STEM - NYSE

Thank you for standing by. This is the conference operator. Welcome to the Stem Third Quarter 2023 Earnings Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Ted Durbin, Head of Investor Relations for Stem. Please go ahead.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our third quarter 2023 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We, therefore, refer you to our latest 10-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 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, COO; and Prakesh Patel, Chief Strategy Officer, will also be available for the question-and-answer portion of the call. And now I will turn the call over to John.

Thank you, Ted. Good afternoon, and thank you all for joining us today. Beginning with slide 3, our agenda will cover five items; our third quarter results, technology leadership and product announcements, and our commercial traction. Bill will then discuss our financial results. Now let's turn to slide 4 on our third quarter 2023 results and highlights. In the third quarter, we recorded $134 million in revenue, up 34% versus third quarter 2022. Revenue this quarter was negatively impacted by nonrecurring adjustments that Bill will discuss later in the call. We set a record for bookings of $676 million; the 3x bookings growth performance drove our contracted annual recurring revenue or CAR, up 43% versus the third quarter of 2022, and up 17% sequentially. Adjusted EBITDA came in near breakeven at negative $900,000 versus negative $13 million in the same quarter last year. Adjusted EBITDA reflects an adjustment to exclude an exceptional reduction in revenue. With strong revenue growth, solid margins and continued cost control, our path to profitability continues to improve. We continue to expect achievement of positive adjusted EBITDA in the second half of this year, a goal we committed to during our Investor and Analyst Day in 2022. Today, we announced an exciting new agreement with SP Energy. We will offer software and services for up to 10 gigawatt hours of storage deployments across North America. This partnership underscores our focus on growing service revenue. At the core of our value proposition to gigawatt scale developers like SP Energy is our AI-driven technology, Athena, which continues to receive third-party recognition for its differentiation and value. Finally, we're announcing that we expect to achieve full year adjusted EBITDA positive in 2024 without the need to issue additional equity. This is a key milestone as we move to free cash flow generation and we'll outline more specifics in our full year earnings call in February. Please turn to Slide 5. In Q3 2023, we far exceeded our guidance for contracted bookings coming in nearly 2x our guidance and the highest quarter in company history at $676 million. The booking strength was largely driven by our entry into the bulk power system scale of the front of the meter storage business this year, particularly in the municipal and cooperative customer segment. Industry analysts expect US public power and co-ops will represent over 20% of future storage deployments, and we are well positioned to serve this market. Our solar backlog also grew significantly, up 41% year-over-year. For both businesses, we are driving consistent strong gross margins, a testament to the differentiation of our solutions. We saw a 32% increase in storage AUM this quarter to 5 gigawatt hours. We have nearly doubled our storage AUM in the past year, a remarkable achievement by the team and another measurable differentiation of the STEM solution. Solar AUM also had the third consecutive quarter of healthy growth with new customer additions more than offsetting the roll-off of some of our legacy low margin contracts. This execution resulted in strong car growth, up nearly $13 million in a single quarter. Additionally, we are raising our car guidance for this year. In-market demand remains very strong. Falling equipment prices for both solar and storage are improving project economics for our partners. The recent clarity on some key tax incentives also remains a major tailwind for the industry. Overall, we have seen several industry analysts come out on a key debate in our sector regarding the impact of higher interest rates. And from our perspective, we can confirm their assessment that project returns are generally higher despite the increase in interest rates. We ship data from Level 10 Energy, PPA price tracker validates 100% plus increase in power purchase agreement prices from 2020 through 2023. Demand continues to be robust, and the focus by developers and asset owners is on finding ways to accelerate project timelines. Our successful project track record paired with our industry leading software and services is particularly well suited for this market environment. As a reminder, we do not have any direct interest rate exposure by virtue of our fixed rate debt, which have maturities into 2028 