Stem, Inc. (STEM) Earnings Call Transcript & Summary

Welcome to the Stem, Inc. Fourth Quarter 2022 Earnings Conference Call. [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 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 10-K 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 on 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. Mike Carlson, Chief Operating Officer; 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. Ladies and gentlemen, thank you for joining us on the call today. Starting with Slide 3 and the agenda for the discussion today, I will review our fourth quarter 2022 results and highlights, followed by an overview of our commercial execution and provide an update on the supply chain. I will then review our strong operating results and new offerings that demonstrate our technology leadership. Following my remarks I'll turn the call over to Bill Bush, our Chief Financial Officer, who will discuss our financial results in more detail and provide 2023 guidance. Turning to Slide 4. Today we reported solid fourth quarter results, including record revenue of $156 million, which was 3x higher than the same quarter last year. We also reported record bookings of $458 million, which was 2x higher than the same quarter last year. Our revenue and bookings in the fourth quarter alone were higher than the entire year of 2021, which is a remarkable achievement over a short period of time. We achieved these results despite a turbulent environment throughout 2022, including supply chain volatility, interconnection and permitting delays, costs inflation, and solar import declines from the AD/CVD and UFLPA restrictions. Our diversified business model across multiple products and geographies helped the company navigate these headwinds. As we previewed in our interim update in early January, revenue came in within the guidance range and our bookings were well ahead of guidance that we had already raised in the middle of 2022. In fact, if you go back to our 4Q '21 earnings call, our bookings ended 50% higher than our original full year guidance. The bookings momentum is a testament to our software and services solutions that are differentiated in the marketplace. We are also capitalizing on the tremendous macro tailwinds in this industry. We grew our contracted annual recurring revenue, or CARR, another 7% quarter-over-quarter to $65 million in the range of our guidance that was also raised by $5 million during our 2Q earnings call. Focusing on the right side of the page, we continued our momentum in e-mobility with an exciting strategic partnership with ChargePoint. I'll discuss more on this opportunity later in the call. We continued to drive operating leverage as we ramp headcount at a slower rate than our revenue growth. We are implementing technology and processes to control cost and leveraging our infrastructure in India to grow headcount in lower cost regions. We're also staying ahead of the supply chain with capacity contracted through Q1 2024. Before we move on from this slide, I would like to make a couple of comments about our full year results. We faced several headwinds during the quarter and throughout the year. We were negatively impacted by COVID-related shutdowns in the fourth quarter in China. To address this risk, we are undertaking a strategy to diversify and deepen our relationships with battery OEMs. In addition, we are leveraging our technology leadership to introduce an offering that provides flexibility for our customers in system design and can help mitigate disruptions at any 1 supplier. On the solar front, as previously discussed, we were negatively impacted by the lack of panel shipments that resulted from the anti-dumping and Uyghur forced labor restrictions. Software Services revenue was negatively impacted by interconnection and permitting delays. Bill will discuss the multiple pathways we have to continue growing gross margin. Finally, we effectively managed expenses throughout 2022, coming in on plan to our guidance for adjusted EBITDA, in large part because we were prudent in our hiring and are seeing the benefit of our strategy to expand headcount in lower-cost geographies, I've charged our management team and our global organization with reaching positive adjusted EBITDA in the second half of this year, and we will not wavier on that key objective. Moving to Slide 5 and our continued commercial execution. As you can see in the chart in the upper right, we had strong Services revenue growth in the fourth quarter, up 17% versus the third quarter, which itself was up 9% versus the second quarter. As you know, this is the highest margin portion of our business, and we are focused on driving these revenues higher in 2023 and beyond. I mentioned our strong bookings quarter, which exceeded full year 2021 bookings. Additionally, over 2/3 of our full year bookings came from new customers. We expect bookings momentum to continue with the tailwinds we are seeing in the industry. As you can see in the lower right chart, Wood Mackenzie is now calling for a 46% increase in solar and storage build-out in the U.S. primarily as a result of the Inflation Reduction Act. We think that the long-term visibility provided by IRA will drive strong growth for years to come. We are pleased to start our first-only software project in ISO New England this quarter and expect to do more software-only deals going forward. We continue to generate strong recurring revenues from our existing customers as they are willing to pay for the incremental additional value we're creating for them. Finally, we have revamped our sales compensation plan to favor margin over revenue. We expect continued strong growth, but will focus on the highest margin portion of the value chain where our differentiated solutions most resonate. Turning to Slide 6 and an update on the supply chain. On the storage side, we have now fully contracted supply through the first quarter of 2024, and we are opportunistically adding supply on the spot market. The choppiness in the electric vehicle market along with some project delays appears to have released some excess capacity that is coming into the