STEM - NYSE

Greetings, and welcome to Stem, Inc. First Quarter 2024 Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Ted Durbin, Head of Investor Relations. Thank you. Mr. Durbin, you may begin.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our first quarter 2024 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We, therefore, refer you to our latest 10-Q and other SEC filings. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are on the Investor Relations section of our website at www.stem.com. John Carrington, our CEO, and Bill Bush, CFO, will start the call today with prepared remarks. Prakesh Patel, Chief Strategy Officer, will also be available for the question-and-answer portion of the call. And now, I'll turn the call over to John.

Thanks, Ted. Good afternoon, and thank you all for joining us today. Beginning with Slide 3 in our agenda, we will cover our first quarter results, product announcements and business updates. Then Bill will discuss our financial results in greater detail. Now, let's turn to Slide 4 on our first quarter 2024 results and highlights. We continue to execute on our 3 guiding principles in the first quarter. We delivered record non-GAAP gross margin and near breakeven performance on operating cash flow. We also accelerated our pace of annual recurring revenue activations. And finally, we launched another software-only product offering. We are on a solid foundation to continue delivering against our financial targets for the full year 2024. In the first quarter, we recorded $25 million in revenue, down 62% versus first quarter 2023. Revenue this quarter was negatively impacted by a $33 million adjustment as a result of some legacy contract guarantees from 2022 and the first half of 2023, which were further impacted by accelerating market conditions, including extended project timelines and declining battery prices. It's important to note this change had no impact on our cash flows in the quarter and is the result of a legacy contract structure, which, as previously committed, we have not offered such guarantees to customers since the first half of 2023. We achieved a record non-GAAP gross margin of 24% this quarter due to a higher mix of software and services revenue. In particular, our high-margin solar revenue was up 16% year-over-year and storage software wins drove AUM up 66% year-over-year. GAAP gross profit was negative $24 million, primarily driven by the net revenue reduction. Bookings in the first quarter were $24 million. As a result of our expansion to large-scale front-of-the-meter storage projects, the timing of our bookings has become increasingly variable on a near-term basis. Our average project size has tripled over the past 2 years and we have a substantial number of projects in advanced stages of negotiations or that are expected to close in the near-term. Given this strong commercial momentum, we remain confident in achieving our $1.5 billion to $2 billion bookings target for the full year 2024. Contracted annual recurring revenue, or CARR, was up 25% versus the first quarter of 2023. In the quarter, we implemented a proactive effort to upgrade the backlog to focus on the most profitable opportunities, which caused a slight reduction to CARR. This underscores our unwavering focus on driving cash flow generation against our full year target of more than $50 million for 2024. Adjusted EBITDA came in at a negative $12.2 million versus negative $13.7 million in the same quarter last year. Excluding the impact of the revenue adjustments, adjusted EBITDA improved despite a lower revenue base compared to the prior year, reflecting our focus on operating efficiency and gross margin improvement. And lastly, operating cash flow was roughly breakeven this quarter, a $35 million improvement over the same quarter last year. We are updating our revenue guidance solely to reflect the non-cash adjustment and otherwise reaffirming our guidance across our key metrics, including $5 million to $20 million of adjusted EBITDA and more than $50 million of operating cash flow for the full year of 2024. Importantly, we are confident that we can achieve these goals and continue to grow our business without the need for additional equity issuance. Bill will provide more details on our financial results later in the call. We're also announcing today our next-generation PowerTrack Asset Performance Management suite for clean energy portfolios. Let's go to Slide 5 for a deeper dive into this new and exciting product. The PowerTrack APM suite is a software solution for centralizing and streamlining the management of storage, solar and hybrid energy asset portfolios. It will help customers understand the commercial impact of technical decisions and the technical impact of commercial strategies so they can more effectively manage risks and drive enhanced returns. PowerTrack APM was built by experts in the storage and solar industry on a dual foundation of Stem's industry-leading solar asset monitoring software PowerTrack and the company's award-winning Athena AI for energy storage forecasting and optimization. This solution was built-for-purpose in collaboration with many of our closest customers, providing feedback on gaps in currently available alternatives. Some highlights on PowerTrack APM. This product will continuously monitor the health of individual assets, holistically track commercial performance of a portfolio and individual sites, automatically manage energy storage warranty obligations, streamline operations center processes, and finally, measure commercial impacts of technical events to minimize risk and drive returns. PowerTrack APM will be released to select beta customers starting this summer and will generally be available at the end of the year. We have already received strong interest from existing and new customers for a comprehensive tool like this, which we believe does not currently exist in the market. For Stem, this offering will drive additional high-margin solar revenue, expand our addressable market and allow for deployments on existing operating assets. The last point is important, because by targeting existing assets, we can avoid the protracted permitting and interconnection cycles impacting the broader renewable sector. This is fully aligned with our objective of accelerating our CARR to ARR conversion. As we outlined in our last call, there's approximately $65 million of annual gross profit embedded in the full year 2024 CARR. Now, moving to Slide 6 for an update on our progress against our guiding principles. As a reminder, in 2024, we're focused on 3 key items: cash flow generation, building software and services revenue and extending our technology leadership position. First, our operating cash flow continues to improve, up $1.5 million versus the fourth quarter of last year and by $35 million versus the first quarter of 2023. We made excellent progress on reducing our working capital intensity this quarter as well. Second, our software revenue grew meaningfully this quarter, up 4% for solar and up 6% for storage versus the fourth quarter of last year. Our outlook for software and services revenue growth remains positive due in part to customer logos you see in the middle of the page. We're also making good progress on converting our CARR to annual recurring revenue, or ARR. As the chart in the middle of the page illustrates, our expectation of storage ARR activation has improved materially since the beginning of the year. That improvement is partially driven by new software-only contracts. The improvement in ARR activation is also driven by better processes as our team leverages our experience to help customers accelerate product timelines in the front-of-the-meter market. We have also streamlined our interaction with our OEM partners, resulting in faster resolution of field commissioning issues. While our interconnection and permitting approval timelines remain protracted, our customer cancellation rates are in the low single digits, which translates into a high confidence and continued expected software revenue growth. Our focus on the municipal and cooperative market is also paying dividends. For example, the first sites of our 313 megawatt hour storage project with Ameresco will go live in May and will generate a significant uptick in recurring software revenue. The off-taker for this project is a cooperative in Colorado and the time frame from booking to first software revenue will be inside 12 months for this deal, much faster than our typical FTM cycle. This validates our focus on public power market and should accelerate ARR conversion going forward. Finally, we continue to extend our technology leadership position with software-only offerings as evidenced by our recent product launches over the last several months as I detailed in the prior slide. With that, I'll turn the call over to Bill.