and 2030. Please turn to Slide 6, highlighting our technology leadership. We are pleased to be recognized once again by a third-party for our technology leadership earning the sustainability product of the year award from the business intelligence group. These awards highlight products designed to help companies improve their sustainability objectives. On the commercial side, our technology solutions continue to resonate with customers in multiple markets. In New York, specifically the Bronx, we helped NineDot Energy bring the first energy storage system into service. We are co-optimizing multiple value streams for our customers in New York and building on the coincident peak prediction expertise we developed for other markets. This is another example of our ability to rapidly scale Athena at low incremental costs as we enter new markets. Between NineDot and some of our other partners, we expect to have over 700 megawatt hours under Athena control in the New York market over the coming years. Additionally, Athena is supporting NineDot Energy with customers including Starbucks, who is the anchor subscriber to the Pelham Gardens project, monetizing sustainable energy credits in New York. The system is operational and currently generating energy credits. In our solar asset performance management offering, we introduced a new application, Event Manager, which helps our customers resolve downtime issues on their assets. In the last year alone, we have onboarded over 1 gigawatt of assets to Event Manager. ERCOT, our data science team has been refining their forecasting and optimization algorithms, including what we believe is one of the leading day ahead and real-time price forecasting engines in the market. Based on our modeling, we believe PowerBidder can offer a 10% to 40% uplift in revenue for assets in Texas versus competitive offerings in that market. Please turn to Slide 7. With the launch of PowerBidder Pro, we are introducing a new software tool for energy professionals to manage their clean energy assets. The product targets asset owners, traders, and power purchase agreement off-takers, a segment of customers we believe are underserved by current offerings in the market. PowerBidder Pro empowers these customers with active asset control. Our customers can take charge of bespoke trading strategies, tailored risk management tools and use our forecasts or input their own market forecast. We have seen strong initial customer interest for this offering with multiple gigawatt hours in the pipeline. Moving to Slide 8. Today, we're excited to announce a significant technology and commercial alliance with SoftBank Energy. This partnership is an example of our focus on growing high-margin software and service revenue. Under the terms of the agreement, we will offer our modular ESS solution and related software services to SB Energy across their 10 gigawatt hour plus project development pipeline in North America. SB Energy is one of the leading utility scale renewable developers, and we are proud to partner with them to advance their vision of generating 24/7 renewable energy at gigawatt scale. In addition, we are collaborating to integrate our industry-leading Athena AI into the SBE digital platform. This will include the development of additional applications such as control and optimization of long-duration energy storage. Importantly, we view this partnership as a template for additional engagement with asset owners, project developers and energy trading firms to drive a programmatic approach for growing high-margin service revenue. On to Slide 9. As we highlighted last quarter, the municipal utility and electrical cooperative segment represents an attractive market for Stem. In particular, these entities are very focused on enhancing the reliability of their power networks and are seeking to drive decarbonization and greater engagement with their members and in customers. In late 2022, we leveraged our winning playbook of investing early in an attractive market where we can drive differentiation through our unique software and service capabilities. We accomplished this by onboarding key stakeholders in the muni and co-op market with preferential access to Stem's deep supply chain relationships. Bill will discuss the financial details of these arrangements, but at a high level, this engagement has resulted in nearly $1 billion of contracted bookings in the last 12 months with our position in the market going from zero to over 15% market share based on expected deployments in 2024. US public, power and co-op market is expected to represent over 20% of all future energy storage deployments and is forecast to represent the fastest-growing segment of the FTM market through the end of this decade. We expect to continue our leading momentum in this exciting segment with engagement on multiple gigawatts of bulk power system projects. Stay tuned on more wins here. And now, I'll turn the call over to Bill.