stationary storage market. We will continue to execute back-to-back contracts to lock in our customer demand as we add additional supply commitments. On the commodities front, we are cautiously optimistic that some of the recent price declines will hold, which could improve project economics for customers and increase our addressable market. For example, lithium carbonate prices are down around 20% from their peak in November, which is starting to flow into the overall energy storage system price. As you know, price increases or decreases are complete pass-through for Stem, but we are encouraged to see these lower prices. And in storage, we continue to progress our unit controller or modular energy storage system strategy that we discussed in our last earnings call. This offering will enable customers to mix and match various hardware combinations with an ability to swap batteries and inverters, ultimately decoupling our customers from some of the supply chain volatility that we have seen in recent years. Importantly, we will still maintain control of the edge hardware solution. Customers and partners are very excited about this offering, and we expect to install our first pilot modular ESS next month. Please turn to Slide 7, where we will discuss our technology leadership. We performed well in 2022 on the technology and operations front. Overall, we experienced a 33% in grid calls across the fleet without impacting customer bill reduction expectations. Athena now has 31 million runtime hours across multiple markets, use cases and hardware devices. Our machine-learning algorithm continues to improve as it is exposed to more data and more markets, which extends our competitive mode. We continue to support our customers and the grid in several core markets. In California, we saw a 20x increase in grid calls during December and January tied to the atmospheric river weather patterns along with the extreme high gas prices in Southern California. Southern California Edison called on the Stem network almost continuously as we provided over 60 megawatts per day for those months. Our virtual power plant delivered the equivalent of several gas peaking power plants and became a valuable capacity option for utilities and grid operators. Athena also continued to exceed our commitments, 8% above baseline for the key SGIP incentive program. In ISO New England, we continued our exceptional performance with the fleet generating 76% more revenue than forecasted. We had a 94% accuracy in predicting coincident peaks, which will be an important differentiator in the PJM market that I will discuss in a moment. And we bid over 200 megawatt hours into the forward capacity market auction this spring that will take effect in 2026. Finally, in ERCOT. Our first sites will begin trading in the wholesale market in 2023. We announced in December our first 4 projects with REX Storage Holdings, a joint venture between Regis Energy Partners, an independent developer, and Excelsior Energy Capital, a leading investment fund. REX has made a substantial equity commitment to ERCOT storage, which could fund dozens of new projects. Let's move to Slide 8 and our new partnership with ChargePoint. ChargePoint is a leading electric vehicle charging infrastructure company, which has followed a similar path of innovation and market leadership as Stem. Founded in 2007, ChargePoint has grown to over 200,000 ports under management focused on charging both personal and fleet vehicles. Our partnership will focus on the confluence of fleet electrification and the grid. Stem will provide battery, hardware and software to coordinate on-site demand with the grid. ChargePoint will provide the charging solutions. Together, we can help accelerate electric vehicle adoption, enhance customer economics, increased grid resiliency and reduce greenhouse gas emissions. Collectively, we will leverage the $5 billion of funding incentives from the National Electric Vehicle Infrastructure Program, or NEVI, that went into effect in fourth quarter 2022. We estimate the NEVI program could offset up to 80% of project costs where available. And further, we estimate the IRA will provide another $9 billion of incentives and tax credits in the markets we're focused, driving additional benefits for our customers. In total, we expect e-mobility to comprise around half of our behind the meter, or BTM, sales in 3 years. We have already booked several EV charging deals and the ChargePoint announcement will help jump-start our progress in this exciting market, along with our previously announced partnerships with Angi and ABB. Next, please turn to Slide 9 and our entry into the PJM market for energy storage. PJM is the largest competitive power market in the world at around 150 gigawatts, which is 3x larger than the California grid. It spans 12 states plus D.C., and the average industrial customer load is almost 8x larger than in California. We started selling our storage solutions in PJM for several reasons. One, rising transmission charges. You can see over the last 9 years transmission charges have more than doubled for most of the major zones. This is raising electric bills for commercial and industrial customers, driving them to renewable energy sources like solar and increasingly storage. Secondly, new state incentive programs are increasing the returns on storage. And finally, the IRA, in particular, the storage ITC, which has opened many new markets to retrofit storage onto existing solar installations. Our installed base from AlsoEnergy gives us a significant advantage in this regard. We think PJM is an ideal market expansion opportunity as customers will benefit from Athena's ability to co-optimize multiple complex value streams. In addition, we have a strong track record of predicting coincident peaks in other markets, and that will be a key value driver in PJM as well. This is a differentiated offering that is accessible with our best-in-class AI capabilities. Because of the additional value we will add for customers, we expect to charge up to 50% higher fees for Athena. Thank you. And now I will turn the call over to Bill Bush, our Chief Financial Officer.

