Thank you for standing by. This is the conference operator. Welcome to the STEM Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Ted Durbin, Head of Investor Relations of Stem. Please go ahead.

Thank you, operator. This is Ted Durbin, Head of Investor Relations of STEM. Welcome to our fourth quarter and full year 2023 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 10-K and other SEC filings. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings press release. We will be using a slide presentation today to discuss our results. Our earnings press release and presentation are on the Investor Relations section of our website at www.stem.com. John Carrington, our CEO; and Bill Bush, CFO, will start the call today with prepared remarks. Mike Carlson, COO; 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.

Thank you, Ted. Good afternoon, everyone and thank you for joining us today. Beginning with Slide 3, our agenda today will cover fourth quarter and full-year highlights, outline our 2024 guiding principles and provide several business updates. Bill will then discuss our financial results and introduce our 2024 guidance. Please turn to Slide 4 on our fourth quarter and full year 2023 results and highlights. Starting on the left side of the page, we recognized $4.6 million of adjusted EBITDA. This is our first quarter of positive adjusted EBITDA in company history and meets a critical milestone goal we set for ourselves in 2022. We accomplished our goal through revenue and gross margin growth and ongoing operating expense discipline. For the quarter, our GAAP gross margin was 7% and non-GAAP gross margin was 13%. For the year, GAAP gross margin was 1% and non-GAAP gross margin was 15% which is in line with our guidance. We also continue to grow our high-margin recurring revenue with CARR up 39% year-over-year and in line with the guidance range that was increased by 9% at the midpoint in November. Fourth quarter bookings brought us to just over $1.5 billion for the year, again, in line with guidance. Lastly, our operating cash flow improved significantly in the second half of 2023, up $35 million in the fourth quarter of 2023 versus fourth-quarter 2022 based on improved profitability and better working capital management. This is a metric we will highlight throughout 2024. Moving to the Q4 highlights on the right side of this slide. Our commercial momentum has continued having signed approximately 800 megawatt hours of software-only contracts since the start of the year. That is a nearly 15% increase in our contracted storage AUM in just the first 2 months of 2024. Today, we…

Thanks, John and thanks to everyone for joining us on the call today. I'll start on Page 11 with the results of our fourth quarter of 2023. The Revenue increased 8% to $167 million as compared to the fourth quarter of 2022. That performance was despite interconnection and permitting delays and slower-than-expected deliveries from hardware suppliers which negatively impacted our storage business. Solar revenue rose 27% year-over-year, faster than the growth in the U.S. C&I solar market as Power Trek continues to gain share with customers and differentiate itself in the market. In the fourth quarter of 2023, GAAP gross margin was relatively flat year-over-year, while non-GAAP gross margin expanded nearly 20% from 11% to 13%. GAAP gross margin was negatively impacted by one-time excess supplier costs and liquidated damages in the quarter. As John previously noted, we met our commitment to achieve positive adjusted EBITDA in the second half of 2023. That was a milestone achievement for our business and we are proud of our team for reaching this goal. Fourth quarter adjusted EBITDA was $4.6 million and second half 2023 EBITDA was $3.7 million. The year-over-year increase of $14 million in adjusted EBITDA was due to higher revenue, expanded gross margins and lower cash operating costs. We continue to drive operating leverage and efficiencies with strict cost controls. For instance, cash OpEx declined approximately 16% sequentially. We recently restructured our BTM business to prioritize targeted opportunities, leading with software and services with partner channels and a direct-to-market approach. Finally, in the fourth quarter of 2023, operating cash flow was a negative $2.1 million, representing a year-over-year improvement of approximately $35 million. This is a significant improvement that positions us well to generate positive operating cash flow and fund operations in 2024 without the need to issue any additional…

Thanks, Bill. Wrapping up on Slide 18 with our key takeaways. Our 2024 outlook is supported by solid 2023 execution. In 2023, we achieved positive adjusted EBITDA for the second half and fourth quarter, upholding our commitment to this important milestone set forth two years ago. In addition, we met our gross margin, bookings and CARR targets for 2023. Through disciplined management of operating expenses, we are on track to reach our cash OpEx target in 2024 and do not expect a meaningful increase versus 2023 which was $111 million. We believe that 2024 is set up as an inflection point for building long-term profitable growth. We expect to generate free cash flow to fund operations without issuing equity, build recurring software revenue and extend our technology leadership position. Before we turn the call over to questions, I have a couple of additional updates. First, we've initiated a director search with software industry expertise to be added to our Board of Directors, consistent with our long-term strategic direction. I would also like to announce that Bob Schaefer, the Co-Founder of Also Energy and a terrific asset to our integration efforts and a great business partner to me personally will be retiring on May 3. Bob has been the President of Also Energy, a business he cofounded in 2007. He and the team built a solar software monitoring platform that is market-leading and continues to gain share. We wish him and his wonderful wife, Donna, all the best on this next chapter and he will always be part of the STEM family. With that, I want to thank shareholders, employees, customers, channel partners and suppliers. And now operator, let's open the lines for questions, please.