Thanks, John. Starting on page 11 with our results for the third quarter of 2023. As John mentioned, to gain a foothold in the bulk power system market, we offered certain strategic partners' preferential access to Stem's supply chain network. In certain cases, we offer a guarantee that the value of the purchased hardware would not decline for a certain period of time after purchase generally six months. Additional details on these arrangements are provided in our earnings release and Form 10-Q filed by the company. The company accounts for such guarantees is variable consideration and update its estimates of variable consideration each quarter for facts or circumstances that have changed from the time the initial estimate and as a result, the company recorded a revenue reduction of $37.4 million during the three and nine-month period ended September 30, 2023. The company does not intend to provide such guarantees and customer contracts going forward and does not expect that the future revenue reduction, if any, with regard to the guarantees outstanding as of September 30, 2023, will be material. In short, this was an exceptional offering that has allowed us to enter and quickly build a leadership position in an attractive market segment, where we have executed almost $1 billion of contracted bookings in the last 12 months. And now, on to the financial results. Revenue was negatively impacted this quarter by the $37.4 million reduction in revenue, I just referenced. Adjusted EBITDA and non-GAAP gross margin have been adjusted to exclude the impact of such revenue reduction. Adjusted EBITDA was negative $900,000 in Q3, keeping us on track to achieve our goal of being adjusted EBITDA positive in the second half of this year. Achieving adjusted EBITDA positive is a critical profitability milestone for us, and we remain laser-focused on this goal. We continue to drive operating leverage with strict cost controls and optimization strategies. We continue to stay disciplined on operating expenses and reaffirm the cash OpEx as a percentage of revenue for 2023 will be less than 25%. Turning now to slide 12 for a look at our operating metrics. Backlog increased 125% year-over-year and increased 35% on a sequential basis to $1.8 billion. The largest driver of the backlog increase was a record $676 million of bookings in the quarter. End market customer demand remains strong, catalyzed by the continuing clarification of the Inflation Reduction Act and an improved supply chain and hardware price environment. Our AUM on the storage side of the business grew from 3.8 gigawatt hours in the second quarter of 2023 to 5 gigawatt hours in the third quarter. That's a significant 32% increase driven by our strong commercial movement and customer demand for Stem Solutions. Our operating AUM on the solar asset performance monitoring side of the business ended the quarter at 26.3 gigawatts, up 300 megawatts or approximately 1%, our third quarter of sequential growth. The solar industry continues to show signs of recovery evidenced by growing AUM and the backlog growth of 41% year-over-year. Turning now to slide 13 and our 2023 guidance. Full year revenue guidance has been adjusted downward dollar-for-dollar sole year's results of the $37.4 million reduction in revenue. We expect to trend towards the lower end of our full year non-GAAP gross margin guidance. We are raising fiscal year 2023 CAR guidance by 9% at the midpoint, a steady increase in CAR positions us well to grow high-margin software and services revenue in 2024 and beyond. In addition, we expect continuing strong growth in service revenue driven by expected commissioning of systems and a result of partnerships such as the one we announced today with SP Energy. We are tightening the range for full year adjusted EBITDA guidance to negative $25 million to negative $15 million. We still expect to achieve our goal of being adjusted EBITDA positive in the second half of 2023. We define that as the sum of the third and fourth quarters being adjusted EBITDA positive, so with the third quarter in the books, we have confidence that we will be adjusted EBITDA positive in the fourth quarter of this year. We continue to expect to exit the year with more than $150 million in cash and cash equivalents on the balance sheet. As previously stated, we expect to achieve full year positive adjusted EBITDA in 2024. We see this goal as a key achievement in our corporate maturation. We will provide more details on our 2024 guidance on our fourth quarter and full year earnings call in February 2024. With that, let me turn the call back over to John for some closing remarks.