Thanks, John. Starting on Page 8 with our results for the first quarter of 2024. As John mentioned, revenue in the quarter was negatively impacted by an approximate $33 million non-cash adjustment as a result of battery hardware price guarantees we made to gain a foothold in the public power and large front-of-the-meter markets. These contracts gave customers certain price protection on their hardware purchases. Since we entered into those contracts in late 2022 and the first half of 2023, interconnection time frames have extended in key markets, while the price of lithium-ion batteries has fallen significantly in 2024 due to the impact of new manufacturing supply entering the market. As a result, the price protection provisions resulted in additional non-cash adjustments to the revenue tied to those projects. In the third quarter of 2023, we adjusted our revenue based on the estimates of the non-cash variable consideration embedded in those contracts. Given the protracted project timelines and decline in battery prices, we have updated our estimate of the non-cash variable consideration, which had the effect of reducing our revenue by an additional $33 million this quarter. Importantly, this adjustment has no impact on our operating cash flow in the current quarter. We have not issued such guarantees since June 2023, and we reiterate our commitment to not issue any hardware price guarantees in the future. We are actively advancing projects under fixed price contracts based on current market conditions that we expect will consume approximately 50% of the remaining batteries subject to these guarantees. We expect that these transactions will close in Q2 and Q3 of this year and they will not be subject to future adjustment post close. Overall, these transactions should enable us to convert accounts receivable into cash more quickly, providing us greater confidence in our free cash flow generation goals. Following these transactions and the $33 million adjustment, the remaining batteries subject to guarantees are currently valued at approximately $50 million. We intend to integrate these batteries into projects, which we expect will be available for sale in second half 2024 and be operational in the second half of 2025. We will continue to evaluate the economics of these transactions based on the then current conditions. To the extent that we are not able to integrate the remaining batteries into future projects or market conditions further deteriorate, we may update our estimates of the non-cash variable consideration embedded in those contracts. This may result in one or more future impairments. As I said in the third quarter of last year, these were exceptional offerings that allowed us to enter and quickly build a leadership position in an attractive market segment, where we have executed over $1 billion in bookings. In addition, we expect that these projects will give us a long-dated revenue stream of high-margin recurring software revenue. And now, on to our other financial results. GAAP gross margin was a negative 95% and was down as a result of the non-cash variable consideration adjustment to revenue I described earlier. We achieved record non-GAAP gross margin this quarter of 24% versus 19% in first quarter of 2023. The year-over-year increase in non-GAAP gross margin was due to an increased mix of higher-margin solar products and more favorable supply costs. Overall solar revenue increased 16% year-over-year and solar revenue was up 15%. Non-GAAP gross margin was adjusted to exclude the impact of the reduction in revenue. Adjusted EBITDA excludes the impact of the reduction in revenue and was a negative $12.2 million in the first quarter, keeping us on track to achieve our EBITDA goal for the full year. We continue to stay disciplined on operating expenses and reaffirm our target cash OpEx as a percentage of revenue for 2024, which we expect to be between 10% and 20%. Finally, operating cash flow was a negative $600,000, representing a year-over-year improvement of $35 million and a sequential improvement of almost $2 million. We continue to improve our working capital management and remain dedicated to generating positive operating cash flow without the need to raise additional equity or equity-linked securities. Turning now to Slide 9 for a look at our operating metrics. Contracted backlog was $1.6 billion at the end of the quarter compared to $1.9 billion at the end of the fourth quarter 2023, representing a 16% sequential decrease. The decrease in the contracted backlog in the quarter was driven by a proactive effort to upgrade the profitability profile of the backlog, focusing resources on the most compelling opportunities. We canceled around $257 million of contracts that were lower margin or expected to utilize working capital based on this review. We realized bookings of $24 million. The year-over-year and sequential decrease in bookings was largely driven by increased variability on a quarterly basis due to our focus on larger utility scale projects. As underscored by John, we continue to see strong commercial momentum and remain confident in our bookings goal for the year. We reiterate our overall guidance in the $1.5 billion to $2 billion range and have sufficient pipeline to meet that goal. First quarter 2024 CARR decreased to $89.3 million, down from $91.0 million as of the end of the fourth quarter 2023, a 2% sequential decrease. The decrease in CARR was due to the previously mentioned backlog review that resulted in the cancellation of about $3.5 million of annual contract revenue. Storage AUM grew 5% sequentially to 5 gigawatt hours from 5.5 gigawatt hours in the fourth quarter of 2023. Solar AUM ended the quarter at 26.9 gigawatts, down 600 megawatts sequentially or approximately 2%. As part of the backlog review, we performed a comprehensive review of both storage and solar AUM. That review resulted in a small reduction to the storage AUM that was offset by new bookings in the quarter and a net reduction to solar AUM. Turning now to Slide 10 and our 2024 guidance. We are adjusting our full year revenue guidance downward dollar for dollar with the $33 million reduction in revenue we recognized this quarter. We are affirming our guidance across all other key metrics. And with that, let me turn the call back to John for some closing remarks.