Thank you, John. Starting on Page 11 with our results for the fourth quarter and full year 2022. But please recall that we closed the AlsoEnergy transaction on February 1, 2022, which will impact the comparability to last year's results. As John mentioned, we reported record revenue of $156 million, which was 194% increase versus the $53 million in the fourth quarter of 2021 and more than we recorded in all of 2021. Most of the growth came from the storage hardware sales on FTM partner projects and about $18 million from the PowerTrack platform. We also recognized approximately $16 million of high-margin software and services revenue, representing 10% of total revenue for the quarter. Full year 2022 revenue was $363 million, an increase of 186% over 2021. For the quarter, our GAAP gross margin was $13 million or positive 8%, up from a negative 3% in the same quarter last year. For the full year, GAAP gross margin increased from $1 million to $33 million. Turning to Slide 12. Fourth quarter non-GAAP gross margin was $17 million, up from $3 million in the fourth quarter from last year due to higher revenues. On a percentage basis, non-GAAP gross margin was 11% in the quarter, up from 5% last year. Our margins benefited from a greater share of high-margin software and services revenue. For the full year 2022, non-GAAP gross margin came in at 13%, up from 9% last year. We came up short of our 15% to 20% non-GAAP gross margin guidance driven by a higher mix of hardware than we expected. Our storage software revenues also increased more slowly than we expected due to the continued permitting and interconnection delays that our partners experienced. While the solar side of our business underperformed from a revenue standpoint in 2022 with relatively flat revenue versus 2021, the business continues to generate high gross margins, ending the year at 60% and is well positioned to take advantage of the expected snapback in the solar industry. Our solar backlog increased 42% on a year-over-year basis, giving concrete evidence of a rebound in our solar results. Net loss was $35 million versus $34 million in the same quarter last year. And lastly, adjusted EBITDA was a negative $10 million in the fourth quarter versus a negative $12 million in the same quarter last year. Adjusted EBITDA improved as we continued to drive operating leverage in our business. For the full year, adjusted EBITDA was a negative $46 million versus a negative $30 million in 2021. Our adjusted EBITDA results were within our guidance range of negative $20 million to negative $60 million. So despite weaker-than-expected gross margins, we were able to meet our EBITDA guidance, and that's due to cost controls. In particular, when we saw the slowdown in the solar business begin to develop in the spring, we managed the pace of our hiring. We will continue to take the same conservative approach this year to ensure we achieve our goal of achieving an EBITDA positive in the second half of the year. Fourth quarter bookings were $458 million, up more than 2x versus bookings in the same quarter last year and a new quarterly record. This was the highest bookings quarter in the company's history and the $1.1 billion of bookings for the full year is up 153% from 2021. Moving from our financial results to our operating metrics on Slide 13. Our backlog more than doubled year-over-year from $449 million in the fourth quarter to $969 million in the fourth quarter of 2022. The backlog increased approximately 19% on a sequential basis from the third quarter of 2022. The largest driver of the backlog increase was the $458 million of new bookings in the quarter, offset by revenue recognized as well as $137 million contract cancellation that we disclosed in early January. The nearly $1 billion of backlog gives us good visibility into 2023 and 2024 revenue. We also no longer report the 12-month pipeline as a key metric in 2023. The business has matured to the point where we believe backlog is a more important indicator of our commercial outlook and does not have the volatility of the pipeline metric. Pipeline was sequentially flat in the fourth quarter, mostly due to the strong conversion of pipeline into bookings during the quarter. Our contracted AUM on the storage side of our business grew from 1.6 gigawatt hours in the fourth quarter of 2021 to 2.5 gigawatt hours in the fourth quarter of 2022. That's a 56% year-over-year increase driven by our strong commercial momentum. Our operating AUM on the solar asset performance monitoring side of our business ended the quarter at 25 gigawatts, relatively flat to the third quarter. Customer additions were largely offset by churn, including on the spin down of the legacy platform that we discussed last quarter. We expect solid growth in solar AUM in 2023 as the industry recovers. Contracted annual recurring revenue, or CARR, ended the quarter at $65 million, up 7% sequentially. We are pleased we are able to grow CARR during the quarter despite the contract cancellation, again, a testament to our commercial success and software differentiation. We ended the quarter with $250 million in cash on the balance sheet. We will continue to deploy our cash to fund operational investments, including securing storage hardware for our customers. These funds will come back to the company in the form of service fees, hardware margin and a long-term recurring software fee. We will remain prudent in our use of cash within risk limits established by management and overseen by our Board of Directors. Turning to Slide 14 and our 2023 guidance. Starting with revenue. We expect to recognize between $550 million and $650 million of revenue in 2023. To the right, you can see the seasonality we expect for revenue during the year. Similar to prior years, it is back half weighted, driven by the timing of the delivery of batteries. We expect more ratable growing service revenue throughout the year. We expect non-GAAP gross margin of 15% to 20% versus the 13% we reported in 2022. This improvement reflects a higher mix of software and services revenue, including from the solar side of the business. On bookings, we expect to contract between $1.4 billion and $1.6 billion this year, representing a 40% plus growth year-over-year. With our EBITDA focus in mind, we have revamped our sales compensation plan to focus on margin as well as revenue. We will focus on the highest margin opportunities, where we can drive differentiated economics for our customers and for Stem. We expect adjusted EBITDA in the range of negative $35 million to negative $5 million versus negative $46 million in 2022. This improvement is driven by higher margins and a continued focus on improving our operating expense leverage. More importantly, we expect EBITDA positive in the second half of 2023. And then lastly, we are introducing CARR guidance, we're expecting to exit 2023 at a run rate of between $80 million and $90 million. This is a function of our bookings growth, including some software-only deals we're pursuing in core markets. I would like to provide some context into some key uncertainties we considered in developing our guidance. Storage supply chain constraints impacted our Q4 results with manufacturing logistics delays and one of our key suppliers delaying delivery of products against our contracted backlog. To mitigate the situation, we have pursued both commercial and technology-driven solutions, including onboarding additional suppliers and building domestic supply relationships. A recovery in the solar supply chain is critical to the achievement of our gross margin targets. We are seeing green shoots with the pace of panel deliveries accelerating across top-tier developers and customers, and this should stabilize the contribution from AlsoEnergy. Our backlog for solar APM was up 42% exiting Q4 2022, so we are cautiously optimistic. On gross margin expansion, we have multiple shots on goal, which I will discuss on the next slide. On Slide 15. We expect meaningful accretion in gross margin for 2023 as a result of several factors and key initiatives. By aligning the compensation of our sales team and gross margin achievement, we've seen a marked improvement in the gross margin within our backlog as we exited 2022. In addition, our CEO, Mike Carlson, is focused on accelerating the pace of system commissioning through the rigor and focus he is bringing and pushing interconnection and permitting processes in partnership with our customers. We expect to roughly double our operating assets under management in 2023, and this will contribute high gross margin software services as our software contract terms begin upon commissioning. We expect a recovery in the solar asset performance business, driven by a return to growth in the solar industry. You can see from the graph on the left, most solar industry expect that the impact of the UFLPA on panel deliveries to be resolved in the first half of this year. In the long term, we are rolling out several service offerings targeting enhanced monetization of activities. We've already been providing our customers as we have built a leadership position in the growth of the industry. This includes project modeling, project design and asset management offerings tied to the introduction of our modular ESS strategy, which we expect to begin to deliver in the first half of 2023. Additionally, we expanded our team of energy market experts last quarter as we roll out services for wholesale energy forecasting and program management for the FTM market. We will update you on the progress and uptake of these offerings in the coming quarters. Bottom line, we will manage the business prudently to address risks in our plan and continue to drive to EBITDA positive in the second half of the year. With that, let me turn the call back to John for some closing remarks.

