STEM - NYSE

Ladies and gentlemen, greetings, and welcome to the Stem, Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Erin Reed, Investor Relations Manager. Please go ahead.

Thank you, operator. This is Erin Reed, Head of Investor Relations at Stem. We welcome you to our third quarter 2025 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These statements 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, 10-K and other SEC filings and supplemental materials, which can be found on our website. 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 third quarter 2025 earnings release, which is on our website. Arun Narayanan, CEO; and Brian Musfeldt, CFO, will start the call today with prepared remarks, and then we will take your questions. And now I will turn the call over to Arun.

Thanks, Erin. Hello, everyone, and thank you for joining us today. Q3 2025 marks 12 months since we announced our strategic realignment, and I'm proud to report that our transformation continues to deliver tangible positive results. Today, we reported third quarter revenue of $38 million, up 31% year-over-year, with ARR growing 17% year-over-year to $60 million. We achieved our second consecutive quarter of positive adjusted EBITDA and generated positive operating cash flow. Our software-centric strategy is delivering results. The success of our strategic transformation is evident in our consistent earnings performance with steady growth in software and services revenue and continued improvement across key profitability metrics. As we maintain disciplined cost management, we believe we have achieved operational stability and our high-performing team is laser-focused on execution and results. Today, we are also refining guidance to reflect our revised forecast, which we will go into more detail later in the call. The key takeaways are we have reduced the historical volatility in our business. We have derisked the low end of nearly all guidance ranges, and we feel confident about the stability of our business. This quarter also marked a pivotal moment in our evolution as we unified our corporate identity under the Stem brand and streamlined our entire product portfolio within the comprehensive PowerTrack suite. This transformation goes far beyond surface level changes. It reflects the deep integration of AlsoEnergy's solar expertise with Stem's storage and AI capabilities. For our customers, this means that we approach them with a single voice with superior technical solutions across their entire energy portfolio, covering solar, storage and hybrid assets alike. Combined with Stem's industry-leading subject matter expertise, this creates an unparalleled customer value proposition. We welcome you to visit our redesigned website at stem.com to see this unified vision in action. Each quarter, we have touched upon our strategic priorities for 2025, driving software and services revenue growth, revamping software development and reducing our cost structure and driving profitability. We've advanced all 3 strategic priorities in Q3 with concrete results. Let me detail our progress. First, let's focus on software and services growth and revamping our software. On September 2, we launched PowerTrack EMS for hybrid and stand-alone storage projects. This energy management system integrates AlsoEnergy's solar C&I offerings with Stem's storage offerings and positions us to meet the needs of key markets, including solar, storage and hybrid assets in both the C&I and utility scale segments. It is an intelligent control system that manages battery charging and discharging operations while coordinating grid services and enabling revenue streams for energy storage projects. PowerTrack EMS fills the critical gap between basic battery management and advanced optimization software such as our PowerTrack Optimizer product, enabling us to provide important control offerings regardless of the commercial management of the battery, including in territories where merchant optimization is not permitted. We remain excited about PowerTrack EMS because it expands our total addressable market by widening our potential customer base and the markets we can serve. Here in the U.S., it unlocked for us the utility scale market, which is heavily hybridized versus the C&I market. Outside of the U.S., PowerTrack EMS unlocks the international market for C&I and utility scale projects, which are also largely hybridized. International expansion is a key component of our corporate strategy that also helps us manage near-term macro headwinds in the U.S. Importantly, in all markets, PowerTrack EMS is an optimization-agnostic controls-oriented product, which means that it can be sold in markets where utilities provide dispatch signals without the need for a third-party optimizer or in international markets where Stem does not provide managed optimization services with PowerTrack Optimizer. It is truly a complementary offering to the existing portfolio and allows us to offer an end-to-end solution for our customers. We launched PowerTrack EMS at the RE+ conference to strong customer reception. This product garnered particularly high interest from operators of hybrid energy sites. Just 8 weeks after launch, we've already booked significant capacity deployments with blue-chip customers in 3 different countries, validating both our product capabilities and marketing positioning. These deals cover primarily hybrid utility scale projects with existing solar assets that expect to convert to hybrid in the near term and are using PowerTrack EMS as a way to future-proof this conversion while limiting downtime. We expect these bookings to convert to revenue in the coming quarters with about a 6- to 9-month typical lead time. Our core C&I solar monitoring platform is deeply established in the industry, but we remain dedicated to continuous innovation and addressing key customer feedback as quickly as we can. In the last 90 days alone, we have rolled out over 100 software improvements and bug fixes directly enhancing the PowerTrack experience for our customers. Recently, we have added best monitoring features and enhanced [ PV ] performance analytics, ensuring that PowerTrack is the platform of choice for our customers as they add storage to their solar portfolios and scale to more complex operations. As we announced last quarter, we are also incorporating advances in AI into our offerings with PowerTrack Sage. PowerTrack Sage is an AI-powered assistant that