Good day and welcome to Stem, Inc. Second Quarter 2024 Results Conference Call. All participants are in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded. 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. Welcome to our second quarter 2024 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-Q 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 release. We will be using a slide presentation today. Our earnings 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. Now I'll turn the call over to John.

Thanks, Ted. Good afternoon, and thank you all for joining us today. Beginning with slide three in our agenda, we will cover our second quarter results, business updates, and recent commercial performance. Then Bill will discuss our financial results in greater detail. Now let's turn to slide four on our second quarter 2024 results and highlights. Our financial results in the second quarter were disappointing. We recorded $34 million in revenue, substantially lower than expected, primarily due to unforeseen extensions of project timelines. This was caused by certain customers' project financing delays and extended interconnection approvals. We are seeing project delays impacting the broader industry. The shortfall was largely in storage hardware revenue, although our high margin software and services revenue was mostly in line with our expectations. Bookings in the second quarter were $25 million. Our recent strategic expansion into the large-scale storage market has resulted in significantly larger average deal sizes with increased variability and increased project complexity. This has protracted our sales cycle and negatively impacted our bookings in the first half of 2024. These projects were also impacted by the delays stemming from customer project financings, particularly tied to USDA funding, as we will discuss in further detail today. GAAP gross margins were 28% and non-GAAP gross margins were 40%, representing a double-digit percentage point improvement relative to Q2 2023. Both GAAP and non-GAAP gross margins were significantly up year-over-year due to the lower-than-expected hardware revenue in the quarter. Contracted annual recurring revenue, or CAR, was up 20% versus the second quarter of 2023, but relatively flat versus the first quarter of 2024 due to low bookings. And lastly, operating cash flow was negative $12 million this quarter, a $154 million improvement over the same quarter last year. We are revising guidance to reflect the push-out…

Thanks, John. Starting on page 12 with our results for the second quarter of 2024. As John mentioned, revenue was down 63% year-over-year as we realized less storage hardware revenue this quarter, in large part because the company did not utilize working capital to fund lower margin hardware sales through its balance sheet. As we have discussed, we modified our payment terms to eliminate the hardware drag on working capital and as a result, there may be some instances of changes to product timelines to satisfy these new requirements. You have heard us talk about our shift to software and services, and this quarter's margins are a preview of our longer term vision for the company. As a result, we generated the highest GAAP and non-GAAP gross margins in our company history. As a demonstration of our continued focus on cost control, we sequentially decreased cash operating expenses by approximately 9%. And we expect to continue to maintain that focus. As an example of the permanent cost savings we've implemented, we've recently reduced our real estate footprint, which will generate annual savings of approximately $3 million. In addition, we continue to reduce our cloud and data com costs as a percentage of operational assets, of which those are our two largest costs. As we advance through the year, we will continue to focus on cost reductions and improved efficiencies, leading to positive EBITDA outcomes. Adjusted EBITDA was nearly flat on a year-over-year basis, down just under $2 million, despite a $59 million decrease in revenue. Again, this is a testament to our increased software and services revenue and continued cost controls, which are driving operating leverage. Our solar business was up 9% year-over-year and continuing to generate strong gross margin performance from our market-leading share in the United States. We…

Thank you, Bill. Finally, on page 17. While we recognize this was a disappointing quarter from a financial perspective, our CARR to ARR conversion has been a core focus of the committee. Our CARR to ARR conversion has been a core focus of the company, and we saw our best quarter in company history on storage software activations and gross margin. We activated over 300 megawatts hours of storage projects in the quarter, and most importantly, the projects are delayed, not canceled. Another key guiding principle is our focus on EBITDA and cash flow generation. Adjusted EBITDA remained relatively flat year-over-year, while revenue was off 63%, demonstrating continued operating leverage execution. In the quarter, we reduced cash operating expenses by 9%. Our ARR was up 7% quarter-over-quarter, driving record GAAP and non-GAAP gross margins of 28% and 40% respectively. And lastly, we reduced networking capital $26 million quarter-over-quarter and $162 million year-over-year. Based on our expected cash flow generation for the balance of the year, we remain confident that no new equity will be required to fund the business. I now would like to briefly discuss today's leadership announcements. As you know, we've been focused on taking actions that will position our company for the future. The changes we announced today will support our continued focus on growing software services revenue, extending our technology leadership, and driving profitable growth. First, the management changes we announced. Bill Bush will be stepping down as Chief Financial Officer on September 2nd. He will continue to lead our strategy targeting public power and large FTM projects, along with the supply chain team. And Prakash Patel, our Chief Strategy Officer, is departing from the company, effective immediately, with his responsibilities assumed by existing members of the management team. On behalf of the board and the…

[Operator Instructions] Our first question comes from Justin Clare of Roth Capital Partners. Please go ahead.

Hi, thanks for taking our questions there. So, first off, I wanted to start with the USDA financing. I was just wondering if you could share a little bit more about the bottleneck that is occurring in terms of your customers being able to secure that financing. And then maybe if you could provide any visibility you have into when that financing gets unlocked and these projects can start moving forward. And then I wanted to also clarify, on slide six, this is a more than one billion of projects delayed. So does that mean more than one billion of your 1.6 billion backlog is dependent on this financing, supporting the projects?