Thanks, Bill. On Page 16, to wrap up, we are committed to achieving EBITDA positive in the second half 2023. Our financial progress is supported by the very strong demand we are seeing from customers as they face rising energy cost and as the full impact of the Inflation Reduction Act fuels market growth. We closed 2022 with $1.1 billion in bookings, representing a 153% increase from the prior year. Our technology team is best in class, driving new market expansion and enhancing gross margins. We launched our offerings into PJM, the largest competitive global power market and are enhancing the economics of sites in CAISO with Athena's unmatched co-optimization and wholesale energy trading capabilities. In addition, we continue to make inroads into the fast-growing electric vehicle market with the partnership we announced with ChargePoint. All these activities set us up to drive double-digit annual software services growth and enable the company to achieve significant growth in adjusted EBITDA. Finally, I want to recognize our diverse global team for the outstanding performance and looking forward to meeting the commitments we have outlined today. We have world-class employees, products and customers. With that, let's open the line for questions, please.

[Operator Instructions] The first question comes from Brian Lee of Goldman Sachs.

I just -- first one on the guidance for revenue. I mean, given the backlog position here, I'm just kind of curious. What's your assumption around backlog conversion? I would have thought you'd be in position to do higher than kind of the revenue guidance here of $600 million at the midpoint. So are you seeing backlog converting more slowly? Or is there something with respect to mix that's maybe not turning over as quickly as you would have thought just given the overall headline number seem to be bigger and gave you more coverage than sort of the revenue guidance you're providing here? And then I had a follow-up on the margins.

Perfect. So yes. And I think we -- in terms of the backlog, it is converting slower. I think we've talked about this in the past, as we're taking on larger and larger projects, those tend to be -- they tend to be FTM first. And then second, they tend to be multiyear installations. And so we saw much quick -- when the projects were slow -- we're smaller, we saw a much quicker conversion, much like -- say, at the end of '21, we had $400-plus million -- $450 million in backlog. We did $363 million in revenue this year. So pretty quick conversion in general. But this year and into -- I think going into the future years, we're just going to -- we're going to need to build more pipeline because the projects are longer. And so from that standpoint, I would say extension, but still pretty significant growth on a year-over-year basis for revenue.

The other thing I'd add, Brian, and thanks for the question, is we do still have some opportunity to convert bookings into this year, so here in the first quarter. So keep that in mind. And the margin question.

Okay. Fair enough. Yes, just on the margins. I know '22, it sounded like you obviously had some issue that impacted you on the gross margins. You're effectively starting '23 here with the same adjusted gross margin guidance is what you had going into '22. But it seems like some of the headwinds from last year have started to dissipate. So is there some conservatism baked in here? Or is there some level of margin leverage that you're not seeing that you would have expected? Because my understanding is you've got maybe a little bit more BTM coming back into the mix, supply chain is better. And I know -- kudos on the operating leverage side of things. So just wondering what are some of the levers around gross margin leverage that we could look to here in '23? Because just based on the headline guidance, it doesn't seem like you're baking in a ton.

Well, I think -- so in terms of the margins, I think, one, is -- I think we need to be somewhat conservative, because the solar part of our business has a lot of margin leverage into it. And though we are seeing some green shoots come out -- I mean, you can see that in terms of we had 8% service growth in the fourth quarter sequentially. We've got really nice increase in backlog, 42% year-over-year. We want to make sure those numbers are actually there. And because of the -- that's a 60% gross margin business in general. If that doesn't materialize, though we expect -- much like in '22, that will have a negative impact on us for 2023. So probably is some conservatism. I think to some extent you can always increase the numbers, hard to take them down. And so I think what we'll be doing as we roll into 2023 is continue to monitor the solar part of our business very carefully. But I think the other thing to consider as well is that the hardware side of the storage part of the business continues to be under pressure. I mean that is definitely going to -- as we move up in terms of project size, the margins on those hardware sales, which unfortunately comes before the software, is going to impact the overall gross margin. So we kind of went through and tried to appropriately forecast what the mix of those 2 things would be. And I think the ultimate answer is going to depend a lot on what the mix turns out to actually be.

The next question comes from Maheep Mandloi of Credit Suisse.

A question. Just following on the previous question from Brian on margins, it feels like there's probably like a shift out of the EBITDA profitability from -- after Q2 to now the guidance is second half of '23. I just wanted to understand, is there anything in the seasonality which could be causing that? And any other levers on the EBITDA profitability here would appreciate it.

Maheep, no, we're not coming off the second half EBITDA positive in any way. So I'm not sure where you got that indication. So that's not the case.

Got you. No, I'll follow up later on that. And just looking at the guidance here and assuming -- for the backlog and bookings, assuming 60% of [ whereas ] hardware here, that kind of implies revenues in '24 could be around $900 million or probably more than that. Does that math make sense? Or is that also kind of impacted by all the delays or the extended revenue recognition you've kind of talked about in the previous question here?