sits on top of PowerTrack and transforms complex solar and storage data analysis into natural language conversations. It's like an expert analyst available 24/7 to simplify certain important product workflows and serve as a first line of support for customer questions. There's high customer interest and excitement about this product, particularly around solar analytics and diagnosing root causes for unusual data. PowerTrack Sage development remains on track for limited beta release with select customers in December and is expected to be broadly available in 2026. PowerTrack software continues to demonstrate strong performance across key metrics. Revenue increased 10% year-over-year. ARR expanded 19% year-over-year, and we commissioned 1.2 gigawatts of solar assets this quarter. Our platform now manages nearly 34 gigawatts of solar assets, reinforcing our market-leading position in C&I solar monitoring. Now let's move on to managed services. Our managed services are software-enabled full life cycle energy storage services covering the design, procurement, commissioning, operation and optimization of energy storage and hybrid solar plus storage systems. We help asset owners maximize the reliability, performance and returns of their storage assets. Managed services are supported by our PowerTrack Optimizer software, previously known as Athena. Energy optimization, especially when value stacking is a specialized area that requires both our optimization software and humans in the loop to execute well. Humans in the loop ensure that the optimization is keeping up with the constant market and program rule changes, market dynamics and new value streams. Our competitive advantage in managed services lies in our ability to serve as a full service provider, leveraging our substantial market share across diverse segments. We remain one of the few companies with this expertise. Our managed services contracts include both recurring revenue and performance-based upside when we exceed operational targets. Q3 2024 included significant overperformance that we did not repeat this quarter, which impacts the year-over-year comparison. The underlying health of this business is strong as our recurring base revenue grew 14% year-over-year and 4% sequentially. Finally, our consultative professional services offering continues to resonate with customers across a wide range of development, deployment and operational needs. We are continuing to drive repeat business, a clear mark that our offerings are adding value. And we are increasingly focused on cross-selling professional services with other business units offerings. Now to another strategic priority, reducing our cost structure and driving profitability. We remain diligently focused on cost management. We have achieved our second consecutive quarter of positive adjusted EBITDA while maintaining robust GAAP and non-GAAP gross margins. Operating expenses remained flat compared to the second quarter, and we are continuing to drive further efficiencies through AI implementation. Additionally, we've generated positive operating cash flow and kept cash flat sequentially. Our financial performance validates the business model transformation, expanding gross margins, 2 consecutive quarters of positive adjusted EBITDA and positive operating cash flow. These results demonstrate both profitability and sustainability. We are dedicated to financial transparency, and we remain committed to helping our investors and stakeholders better understand our business. To that extent, our Form 10-Q to be filed today once again disaggregates revenue across distinct categories. What's new this quarter is that we are also providing detailed gross margin disclosure for each revenue category in our supplemental slides. Now on to guidance. With 9 months of reported results and early visibility into Q4, today, we are refining our full year 2025 guidance ranges, including a tightening of ranges previously disclosed. First, we'd like to highlight that our ability to tighten ranges is a significant advancement versus where we were previously, where volatility and back-end seasonality negatively impacted our ability to guide with precision. Our software-centric model has reduced this volatility and enhanced our forecasting accuracy. With that said, we are tracking towards the midpoint or better on all metrics except operating cash flow, where timing of working capital movements could result in performance towards the lower end of our range. I'd like to highlight that we have brought up the low end of the ranges for software, edge hardware and services revenue and adjusted EBITDA and raised the guidance for non-GAAP gross profit. Brian will provide the specific updated ranges, but I want to emphasize that the underlying business fundamentals remain strong, and we are well positioned entering into 2026. Now turning to the macro environment. Headwinds from policy uncertainty remain, and we are actively working with our customers to navigate this environment. We remain on track to meet our guidance expectation through the end of the year. In addition, our diversified software-centric model, combined with our recently enhanced international strategy should position us well against the potential impact of domestic headwinds. We remain confident in our end markets, and we believe that we are well positioned to benefit from the projected international load growth. Our international expansion efforts are focused on a multiphased approach. First, we developed an internationally ready product suite with PowerTrack EMS. Second, we are leveraging our regional expertise through our existing teams in Berlin and Japan. We see significant opportunities to expand within the European markets. And in Berlin, we recently moved our operations to more centralized and collaborative facilities. We are expanding our technical depth and customer support in Berlin to combine our global expertise with local execution that can service high-priority European markets. Our growth strategy for Q4 and beyond centers on 2 drivers: PowerTrack EMS expanding our addressable market into utility scale and international hybrid projects and continued focus and acceleration in our core C&I solar business. Our recurring revenue base, substantial backlog and international diversification provide a strong foundation for sustained growth. With that, let me turn the call over to Brian for detailed financial results and the updates to guidance.

