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

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our third quarter 2024 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking.

These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10-Q and our other SEC filings. Our comments today also include non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are on the Investor Relations section of our website at www.stem.com.

David Buzby, our Interim CEO; and Doran Hole, CFO and EVP, will start the call today with prepared remarks. And Mike Carlson, our COO, will be available for the question and answer portion of the call. And now I will turn the call over to David..

first, refining our product and go-to-market approach to be centered around software and services.

Second, expanding and emphasizing consultative energy services as opposed to hardware resale as our entry point into project based customer relationships, creating predictable revenue and gross profit that is less dependent on project timing or completion.

Third, enhancing our commitment to innovation by leveraging AI to expand and improve our software products value to our customers as well as enhancing edge device capabilities. And fourth, changing our approach to battery hardware.

This means offering hardware procurement as a service and sometimes directly procuring it for our customers, but only when it meets strictly defined criteria. As we implement these strategic initiatives, we remain committed to our defined path forward, while allowing for necessary adjustments along the way.

This year, the unpredictability of project timelines for utility scale storage hardware persisted, prompting a strategic shift to reduce our reliance on this revenue stream. These timeline challenges resulted in significantly lower than expected bookings, revenue and accounts receivable collections.

We expect our refined strategy to accelerate the growth of more predictable revenue from software and services. Through our consultative energy services offering, we aim to generate revenue earlier in the project lifecycle, independent of potential interconnection or permitting delays positioning services as a gateway for software sales.

By emphasizing our software and services offerings, we believe that we also have a clear path to gross margin expansion and profitability. Finally, by updating our approach to battery hardware, we expect to see improvements in the company’s working capital management. To execute our refined strategy, we have a team of talented leaders.

I’d like to highlight two of them, Matt Tappin and Jake Berlin, both seasoned professionals with deep industry experience. Matt, who joined us at Stem 3 years ago, has been leading our software business for the past 18 months and will continue to do so.

He brings a robust background and strategy and corporate development with a focus on the energy transition. Meanwhile, Jake Berlin, the current leader of energy services, has nearly two decades of experience in the energy sector, developing and delivering service solutions for a wide range of clients.

Both Matt and Jake are reporting to Doran Hole, our new Executive Vice President and Chief Financial Officer, who joins them in early September. Doran has more than 25 years of global finance and management experience, providing leadership and strategy and operational efficiency in the growing clean technology industry.

He most recently served as Executive Vice President and Chief Financial Officer of Ameresco, a customer of Stem, where he led the company’s financial strategy in capital management. He was also responsible for the company’s SaaS and consulting focused business units as well as overseeing its off-grid solar business.

Doran has deep financial and business experience, strong strategic acumen and proven leadership success. Mike Carlson, our COO for the last 2 years, will continue to focus on delivering products and services to our customers on time and on budget.

Albert Hofeldt, our recently announced CTO, who has also been with Stem for over 2 years, will focus on our AI-enabled software product development. With such an experienced team of leaders, we are confident in our ability to drive innovation and achieve our strategic goals, ensuring success and growth for our organization.

I will now pass the call over to Doran..

first, a reduction in battery storage hardware resales within our bookings; and second, a gradual shift towards shorter duration software and service contracts on the storage side, ranging from 3 to 5 years compared to the historical 15 to 20-year contracts.

We will still have some variability in our revenue in 2025 and 2026 based on the timing of delivering battery hardware out of our backlog. Again, we are upholding our existing customer commitments, but over the long-term, we expect a lower contribution from hardware resale revenue.

Second, we have moved quickly to reduce our operating expenses to reflect our new strategy. We expect to reduce our run-rate cash OpEx by around 15% between now and the end of the year. Most of the reductions will come from headcount tied to some of our old business lines alongside reductions in other discretionary spending.

In short, we are laser focused on driving the company to profitability. Third, we are evaluating the financial and operating metrics the company will use to measure and manage performance going forward.

Expect to see some corresponding changes in our reported metrics for 2025, including guidance metrics that align with software and services centric businesses. We will be looking to provide investors and analysts with useful information enabling them to better evaluate the company.

As usual, we will provide 2025 guidance during our fourth quarter call. With that, let me turn the call back over to David..

Thank you, Doran. Before covering our key takeaways, I’d like to comment on the status of our CEO search. While I am passionate about the future of Stem, I have no plans to be the permanent CEO. Since September, the Board and an executive search firm have been engaged in the search for our next CEO looking at both internal and external candidates.

Today, the search remains ongoing, but we hope to identify the new permanent CEO by the end of this year or sometime shortly after that. I intend to remain Chairman of the Board once the new CEO is in place. Now, let’s turn to Page 17 for our key takeaways. Our strategy review is complete. We’ve moved into the implementation phase.

And while we might make slight adjustments along the way, we are moving decisively to focus on software and services growth. This will drive more predictable revenue, higher gross margins and improved profitability.

We will continue to invest in our industry-leading software and technology platform, which will drive differentiation and commercial success. And we will lead our storage efforts with services deemphasizing hardware resale.

This will bring forward when we collect revenue from our project-based work and improve our working capital profile as well as continue to grow at channel for software sales.

In closing, I want to thank the Stem employees for their continued strong execution to support our customers despite significant changes in the business and leadership over the last several months. The strength of our offerings ultimately depends on the strength of our people, and we believe that we have some of the best in the business.