Thanks, Bill. Wrapping up on slide 14 with our key takeaways. Third quarter momentum driven by strong end market demand, resulting in record bookings growth, significant storage backlog, AUM and CAR growth, solid solar asset management growth and execution, our software and services deal execution underscored by the SPE agreement. Athena continues to add additional value for solar and storage customers with new products in multiple markets, and the muni co-op momentum continues with $1 billion in contracted bookings in the last 12 months. We reiterate our expectation to achieve adjusted EBITDA positive in the second half of 2023, and finally, we're excited about the tremendous opportunity in front of us with the expectation that we will achieve full year adjusted EBITDA positive in 2024 and beyond. With that, I want to thank our key stakeholders, employees, customers, channel partners, suppliers and shareholders. And now, operator, let's open the line for questions please.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brian Lee with Goldman Sachs. Please go ahead. We will come back to Brian Lee. The next question comes from Thomas Boyes with TD Cowen. Please go ahead.

Great. Appreciate you taking the question. Maybe just a quick one on the customer contract guarantee. I just want to make sure that I understand how it's structured because I know this is something we saw in the first quarter of this year as well. Originally, I thought the revenue adjustments could be made all the way up until the first quarter of next year. So is there a floor in place in that structure that we've already reached just given the declines in within garment pricing market, or did you elect to recognize the maximum amount of exposure this quarter? Just want to make sure I understand why there shouldn't be any material changes after, say, the 30th of September? Thanks.

Yes, this is Bill Bush. Thanks for that question. So the contract that you're referencing is actually somewhat different than what we adjusted for this quarter. In fact, that contract is, as you mentioned, tied to the price of lithium. These contracts were not. And so there are significant differences between those. These effectively had a remarketing rate associated with them which we've now taken what we believe to be the full downside risk associated with them. So we don't expect any material change after this transaction. And in fact, we expect to be able to move on from these contracts in their totality within the first quarter of 2024.

Got it. Appreciate the clarity there. And then maybe I obviously enjoyed kind of going through the PowerBidder Pro Demo at RE plus that was earlier this year. Maybe could you just talk a little bit more about how the customer response has been thus far? You know, what the timing expectation is for the PowerBidder Pro? And then what's the go-to-market deployment strategy? Is this going to be something that you're primarily in focus -- on with new customers? Or is there something in place as a way to go back to existing PowerBidder users and kind of convert them over to Pro?

So thanks for the question. This is Mike Carlson. As far as where we're at the initial response, we launched it in September we had great response at the show at RE plus and then correspondingly, a number of specific opportunities as we put it in front of customers. At a high level, the response we got is exactly what they're looking for and not able to find in other opportunities they consider. We've got proposals out in the field, some which early indications are that they're going to move forward beginning of second quarter of 2024. So we'll have product release at the end of this year. Production expected in the first half of next year. As far as our go-to-market strategy with it, obviously, we've got an existing customer base that is considering expanding their own capabilities beyond our service offerings that we would then continue to add Bidder Pro solution to. And then obviously, a whole new market that doesn't want to look at our managed services. They've got their own trading desk, their own risk management, and this is opening up that opportunity to bring them into our portfolio of customer base.

Prakesh, do you want to talk about the bulk power side, may be?

Yes. One thing I'd add -- this is Prakash Patel, is that this offering is very well suited for gigawatt scale what we call bulk power system in the front-of-the-meter segment. Because these customers or asset owners are typically more sophisticated, have a need for greater control as you're dispatching very large systems into the power grid. And a lot of the functionality involves bespoke trading strategies, enabling greater control, better risk management. So it really compounds with some of the things that John talked about earlier in the momentum we're having with new co-ops and broadly at the larger FTN scale.

Excellent. And I appreciate the color there. If I could just sneak one more in just on the same vein. For the 10% to 14% potential uplift that was referenced on slide 6, was that for the plain vanilla power bidder? Or is that the Pro version, I wanted to know?

Yeah, that's the core Athena optimization engine. So that's across either offering. It's really our ability to optimize these assets. The Powerbit or Pro, what that allows is customers to further tweak certain risk metrics or their views of forward energy forecasts and the like, but it's available to everyone.

Got it. Thanks again. I appreciate it.

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

Hey, guys. Thanks for including me in the question queue here. I had a couple. Maybe the first one just on the announcement this afternoon, SP Power, the 10 gigawatt sounds pretty robust, especially in the context of what they've done to date as well as what you've deployed to date. Can you give us a sense of I guess, the near-term or medium-term impact of that relationship, kind of how quickly do you think you can get volume deployments with them? And also maybe sizing kind of the magnitude of the opportunity. I would imagine the entire 10 gigawatts is convertible, but how are you thinking about it when you're framing the opportunity?