Thanks, Arun, and hello, everyone. In the third quarter of 2025, we saw solid financial performance across the business. Total revenue grew an impressive 31% year-over-year to $38 million. PowerTrack software revenue continued its strong performance in the third quarter, growing 11% year-over-year, and edge hardware grew a notable 18% year-over-year. As a note, this quarter with the introduction of PowerTrack EMS for hybrid and storage sites, we have redefined solar software revenue to PowerTrack software revenue as our PowerTrack software revenue will now include all customer-facing SaaS revenue generated from solar, storage and hybrid assets. Project and professional service revenue decreased year-over-year as the third quarter of 2024 benefited from approximately $5 million of onetime DevCo revenues. As Arun discussed, managed service revenue was also down year-over-year due to onetime overperformance in the third quarter of 2024. Although we are deemphasizing the business as part of our software-centric strategy, battery hardware resale brought in $4 million in revenue this quarter. You can find this revenue detail in the disaggregation of revenue footnote in our Form 10-Q and supplemental materials, which provide enhanced clarity into our business. We again achieved strong gross margin this quarter with GAAP gross margins of 35% and non-GAAP gross margins of 47%. This expansion reflects the increasing mix of higher-margin software and services in our revenue base and improving hardware margins for both edge hardware and battery resales. Our disaggregation of revenue provided in our supplemental materials now includes gross margin ranges for each revenue category to provide more clarity for investors and analysts. GAAP and cash operating expenses were both flat sequentially from the second quarter of 2025. Cash operating expenses were down an impressive 47% year-over-year. These reductions were primarily the result of the difficult but necessary workforce reduction that took place in the second quarter, and we remain focused on driving operating leverage and further cost savings across the business. That said, we feel positive about our ability to grow revenue without significant OpEx increases as demonstrated by our development of PowerTrack EMS and PowerTrack Sage products with current staffing levels. The improved margins and significantly reduced OpEx drove positive adjusted EBITDA of $2 million for the quarter, demonstrating that we are finding sustained operational profitability in our lower OpEx structure and our business transformation. Operating cash flow turned decisively positive at $11 million this quarter, a $21 million swing versus the same quarter last year, and our cash position remained stable at $43 million. My key strategic priorities as CFO remain to help drive profitable growth and manage our capital structure as we look to continue growing in key revenue categories over the coming years. And now turning to our operating metrics. Bookings were $30 million, down slightly versus last quarter, largely due to timing of bookings from our historically lumpy low-margin battery hardware resales. Software and service bookings were sequentially flat and contracted backlog was $22 million, down from $26.8 million last quarter due to lower bookings and increased hardware revenue recognition in the quarter. Contracted ARR remained stable at $70 million. And importantly, ARR increased 3% sequentially and 17% year-over-year, demonstrating the strength and scalability of our recurring revenue model. Finally, storage and solar AUM increased 6% and 4%, respectively, since last quarter. Now turning to our updated guidance for full year 2025. First, for revenue, we are tightening our revenue range to $135 million to $160 million from the prior $125 million to $175 million range. This reflects strong software and service performance with an updated range of $125 million to $140 million and is offset by lower battery hardware resale expectations of up to $20 million as we continue to deemphasize that business. For gross margins, we are raising the range to 40% to 50%. We are already tracking toward the high end of this range, but expect some margin compression in the fourth quarter with increased edge hardware deliveries. For adjusted EBITDA, we are raising the low end of the range and now forecast between negative $5 million and positive $5 million for the fiscal year 2025. We have factored in some conservatism in this metric, and I would highlight that we are currently tracking above the midpoint of our updated range. For operating cash flow, we are adjusting our range for this metric to between negative $5 million and positive $5 million. This quarter's $11 million in positive cash flow demonstrates the underlying cash generation capability of the business. Any fourth quarter working capital fluctuations will reflect normal timing differences in customer payment cycles, not fundamental business performance. And finally, our forecast for year-end ARR remains consistent at $55 million to $65 million and continues to reflect an attractive base of recurring revenue. While we won't provide formal guidance for 2026 until early next year during our fourth quarter and full year 2025 call, I can share that we enter 2026 with strong visibility from our recurring revenue base and contracted backlog, positioning us well for continued growth. And now I will pass the call back over to Arun for closing remarks.

