Stem Inc (STEM) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to the Stem Inc. Third Quarter Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ted Durbin. Please go ahead.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem, and we welcome you to our third quarter 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 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 third quarter earnings release, which is on the Investor Relations portion of our website at www.stem.com.

John Carrington, our CEO; Larsh Johnson, CTO; 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. Today, we reported record financial and operating results across all of our key metrics. Record revenues of $40 million, up 4x from the same quarter last year; record pipeline of $2.4 billion, up 41% since the second quarter; record contracted backlog of $312 million, up 25% since the second quarter; record assets under management of 1.4 gigawatt hours, up 40% year-over-year; and $576 million in cash at the end of the quarter. Our momentum continues to accelerate as customers demand our proprietary Athena software-driven smart storage solutions. We are reiterating our guidance for full year 2021 revenue and adjusted EBITDA.

On today's call, I want to focus on 3 things that differentiate us in the market. Number one, our software; number two, our customer focus; and number three, our financial position. First, starting with software. Let me be completely clear about our vision. It is to expand our position as the leading energy intelligent software provider. We have purposefully built our organization to drive the deepest, most robust artificial intelligence platform in the industry. Larsh will discuss our software differentiation in more detail later in the call.

Second, on customers. We provide significant value to customers over a contracted period of up to 20 years, both through our AI software and our operational services. And third, our financial profile benefits from strong and growing gross margins, driven by our software and customer focus. The Athena platform drove 8% GAAP gross margin and 15% non-GAAP gross margin this quarter, and Athena will continue to drive our margin expansion. Bill will provide further financial detail later in the call.

Before I turn it over to Larsh and Bill, let me focus on the second leg of Stem differentiation, our customer focus. Specifically, I will start with Stem's go-to-market strategy, which leverages our direct sales force, channel partners and our strategic investors to maximize reach across multiple markets. We have had great success with our channel partners in particular, who know our products and capabilities and have completed training at Stem University, our education platform.

We continue to expand the breadth and depth of our customer relationships. Our breadth expanded sharply as we nearly tripled the number of active Stem partners versus the same quarter last year. And our depth also increased as our average project size has doubled in the last year. This diversification results in limited customer concentration. We do not expect any one customer will represent more than 10% of our revenue this year versus some of our competitors who are highly dependent on a small number of customers to generate revenue. This broad customer base continues to inform our Athena AI platform in different customer segments, use cases and geographies, which enhances our software's competitive moat.

In the front of meter, our FTM market segment, we continue to gain share, which contributed to the significant increase in our pipeline this quarter. Additionally, our behind the meter, our BTM customers, continue to grow. And our repeat customer metrics are up quarter-over-quarter and year-over-year. In fact, nearly 50% of our bookings this quarter came from existing customers.

Partners continue to be a source of domestic and international growth, which led to the announcement of our expansion to Chile with our partner and investor Copec, one of the largest public companies in South America. We expect additional wins from this partnership both in Chile and the broader South American market.

Moving to some of our key metrics driven by our customer success. Our 12-month pipeline grew by 41% in only 90 days from $1.7 billion at the end of the second quarter to a record $2.4 billion at the end of September. We achieved this stellar growth across both FTM and BTM segments and across multiple geographies. Drilling down in geographies beyond South America, we've seen tremendous growth of opportunities in the Texas market, which now is the second largest market in our pipeline and was the source of significant bookings this quarter. We're helping customers garner exceptional economics for storage as the build-out in wind and solar has increased market volatility, which has led to strong merchant revenue opportunities. We expect our demonstrated success in generating merchant revenues in ISO-New England to translate into multiple markets across the country, and Texas is a foreshadow of things to come.

Now moving to our customer contracted results. For the first time in company history, we exceeded $100 million in bookings for a single quarter. The $104 million was more than double our bookings in the second quarter of this year and nearly triple the bookings in the third quarter of last year. Again, the Texas market represented a large portion of our bookings, and we are optimistic this will continue for several quarters to come. I'm encouraged by our strong commercial prospects in the fourth quarter of this year and beyond. Like last year, you should expect back half-weighted seasonality to our bookings, similar to our revenue.