With that operator, let’s open the line for questions, please..

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

Thanks and good afternoon, David and Doran. I think the first question for me is really around you have had a lot of changes here in the last couple of months, management strategy, although the strategy, to me seems like kind of the evolution of where the company was already headed into much more of a fast and services business model anyway.

But I would love to hear just kind of as you – as both of you being especially both you are new in your seats. And I know David, you will intend to stay in that seat.

But I would love to hear kind of the feedback you are getting from customers, what the – what you are hearing, obviously employees that have been good, what you are hearing from customers around kind of this strategic shift and some of the management changes that have happened..

Thanks James. This is David. We think that customer response has generally been very positive as they are increasingly sophisticated in the way they buy their storage hardware. And it’s viewed increasingly as a commodity that’s available from multiple sources. So, I don’t think it will affect our storage hardware customers.

And to repeat what we have said elsewhere, we will continue to support those customers if they want us to procure the hardware for them before it won’t be a requirement of the relationship going forward.

And our 16,000 or so plus solar customers have been very receptive of the new strategy, as it reassures them that our primary focus on software improvements will continue and we will be able to enhance our products and give them some of the enhancements they have been asking for us to optimize their assets,.

Okay. And I guess maybe to add on to that.

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

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

James, this is Mike. Probably, we have obviously got a host of interest from the customers and what they want to see, but they probably bundle into three distinct areas. That is one more capability around just the user information flow and the ease of access to information.

Number two is around the predictive and we are looking at leveraging advanced AI for that predictive information flow into the asset, particularly in its operating characteristics.

And then third is the automated warnings and resolution process and getting more integrated work process into the platform that automates more of the focus of what they intend to use the software to provide. Those are probably the three categories of information they are looking for.

Then when you get into the storage optimization, obviously there is a financial modeling that goes along with that as well..

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

Thank you, James..

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

Appreciate you taking the questions.

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

Yes. This is Mike, again. Absolutely, the modular component, and we have talked a little bit about in the deck, you will see a reference to the power core EMS, which is part of that solution.

That’s a big component of whatever that hardware platform is, and the connectivity into the cloud services, so that modular edge device will continue to be a major part of that overall architecture and strategy..

Yes. And Thomas, this is Doran. I would say, it is important to distinguish between the edge device hardware and the kind of battery hardware, OEM, battery resale when considering what we are talking about here with the strategy. The edge devices are a critical component of our strategy going forward. And we have dominant market share here in solar.

And as Mike described, that modular offering is really, really important. It’s really the large ticket OEM hardware re-sales that we are going to be focused on, kind of working through the backlog and providing the procurement advisory services on..

I understood.

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

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

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

So, between now and the end of the year, I think it’s fair to say it’s going to be both. As we talked about, there is the potential for us to opportunistically and as a customer requires it to do this hardware resale, if it’s satisfying all of the criteria.

I have laid it out pretty heavily internally, about profitability, cash flow metrics coming accompanied with the software. So, I expect that to be a continued theme even on some of the things that are, as we – you look at that range in the bookings forecast, obviously there are some things in there we have been working on for a while.

And so we don’t want to really just kind of suddenly back away from that and we are one of the reasons I am here. Stem was focused on the customer. We want to keep focusing on the customer. We want to be able to deliver what they are expecting. But I do expect us to satisfy those criteria.

And you will see a combination of some hardware and software between now and the end of the year. And it really, frankly, that’s why the range is so wide..

Understood. Now, appreciate the clarity there.

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

Yes. This is Mike again, and the primary drive of that is the change, the focus of software. And software stats agreements, probably industry standard is closer to that 3-year to 5-year. That’s what our solar business model has been, and it’s really responsiveness to the customer.

That long 20-year commitment is directly tied to the OEM hardware warranties that they want, that extended confidence of asset performance, and that’s why we are decoupling those and you will see that change in contract duration as a result..

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

Thanks Thomas..

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

Hey guys. Thanks for taking the time here. I wanted to just follow-up on the prior question here, on the shorter duration contracts, 3 years to 5 years versus 15 years to 20 years, I was wondering if the annual revenue expectations for these contracts are changing at all, or if it’s just the length of the contract.

And I think we have to consider the offering that you are providing here as well, and the fact that you are engaging with the customer earlier, so maybe you can just speak to the potential change in the revenue opportunity..

So, Justin, I think one thing I have been looking at closely here is the way that we price our software, and we are going to consider that very closely. However, I would say, based on the business that we have got in front of us, probably not a lot of change in the annual revenue numbers, not anything really material.

It’s really all about just running into shorter contracts because of the customers looking for, again, trying to offer them flexibility there..

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

Absolutely, it’s going to be a mix. There are a number of engagements, called site assessments, forecasting assignments, you name it. We have variety of different types of services that we kind of outlined.

And many of those are engagements that might be one time, two-month, three-month, six-month assignments where our subject matter experts are helping customers work through particular items that they need to sort of check off to help de-risk their projects.

And the customer base there, are folks who just aren’t equipped internally to handle that type of work, so they really look to us as the experts. But yes, there will be a mix of that, as well as some of the longer term service contracts that we will be offering..

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

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

Okay. Got it. Appreciate it. Thanks..

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