Thank you, Brian. Our team delivered strong execution across the business this quarter. One year into our strategic transformation, the results are evident. Revenue growth, margin expansion, sustained profitability and positive cash generation. We established clear objectives for this transformation, and we are achieving them. The clean energy transformation continues accelerating globally and our industry-leading software platforms, solutions and dedicated team positions us to capitalize on this transformation. I want to thank our investors and customers for their continued confidence and trust in us, and I want to take this opportunity to also express my gratitude for the hard work and contributions of Stem employees in achieving these results. With that, operator, let's open the line for questions, please.

[Operator Instructions]. The first question comes from Justin Clare with ROTH MKM.

So I wanted to start with the guidance. And so with the update here, it looks like you're guiding to the midpoint or better across all the metrics. But just looking back to what you said last quarter, it sounded like you were tracking toward the high end of the guidance based on your comments from last quarter. So just wondering, has your outlook moderated somewhat given the new ranges? Or maybe you could speak to the potential to kind of deliver at the high end.

Justin, this is Arun. Thanks for the question. Let's address your point. The way we show the updated guidance on Slide 6 in the exhibit, you can see that we are actually still tracking towards the midpoint or high end of all the ranges. Only the deemphasized and nonpredictable sort of OEM hardware resale business, which was ranged at [ 0 to $35 million ] is now ranged between up to $20 million. I think that difference is sort of, you could say, the main difference. The rest of it is just a tightening of the ranges. And I would say that that's the main interplay between the 2 quarters.

Okay. Got it. That's helpful. And then just on the gross margins, it looks like in Q4, you could see a slight compression. I'm wondering, is this only really due to a mix shift with a little bit higher sales of the battery hardware or should we anticipate any other notable change to the gross margins by business line? And then I guess just looking beyond Q4, how should we be thinking about the gross margins by business line? And definitely appreciate the added disclosure here that you provided this quarter.

Thanks, Justin. This is Brian. Yes, I think when you look at the new disclosure there, hopefully, you see detailed on Page 12, when we talked about a little bit about compression in Q4, it's just going to be mix. Q4 is our largest delivery quarter for our edge hardware to a slightly lower margin. So that's really what will compress it in the fourth quarter kind of just in that period. As far as the out periods, we don't give guidance until Q1, but I think you can kind of see the 3 and 9 months trends. And so we do expect to keep working on margins and improving them over the next coming years, especially as, again, we're deemphasizing that OEM hardware, but the other categories are pretty stable and will continue to improve.

Got it. Okay. And then maybe just one more. Bookings in Q3 modestly lower than Q2. But again, that sounds like it's more a deemphasis of the battery hardware sales. But wondering with the release of PowerTrack EMS, can you talk a little bit more about the demand that you're seeing, the potential to see an increase in bookings potentially in Q4 here and just what you're seeing at this point?

I can take a stab at that. This is Arun again. We are very excited about PowerTrack EMS, as we have said in the prepared remarks quite a few times. It opens up new markets for us. And the market -- the subsegment sort of that we are targeting is the small utility scale sites. So sort of 20 to 100 megawatts in size. As we look at the initial energy around it, we are quite enthusiastic about it, and we are quite glad that our product fit is good. As PowerTrack EMS becomes a more meaningful portion of the revenue, we will provide more breakup and details around that. I think that's sort of our thinking at this point.

Our next question comes from Jon Windham with UBS.