So Justin, this is Bill. Thanks for the question. So I'll kind of answer those in reverse. So the first question is on the one, the more than one billion is that in the backlog, many of those projects are actually not in the backlog. So that would be incremental to the 1.6 billion in total backlog. So the way basically, and this is kind of leading into the rest of your answer, but the way these projects generally work is that they cannot contract. So the entity which we would be providing [Indiscernible] hardware and services to and software and services would generally not be able to contract until they have a number of items completed. And that includes things like, depending on where this site is, of course, but potentially a NEPA review, as well as other development tasks. And so for that purpose, they're not allowed under the New Era and the Pace Funding, they're not allowed to start the contracting process until that is complete. And so I think that's really where we are. So we have verbal commitments from these partners that they're going to award us the project as they get past those milestones and that lock that net funding is locked in. And so this kind of kind of rolls a little bit into some of the election situation and that I think what's happening is really kind of two things. One, as John mentioned, there's a lot of these entities that we're working with that are applying for these funding. And it's actually oversubscribed at this point. So the government, as we understand it, is committed to making all these projects work. But they also have the issue that within the system, they have to be able to be able to be qualified. And so the government, what the USDA right now, which is the ministers, both of these two programs is doing, as we understand it, is really making sure that all the eyes are dotted and the T's are crossed. So to the extent that there is a potential for a different government coming in, that these projects couldn't be canceled. So that's really the most important thing is that they're doing all of the work to make sure that these projects are eventually awardable. And I think it's important to note that many of these projects are actually in red states, which are focused on rural electrification. So we think that the irrespective of government that these things are going to move forward. But I think what's happening right now is the USDA folks that I actually talked with when I was down in ribbon cutting here just a little bit ago, was they're just wanting to make sure that none of the projects fall apart later on, because they're so important to their local communities.

Okay, got it. And then, so maybe just following up on that. So can you share how much of your current backlog, the 1.6 billion, is dependent on the USDA financing?

Right now it's about less than a third.

Less than a third, okay. And then just one more, just curious on the interconnection delays, how long the delays might be and how much of the guidance reduction was as a result of those kinds of delays.

Okay, it's really, I would say difficult, because you got to do a project by project analysis to be able to answer that fully. But in general what we're seeing, and I think we've mentioned this before, is an extending of interconnection time frames. And so like as a, for instance, in Texas, a market which we do quite a bit of work in, I mean we've generally seen projects, or say interconnection approvals, extending between 18 and 24 months. And so that's definitely longer than we saw when we first got started in Texas now three years ago. So yes, that definitely has had an impact. In terms of the guidance push out, there's really comes down to just a few projects. I mean because one of the things that has happened in this transition that John mentioned, is that we've moved to larger projects. And so those larger projects create a lumpier version of the P&L than maybe what we saw in the past. Where we have, like a good example of this United Power contract that John mentioned, that really drove a lot of the ARR conversion this quarter. And that’s a 300 megawatt hour project. And we’re seeing more and more of like that. Like the one that we announced here coming up on six, eight months ago with APCO, which is 1.3 gigawatts. And so I think our gigawatt hour is, importantly. So you really have these larger projects and they have a lumpier impact. And so when you look at the guidance, which is what we pointed out on one of the slides, was that had those not pushed out, we actually were on track to meet our guidance. But one of the things that's happened is that it's really a combination of things. One is that high voltage transformers are harder and harder to get. And many of these groups want to use US and really kind of maybe call it non-Chinese transformer product, which means that there's only a couple manufacturers. They can make those devices. And so you've got to, you know, in some ways there's a line there. Then you have interconnection and some of these other issues that just run into these projects. And so we were hopeful that we were going to have, we were going to be able to get past that. But we just, after talking with our customers, we just realized that it was less likely that was going to happen. And so we wanted to accurately reflect that in the guidance.

Okay. Great. I appreciate it. Thank you.

Absolutely.

The next question comes from Thomas Boyes of TD Cowen. Please go ahead.

Appreciate you taking the questions. One is, great to see the SSVEC project. I was just wondering for this, the three projects in total. Are any of those using kind of the remaining hardware that was under the guarantee, that kind of included in the previously disclosed 50 million outstanding or would that be part of that kind of remaining balance?

No, they're, so the equipment that is running is sun growth equipment. And that is not part of that particular project. We are working on other DevCo projects, which are generally described as 10 megawatt, in this case, 10 megawatt hours. And so that's those are the types of projects which we would expect to use that, that excess hardware on.

Got it. And so forth. And then, could you talk a bit about some of the unique drivers that you're seeing for demand in the solar business? Because you're the outlines kind of the EU and Japan. And then are there specific companies that you're or countries that you're focusing in Europe?

Yes, and Thomas, it’s John Carrington. A couple of things. I think our, the install base and the PowerTrack portfolio and platform is very compelling to customers. And we continue, as you see on one of our slides, number 10, specifically how that ARR is increasing at a customer by customer level. And from a geographic standpoint, we're seeing growth in Europe, seeing growth in Japan. We announced a nice project in Hungary. So it's pretty, it's pretty broad based. And I think that you'll continue to see more momentum in those markets because we do have teams in both of those focused on the solar and actually getting a fair amount of incoming around storage. But we're excited about the way the business is performing. And you can also see 19% CAGR on the software revenue as well. I mean, it's a, it's a business that continues to be very strong and a very important part of our total portfolio offering.

Got it. And maybe there's a quick follow up there just because historically, on the storage side, you've been focused on the U.S. for storage opportunities, say in the EU or in Europe, would that be driven from a customer who's also coming through kind of a solar vector? Or would you, are you kind of looking more broadly?

Yes, I mean, our team out of Europe is primarily around the solar side of our business. I was referencing more incoming to them on their customer base that is asking about what we could do on the storage front. So it's really a lot of existing customers and/or customers that want to use PowerTrack and have an opportunity to expand at a certain site with storage, but kind of both, if you will, Greenfield, Nunu [ph] as well as existing customers on new sites.

Got it. I appreciate the clarity there. I'll hop back in queue. Thanks.

[Operator Instructions] This concludes our question and answer session. I would like to turn the conference back over to Mr. John Carrington for any closing remarks.

Okay, well thank you very much for joining our second quarter earnings call and look forward to speaking with you again on our third quarter call in the fall.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.