Thanks, Bill. Wrapping up on Slide 11 with our key takeaways. We are building a solid foundation for continued growth. We had strong performance with record non-GAAP gross margin of 24%, delivered near breakeven performance for operating cash flow and are solidly on the path to our EBITDA target for full year 2024. In addition, we took several actions to enhance the profitability and pace of cash flow generation, including trimming the backlog of lower margin opportunities. I am most excited by the continued strong momentum in our software business with an increase of 42% expected in the conversion of contracted annual recurring revenue for the balance of 2024 as a result of our activities in Q1 2024. This acceleration of ARR activation is a key focus of the organization, and as we highlighted in our prior quarter call, represents a substantial value unlock. At this run rate, there is approximately $65 million of annual gross profit embedded in the full year 2024 CARR. In addition, we continue to add software-only wins, signing up sophisticated renewable asset managers and energy market trading firm. The momentum in our software offerings is augmented by our accelerating pace of new product releases. We announced today the introduction of our next-generation PowerTrack Asset Performance Management suite, which we expect to further build on the strong uptake of our software-only offerings evidenced in the recent release of PowerBidder Pro. We continue to invest in our India Center of Excellence, which is driving enhanced productivity across our software development teams. We expect to continue the rapid pace of new product introductions, cementing our leadership position in the industry. Before I close for questions, I wanted to announce a couple of people updates. Larsh Johnson, our Chief Technology Officer, retired on April 18. Larsh shared his personal path forward with me almost 2 years ago, and since then, we've been working together on a succession plan to ensure a smooth transition with a particular focus on our software strategy. We hired Albert Hofeldt to serve as SVP of Technology, who has extensive experience in shipping SaaS solutions and, in particular, building robust utility scale software for next-generation distributed generation assets. Larsh and Albert have been working closely together in developing the transition and strategy for the Stem technology team. Eight years ago, Larsh joined Stem to lead the company's hardware and software engineering teams, driving the evolution of our Athena platform. Larsh has helped to scale our global technology team and has extensive industry knowledge. And customer engagement has been instrumental to Stem's growth and recognition. Larsh will continue to consult for the company, supporting key product initiatives. We wish Larsh and his family all the best in the next chapter, and he will always be part of the Stem family. During our last earnings call, I also mentioned that we were initiating a search for a Board member with software expertise. I'm thrilled to announce that Gerard Cunningham has joined the Stem Board effective April 19. Gerard brings extensive experience in the technology, software services and, most importantly, the AI sector. He founded several companies in the data science space and most recently was a partner at McKinsey, where he co-founded and led the global clean technology practice in addition to launching the AI for sustainability initiative. Gerard was also a leader of the McKinsey's digital business building practice. With that, I want to thank shareholders, employees, customers, channel partners and suppliers. And now, operator, let's open the line for questions, please.

[Operator Instructions] The first question comes from the line of James West with Evercore ISI.

So understanding that you kept your revenue guidance and most of your guidance generally the same ex the non-cash charge, a lot of it is back-end loaded here. I'm curious about the confidence that you have in hitting those revenue targets that you've outlined, given interconnection delays and hookup delays and things like that. Is this -- I mean, I guess, are these projects that you have line of sight on? Or are these projects really could slip?