Certainly. We'll now begin the question and answer session. [Operator Instructions] The first question comes from Brian Lee from Goldman Sachs.

This is actually Nick Cash on for Brian Lee. Can you guys hear me all right?

We can.

Awesome. I guess the first one in front of mind. Just was wondering why, I guess, guidance -- revenue guide seems a little bit limited given your tremendous growth in the backlog as well as you hinted at the demand environment remains robust and input costs coming down probably likely driving up project IRRs, further increasing demand. So kind of just trying to get a better sense of your backlog conversion and cycle times, if you'd walk me through that.

Yes. Thanks. This is John Carrington. A couple of quick points. I think if you look at Slide 15, you'll see a variety of commentary around the guidance. And I think the real highlight I'd note is that we have really several large deals which could present upside to the number. And obviously, we'll update everyone as those come together. But there's -- I think, some good commentary on the -- on Slide 15 in the deck. Bill, do you have anything to add?

No. I think the other piece that I would say just more specifically, is that the type of deals that we're signing have grown both in size and complex which means that they're longer duration. So the -- for sure, one of the things that we've talked about here consistently, backlog is getting longer. And so that's going to have an impact on the revenue guide. And I think as we said in the deck in the prepared comments there is opportunity potentially for some deals. And if that happens, we'll be able to [indiscernible].

The next question comes from Dylan Nassano from Wolfe Research.

I want to go back to the opening comments. It sounds like you're pretty clear that you don't plan to issue equity this year. But do you see any potential for maybe needing to pull some other funding levers just to kind of work through the quarterly lumpiness as you get to the $50 million of operating cash flow?

Thanks, Dylan. We do not. I mean our prepared remarks are pretty clear around that. And so we're confident in that statement.

Great. And then I want to go back to the comment on domestic content and how that's favorable for project economics. Can you just provide a little bit more color around how STEM specifically sees that benefiting?

Dylan, this is Prakesh Patel. I think it helps in a couple of ways. First, the domestic manufacturing partners that we're engaged with, they receive certain manufacturing incentives. And then, of course, our customers can benefit from domestic ITC or other incentive adders. So in aggregate, all of these incentives improve project economics and in those cases, allows us to negotiate more favorable pricing or better margins. So that's how it flows to us. As you know, we don't manufacture hardware, so we're not direct beneficiaries of those incentives.

The next question comes from Thomas Boyes from TD Cowen.

Great. Maybe first one, obviously, great to see the agreement with Mercuria. Given they have a 20-gigawatt renewable energy portfolio, how does that kind of equate to an overall market opportunity for STEM similar to the 10-gigawatt hour energy storage pipeline that was identified for SB Energy in China. Get some insight there?

Yes. Thomas, this is John. I'd say a couple of things. And I think you might have been one of the individuals on the call that were there for the demo at RE+ on PowerBidder Pro that we launched in the third quarter. And look, I'm really excited about this one because obviously Mercuria is a very significant player. What they've publicly committed to is directing over half or at 50% of their investments into the energy transition and planning a 20-gigawatt renewable energy pipeline. We'll work closely together with them as it relates to those projects. At this point, we're not committing to how much of that piece of the 20 gigs we'll go after that we will close, I should say. So more to come there but I think it's just a real statement of how important and valuable this PowerBidder Pro technology is for someone with the domain expertise that Mercuria represents.

I appreciate it. I did see the demo there at RE+; thought it was just great. As a follow-up, from an operations standpoint, is there an opportunity to transfer additional headcount to lower geographies? Or is that kind of largely been exhausted with everyone that can kind of move to India already having shifted there?

No, I'd say we're really continuing to focus on that initiative. The India Center of Excellence actually continues to get better and better as we've gotten more people over there. And there's really -- maybe other than direct sales, there's not a function that we have not considered to put over in India. It's been a very successful approach that we've taken. Obviously, we're always going to have people in the variety of geographies that we're playing in. But I think the slide that outlines the 30% down in wages is a real statement to that commitment and we'll continue to look at India as much as possible as a go-forward strategy. We also feel like on the software development side, it's interesting because you kind of have this 24/7/365 software development piece that is enhancing our, I think, velocity of creating new apps for our software and that's another component that we appreciate and think is a long-term viable option for us. And the teams are really working well together cross [Indiscernible].

Great. Now that's helpful. And then if I could just sneak one more and then I'll jump back in the queue. I just wanted to get some insight on maybe some of the cross-selling opportunities that you have previously identified with the Also Energy portfolio. I think we saw the first really kind of conversion coming through last quarter. And I was just wondering how you're thinking about that opportunity to play out this year.

Thomas, this is Prakesh. We're continuing to be encouraged by our initial traction. We did -- in the full year '23, we did highlight some wins there and we'll continue to advance progress there for us. As we highlighted in the call, BTM is now moving to primarily an exclusive software services focus. So that will drive a refined focus in the cross-sell.