Thanks, Brian, John Carrington here. And we're really excited about it. I think you're talking about top five developer also some -- a developer that has an extensive and growing pipeline. I would say that, our view is this is the first of many of these kind of multi gigawatt pipeline that we intend to collaborate on with our services and software strategy. And again, it also we intend to include our modular ESS solution. On the timing side, look, I would say these are becoming much larger projects, which do tend to take longer. So we would expect that this pipeline, in particular, is a multiyear pipeline. I like the fact that, it is multiyear because we'll do others like this, and it's just shows the continued strength, we believe, in our services and software offering. So there'll be more of these as we go forward. But I think it's a multiyear deal. We just signed this. And so we're now kind of looking at the pipeline and assessing both the timing and what we can provide and where. But it's a really exciting announcement for us. We've had a lot of discussion on software services only. And here is a very significant announcement in our view, specifically on that objective as we talked about really since our Analyst Day.

Yeah. No, that's great color. I guess you had a huge bookings quarter here, so kudos to you on that. Maybe just some follow-ups. Did -- it doesn't sound like you're based on the timing of you just signing this deal, but did SP Power factor into those bookings at all? If not, when do you expect you'd see first bookings from that new relationship? And then given the sort of record bookings here, were there any of these multi-gigawatt framework type customers that you haven't been able to announce yet that actually are in the bookings already but just haven't been in the press.

Yes. So Brian, thanks for the question. First part of that is that the bookings that we recorded or referenced this quarter don't include any bookings from SoftBank Energy. In general, those are longer lead projects and we'll start seeing bookings in 2024 for those and then revenue thereafter. But these are large CISO 100 -plus size 100 megawatt hour size plus projects. So they're going to be a lot bigger than an average. As far as the other aspects of your question, I think that when we're I mean -- and really, what SoftBank Energy is it's -- I think it's a software and service play for us -- moving us into markets that we have not traditionally played. And I think it's a real shot in the arm for the Athena platform.

Hi, Brian, just to add on that, the other string of deals that we announced in this quarter that 200 to 313, the 1.3 gigawatt hour, that portion of those represents a partner we're working with around the same templatized approach to software services. So -- this model seems to be working.

Okay. No, that's great. And then the sort of reiterations around EBITDA as well as the view here that you'll be positive in fiscal 2024 on adjusted EBITDA, maybe I know you're not going to give full guidance metrics because we're not there yet in the calendar. But as we think about you transitioning into becoming a positive EBITDA company going forward, starting next year, can you just, at a high level, give us a sense of are you embedding gross margin expansion off of this year's level? Is it just purely scale driven higher volume and revenue growth that's getting you to the adjusted EBITDA positive view for the full year, kind of maybe some of the workings around how you get to that outlook for next year without maybe giving us the exact ingredients. Thank you, guys.

Yes. So as you mentioned, I think we're going to stay away from full year guidance for next year. But I think kind of starting with this quarter, in particular, I mean, we're really close to breakeven. I mean, at $900,000 negative. And that's a dramatic improvement from the third quarter, really not a significant amount of additional revenue growth, which is primarily hardware driven. So I think cost control continues to be a big part of what we're doing. And I think as part -- as you start thinking about 2024, I think we're going to continue to see software growth, which is, in general, is going to be high-margin revenue. And so I think you're going to have two parts there. You could have more hardware sales. I mean I think we're expecting to do more of that next year. But more importantly, more software and services, Mike and his team are doing a lot in terms of expanding our Proserve [ph] initiative. And so you're going to see margin expansion from that standpoint and more volume just in general. So I think the combination of those two top line items with continued cost control in 2024. I think you're going to see -- I mean that's the pathway for a positive EBITDA a year for us.

All right. That’s great. Thanks, guys. I’ll pass it on.

The next question comes from Andrew Percoco with Morgan Stanley. Please go ahead.

Thanks so much for taking the question here. I just wanted to follow-up on just what you're seeing on the hardware side of the business in terms of price and availability of supply. I know it's a pass through for your business, but can you just discuss how it's impacting customer project economics in light of the rising cost of capital environment and therefore demand for your services? Thanks.