I would like to make some comments related to customer centricity and lifetime support. This is a core value of Stem and we believe, highly differentiated. We commit to maximize the lifetime value and performance of asset operations in excess of 20 years. A core strength is centered around our AI-driven software, but also extends across our operations group. We add value for customers in several ways. Our deployments team supports logistics, engineering and interconnection for dozens of projects at a time. Our network team implements communications and uses a terabyte of data to automatically monitor asset performance and safety. And our programs team provides monthly performance reporting and troubleshooting in the rare case an asset underperforms. This team also oversees fleet performance, which includes 22,000 grid calls from multiple utilities and ISOs year-to-date.

Unlike some of our competitors, we do not manufacture install batteries. So we are agnostic as to the hardware manufacturer or installation contractor. We work hand in hand with dozens of EPCs and utilities to ensure these projects are installed on time and on budget. Our goal is to align with our customer use case, installation timing and geography, providing maximum flexibility and better project economics.

Our developer partners also know that we will not compete with them for future projects, enabling a more collaborative and enduring relationship. We have purpose built an organization designed to satisfy our customers over the life of their assets. These are seasoned teams with deep power market operating experience, and we continue to automate more and more processes to keep our costs low as we scale up our assets under management.

Again, this ongoing support is differentiated from many of our competitors who often provide a onetime installation with limited follow-up services or ongoing software-driven asset management. Bottom line, we believe we provide extraordinary customer service, which drives higher gross margins and strong customer satisfaction and loyalty. Today, nearly half of our business comes from repeat customers.

With that, let me turn the call over to Larsh Johnson, our Chief Technology Officer, who will discuss our differentiated software offering.

Thanks, John. Athena is the premier energy intelligence software solution in the industry. Our Athena platform is purpose-built to serve the changing power markets and a decentralized grid. This requires new solutions and business models to coordinate and optimize distributed generation assets, whereas traditionally, power flowed from central generating stations in a predictable one-way direction to demand centers. Today, distributed sources generate power from a multitude of locations and asset types requiring intelligent, flexible 24/7 manager.

The grid is also decarbonizing as individuals, corporations and IPPs and utilities pushed to install wind and solar assets to meet the growing demand for clean power. These new energy resources are enhanced by battery storage and smart software to predict intermittency and provide the balancing factor to ensure reliability and resilience. The sheer number of decisions needed to operate these clean distributed assets will far exceed both human and conventional automation capabilities. Distributed assets need distributed intelligence, and our Athena artificial intelligence platform is uniquely equipped to solve these challenges.

Our solution is broad. We provide energy intelligence across a wide variety of markets in the U.S. and internationally. We operate energy storage source from over dozen OEMs in over 75 utility jurisdictions in 200 cities, and we have over 20 million run time hours on our software, which provides extraordinary insight in the value generation for a multitude of customer types.

Our solution is also deep. Athena supports 11 of the 13 storage value streams identified by the Rocky Mountain Institute. Most importantly, we continuously co-optimize those value streams in real-time over time to maximize economic value for our customers. This is a key differentiator versus our competitors who often only execute on 1 value stream, whereas we often start with 3 or 4 and add more over time.

We are continuously expanding and improving our offerings and introducing new features. Our Athena SaaS platform supports continuous software updates that reliably deliver new features across the fleet on at least a weekly cadence. This intellectual property is protected by 25 patents, copyrights and several trademarks.

Last month, we introduced new advanced applications for wholesale energy markets. Athena Supervisor, which provides customers and partners asset performance insights with real-time visibility into how Athena manages and monetizes energy assets to ensure the lowest total cost of ownership. And Athena Bidder, which incorporates an owner's asset strategy and continuously generates market bids to maximize wholesale market revenues. We are fulfilling significant demand for these applications as we continue to expand our presence operating front-of-meter assets in wholesale energy markets.