I think, first, of course, we're not giving '24 guidance just quite yet. But I would refer you to the data that we gave in the LRP. So from that, we do expect to see '24 revenue grow at those rates. The midpoint in hardware was, of course, 30% and services would be 75%. So I think from that standpoint, we do expect to see growth. And then I think one of the places that you saw that in this last fourth quarter is a 17% sequential growth in services. So I mean, ultimately, the path to EBITDA is going to be paved through services, and we're seeing a lot of very positive momentum from that standpoint. 2 quarters in a row, 9% in the third quarter, 17% in this quarter of service growth. So we're really excited about that. That's going to be where the gross margin dollars come from. And so I think that will be something to keep in mind as we go on, not just the big print of what the revenue is, but also with the gross margin dollars shake out to be.

Got you. And the split of hardware versus software and bookings and backlog 60-40, is that changing for '24 -- sorry '23?

No. No, we don't expect that to change. I mean what will change, though, to be clear, is we'll have more software-only deals in 2023 in the backlog. So you'll see more deals there. And that's particularly true on the largest deals. So one of the things that we tried to adjust for in the bookings number in total was the fact that we expected to have software-only deals this year. And that, of course, only represents, call it, 40% of the total economic value of the system. So the bookings growth is going to be slower on a nominal basis as a result of that. But the KWH or the megawatt hours is going to continue to grow at a very quick rate.

The next question comes from Julien Dumoulin-Smith of Bank of America.

So with respect to the services, the pro-serv and dev-serv, can you guys talk a little bit about the growth of the services business and specifically how you're tracking? And maybe some of the data points we're going to see materialize here as signs or road posts to know that you're scaling here? I know that there have been some other discrete issues here as we're alluding to in the gross margin mix. But I just want to specifically get back at some of these -- the services side.

So I mean I think the most obvious is going to be what's going on at the top there, yes. So that's that 17% sequential growth. And I think that's the kind -- those would kind of be the high-level signposts that you and the other folks should be looking for is what are we able to do in terms of total service revenue just in general. And so I think that's where we've made a lot of progress. Mike Carlson, who's here with us, of course, today is leading the pro-serv side of the business. And so I think we expect to see quite a bit of progress from that standpoint. We picked up that initiative on the storage side of the business this last August. The solar part of the business has been doing that for some period of time. And to the extent that we're able to experience the growth that a lot of the analysts are expecting, i.e., 100% year-over-year growth in solar, we're going to do much better. We did see a little bit of that in the fourth quarter with the solar part of the business. It did grow 8%, which was a nice accomplishment, particularly given a 1% decline in the third quarter. So I think those are going to be the obvious points that you should be looking for as we go on.

You want to add anything, Prakesh?

Julien, this is Prakesh. 2 points I would make. When Bill was discussing the gross margin accretion strategy, the long-term plan -- and John referenced this as well. Next month we'll be installing our first modular ESS. That comes with services attached to it. We expect a lot more of that controller type business to launch services and project modeling, project design and asset management. And then separately, we expanded our team that advises customers on forecasting for wholesale energy markets. And so both of those. You should start to see either just, as Bill mentioned, growth in services line item or press releases around these customer wins and engagements.

Got it. And then with respect to PJM, just quickly if I can. Obviously, they have disproportionate interconnection issues. How are you thinking about the confidence in the backlog translating given some of the time line issues as it pertains to kind of leaning into the PJM? I appreciate the margin comments about PJM, but just some of the interconnect and delay issues that we've seen there, how does that fit with, a, your backlog and mix there? And b, how you risk adjust, if you will?

Yes. Right now -- this is Prakesh again. Right now, I'd say the primary focus in the PJM market is behind the meter, where there's a templatized approach for interconnection approvals. We're not chasing very large, highly engineered front of the meter deals. So that's one strategy. And we're leveraging developers and EPC firms that -- that corporate Fortune 500 accounts we're targeting have worked with -- for quite some time in deploying their solar project. So it's a different segment of the market, and we've seen a faster pace. But -- and then just context around your question on the backlog, it's still early days. So we just launched it turn of the year, so we don't have a significant component in the backlog just yet to risk weight it.

The next question comes from Thomas Boyes of Cowen.

Maybe the first one, I was just wondering if your sourcing strategy has changed at all post IRA. Have you held back on sourcing anything maybe beyond 1Q 2024 in the hopes of securing domestic production as it comes online? And then maybe as a follow-up there, what do you think is reasonable to assume for U.S. battery supply to finally be available, late 2024 or 2025?

Yes. I'd say a couple of things. We have contracted supply for 2023 and making progress on 2024. As we've talked in previous calls, we continue to make opportunistic spot market purchases. And I think that served us well and we'll continue to do that. I think our suppliers know if there's a change in one of their customers, I believe we're one of the first calls. And on the U.S. content piece, look, we're still a significant customer of Tesla's and we'll continue to work closely with them. They've been a long-term partner for us really since by 2013 or so, 2012. And as far as new capacity coming online, I think specifically related to IRA, I'd say 24 months, maybe a little longer till we see some of that. And we're not really engaging just yet on that focus because we just -- we don't have that kind of visibility today on our bookings. So we'll probably start that in the summer, I would guess, as we get more clarity on who's coming in. Do you want to add anything, Bill?