Sure. And it's been a pretty dramatic change. I mean, as you look at the, you know, say batteries just in general, And I think this also falls down to part of the solar business also. But availability prices are down and we expect that to continue, which is in part why, we're referencing, that we're, we feel like, we're going to be shorter on inventory than we have in a faster place of purchase orders. Because, at this point in time, finding why long dated supply agreements is going to be a tough ask I think. So for us, that's what we're seeing in the marketplace today, But the market has shifted dramatically in the last year. So I think it's something that we've got to be pretty watchful of over the incoming time period. You are seeing a lot of new supply coming into the market right now, which is really driving. And not just in the US, but also in China. So you have the likelihood of declining prices.

Hey, Andrew, this is Prakash. One other thing I'd add is just the equivalent price decline we're seeing available from OEMs alone is offsetting the impact of higher interest rates in project economics. So it's a really positive environment with not only that trend, but the fact that, as John highlighted, power purchase agreement pricing has continued to be very robust. So overall, we're seeing much better project economics and significant demand.

Got it, That's a super helpful data point. And maybe just to follow-up on the prior question on just software services growth. What do we need to see or what needs to happen within your business to get closer towards that 75% year-over-year growth rate target. I think you've been lagging behind that so far this year. What needs to happen practically within the business and maybe in what time frames you expect that to happen? Thanks.

This is Prakash. I'd say a big part of it is getting the systems interconnected and permitted, and we talked about how the broader market has seen challenges. We've moved up the size scale. These projects have been more complex, larger projects generally. There is some light at the end of the tunnel with some recent actions on the federal side at the FERC level as well as at the state level. So we're hopeful these things start to normalize, let's say in the second half of 2024 and beyond. The other piece is, as we announced today, engagements with large asset owners or developers on a programmatic way to drive services revenue. What's really compelling about that is that's not tied to project timelines or actually It's not tied to interconnection timelines, right? Because we can earn service revenue even earlier in the project life cycle where we're helping them develop project performance or system design, things of that sort. So it should smooth some of the seasonality. And as John mentioned, we're engaged with multiple of these parties and looking to continue the momentum we're seeing in that space.

Super helpful. I'll take the rest offline. Thank you.

Yes. On the muni cost side, it's a market that's very well suited for our capabilities. These are typically smaller entities. So they're not like the larger investor-owned utilities where they have -- where they may have army of engineers to write software or a large balance sheet to procure their hardware. So we can really bring the complete STEM solution to these customers. And they're very forward thinking around wanting distributed generation, wanting greater engagement with their customers. And we just hit the right part of the market at the right time. I think as John mentioned in his discussion around these, in less than a year, we run from 0% to 15% market share. We think there's upside there, and we'll continue to bang away at that.

Got it. Makes a ton of sense. Just as far as the bookings themselves as a bit of a follow-on. Obviously, this is a really outsized quarter for bookings. Your guidance is maintained on the full year basis, but car is up. I guess I'm just trying to kind of reconcile those sort of moving pieces. Were these sort of pulled forward relative to some other projects that may have shifted out that may have been in late-stage discussions. Just I guess sort of clarify, if you can, the interplay between the bookings in this quarter, the maintain full year and car going up relative to your prior expectations? Thanks.

Yes. And thanks for that question. This is Bill. So I think a couple of points in there. One, of course, I mean, this was a record booking quarter for us. But you'll also referenced that last quarter, we were a little bit lower. And so I think it kind of points to some of the lumpiness of the deals. And much like we said in the second quarter, the bookings are not revenue based and so we feel less pressure to sign a deal in a particular quarter until the terms make sense for us. And so that's kind of how we think about that. We've always touted the $1.5 billion at the midpoint was a reasonable target for us. And I think the fourth quarter is going to be able to get us the rest of the way there. We're just under $1.3 billion. So it really is -- it's an opportunity for us to continue to sign deals in markets, which we think are interesting. There's been a whole bunch of transactions that have happened here in the last little bit. And as Prakesh mentioned, the muni in the co-op space has been really successful area for us as well as our kind of our core markets, California, Texas and New England ISO. So I think from our standpoint, we continue to look for good deals that represent opportunities for us to place more software and services into them. And I think that one of the tenets is that, as Prakesh mentioned, that muni co-op space is really a good area for that.

