on just for next year demand over here if we get like an IRA or not, if when we get the IRA approved, do we have enough supply for batteries to support that kind of demand here?

I'd say that we have to understand exactly the details around this as far as what the demand looks like. If you, as I said, if you look at some of the third party estimates, it's ranging from 20% to 300%. So we're have to -- we'll have to unpack that. I feel very good about our supply chain and our OEM commitments to the company. We've talked about this in the past. I think we've been pretty good about very granular reviews on a weekly level as we've discussed in previous calls. And I would also say that, we've been super transparent with our OEMs to say, make Stem the first call, if you excess capacity and in fact, in the last couple of weeks, we've seen that occur and we executed on a fairly significant amount of hardware specifically for the BTM market and feel great about that move. And we continue getting incoming calls. So, we'll monitor it closely. I think we have to understand how big this could be and the timeframe associated with it in particular and we feel like we could put a supply agreement in place with the variety of OEMs that we have, another advantage of our very disperse amount of OEMs that we've partnered with over the last few years. So we have a lot of optionality in that in that category.

Got you, and then just one last one and then jump back in the queue one UFLTA, and gave some color around it. Could you just elaborate more on that? Is it causing projects which are previously planned earlier this year to be moved to next year? Or what is this latest you hearing on that end? Thanks.

Yeah, I think we're seeing -- we're seeing a little bit of impact on the large utility scale. We are not necessarily seeing the BTM. It's something we're closely monitoring. It's still a little bit early but, it's certainly gotten our attention and we'll continue to closely monitored. I don’t know, Bill, you've been working a supply chain quite a bit recently, if you have anything to add.

Yeah. We haven't yet seen an impact on the, you know, say, and it's really probably more the battery cells. I think that's where you're going to see probably the most in that some of the rulings seem to indicate that the customs department is looking actually at the mineral level. And so I think that is probably going to depending on how that works out, we could see some impacts there, but we have not seen any yet. I think what we have heard is that it's more impacting solar panels coming in through the port. And so I think that which we haven't seen a significant impact yet, but that's what we've heard. I don't know, Bob, if you guys have seen anything on your.

So for us, and this is Bob Schaefer, thanks for the question, Mohit. So I think, for us, when we see, challenges just related about, kind of large scale utility projects on the PV side and there it's just a timing problem. It takes a long time to get those projects in the ground. So you need pricing certainty before you really want to embark. And so that favors projects that can execute quickly and that's kind of what we see here in our part of the business.

[Operator instructions] The next question comes from Biju Perincheril with Susquehanna. Please go ahead.

Hey, thanks. Congrats on a great quarter. So I was kind of intrigued by your comment about software-only deals the increase there. So can you give us a little bit more color? Are these -- are you replacing like a previous provider of software's solutions or are these adding software existing call it, dumb storage facilities, any extra car that will be good?

Sure Biju. Thanks for the question. Good to hear from you. I would say a couple things. One is the largest behind the meter portfolio down in Southern California was a replacement with Athena software on an existing platform. And we have talked about that in the past. That's not inclusive in this 10X obviously, but I would say the majority of what we're seeing are large front of the meter projects whereby the developer may be procuring their own hardware and utilizing Athena and all the attributes that we bring. I think it's exciting too, because as we mentioned in the prepared comments, we've added two more applications as part of our offering that gives us all 13 of the Rocky Mountain wheel. So that's really compelling, we think. And obviously, as you look at the CAR metric, it's one that captures the progress of the business. And so that's going to continue to grow both as we sell more hardware and software and start to do more software only deals. It's something we've talked about, it's something we've been focused on and we're really starting to see strong demand for our platform. So very excited to see that. We'll update everybody as we get more closes and, hopefully have more to talk about on the analyst day as well in September around this.

One thing I would add to that though as well is even if we're not selling the hardware, we are selling services into those same projects. And so, the interesting part of the business for us, of course, from a margin perspective is on that software and services line. So even if we are losing the quote unquote 'top end of it', as a result of the hardware, we're not necessarily losing the engineering services and such that we would be providing to those same customers. So they still need our help in terms of the battery warranties, the selection itself, and a number of other topics, interconnection, etcetera.

Got it. Now I was thinking, this is a sort of nice tailwind sort of adding to your hardware plus software business making that transition to the software, becoming a bigger part of the business, making that a faster transition.

Yeah, we feel great about the momentum and I think it'll only continue Biju. Thanks. So go ahead.

And then maybe it looks, you add a little bit more color on the booking this quarter. It was a nice pleasant surprise with all the headwinds the sector has been facing, but are these -- the bookings, are they mostly standalone storage or is it because the behind the meter projects were not as impacted by the supply chain constraints?

Yeah, I appreciate the comment of the bookings. We're really excited about it as well as we mentioned $226 million, that's 50% quarter over quarter growth and 400% year-over-year. So the demand on the ground continues to be extremely strong. From a mix standpoint, 91% FTM, 9% BTM. We do believe that BTM will increase. We feel like coming out of COVID, we're seeing more and more activity around behind the meter opportunities, obviously with the Inflation Reduction Act. That's a huge lever for that as well. So we'll monitor that piece, but just continued strong demand really across the board. I wouldn't highlight one geography even it's been very strong and we're excited about the balance of the year and obviously excited enough to move up guidance. So…

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

Thank you and thank everyone for joining us on our second quarter 2022 earnings call. We look forward to speaking with you at our Investor and Analyst Day on September 28th in New York.

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