This is Bill Bush. So I think we're very confident in the revenue goals that we've laid out. And I think the reason for that confidence is based in the projects themselves. And so while I would agree it is possible that we could have some shifting, there's also other projects which we could move in. So I think we've got the ability to, I wouldn't say mix and match, but we certainly have the ability to hit the goals with the pipeline that we have. So we're quite confident where we are. I mean this -- I mean, I think the first quarter is always a tough quarter because you have -- like we guided to the 8% revenue number. Net of the adjustment, we basically did a little bit better than that. But I mean it's a small number. And that's been true for a long time. This business has always been pretty cyclical, and it hasn't really changed. And so I think the only thing that has changed is the size of the projects which we're working on, which we've talked about at length in other calls. So I think what you're seeing is a bit more variation. We certainly saw that in terms of bookings this quarter. But ultimately, what we're trying to make sure that we're focused on is positive EBITDA and generation of cash flow. So I think those are goals that we did reasonably well with this quarter. $600,000 negative operating cash in the quarter, I think, was really an accomplishment for us. And certainly, where we are from an EBITDA standpoint is actually ahead of where [Technical Difficulty]. I think when we think about it every day, it's cash flow generation, gross margins. This quarter, of course, we had record non-GAAP gross margins, which I think is super important for us in terms of meeting those cash and income goal or really EBITDA goals. And so I think all things equal, I think the business is on track to be able to achieve the goals that we laid out.

Okay. That's very helpful, Bill. And then maybe just a follow-up here. Are you starting to see, as -- I know everybody has been talking about permitting challenges and interconnection challenges. Are you seeing those lengthen further? Or are they stabilizing? Or are they possibly getting better? How do you guys feel about those issues?

I think that interconnection and permitting have always been a problem. And I think this year, in particular, I think we've seen some additional slowdowns to what we've seen in prior periods. But I think on the other side of that, I would say other things can happen as well. I mean the United project, which we've talked about at length, was actually some of the first -- there's 4 total sites there on that project, 313 megawatt hours in total. And those sites have started to turn on here just within the last few days. And so from that standpoint, that system became a booking, a revenue event and now a software event in a year. So I would say one of the things that we've talked about as well in the past is really shifting the business away from projects where the -- say, the customer has less control over what's going on from an interconnection standpoint. So really, we've moved much more into the municipal power and public power markets, which have different interconnection schemes than maybe what some of the classic C&I projects have. And so for sure the -- I think the news is generally not great for C&I projects in terms of interconnection. I think we are seeing slowdowns there. But that's becoming a smaller part of the overall business of the company. And so that's how we're combating that negative headwind, is by moving away from projects which are particularly susceptible to those sorts of delays.

Next question comes from the line of Jon Windham with UBS.

Great. I was wondering if you could just sort of help talk through your sales strategy, points of differentiation going into the utility scale market a bit more, on the storage side and just how you line up with competitors.

Jon, this is Prakesh Patel. I think the way we really differentiate ourselves in the market is through the project economics that we deliver for customers using our software. We consistently talk about in prior quarters and provide examples of how our software delivers much better project returns than competitive solutions. And so there's a multipronged approach to driving that uptake either by engaging with asset owners and having them specify or push down to project [Technical Difficulty] you must use Stem software in projects that will finance or directly engaging with these project developers and engineering procurement firms and helping them through the bankability as well as advancing their projects. One of the things we talked about this quarter is the fact that we dramatically accelerated the activation of our storage projects. If you look at for the balance of 2024, that's about a 42% uplift from what we thought would happen at the beginning of this year in January. A lot of that is blocking and tackling and helping those customers move through an advanced interconnection timelines and the like. So that subject matter expertise, the differentiated software economics is really what drives our competitive advantage on the storage side.

Got it. And if you would allow me, I have one just sort of accounting question. The $33 million non-cash charge -- I know we went through this in the third quarter as well -- what is the -- what's the mechanics of that? Is it like a reduction in accounts receivable?

That's right. Exactly. It's a reduction in accounts receivable, a reduction in revenue.

Yes, let me just add on to that to give everybody -- this is John Carrington -- to give a quick explanation of the revenue adjustment to kind of level set everyone. We've been focused on [Technical Difficulty] contracts from accounts receivable to cash. And there was a significant reduction in project values as a result of deteriorating market conditions, but we did transact with our customers to resolve about 50% of the hardware subject to these guarantees. And we expect to close those in the second and third quarter of this year and have updated the value of the remaining hardware. So I would also add, I think this is an important component of this, that this legacy guarantee structure enabled our rapid growth into the utility scale market and it resulted in over $1 billion of executed customer contracts. And those contracts will drive significant recurring software revenue. So I just want to add that point, if I could, please. So let's go to the next question.

Next question comes from the line of Andrew Percoco with Morgan Stanley.