Yes. So I would -- just to put up on the point on John's comments. So we are fully booked in terms of contracted supply through the first quarter of 2024. You shouldn't read that to mean that though we haven't contracted anything beyond that into 2024. I mean we've talked about that in prior calls, where we're getting -- we're going further out. And I would make the distinction between being contracted and actually having the product on the ground. We think from a working capital standpoint, it's probably better for us to do some contracting. So I think that -- but for sure, we're talking with the folks that have made announcements around the domestic supply side of things. But of course, it's early days for them, right? I mean there's no -- that we're aware of, at least nobody has broken ground on a plant yet from a battery perspective. A lot of conversations around panels, inverters, batteries, et cetera. And we're monitoring that. Our supply chain team is monitoring that very closely to the extent that one of those groups is able to produce a product here in the U.S. I mean, it's a really interesting attribute from the standpoint of domestic content and how it works within the IRA. So it's something we're very closely monitoring. But for '23, the primary U.S. supplier for us is going to be Tesla. And then we're going to be buying stuff from Korea and, of course, Japan and China as well. So no real changes in the strategy other than the fact that, obviously, the IRA makes us kind of start talking to some of the folks that we would not necessarily have been speaking with before because they didn't have plans and spots that were interesting to us.

Great. And I appreciate the color there. Maybe this is my follow-up. I just wanted to check in on the cross-selling opportunities with AlsoEnergy. Could you give us an update there? And then maybe talk about your approach and kind of parsing through those 40,000-plus C&I sites? And $6 billion is still a number to think about? Or has that changed after the kind of the pruning efforts?

This is Prakesh. Yes, the $6 million is a good estimate. We have made some progress. We've analyzed upwards of 600 sites in a granular detail and have started the customer conversations. One statistic I would point out: about 1/3 of our bookings in the BTM segment last year came from that cross-sell. So we're seeing early momentum there already.

The next question comes from David Peters of Wolfe Research.

So just as it relates to the margin profile, can you maybe provide kind of a rough split of what guidance assumes for AlsoEnergy revenue versus legacy battery, hardware and software, just to the extent UFLPA issues linger beyond maybe expectations?

So as you can see from the various pieces -- from the standpoint of AlsoEnergy for 2022, for us on a consolidated basis, they did about $58 million or so in revenue. They did more than that, of course, in 2022. We just didn't consolidate January. We expect to see strong growth there. You look at any of the Wood Mac data, they're presenting 100% growth. I don't -- and I would say I don't think we're going to see 100% revenue growth in the company, but we do expect to see significant growth from that part of the business. I mean, if you look at most of the publicly available data around solar, we should see anywhere from 20% to 40% growth in that business. And so a lot of it is going to be how quickly does UFLPA, how quickly does -- the anti-dumping rules, do those come back. I mean there's been some chatter amongst various Congressmen that you've probably seen that they're going to roll back the work that Biden had done. And obviously, if that happens, that will obviously have a negative impact. So the stuff that we're going to be monitoring very carefully were -- like as I mentioned before, I mean, our backlog is up 42% on a year-over-year basis. And so as we look at -- and this is -- and so I'll make a fairly large distinction between backlog on the solar part of the business and backlog on the storage part of the business. The solar backlog turns into revenue pretty quickly, 6 months or less, and many of it is like 3 to 4 months. And so it's able to churn pretty quickly. So we feel like if those projects are able to move forward in the way that we're seeing from our partners and what we're hearing, we're pretty optimistic that we're going to have a really nice year on the solar side of the business. It really is -- it's positioned to snap back. I mean, I think we've talked about that even as early as last summer when we were seeing some of the early slowdowns as a result of the antidumping and kind of really harkened back to the 2016, 2017 time period when solar really kind of took it -- kind of had a tough period as well and then snapped back really strong in the next period. So we'll have to see, which is why in part why -- I think we're a little bit conservative in terms of the gross margins and some of the revenue growth, is that we want to actually have that turn into revenue and gross margin as opposed to just having good feelings about what's going to happen.

Yes. I'd add a couple of quick points as well, David. Number one, the RFQs that we've seen year-to-date are up 2x versus 2022. So it feels strong coming out of the gate. And I'd also highlight that as we talked in the last earnings call, their solar asset performance management business exceeded market growth last year, and we expect more of the same this year.

That's helpful. I appreciate all that color. Just my follow-up then is just wondering if you can provide a sense of where things stand today with interconnection request timing broadly. Just trying to see if it'd be possible to kind of parse out where the CARR metric could be for 2023, if that bottleneck were to ease some and kind of just what you assume, I guess, for '23.

Prakesh, do you want to start maybe Mike to jump in.

Yes. I'd say, so far, we're seeing status quo around interconnect conversion of delivered hardware. We have undertaken -- and I'll hand it to Mike Carlson, our CEO, to talk about some of the initiatives, but we are taking a very rigorous approach to driving that faster and that -- that was kind of what prompted Bill to mention. We're looking to double our operating AUM this year. Mike?

Yes so Dave, this is Mike Carlson. What we're doing, it's kind of a 2-pronged approach on everything related to getting these assets into the field and obviously interconnects a big piece of it. But internally, we put a lot more, I guess, you call it, rigor around project management as these assets are secured by us and then getting into the field for our developer owners. And then turning that same focus of project management to our partners. So they are aware of and leveraging every opportunity they can move that forward with the interconnect progress, if that's what's holding them up. And what we want to make sure is as we get through that backlog or that bottleneck of interconnect that we fundamentally don't have any direct control over but we've got the expertise and knowledge of how to move through it as rapidly as possible. We don't lose any other time to moving these assets into the field and getting them commissioned and online. So that's really the focus we expect, we won't definitely solve the problem, but we'll improve on the performance of it as we go forward.

The next question comes from Joseph Osha of Guggenheim Partners.

Kind of following on the previous question. You all have talked a lot about projects that are out there on the storage side that show up in your contracted AUM that aren't interconnected and they're not generating revenue. And we've kind of gotten the sense that there would be, at some point, a nice sort of step-up as those things came online and started to generate service revenue for you. So my question is as follows: Can you quantify how, maybe in gigawatt hours, how many projects in this contracted storage AUM you have that aren't interconnected and give me some sense as to how much of that might manage to make it into operation in 2023. And then I have a follow-up.