Let's focus on our co-optimization capability for a couple of these FTM sites that went live in Massachusetts this year. For the first time, Athena Bidder automated day-ahead and real-time energy market participation along with capacity and frequency regulation services of hybrid solar plus storage assets in ISO-New England. Athena continuously forecast solar generation, the battery state of charge, energy and frequency regulation prices, market options and incentive goals.

With this information, Athena optimizes executing millions of scenarios per hour to determine the best operation for each site and then automatically generates bids for each market interval over the coming hours and days. Athena continuously tracks real-time conditions and cleared bids to better inform this nonstop real-time trading activity. I'm pleased to report that our first system is already performing 16% better than the initial forecast.

Lastly, we aggressively deployed these systems to maximize returns for our customers. This was no small feat and involved working with the ISO-New England to ensure these new hybrid systems were operating properly with the market. Our deep domain expertise is differentiating, and we will continue to work with grid operators on maximizing the benefits of energy intelligence.

Our customers are delighted with our performance, and our partners are starting to deploy these extraordinary solutions to new markets in the U.S. and abroad. We are targeting Athena Bidder for use in multiple large markets in the U.S., focusing initially on ERCOT, PJM and California.

The foundation of our success is intelligent energy storage, but we continue to build out robust additions in other areas. We constantly strive to provide new functionality for Athena to meet the needs of the grid and our customers' needs such as e-mobility. For example, we recently announced a pilot project with Penske to optimize their heavy-duty electric truck charging in Southern California.

Athena predicts when vehicle charging will spike the site's electricity demand and uses the stored battery energy to generate electricity savings and minimize demand charges. Since starting the pilot, our solution has decreased Penske's peak energy demand by 40%. We also helped Penske optimize their energy tariffs and secure incentive funds from multiple state agencies. It's worth noting that we displaced a competitor that was not able to provide the software required, and Penske is delighted with the performance of Athena. We're in discussions to expand our relationship with Penske, and we are also actively exploring EV partnerships with multiple parties.

In addition to e-mobility, we are supporting customer trends to electrification, including managing peak hour requirements for newly electrified loads and providing resiliency and backup power solutions that minimize the greenhouse gas impacts of traditional backup generators. Over time, we want to extend our leadership position as the world's premier decentralized power plant operator, delivering intelligence for the energy transition.

Looking ahead, our road map includes expanding our software capabilities across a broader spectrum of our customers' assets, driving further assets under management on the Athena platform. As an example, we are seeing demand from front-of-the-meter developers to source greater scope from Stem, and we intend to drive both organic and strategic activities to serve the needs of this segment.

Ultimately, our success comes from our people, and we are fortunate to have amazing software engineers and data scientists that are passionate about tackling some of the toughest challenges in AI and energy. Power market volatility and complexity is increasing as more intermittent distributed resources enter the grid. Athena thrives on this complexity, and our software team loves making the complex easy and helping lead the grid transformation. We are attracting terrific talent to tackle these challenges, and we will continue to invest in our people and tools to ensure we keep our competitive edge.

With that, let me turn it back over to John.

Thanks, Larsh. I want to touch on 3 other items before I pass it over to Bill for the financial results, the storage ITC, our views on supply chain and our ESG efforts.

On the legislative front, we remain cautiously optimistic that stand-alone storage incentive tax credit will be written into U.S. law in the coming months. As you have seen, the most recent reconciliation bill that came out of the house calls for a 30% ITC for 10 years, which includes a direct pay option that could accelerate storage deployment in our key growth markets, including co-ops and munis.

As a reminder, Wood Mackenzie has estimated passage of a stand-alone storage ITC would increase Stem's total addressable market by up to 25% against their previous baselines. More recently, Bloomberg New Energy Finance estimated that a stand-alone ITC would increase storage build-out by 3x versus the baseline forecast. We've done our own analysis of the ITC on our business, and we believe it will have the effect of opening new markets, but also deepening existing markets.

