Earnings Labs

Stem, Inc. (STEM)

Q3 2024 Earnings Call· Wed, Oct 30, 2024

$10.58

-6.33%

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Transcript

Operator

Operator

Good day, everyone and welcome to the Stem Inc. Third Quarter 2024 Results Conference Call. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I’d like to turn the floor over to Ted Durbin, Head of Investor Relations. Sir, please go ahead.

Ted Durbin

Analyst

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our third 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 our 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. David Buzby, our Interim CEO; and Doran Hole, CFO and EVP, will start the call today with prepared remarks. And Mike Carlson, our COO, will be available for the question and answer portion of the call. And now I will turn the call over to David.

David Buzby

Analyst

Thanks, Ted. Good afternoon and thank you all for joining us today. Starting on Slide 3 with our agenda, we will spend a good portion of our time discussing the results of our strategy review. Doran will then go through our third quarter results and updated 2024 guidance. And I will wrap up with some key takeaways. Turning to Slide 4, as Ted mentioned, our Board of Directors appointed me as Interim CEO about 6 weeks ago. I also serve as Executive Chair of the Board. I was one of the early investors in Stem and been on the Board since 2010 witnessing the evolution of Stem and the maturation of the clean energy industry. I am well appointed with the company’s mission, strategy and management team, and it’s been a pleasure working more closely with everyone over the past 6 weeks. Stem is a community of driven individuals focused on the success of our customers. It’s been a busy few months since our last earnings call and these last several months have been transformational for Stem. Over the last 90 days, we completed a comprehensive strategy review and announced several senior leadership changes. Looking forward, we are implementing cost-cutting measures to right-size our business operations to align with our new strategy. This review was a collaborative effort between the Board, software strategy working group and the management team. This process resulted in an updated and refined business model to drive towards sustainable and predictable revenues, profitability and scalable expansion. Please turn to Slide 5. Our new strategy focuses on four key initiatives: first, refining our product and go-to-market approach to be centered around software and services. Second, expanding and emphasizing consultative energy services as opposed to hardware resale as our entry point into project based customer relationships, creating predictable…

Doran Hole

Analyst

Thank you for that introduction, David. As David mentioned, I was a Stem customer while at Ameresco. I was also a customer to many other energy storage companies and Stem has always stood out amongst them. The quality of Stem’s products and strong customer focus, have long been differentiating factors. On the solar side, the PowerTrack brand is the industry standard for C&I developers. And for storage, Stem’s Athena software and subject matter expertise also stands out. The leadership team that David described, combined with the immense talent throughout Stem’s ranks, makes me very excited about the opportunities ahead. In implementing our new strategy, we will be focused on growth, but also on increasing operating leverage to maximize profitability. We are looking at ways to optimize our capital structure to fit this new strategy as well. As David said, in addition to my CFO role, I oversee the software and services groups, which takes me back to the refined strategy that David outlined. And I’d like to take a moment here to dive deeper into the four key strategic initiatives we have identified. Following our strategy review, we refined our go-to-market approach to lead customer relationships through our consultative energy services, innovative software and advisory procurement services offerings rather than battery hardware resale. Slide 6 illustrates how this shift allows us to engage with customers earlier in their project lifecycles. Previously, we would step in after a project had been de-risked and the customer sought hardware procurement integration services and a software provider. Now, we will collaborate with developers from the outset offering services to support a portfolio of potential projects. This change enables us to recognize revenue earlier and reduces our dependency on the success of individual projects. We anticipate these services to generate gross margins in the 30%…

David Buzby

Analyst

Thank you, Doran. Before covering our key takeaways, I’d like to comment on the status of our CEO search. While I am passionate about the future of Stem, I have no plans to be the permanent CEO. Since September, the Board and an executive search firm have been engaged in the search for our next CEO looking at both internal and external candidates. Today, the search remains ongoing, but we hope to identify the new permanent CEO by the end of this year or sometime shortly after that. I intend to remain Chairman of the Board once the new CEO is in place. Now, let’s turn to Page 17 for our key takeaways. Our strategy review is complete. We’ve moved into the implementation phase. And while we might make slight adjustments along the way, we are moving decisively to focus on software and services growth. This will drive more predictable revenue, higher gross margins and improved profitability. We will continue to invest in our industry-leading software and technology platform, which will drive differentiation and commercial success. And we will lead our storage efforts with services deemphasizing hardware resale. This will bring forward when we collect revenue from our project-based work and improve our working capital profile as well as continue to grow at channel for software sales. In closing, I want to thank the Stem employees for their continued strong execution to support our customers despite significant changes in the business and leadership over the last several months. The strength of our offerings ultimately depends on the strength of our people, and we believe that we have some of the best in the business. With that operator, let’s open the line for questions, please.