Yes. So Joe, thanks for the question. I appreciate that. At this point, we don't break out the specifics of that. So it's difficult for me to give you exact numbers. But I think one point you can definitely take into account is that we do expect operating AUM to double this year. And so on the storage side of the business. And I think that is a great indicator that, as you said, I think there is a bit of a backlog of projects, which we're able -- we believe that we're going to be able to turn on. And I think that, as we look at the future, and I think Mike talked a lot about this already, is how we're going to do that, how are we going to speed up the conversion from a deal when it goes from a booking to equipment delivered to the system actually being operational. And I think that -- because that's really, as we all know, that's when the software kicks in, that's where -- and that's the highest gross margin part of the business. And so for us, it's a huge focus making sure that, that process is happening as quickly as possible.

Okay. And have you shared what the actual operating AUM number is?

We have not.

Okay. So -- but just to follow on that then, if your operating AUM is doubling and you're bringing additional projects -- you're executing on additional projects and it's, I think, reasonable if you look at your CARR and what the annualized run rate of your revenue -- your service revenue is right now. I guess I'll ask the question the way a lot of other people have asked it. Why is this service revenue number not going up a lot more? Why is it not doubling?

Well, it is growing at 75% rate. So I think that's pretty significant growth and then when you look at…

Not to belabor it, but you put a CARR -- an end of year 2023 CARR metric of whatever is 80% to 90% and you're at 65% currently. So I guess I'm trying to understand why that CARR number, which is a reasonable bogey for the de-annualized software and services run rate, why that's not going up more given what you're saying about adding to the operating base?

Well, so CARR wouldn't increase as a result of operating assets first. So, I think that's an important distinction. CARR is the contracted amount. So that CARR is going to increase based on the amount of software, let's say, that is attached on an annual basis to a particular contract. The software number that we recognize as revenue in the business is tied to the operating assets. And so that's where I'd say like when you look at the growth rates that we've had so far about 9% in the third quarter, 17% in the fourth quarter, that's where you're seeing the actual operating assets being able to generate actual revenue and then gross margin. So CARR is an indicator of what will happen not what has happened. And so when we think -- when I say, hey, operating assets are going to double, that means that we're going to have a faster conversion of CARR into ARR than what we've had. So that's a distinction that I would make.

Okay. I'll take it off-line, but I think that the $64,000 question here is what is the software and services run rate going to be by the end of next year.

Well, I think I would say -- the way I would answer that is a 75% growth rate on what we've currently reported. So that's the number that we've talked about. It's like the services are going to grow at a compound rate across the 3-year time period, it's 75%. So if you look at what the services number was for 2022, we expect that number to grow at 75% in 2023.

The next question comes from Biju Perincheril of Susquehanna.

So I guess my question was also related to CARR and sort of, when I sort of looked at -- compare your CARR to asset under management, it's been pretty stable through last year. Because when I look at the guidance, it seems like there's a step down and that how much of AUM is translating into CARR. I guess, is that related to project size or is there a thing going on in the software attach ratio?

It's not that everything we sell has -- all hardware has 100 software attachment. Really, the dynamic that's happening, and Bill mentioned this in his discussion is we're selling and winning much larger front of the meter deals and some of those are expanding beyond 20 years in term. And so when you see the average length of the software terms expand, that's bringing down the per year CARR conversion.

Got it. That's helpful. And then I think on the last call, you sort of mentioned the -- you're starting to see the BTM mix come up with data, I think, in your pipeline. So can you give us sort of an update where you stand now, what are the recent bookings? Are you still sort of setup for the bookings in the 90:10 ratio or has that moved?

We really have, Biju, and thanks for the questions. So one of the -- certainly, one of the things that we've seen is that larger FTM or our ability to win larger FTM deals. So what that tends to do in terms of the bookings and then, of course, the backlog is it weights it heavily towards FTM projects. So we are absolutely increasing both the percentage and absolute values of the BTM side of our business, but it's a smaller part. It's just -- those are just smaller projects by their very nature, they're not going to grow in size nearly as fast as the FTM projects. And so I think one of the things -- one of the benefits of the integration of AlsoEnergy in STEM has been a -- I'll call it refocus on BTM. And we, I think, are going to continue to invest in that area. It's where Stem got started years ago. And I think it's a market which we can do very well, and it has better -- as a compare to FTM, it has better margin attributes to it, not necessarily the same term. The terms of the FTM deals are longer, but the margins both on hardware and software are a bit better. And it's also within the context of our classifications, all the EV businesses in BTM. And so that, we've talked pretty consistently about the ability because we're delivering customers more value that we'll be able to drive higher software attach rates and actual dollars. So we're really excited about the BTM or behind the meter side. I think it's going to be a nice growth area for us. But it's always going to -- just because of the absolute size of the projects, it's always going to get a bit swamped by what we're doing on FTM.

It's certainly more incoming than we've had in the past Biju post IRA in particular, the corporates. I think we discussed this in the past is we're seeing Fortune 100s coming to us asking to look at 200 sites across the country, and we're trying to operationalize that process to enable that.

The next question comes from Justin Clare of ROTH Capital Partners.

So first one here, I just wanted to ask if you could give us a sense for how much of your revenue for Q4 was the 80% gross margin software sales? And how that was split between your battery software and your solar monitoring software. And then looking into 2023, are you expecting that 80% margin software revenue to drive the vast majority of your services growth? Or is there a meaningful contribution from the onetime kind of services sales?