Congratulations on the back-to-back quarters, probably adjusted EBITDA. I just have 2 questions. I'll ask one at a time. Any -- would love any commentary or color you're getting from your customers. There's obviously a lot of moving parts going on right now, particularly around batteries with [indiscernible] , but also with solar and some of the [indiscernible] guidance. Just love your thoughts on what you're seeing in sort of the top of the funnel, how demand looks in general for the industry and for you?

John, thanks for the question. This is Arun. I can take a stab at it. We are maintaining the momentum in our engagement with our customers. And we do see that the engagement levels that we have in terms of being able to drive our conversations around PowerTrack are maintained. So the comments you're making on [indiscernible] and other points are valid, but we see reasonably unchanged sort of conversation momentum in customer engagements.

Perfect. And I guess the second question, may I love this. You're into the turnaround, you're delivering on gross margin expansion very nicely. EBITDA is positive. How do you think about your goals for them because the market is always on to the next thing. When do we get to operating income positive, when do we get to net income positive? Once how do you think about that path or alternatively, if you don't want to answer that question, which I would understand, is how do you think about laying that out to investors and here's the path we're on a time line to sort of get longer term. Clearly, we had a lot of success here in the first year with the strategy shift. But I think the questions from investors are increasingly -- how does this progress down the income statement to positive numbers all the way down? Appreciate any thoughts you have on it.

It's a really good question. Let me take 2 or 3 parts to it. First of all, I think this quarter is the 1-year anniversary of the shift to the software-centric focus for the company. And you can sort of see that, that strategy is paying off in terms of stabilizing the revenue margins and being able to have a predictable business. The second piece is I've been in this role now 9 months roughly. And there's been a focus on managing our costs and driving a push towards profitability. Now I think we'll give more guidance on this in the next call. But maybe one thing I can direct you towards is a note that we put out towards investors and stakeholders in one of the press releases in the early part of September, which sort of explains our thinking in terms of our overall product strategy, in terms of our overall service strategy, how we look at international markets and what our general approach is towards having a very continuous full market coverage solution all the way from C&I to the smaller scale utility projects and then going up from that space to what PowerTrack Optimizer provides in terms of the high end of that market. So I think it's an elegant story. And I would sort of encourage you and the other listeners to go back to our website and read that note that we have put out towards investors that comes with an attachment and a very nice presentation.

Our next question comes from Thomas Roche with Barclays.

This is Tom on for Christine. Congrats on the great quarter. So I guess I just first wanted to ask, do you foresee the business benefiting from the hyperscaler data center build-out in any way? I know you've typically been more focused on C&I and smaller utility scale customers, but has there been any internal strategy discussions around trying to go after hyperscaler customers with either your solar or storage offering?

Yes, Tom, really good question. This is Arun. One of the things I love about Stem is the team is very energetic, always focused on new business models, new business opportunities. We continue to target all of these opportunities with a lot of bigger -- what we're seeing in the data center markets, which typically prefer sort of natural gas solutions is that there are early indications that it's going to come around towards more renewable energy plays. So it's an exciting development as that shift seems to be happening, and we continue to watch that market space and see how we can play into that effectively.

Got it. Understood. And then just one more quick one for me. So you guys have -- you've cut a fair amount of OpEx here in the last few quarters. Would you say that it's safe to assume that we're at a decent quarterly run rate here on a go-forward basis?

Yes. Tom, this is Brian. I can take that one. Yes, I mean, as you've seen, right, we've cut cash OpEx, we've cut about 47% year-over-year. We reported just over $20 million of cash OpEx this quarter. I think we're done with the fundamentally large execution of that, that you've seen in the second quarter, we took a really large chunk out of the team with a very difficult but motivated strategy. But we are now -- we continue to look at other opportunities for savings. An example, this quarter, we exited our India facility, which was just oversized for what we needed. So the team is working on it. We'll always kind of manage cash just in the fundamental blood of this company now to make sure that we're operating that way. So we'll expect -- we're not really giving guidance yet, but I would say this quarter's trend is a good indication, and we'll keep working it down.

Ladies and gentlemen, this concludes the question-and-answer session. I would now like to hand the conference over to Arun Narayanan, the CEO, for the closing comments.

I want to thank everyone for joining the third quarter earnings call, and we look forward to speaking with you during our fourth quarter and full year 2025 earnings call next year. Thanks, everyone.