I guess I just wanted to start with this -- a few questions on this backlog cleansing effort that you guys are doing. I guess, first, when were these projects booked? And I guess what's changed? Were there changes to the customer, maybe credit quality or creditworthiness? Or was it just more underlying -- underwriting related to the margin profile? And then, I guess, a second follow-up to that would be, are you done with that effort? Or are you still kind of evaluating the backlog? And could there be additional attrition from here?

So I think -- let me start with the last question first. So this is Bill Bush on the line. We are done. But I would also say that we're constantly reviewing the components of the deal. I mean I think we've done a lot of things in the last year, 1.5 years that have driven us towards a positive EBITDA outcome. And this is just one of those efforts. I mean, we cleansed the AUM on the solar side. Now just about a year ago, we've done a number of things in terms of projects. And so we're always trying to make sure that we've got maximum leverage in the backlog. And these projects were really for a combination of reasons. We determined that they just weren't projects that the company should be working on, that they either had low margin profiles, were in territories where we didn't have enough leverage or concentration, or customers that we believed to be non-core to the total business. And so there's a lot of different reasons. And it was a pretty big effort across the team. But we're trying to make sure that we have maximum leverage across our employee base to work on projects which generate cash for the business. And so that's really the result of all that work.

I'd add, Andrew, that I think a lot of these were areas that maybe we didn't see as prospective markets that we could scale in as well. So getting rid of those one-offs, very high cost to serve. And very much around the focus, as Bill mentioned, on contribution margin. So it was the right thing to do for the business. And as Bill said, that project is complete.

Got it. Totally makes sense then. Okay. And then -- and my second question would just be on margins. Adjusted margins were pretty strong in the quarter. And I guess I would typically think of the first quarter as the low point, just given your seasonality on volumes. But gross margins on an adjusted basis were well above your guided range for the full year. So can you just help us think about the cadence for the remainder of the year on margins and cash flow as well?

Yes. So I think as it has been true for a while, the first quarter gross margin is typically the strongest. So you'll recall last year we were at 19%. We ended the year at a total of 15%. So we kind of feel like we're -- obviously, again, this is a relatively small part of the total year, but we're trending in the right direction from the standpoint of margins. So we're 4, 5 points higher than we were last year. And so that -- when folks say, "Hey, do you have confidence in the guide," doing things like that gives you the ability to have confidence in that guide, that you started 5 points higher on a comparative basis. Last year, we were at 19%, went to 15% for the full year. And this year, we're starting at 24%. So we kind of feel like the midpoint of that guide is defensible. So we're feeling pretty good about where we are. Obviously, as we ship more hardware, the margin is going to decline. I mean there's no doubt about that. The sale of hardware is a lower-margin product than software. But software as a total part of the business is increasing. One of the things that John talked about in his prepared remarks was the CARR to ARR cycling. And we expect to see a lot more of that in the rest of the year. So all of those things will end up in a positive cash flow profile. And that's really where -- I think when you think about margins, thinking about cost controls, all of that stuff, you think about like what are the projects that you're working on? Are those positive in terms of the total guide for the business? And so we feel like the EBITDA number that we've given is definitely defensible and as is the cash flow number. I mean, we had a pretty -- we had flat cash on a sequential basis, which is fairly unusual for us. I mean, in the -- typically, as you're coming out of the fourth quarter, you're starting to really pay down accounts payable of hardware, understanding the terms. And we were able to maintain our cash position. And we feel like there's a lot of receivables out there that we can collect and build that $50 million number that we've talked about at [ length ]. So it's always hard in the first quarter because it is a small part of the total year. But I would say when we look at where we are and what we have in front of us, the goals that we've laid out are achievable.

Next question comes from the line of Thomas Boyes with TD Cowen.

Maybe the first one, great to see kind of PowerTrack announcement. And I just wanted to get more insight maybe into the go-to-market strategy for the solution as it's deployed to customers exiting the year. Is kind of the goal to leverage it primarily first with hybrid deployments? Or is kind of the key the flexibility to address both solar and storage and take advantage of some brownfield opportunities? The reason that I ask is just looking at the interconnection queue exiting 2023, around, I think, 80% of all of the new capacity requests were for solar for storage. So I was just wondering how you were thinking about that.

Yes, Tom, it's John here. Yes, I'd say the PowerTrack APM suite in general is really a software-only solution that we are targeting to help the management of really storage, solar and hybrid energy asset portfolio. So it's really across the board. And it's interesting. It's another one of these projects whereby our customers have asked us to build a platform that is not available in the market today. And we have a core team specifically focused around software-only that is out talking to a variety of different types of customers, bringing that back to our developers. And that global development team is doing a tremendous job, particularly as you think about our India Center of Excellence, pulling all of that global network available that we have to develop these products. We're doing it much quicker and much more aligned to what our voice of customer that we're getting as far as what is missing in the market. And Stem's filling that void. And really excited about the PowerTrack APM uptick and the interest by customers. And again, as we said, that's something that we'll have available at a demo this summer. Interestingly enough, we've got multiple customers interested in doing the demo and then -- more broadly, at the end of the year. Prakesh, you had something you want to add?