So thanks for the question. I think the first point I would mention is that all of the recent additions in software in terms of revenue are at the high gross margin rate. So that's 100% what's going on there. And mostly, that's because of the way we shifted our model from a structured finance model to a straight by cell. And we did that now a couple of years ago. So everything over the last 3, 4 years has been that's added into the services line has been the high-margin software. So from that, we don't -- then your other question, what's the breakout. We have not done that yet. Likely, we will in the future. But at this point, we're not breaking out those individual components. AlsoEnergy, of course, and you can see from what they -- from the tables that are in the back of the PowerPoint deck which post and you can see kind of what the software and hardware component of that business is, which we think is what makes it particularly interesting in what's driving that 60% gross margin across that business.

Okay. Great. And then just one more contracted storage AUM up, I think it was about 4% sequentially in Q4, but you had very strong bookings in the quarter. So just wondering if you could better help us understand why the contracted AUM didn't move upward more significantly. Did you see any meaningful customer cancellations on battery storage software contracts or was there may be a higher mix of solar monitoring bookings? Any additional color would be helpful.

Sure. And again, so we had -- so we did a $460 million in bookings in the quarter. Unfortunately, we had a call it, rounded $140 million cancellation. So that definitely tamped down the growth in that particular metric.

The next question comes from Abhi Sinha of Northland Financial.

Just trying to understand the PJM market, it's interesting that you get into that. So maybe you can just give some idea on what percentage of 2023 revenue comes from that I'm trying to understand what it takes for you to bring in new market and in a new area. So maybe you can provide some color on like how that market you expect to unfold in 2023, '24, '25 or something like that.

Yes, I can -- I'll start, Prakesh if you want to jump in. So first of all, one of the things that we did a few years ago is align with channel partners through distribution. And that gives us a very interesting footprint across the country. So as we look at new markets, we have distributors and partners in those areas already so that kind of CAC concern that you would have is eliminated through that. The other piece is our software platform through Athena is highly translatable into new markets very quickly. So we believe we have the right technology offering for the market. We believe we have the commercial force to go into executing that market. And I just think that our ability with Athena to co-optimize in a variety of complex value streams as we've proven out in many markets is highly applicable in PJM. And certainly, our coincident peak track record has been very good if you look at some markets like Ontario. So just some of our past experiences, we believe we can execute in that market very effectively. And when you look at the size of that market being so much larger than California, and our execution here in California has been very strong. Market leading -- market share over the past few years. And then you look at some of the higher cost from a transmission standpoint, it's a really compelling opportunity for the company.

I would just add -- this is Prakesh, that we are optimistic about this market. The value that we can create for our corporate customers in that geography is tremendous. We are tempering our expectations around what gets installed in '23, just given some of the interconnection time lines that you see in PJM. It's not exactly the case in behind the meter, but we wanted to be conservative there, but certainly seeing significant interest in the pipeline and early bookings as well.

Got it. Sure. So just one more as a follow-up. As we see more hardware, I mean, hardware product business is continue to get a little bit more struggling part of it. So as you as you make move towards more of the software part. So how do we look at the trajectory here as the business transitions more and more towards the software only, I guess? I mean, when do you consider the business to be software only and what the trajectory looks like?

I'm not -- I didn't totally understand your question, but if I -- if I understood right, you're asking what's going to be the long-term distribution of hardware and software on contracts. Is that fair?

No, I was thinking like more as the business heads on fast forward a few years, is it not like more and more towards getting more software-only business? And are we heading towards that? If that's the case.

Yes. We think software and services is definitely going to be a bigger part of the business. I mean -- and I think that is, as we've discussed, like as we move up the size graph in terms of how big of size projects that we're working on, it's less and less likely that will supply the hardware, which is all around the project and Mike is leading on the unit controller -- the unified system that we're working on and are going to ship here this quarter. So I think longer term, it's going to make sense for companies to probably do procurement for themselves on the batteries -- the larger projects. The smaller ones, we think that won't be the case. But -- and that's why I said earlier on when I talked about the bookings growth on an absolute basis, $1.1 billion in 2022, obviously, a slower growth rate in 2023 when comparing those 2 time periods. And I think over time, you're going to see more and more of that. I mean it's an exciting part of the market for us. It's a much more capital light, which we've always talked about. It will be easier from a working capital standpoint, if we're not taking all of that battery or the economic value onto our balance sheet. So it's definitely something that you should expect to see growing as the business matures.

Maybe we can assume that '25, '26, could that be a software-only business or that's too aggressive?

I think we're still going to be selling hardware. I mean I don't want anybody to hear that commentary and think like, "Oh, they're not going to be selling any hardware. I think we're not going to be selling hardware on the very largest projects to make a distinction between those 2 things is there's -- like last year, we recorded over $300 million in hardware sales. I don't think that number is going to go to 0 anytime soon. And with the forecast that we've given for 2023, you're looking at a number north of $500 million in terms of hardware sales. So it's definitely not a business, which we think is going to go to 0. It's just going to go -- I think it's going to mature and that the larger projects with the more -- with a developer that what I would call is be fully integrated, that has procurement capabilities. We're not going to be buying hardware for them. But for many of these other partners that we're working with today, we will be.

I would add that the amount of our developer standardizing on Athena is growing. So I think even if they do that, we continue to see them having a need for software. So the Athena platform is ideal. And to echo Bill's comment, we are seeing many more software-only deals, building in the pipeline with our commercial team. And so I'm bullish on that front as well.

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

Sure. I want to thank everyone for joining us on our fourth quarter and full year 2022 earnings call. We look forward to speaking with you during our 1Q 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.