Got it. Thanks, guys. I’ll take the rest of mine.

The next question comes from Sean Milligan with Janney. Please go ahead.

Hey, guys. Thanks for taking the questions. I wanted to go back to Joe's question and just focus a little bit on the supplemental revenue detail. So when you look at the storage software services revenue, I think it was $5.5 million this quarter, down from 7.7% last quarter. Prakesh, I think you mentioned higher market participation last quarter, but just wanted to kind of get your thoughts if there was anything else going on there. It's my understanding that there was some SPE, Vegas SPE revenue that was running due there. And if you back that out, that kind of implies like a 60% decline quarter-over-quarter in the -- I guess, the core storage software revenue. So, just any thoughts there would be helpful.

Yes. So -- and thanks for the question. So I think there are a couple of things moving through the quarters. One, as we -- I think we noted last quarter, we had quite a bit of market participation revenue come through, the books that got reflected there. So it looks like a sequential down when it's really kind of on the basic business, it's really slightly up, not a lot, but slightly up. So I think that's one thing to note. And I think as Prakash mentioned, I mean, interconnection continues to be an issue in terms of the uptick in what the software revenue is. And across the ISOs in particular, I would say, New York with the better program and in Texas, we're really seeing significant slowdowns and how quickly systems can get turned on. So when you end up happening is you have a hardware sale but not a company software sale in a reasonable time period. And so that's really kind of what's happening on the ground. The good news is there's no cancellation. So it's pushing software revenue out, and that's really reflective of the CAR difference, whereas you see CAR continuing to grow, but not necessarily being reflected on the income statement line. That's a direct reflection of what's happening in those markets as it relates to interconnection

The other thing I'd add -- this is Prakesh is some of the apps we've been rolling out recently focused on this trend generally. So if you look at Power bitter Pro, as an example, or event manager, those can go to existing assets, existing customers. So we're not as tied to just interconnections and greenfield development. And that's a big part of our product road map generally.

Okay. That's helpful. And then, just to build on that in the response there. If you look at CAR, I guess, the third quarter of last year, you were $61.5 million, now you're $87.5 million. Just wanted to confirm, one, does CAR include project services business? And if not, I think if you look at kind of the implied run rate of the storage and solar, you're kind of up $5 million on an annualized basis year-over-year. And just is there like an average time frame to turn on storage business that we should think about, like in terms of how to model unlock an additional CAR over the next 12 to 18 months? I know you haven't given guidance on how far CAR extends. But is there something you're seeing in the portfolio on how long it takes to turn on storage assets?

Yes. So a couple of points in there. So first, I would reference you back to the investor presentation that we had in September. There's a pretty detailed slide on the various types of projects and the timing that it takes to get them through all the way into interconnection operations. So, just to point that out to you. I think that's available on our website. And to the extent you have any questions about that, we can pick those up later. So that's the first part. I think the second is that to your point, we are seeing growth in the software and services, line item and CAR does not include cars software. That's just really a software line item. It does not include items that would be non-recurring. So imagine that to be, like I mentioned, software and service contracts that are long term, that generally have solar style adjustments associated with them that would typically lasts anywhere on the solar side, say, three to five years, storage side, 10 to 20 years

Okay. I guess I'm just kind of looking at the numbers this quarter, it sort of implies that the storage business is from a software side is like $4 million to $5 million annualized. So most of the software revenues coming from the solar side right now. Again, just trying to kind of understand a little bit better, like when you start to turn on more storage and we start to see more Athena revenue come through the line item –there was a little bit -- I thought there was a little bit of a step change in the first half of this year, but I guess that was more market participation than true underlying recurring revs.