Operator

Operator

[Operator Instructions] Our first question today comes from James West from Evercore ISI. Please go ahead with your question.

James West

Analyst

Thanks and good afternoon, David and Doran. I think the first question for me is really around you have had a lot of changes here in the last couple of months, management strategy, although the strategy, to me seems like kind of the evolution of where the company was already headed into much more of a fast and services business model anyway. But I would love to hear just kind of as you – as both of you being especially both you are new in your seats. And I know David, you will intend to stay in that seat. But I would love to hear kind of the feedback you are getting from customers, what the – what you are hearing, obviously employees that have been good, what you are hearing from customers around kind of this strategic shift and some of the management changes that have happened.

David Buzby

Analyst

Thanks James. This is David. We think that customer response has generally been very positive as they are increasingly sophisticated in the way they buy their storage hardware. And it’s viewed increasingly as a commodity that’s available from multiple sources. So, I don’t think it will affect our storage hardware customers. And to repeat what we have said elsewhere, we will continue to support those customers if they want us to procure the hardware for them before it won’t be a requirement of the relationship going forward. And our 16,000 or so plus solar customers have been very receptive of the new strategy, as it reassures them that our primary focus on software improvements will continue and we will be able to enhance our products and give them some of the enhancements they have been asking for us to optimize their assets,

James West

Analyst

Okay. And I guess maybe to add on to that. David, what are the enhancements that they are asking for in the software product? What are the critical things that they would like to see, more R&D, more focus on going forward?

David Buzby

Analyst

I am going to pass this off to Mike Carlson, but this has been a big focus of ours to make sure we prioritize and schedule a product roadmap that fits the market needs.

Mike Carlson

Analyst

James, this is Mike. Probably, we have obviously got a host of interest from the customers and what they want to see, but they probably bundle into three distinct areas. That is one more capability around just the user information flow and the ease of access to information. Number two is around the predictive and we are looking at leveraging advanced AI for that predictive information flow into the asset, particularly in its operating characteristics. And then third is the automated warnings and resolution process and getting more integrated work process into the platform that automates more of the focus of what they intend to use the software to provide. Those are probably the three categories of information they are looking for. Then when you get into the storage optimization, obviously there is a financial modeling that goes along with that as well.

James West

Analyst

Great. Okay. That’s very helpful, Mike. Thanks for that and thanks guys for the questions. Thanks.

Mike Carlson

Analyst

Thank you, James.

Operator

Operator

And our next question comes from Thomas Boyes from TD Cowen. Please go ahead with your question.

Thomas Boyes

Analyst · your question.

Appreciate you taking the questions. Maybe just first, as you move deeper into the procurement advisory services space, is the intention to continue to leverage the modular ESS solution that you had, or is that something that’s not as germane given the new path?

Mike Carlson

Analyst · your question.

Yes. This is Mike, again. Absolutely, the modular component, and we have talked a little bit about in the deck, you will see a reference to the power core EMS, which is part of that solution. That’s a big component of whatever that hardware platform is, and the connectivity into the cloud services, so that modular edge device will continue to be a major part of that overall architecture and strategy.

Doran Hole

Analyst · your question.

Yes. And Thomas, this is Doran. I would say, it is important to distinguish between the edge device hardware and the kind of battery hardware, OEM, battery resale when considering what we are talking about here with the strategy. The edge devices are a critical component of our strategy going forward. And we have dominant market share here in solar. And as Mike described, that modular offering is really, really important. It’s really the large ticket OEM hardware re-sales that we are going to be focused on, kind of working through the backlog and providing the procurement advisory services on.

Thomas Boyes

Analyst · your question.

I understood. So, when I was referring to the modular ESS, I was talking about the decoupling with the inverter and the DC block, so that sounds like that’s the emphasis on that, and more on the edge device, correct?

David Buzby

Analyst · your question.

Exactly, that’s a continued component of the strategy that gives that optionality that we talked about prior.

Thomas Boyes

Analyst · your question.

And then just for my follow-up on bookings, is it safe to say, then for any additional bookings heading into the end of the year, that they will be under kind of this, again, the new strategy, and they would be software nature and hardware would not be a significant component of that.