Tom, this is Prakesh. As far as the market, definitely, this is another example of a solution that can work in existing storage -- operating storage assets. So it's applicable for brownfield as well as newbuild. So it's another way for us to access software services growth without waiting for interconnection approval.

Great. And I appreciate the color there. Maybe -- I just wanted to dig in a bit on the solar AUM decline. Was some of the -- was this really for those legacy contracts that ended up not making the transition from the initial pruning up efforts that you had kind of around the Analyst Day? Or is this exiting business with new customers that are just not hitting an even higher profitability threshold that you've kind of used?

Yes, it's really what -- this is Prakesh again. It's really what Bill laid out earlier. We took a screen of, are there subscale customers that are difficult to serve? Is it a lower margin contract? And one other thing I would hit on is -- and this was especially true on the storage side -- will it tie up additional working capital? If any of those hit, then we would flag that and it was reviewed. And then unless it's a very strategic customer, we opted to cancel that agreement. So that's really what drove all this activity.

Our next question comes from the line of Justin Clare with ROTH MKM. Mr. Clare, please go ahead with your question.

Yes. Can you hear me?

Now we can.

Yes.

Okay. Great. Sorry about that. Yes. So first, I wanted to just ask about the impact on ARR. So it would seem if you took the write-down, I guess, and lowered the value of ARR, it would have an impact on the cash flows that you would anticipate collecting this year if you had been anticipating essentially selling that legacy hardware within the year. So the question is, does this have an impact on the cash flow for the year and an impact on your guide? And are there offsetting factors that would essentially offset this?

So I think when I think about the backlog, generally, I mean, we're always taking a look at how durable that backlog is. And really what I mean by that is saying from a margin standpoint. So I think that when we're -- when -- the evaluation that we did was really targeted to that. Like, as we're looking at projects which are cancelable prior to a PO being placed, are we able -- particularly, in this market for hardware, are we able to create a situation with a customer where we have a positive cash flow environment? And so that's really the gist of everything. And I think, can we -- so if the question is, then can we refresh that backlog with better projects? I think the answer is yes. And we've reaffirmed the guide of $1.5 billion to $2 billion in total bookings. And I think from that standpoint, I think, we're in a good position. Ultimately, the question is going to be, how quickly can you collect on that accounts receivable? And I think these are deals that we really restructured such that the velocity of the cash flow is higher. So I think those -- it starts at looking at the first piece, which is, what's the margin profile of the project, what's the timeline associated with the project, and then what's the cash flow velocity associated with it. And so we think that we're going to replace the backlog with projects which are more favorable for the business than those that went away.

Okay. Got it. And then maybe just one more. Curious on -- so it sounds like with the legacy hardware, some of it is being incorporated into development projects. And so wondering what stage are those projects in? Have you signed effectively PPAs for those projects? And then are those planned for sale in 2024? And is that a part of your cash flow expectations?

So the projects are in development. They are expected to be sold this year. In some cases, those projects will -- they'll COD this year, but most will probably COD next year in 2025. And when we think about the cash flow profiles of those, they're definitely going to contribute to cash this year.

Our next question is from the line of Brian Lee with Goldman Sachs.

I had to hop around on a couple of calls this afternoon, so I might have missed a couple of things you said at the beginning. So apologies in advance if these are redundant. On the contracts you canceled, did you specify kind of the range of -- you called them low-margin contracts. What's sort of the delta between what you canceled and what you are keeping in the backlog? Just trying to get a sense of what that kind of threshold is for not hitting your target profit levels?

Yes, I -- Brian, this is John. I think the ones that we consider to be out of scope would be below the kind of gross margin targets that we set for the business. And that was one of the thresholds, as I mentioned. I think the other important component is, we really looked at what kind of installations or total megawatt hours or what other metric you may have that would actually be enough to spread those costs out to make it compelling. To do 15 sites in Des Moines, Iowa is not a great outcome for the company. So that was another lens we looked at. But certainly, the contribution margin to align with guidance and then, obviously, looking at markets where we had critical massive systems. And by the way, this could change. I mean if local legislation, state legislation changes, we could go back into that market. I mean the nice thing about our model is there is a certain flexibility that we have if things change to move very quickly because a lot of these customers have multi-sites in a variety of states and we're their preferred supplier. So we can go where they need to go, wherever the market dynamics change in favor of that contribution margin equation that we mentioned earlier.

Okay. Understood. That's helpful. And then on these hardware revaluations, I think it might be maybe the second time you've seen some of this. And then you also cited there's another $50 million of contracts that could potentially need to be revalued, I mean, non-cash consideration, obviously. But still it is impacting kind of the outlook in terms of some of your KPIs that the market and investors follow. So can you -- just the thought process around identifying potentially $50 million still left through the balance of this year, early next year. Do you have a high confidence level of being able to remarket those? Is this more of an auditor decision? Whether you get to actually pull the trigger on taking that out of the numbers or not? Or kind of what's the thought process? Because it feels like you're still subject to another headline risk on this number if it does get to a point later this year where you decide you have to take it out of the revenue outlook again.