We have already begun targeted outreach to customers that we believe could benefit from the incentive. And we'll continue to engage via webinars, content on Stem University, co-marketing with our partners and new offerings from our product marketing team. Remember, our plan does not depend on passage of the storage ITC, and it would represent upside to our forecast. Some of our customers are in a wait-and-see mode for the ITC. So if it does pass, we would not expect a material impact on our 2022 results.

And then to the supply chain. I'm pleased to report that, as of today, we have secured adequate supply to meet demand through the third quarter of next year. We identified supply chain management as a critical risk at the beginning of this year, and our entire management team has been focused on securing adequate supply at competitive prices to meet our customer needs. As a reminder, our supply purchases match our contracted demand. You could see how much we have grown our backlog, and these new supply agreements ensure meeting customer commitments for next year.

Our supply chain strategy continues to focus on diversification across vendors and technologies. We plan to add a fourth vendor to supplement our 3 core hardware manufacturers. Our vendors are also diversifying their upstream suppliers. We have good line of sight to meeting our supply needs and continue to engage with them at a deeper level to further understand these supply chain constraints. We are seeing some inflation in our supply agreements, but the impact has been small, and we have been able to pass through the bulk of any cost increases in order to protect our margins.

On the customer front, we have not seen a material change in project timing for the first half of next year for developers relative to the solar supply chain disruptions. We may see some potential timing risk to projects in the second half of next year, but we'll continue to closely monitor the situation with our partners. We have also seen some delays related to interconnection and permitting. This is directly correlated to COVID staffing issues. We will engage directly with utilities and permitting agencies to help our partners mitigate any timing delays.

In addition, I want to update you on our continued focus on ESG. We are developing processes to systematically measure and report on the impact of our systems in decarbonizing the grid as well as driving engagement from our employees, partners and suppliers. These efforts are led by our Director, Laura Tyson, who chairs our Nominating, Governance and Sustainability Committee. We will update you on the great progress we're making on this front in the coming quarters.

Finally, I want to thank our team for another strong quarter, with our growing backlog, steady execution and exciting new product offerings giving us tremendous momentum going into 2022 and beyond.

With that, let me turn the call over to Bill Bush, our Chief Financial Officer.

Starting with our financial results. We recognized a record $40 million of revenue in the third quarter, which was at the high end of our guidance range we provided in January and over 4x versus the same quarter last year and 2x over the June quarter. The vast majority of growth came from the hardware sales on the BTM and FTM partner projects with some additional service revenue from host customer arrangements.

Our GAAP gross margin was $3.1 million or 8% versus a negative $1.7 million or negative 19% in the same quarter last year. This represents our first quarter of positive GAAP gross margin, reflecting the impact of our long-dated software contracts and hardware momentum. On a sequential basis, GAAP gross margin improved from a negative 1% in the same quarter of this year.

Non-GAAP gross margin was $5.8 million or 15% for the quarter, up from 8% in the third quarter last year, which benefited from a higher mix of software services revenue and higher margin hardware deliveries. Sequentially, non-GAAP gross margin increased from 11% in the second quarter of this year as we continue to drive the adoption of the Athena platform.

Net income was $116 million versus a loss of $19 million in the same quarter last year. That swing is almost completely the result of a large noncash gain from the warrants issued as part of the Star Peak IPO in August 2020. Net loss was $100 million in the second quarter of 2021, and the sequential improvement in the bottom line results is also due to the revaluation of those same public warrants.

As we mentioned in our call in August with the announcement of the planned and now completed redemption of the public warrants, we are looking to simplify our capitalization table and eliminate the large swings in income and expense due to the derivative securities. As of the end of September, there are no more warrants outstanding, so we do not expect these types of charges in the future.