David Buzby

Analyst · your question.

So, between now and the end of the year, I think it’s fair to say it’s going to be both. As we talked about, there is the potential for us to opportunistically and as a customer requires it to do this hardware resale, if it’s satisfying all of the criteria. I have laid it out pretty heavily internally, about profitability, cash flow metrics coming accompanied with the software. So, I expect that to be a continued theme even on some of the things that are, as we – you look at that range in the bookings forecast, obviously there are some things in there we have been working on for a while. And so we don’t want to really just kind of suddenly back away from that and we are one of the reasons I am here. Stem was focused on the customer. We want to keep focusing on the customer. We want to be able to deliver what they are expecting. But I do expect us to satisfy those criteria. And you will see a combination of some hardware and software between now and the end of the year. And it really, frankly, that’s why the range is so wide.

Thomas Boyes

Analyst · your question.

Understood. Now, appreciate the clarity there. And if I could just squeeze one more in, just for my own edification, the switch from like 15-year to 20-year contracts to 3-year to 5-year, is that because of the de-emphasis of hardware that won’t be attached to it, and it’s just that the nature of the that market is on shorter duration contracts, like, what is the mechanism there?

Mike Carlson

Analyst · your question.

Yes. This is Mike again, and the primary drive of that is the change, the focus of software. And software stats agreements, probably industry standard is closer to that 3-year to 5-year. That’s what our solar business model has been, and it’s really responsiveness to the customer. That long 20-year commitment is directly tied to the OEM hardware warranties that they want, that extended confidence of asset performance, and that’s why we are decoupling those and you will see that change in contract duration as a result.

Thomas Boyes

Analyst · your question.

Perfect. Really appreciate it. I will jump in queue.

David Buzby

Analyst · your question.

Thanks Thomas.

Operator

Operator

[Operator Instructions] Our next question comes from Justin Clare from ROTH Capital Partners. Please go ahead with your question.

Justin Clare

Analyst · your question.

Hey guys. Thanks for taking the time here. I wanted to just follow-up on the prior question here, on the shorter duration contracts, 3 years to 5 years versus 15 years to 20 years, I was wondering if the annual revenue expectations for these contracts are changing at all, or if it’s just the length of the contract. And I think we have to consider the offering that you are providing here as well, and the fact that you are engaging with the customer earlier, so maybe you can just speak to the potential change in the revenue opportunity.

David Buzby

Analyst · your question.

So, Justin, I think one thing I have been looking at closely here is the way that we price our software, and we are going to consider that very closely. However, I would say, based on the business that we have got in front of us, probably not a lot of change in the annual revenue numbers, not anything really material. It’s really all about just running into shorter contracts because of the customers looking for, again, trying to offer them flexibility there.

Justin Clare

Analyst · your question.

Okay. Got it. And then when we consider, like the services opportunity, the fact that you are engaging earlier, is there a larger revenue opportunity there, that could be more of a one-time opportunity, as opposed to a ongoing contract.

David Buzby

Analyst · your question.

Absolutely, it’s going to be a mix. There are a number of engagements, called site assessments, forecasting assignments, you name it. We have variety of different types of services that we kind of outlined. And many of those are engagements that might be one time, two-month, three-month, six-month assignments where our subject matter experts are helping customers work through particular items that they need to sort of check off to help de-risk their projects. And the customer base there, are folks who just aren’t equipped internally to handle that type of work, so they really look to us as the experts. But yes, there will be a mix of that, as well as some of the longer term service contracts that we will be offering.

Justin Clare

Analyst · your question.

Okay. Alright. Got it. That’s helpful. And then just one more, wanted to ask if you could update us on the outlook for storage software activations, any chance you could give us an idea for where ARR could be when you exit 2024, or the timeframe in which you can convert all of the CARR to ARR, that would be helpful.

David Buzby

Analyst · your question.

Yes. Justin, appreciate the question. It’s not something we have talked about in the past. I think this cadence between timeframe from CARR to ARR is something that we are taking a close look at, and we will probably talk more about when we report the full year, our metrics for 2025, it’s not something we are in a position to disclose today.

Justin Clare

Analyst · your question.

Okay. Got it. Appreciate it. Thanks.

Operator

Operator

And ladies and gentlemen, with that, we are going to conclude today’s question-and-answer session as well as today’s conference call. We thank you for joining. You may now disconnect your lines.