Yes. I mean, I think, as you mentioned, I mean, we are seeing more solar revenue -- software revenue today. But I think the -- and I think as we've mentioned, the reason why there is not more storage is really is in relation of how long it's been taking to get these storage products interconnected. So the car aspect is really what's going to happen in the future at any point in time, it's always transitioning from contracted into, say, a straight ARR metric. And we've just seen this year in particular -- and I think I would point out spots like New York and Texas, we really just had a really hard time getting those projects across the way. As a result, either, in some cases, interconnection, in some cases, there supply chain issues that have slowed down those individual projects. As I mentioned, good news is those projects have not gone away and that car is going to turn into a GAAP revenue item.

Okay. That’s helpful. Thanks.

The next question comes from Justin Clare with ROTH MKM. Please go ahead.

Hey, guys. Thanks for taking the questions here. So first off, I just wanted to ask about the expected time line for delivering the first modular ESS solution or a software-only sale. So in Q3, was there any revenue associated with the modular ESS or software-only sales? And just trying to get a feel for how that scales up looking forward for here. So thank you.

Yes. So I think -- and thanks for the question. We should start seeing modular ESS system, depending on, again, and I hate to kind of harp on the point, but as interconnections can get dragged out, we do expect to see the first modular systems be installed in the first half of next year 2024. We, of course, have been doing software only now for quite some time. The first system actually dates back to 2018, even when we did the portfolio down in Southern California, and we just apply software into that. So those are longer-term efforts that have been continuing for quite some time.

Got it. Okay. All right. And then so shifting gears, just on the SB Energy agreement, I was wondering if you could share a little bit more detail on how that structure. Is this something where you have kind of the right of first refusal to supply the 10 gigawatt hours of projects there? Just wondering how that agreement moves through into contracts and flowing through into your bookings there.

Yeah. This is John. Look, I don't want to go too far into the specifics on the contract, but suffice to say that we will be working very closely on every storage platform and project that they have. And I think what's really exciting is, we'll be able to integrate Athena into the digital platform as well. So, more to follow, we'll certainly keep everybody updated on that. But it's like I said earlier, a massive and growing pipeline. And as I also stated earlier, I really am excited about the fact that we view this as a model or a template to carry on to other large bulk power developers to further drive our services and of our strategy.

Okay. Great. Thank you.

[Operator Instructions] The next question comes from Abhi Sinha with Northland Capital. Please go ahead.

Yeah. Hi. Thanks for squeezing me in. Just want to learn on STEM energys. I know it's a multiyear project. And I just wanted to see when exactly do you start getting the revenues and maybe some time is it on 2024 event from 2025 event? And second, how do you -- if you can elaborate like, how do you guys compare the economics of these projects versus the smaller ones that you guys have announced? Like when I'm comparing these two projects like this one or something smaller. I mean trying to understand, if you are -- how profitable these big ones than just smaller ones projects.

Hi. This is John. On the first part of your question, we're working through the project specifically, and I hate to keep talking on interconnection. But it's going to be predicated on that. There's a chance in 2024, possibly 2025 it moves around it. So it's hard for us to say right now when the first project is going to be operational and interconnected more importantly, but we'll obviously cover up to speed. And it was hard to understand the second part. I think it was around the economics?

Yeah. Right. I'm just trying to understand the project economics for this kind of big-sized projects. Trying to see how profitable are these versus the smaller projects that you can get like much smaller that you get hold of?

Hi. This is Prakesh. Yeah, generally, this engagement should deliver higher-margin projects than when we're selling hardware into a particular customer, right? This is purely a software and services engagement. So the services and we delivered any time in the project Life Cycle that those are around 30% to 50% gross margin, and the software is 80% GM.

All right. So that's one. So that economy does not change even if such a big project comes in there. I mean, you still maintain that kind of profit margin.

That's right. Yes. These are just leveraging our capabilities. It's not discounted or anything of that sort.

Got it. Thank you.

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

Yes. Thanks. I want to thank everyone for joining third quarter earnings call. And we certainly look forward to speaking with you during our fourth quarter earnings call, which will take place in February.