And lastly, adjusted EBITDA was a negative $7.2 million versus a negative $7.9 million in the same quarter last year. Adjusted EBITDA improved because of higher gross margins, partially offset by additional headcount as we continue to build out our teams to take advantage of market opportunities. Adjusted EBITDA improved 16% on a sequential basis from a negative $8.6 million, reflecting the continued top to bottom strength of the quarter.

Turning to our operating metrics. Our 12-month pipeline grew to $2.4 billion as of the end of September. That's up 41% from the second quarter of 2021. Our pipeline grew in multiple markets and both in FTM and BTM. Our backlog increased 25% sequentially to $312 million at the end of September and up 70% from the year-end 2020. That $312 million backlog provides momentum for continued growth in 2022.

As John mentioned, our backlog growth was driven by record quarterly bookings of $104 million, partially offset by revenue recognized during the quarter. Our bookings growth reflects strength in existing markets and the entrance into several new markets, which we expect will have significant commercial impacts in the coming quarters. Our bookings more than doubled relative to the $45 million from the second quarter of this year and almost tripled versus $37 million in the third quarter of last year, reflecting the strength of our commercial offering.

With this quarterly performance, we eclipsed the $200 million mark for the first time and exceeded total bookings from 2020 of $137 million with 1 quarter left to go. One note on the backlog. Recall that it represents the nominal value of contracted hardware and software services. We previously expected a hardware software mix of around 70-30. But in many of the recent FTM deals, the split has been closer to 60-40. That's a good long-term trend.

We generate 10% to 30% gross margins at hardware versus 80% plus on software. But under GAAP rules, we can only recognize the pro rata value of our software contracts every year, and our contracts range from 10 to 20 years. That trend will result in more deferred revenue on the balance sheet in the near term and create a more predictable revenue stream in future quarters. So keep these trends in mind as you think about modeling our revenue relative to our backlog.

And our last major metric, our contracted assets under management, which grew 40% year-over-year to 1.4 gigawatt hours. That -- this broad scale indicates the long-term strength of the business, and we think AUM is the best metric to track for software market participation revenue potential.

Turning to guidance. As John mentioned, we are affirming our guidance of $147 million of revenue for the full year and negative $25 million of adjusted EBITDA. We continue to expect to recognize 50% to 60% of our revenue in the fourth quarter, driven by normal seasonality of the sales and the customer installation cycles. And we do expect to see seasonally stronger bookings in the last quarter of the year, similar to this quarter. We intend to provide our full year 2022 guidance when we report our fourth quarter results in mid- to late February.

This quarter, we continued to take steps to simplify our capital structure as we move forward from our April merger. On August 20, we announced the redemption of all 12.8 million public warrants outstanding. Holders exercised 12.6 million warrants at a purchase price of $11.50, which generated gross proceeds of $145 million to the company. The remaining 147,000 warrants were redeemed for $0.01 each. And as of September '21, there are no more trading warrants on the balance sheet.

Additionally, with regards to working capital, and as we have said in the past, the company has made plan to continue to make significant investments to secure battery capacity to fund future growth. As a result, as of the end of September, we held $576 million in cash and liquid investments on the balance sheet and no debt. We continue to use cash to lock in supply for future quarters as well as use our strong balance sheet to drive the adoption of Athena in key markets with our partners. We will continue to evaluate different opportunities to strengthen our capital structure while maintaining financial flexibility to support our growth.

Finally, I want to expand on the third leg of our differentiation, which is our financial model. Our business model generates strong and growing gross margins. We expect to generate around 16% gross margin on a non-GAAP basis for the full year 2021. And year-to-date, we have generated close to that figure. We do not engage what we consider lower-margin activities like construction or field services, and in fact, expect our gross margins will blend up over time as our high-margin software services become a larger portion of our revenue stack.