The next question comes from Justin Clare from ROTH MKM.

So I guess, first off, just on the 2024 guidance, I was wondering if you could give us a sense for what your expectations are in terms of the mix of hardware sales versus software sales or potentially give us an idea of what the growth expectations are? I know it sounds like many of your customers may prefer you to be sourcing the hardware for them still. So I also wanted to think about that in terms of the context of your long-term targets. So your hardware target of 25% to 35% growth, service is 65% to 85%. Should we be thinking about a change in those targets?

Yes. So thanks for the question. We historically have run around 85%, 15%, 85% hardware, 15% software. We think over time, the absolute value of the software is going to continue to increase. But the prints on the hardware, particularly that of the storage hardware is so high that it's going to be difficult to dramatically change those. So I think what you'll see over time is that growth in software and services which should why -- but a larger absolute dollar growth associated with hardware.

Got it. Okay. And then just looking into Q4, it looks like the storage software revenue is flat year-over-year. So you could just help us understand why we didn't see more growth given the growth in the storage AUM? Is it specific issues with interconnection or permitting? And then, just wondering if you can give us some insight into whether those could be resolved as we move into 2024? Are there specific large projects that could come online potentially early in the year?

Yes. So I would say, you're right. It is an interconnection and permitting issue. It continues to -- there are some large projects. I think we talked extensively in prior quarters about United -- that to come online somewhere in the first half of this year. And so that's about a little bit more than 300 megawatt hours of projects which are going to come online. So we're excited for that. And so we're certainly doing a number of things that we talked about them in the slide deck in terms of being able to accelerate the conversion of CARR into ARR. So I think for us, that's a big point. I think one of the points that we made in the slide deck was that if we were able to convert half of the CARR into ARR, that would have generated about $20 million more in revenue. So there's certainly a lot of opportunity for us to be able to increase the amount of services and then obviously positively impacted the gross margin line as well. So we're -- there's a number of things that we're doing. We're investing in the deployment teams. We've got a number of folks that were accelerate the growth of the ARR, i.e. the conversion from CARR. And so that -- those are all things that we're pretty focused on for 2024.

Justin, I'd highlight Slide 16 along the lines of what Bill said. There's some, I think, very good color there. And actually, it's the pro serve side of the business that we're very excited about as well. And we feel like that will be a continued growth area for us and upside to the numbers. So I encourage you to take a look at that. We're happy to follow up on any specific colors.

[Operator Instructions] The next question comes from Julien Dumoulin-Smith from Bank of America.

Guys. This is actually Cameron Lochridge on for Julien here. Just wanted to come back and again, congrats on reaching the positive adjusted EBITDA figure in the fourth quarter. If we think about the longer term, right, understanding that there is an effort to accelerate that CARR conversion to the income statement. How are we thinking about the 2025 software and services target that you guys played out at Investor Day, just that 65% to 75% revenue CAGR that you guys have talked about. What are we thinking there? Is that still on the table? And if not, when can we kind of expect an update there?

Yes, I'd say a couple of things, actually. Number one, we're not updating the long-term forecast on this call and really focused on 2024. I think the numbers that Bill just outlined, though, a moment ago of, again, if we converted 50% of the 2023 CARR, it add $20 million of services which is actually a 60% year-over-year growth without the professional services that I just mentioned in answering Justin's question. So it's -- and that doesn't include ProServ. So we'll update that as we move forward but those are the numbers we feel good about the amount of CARR. And as we mentioned in the prepared remarks, the transition from CARR to ARR is a big focus and we've got several initiatives in place, whether it's the PowerBidder Pro event managers as a software-only offerings. Obviously, our focus on public power. We talked about that as well, both in this call and previous calls. And really, those entities are important because they can control the permitting interconnection timeline that Bill referenced and then some operational and contracting changes that we are putting in place to try to gather that revenue sooner.

I'd add one additional thing. If you look at our guidance for 2024, that doesn't anticipate an acceleration of the software conversion and we still expect to hit those EBITDA and cash flow targets. So there is upside from accelerating the CARR to ARR as well as any kind of traction we make on the professional services side. So for us, much like in '23, even if other things -- some things go against us, we still expect to deliver on the EBITDA and free cash flow targets. Yes. I think the -- when you think about the numbers themselves, I think the free cash flow component to this such that we have never had significant cancellations on contracts. And so by generating the free cash flow that we expect, we should be in a good position to be able to take advantage of those software conversion opportunities. That's really when we think about being EBITDA positive, generating free cash flow, it gives you an opportunity as particularly given that the size of our deals have increased and those will be around for when those systems are operational and that will end up being -- showing up on the income statement and generating a lot of both cash and gross margin.

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

Great. Thank you, Brenda. And look, we look forward to speaking with you during our 1Q earnings call. And thank you all for joining us today.

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