This is Bill. When we looked at the variable consideration, we're constantly on a quarterly basis taking a look at all of the potential variable consideration components. So I would say it's not really an auditor decision. This is a management decision. We just looked at what we saw as the implied value of the underlying projects and how the equipment that we own interplays into that. When we did that math, we determined that we were going to need to make an adjustment to that variable consideration. So I mean, that analysis will continue. I mean the good news is we do have a robust portfolio of projects. Because ultimately, the equipment, while an integral part of any storage project, is not the only way you think about it. I mean, the other question, of course, is like what's going on in the revenue side of the project and other factors. So I think the market for the equipment -- or, say, the valuation of the equipment reflects the current market conditions. I mean that -- and so that's how we did the analysis. And certainly, I wouldn't disagree with you that there is more risk in that $50 million of remaining equipment. But I think we've got a portfolio of projects which we can place it into. And so we're confident that we can do that.

Okay. That's helpful. And then just last one for me. So it is a legacy issue. So we shouldn't -- it's nice to have it out there that you're kind of capping it at $50 million if it does come to fruition. Could you remind us -- some of your peers with lithium and battery prices continuing to remain volatile, they've implemented like RMI index-based pricing and other strategies. How are you going to market with some -- the pricing and cost management on the hardware side because you're not doing these legacy guarantees anymore? Could you remind us what the strategy is for the larger scale projects you're going after now?

Yes. So you're absolutely correct. First, we are not issuing guarantees like that anymore. So in the [Technical Difficulty] it's been a little while since we did them. Since then we've really gotten super short on contracts, because I think one of the things that we've seen in, say, the lithium market is that there's been a lot of supply that's come into the market here in the last maybe 6 months and maybe -- and really starting to see the impact of that in the last couple of months. And so battery prices have -- even though -- I mean it's almost become distanced from the lithium index. I mean, if you -- I don't know how closely you follow it, but like the index has actually increased since March almost 15%. However, battery prices have declined pretty dramatically across all of the major manufacturers during that same time period. And I would say delivery time frames have gotten probably more aggressive than they have been in the past. So this really -- which kind of went into the valuation of the variable consideration conversation that we were having before. So I think one of the things that we've done is we've gotten really close with our customers and said like, "When you really need the equipment, let's" -- which is a difference from maybe a year or 2 ago when folks were more than willing just to buy things just to make sure that they had them for when the projects were ready. Now people are kind of holding off and buying when they actually need the equipment. So the good news, I think, for us is that 2 things are going to happen. One, the battery delivery is going to be more reflective of the current market conditions. And because the batteries are purchased closer to their installation dates, you should see a speeding up of CARR to ARR, which is exactly what happened in the first quarter here. So I think one of the things that we're trying to do is really kind of shift the business from where we were -- I mean, depending on how long folks have been following the company, it used to be really a straight BTM company. And now we're really -- we've changed both the model of -- moving to FTM, but also the type of FTM that we pursue. And so I think one of the things that we're -- you're going to be seeing from us is quicker conversions from bookings to hardware revenue events and quicker from CARR when -- basically, when that hardware is delivered to when the actual software starts working. And so I think for us, that's really our strategy, is shortening those time frames such that there's quicker conversion from a booking to revenue and particularly on the software side.

And I think from a contract level, we're about 40% for 2024. Is that about right, Bill?

Yes.

Sorry, Brian. Go ahead.

No, I was going to say I appreciate all that color and the additional percentages are helpful, too.

Next question comes from the line of Joe Osha with Guggenheim Partners.

I want -- we've kind of tossed a lot of numbers around, but I wanted to see if I could just make sure I understand it. Now, you're talking about exiting the year at a CARR of $115 million to $130 million. We talked a lot about CARR to ARR conversion. So what should that $115 million to $130 million reflect in terms of an ARR, annualized run rate, at the end of the year you think?

I don't think we've given that specific guidance, Joe. So I think I'm going to stay away from that answer. And so I'll apologize and go to your next question.

Okay. Can I -- all right. Is there -- can we assume that the rate of conversion is going to improve? I mean I know there's been lots of -- all right. Can you give us a signpost at least, right? Because I think one of the challenges here is that we do see the CARR metric moving, but the ARR is not. And you've chosen to talk a lot about -- on this call about how the conversion is improving. So what kind of signpost can you give us to at least try and make a guess with that on our own?

Well, I think we had -- so in the fourth quarter presentation, we had a slide around CARR and ARR, where we kind of laid out -- kind of didn't give specific numbers, but certainly graphically showed kind of where things were. And so I think one of the things that we have seen generally is around when we had the $91 million, which was, of course, the CARR number as of the end of 2023, about half of that was IRR or so. And so I think one of the things that we're trying to do is get that number higher as a percentage. And so the numbers that John gave you -- or gave the call a few moments ago give credence to the fact that there is an increasing rate of CARR to ARR conversion.

Okay. Second question then, you showed quite a nice improvement in terms of the amount of working capital tied up in receivables. Sequentially, it was down to like 240. Just kind of wondering given how everything you've talked about in terms of trying to improve the velocity of cash and so forth, could we see the number trend back to like where it was in '22, where it was like $95 million and $144 million? Are we going to free up a significant amount of additional cash here? Or should I still think about this receivables number bouncing along in the kind of low to mid-200s? How should I think about that going forward?

Yes. I think we've been pretty transparent about that receivables number. I mean, last quarter, it was just over -- a little bit over $300 million. And I think we talked in the call, I mean, like we expected to be able to reduce that number by around $100 million and return that cash to the balance sheet. So that's really -- that's the target for us. I mean, I think -- depending on what time of the year you're talking about, I think probably a number between kind of $175 million and $225 million of receivables is probably the right number for us, depending on what period of time you're talking about. I mean that's an important distinction.But I mean, for sure, we got a little heavy on the receivables side. And our goal is to reduce that. One of the questions that we get a lot is like, "Hey, do you have to raise cash?" I mean I consistently answer that by saying we've got to collect our receivables. And that will be the way that we raise cash. So yes, I think we saw the first spots of that this quarter. Net of the adjustment that we've been talking about, receivable did decline by around $30 million. AP came down as well. And so I think we're going in the right direction from a cash generation standpoint. And we feel really confident that we can make that $50 million number that we laid out for the year.

Yes. And I wasn't casting aspersions. I was just trying to understand.

No, none were taken.

And you said -- that's helpful. So $175 million to $225 million. That's kind of -- that's helpful. Yes. And then my last question is, we hear a lot and I think we've -- some questions in this call alluded to -- we're hearing a lot about Sungrow, Canadian and some of these guys showing up with a combination, BESS inverter solutions and customers self-integrating CATL as well. Are you all seeing that? And I'm curious. Does that potentially represent an opportunity for you guys as you think about the software-only part of your business as more of these Chinese guys show up and sell directly?

Yes, Joe, John here. I think it is an opportunity for us. Some of the names that you've mentioned, certainly, we've -- they're either existing suppliers to us or ones that would have a need for the Stem system. Modular ESS is a good example that could integrate into their offering. So I think you're on the right track. And I think the breadth of the Athena platform is being recognized by these OEMs. And so we're excited about that opportunity.

Joe, this is Prakesh. One of the other things -- and you highlighted this with the Chinese OEMs, is there's increasing cybersecurity and national security concerns by a lot of grid operators and it presents a good opportunity for us to partner with these OEMs to use our software, where a U.S.-based company can guarantee NERC CIP, other compliance standards and have no -- we've worked with utilities -- actually, the first largest utility contract of any storage provider was Stem. So we have a lot of credibility to [Technical Difficulty] set of opportunities for us as a result.

Next question comes from the line of Kasope Harrison with Piper Sandler.

Just 2 for me. First one is on the GAAP gross margins for software and services. It looks like it got quite a bit better year-over-year and I think quarter-over-quarter as well. Can you speak to what the driver was of that improvement? And how sustainable the current software gross margins are?

We think that it is sustainable first. And I think the reason for that growth is a combination of effects. But principally, it's the newer, i.e., within the last couple of years, software contracts coming online and being fully effective, while the older, what we call, the host customer systems falling off. And so that mix is continuing. And I think the other part of it, of course, is the continued impact of the growth in the solar part of the business on the services side.

Got it. That's helpful. And then my next question is on the booking side, specifically $23.8 million. I get that it's lumpy, it's FTM. But that's still a pretty big drop from the [ $36.4 million ] last year. And so I was just wondering if you could share some context on what happened with bookings this quarter. Are you seeing anything change in the market? Or was this about in line with what you expected? And I know you shifted away from quarterly bookings. Just any sort of color on the market would be great.

John Carrington here. Look, I'd say a couple of things. It is lumpier for sure. As we have expanded into the larger scale front-of-the-meter storage projects, the timing of these bookings certainly moved around. It's exactly what I saw when I was at First Solar incidentally. And so I've seen this playbook before. And I would also add that our project size has tripled over the past 2 years. And we have a substantial number of projects that are advanced stages of negotiations that Bill mentioned earlier or expected to close in the near term. So I think we feel good about the total year, as we mentioned, the commercial momentum. And we remain confident in achieving our $1.5 billion to $2 billion bookings target for the full year. But yes, it's just -- landing the plane every quarter on a bookings metric is tough as you get bigger and bigger projects.

There are no further questions at this time. I would like to turn the floor over to John Carrington for closing comments.

Thank you, Ranju. And I want to thank everyone for joining our first quarter earnings call. And we look forward to speaking with you during our second quarter earnings call, which will take place in August.