Our go-to-market strategy is intentionally asset-light, which keeps our capital expenditures low. We do not intend to own and finance assets on balance sheet on a long-term basis. Rather, we will sell those through our partner channel to the ultimate more natural asset owner. And our model should allow us to scale our AUM and revenues at a much faster pace than our operating expenses. Combining growing margins, low CapEx and moderate OpEx growth, we expect to generate significant free cash flow as we scale the business. Bottom line, we are confident we have the right operating and financial model in place to differentiate ourselves in this growing market.

With that, let's open the line up for questions.

(Operator Instructions) Our first question comes from Maheep Mandloi of Crédit Suisse.

Congratulations on the quarter. John, maybe one thing on the visibility you're seeing on the end markets here. Can you just maybe talk about how is your end -- your customer contract is somewhat different from others in the industry. Like we're seeing or we're hearing a lot of your peers in the solar industry from delays over here or pushouts. So if you could just talk about like how is your backlog or your customer is somewhat different over here.

And just an extension of that, like what changes are you seeing for the second half of next year, which could impact some of these projects?

Sure, Maheep. Thanks for joining the comments. Yes, a couple of things. I'd say our channel partner strategy that we've talked about in the past is really important to help us understand exactly the lead times and where we are with those projects. And we've run a very rigorous process of weekly discussions, looking at each project aligned with each hardware supplier in that specific geography. So it's a rigorous literally weekly call with the operations team and e-staff members. So we're all over this.

I'd say, on the longer-term projects, those front of the meter that tend to be a little further out, we're also monitoring those on a regular basis. And I think the most important part is really the supply chain. And we have secured into the third quarter of 2022. We're starting on the fourth quarter as well and feel very good about where we stand with those suppliers.

We've been working with these suppliers for many years. We have a terrific relationship with them. And as mentioned in the minutes ago, I said that we're going to probably be adding a fourth. And so we feel like that diversity of supplier is very important and a big part of our success as we look at ensuring delivery for our customers.

Got it. Got it. And can you maybe just talk more about that nature of the contracts for the battery needs over here? Already have those 12 months. And when do you expect to finalize your Q4 2022 deliveries or supply chain visibility?

Yes. We expect to lock down the fourth quarter certainly before the beginning, if not maybe mid-January at the latest. We'll probably lock it down this quarter. We get pretty good visibility upwards of 12 months, so we feel good about as those bookings come in, in the fourth quarter of this year, it gives us more transparency into what we'll need in the fourth quarter of 2022.

And I'd say, from a supply perspective, we feel like there's a pretty interesting oversupply effect coming our way. And BNEF has done some work around this, and they say it's 586 gigawatt hours in 2021, going to over 2,500 gigawatt hours in 2025. So that's a 4x expansion. And we feel like, with the 4 suppliers I mentioned, we're very well positioned to ensure that we have supply for our customers, both in 2022 and beyond.

I think, Maheep, it's also important to note, as part of what John is saying, is we have already secured some supply into Q4. So what he's really referencing is the full scope of what we think the forecast will be for that time period. So it's not that, that is a 0 number. It's just not the full top end of what we would expect to sell.

Got it. No, that makes sense. And just one last one for me and then I'll just hop back in the queue here. If you could just talk about the split of, in the bookings, the share of behind the meter and front of the meter and how much is hardware versus software?

Yes. From a booking standpoint, 80% of our bookings in the third quarter were front of the meter. And Texas was a large part of our pipeline expansion, particularly around front of the meter. The pipeline as we go forward looks to be about 75% front of meter. And so we feel like we're making great progress on that front and getting into new geographies. The second part of the question you had on that was software.

Yes. (inaudible)

In there, Maheep -- and this is Bill Bush. We're starting -- as I mentioned in my comments, we're starting to see a shift towards a heavier weight on the software side, which is a great long-term problem for us. And the fact that, that generates more deferred revenue, it gives us more predictability on the revenue side of the equation. So we're starting to see a heavier emphasis on software as a component of the total bookings value.

The next question comes from Biju Perincheril of Susquehanna.

Congratulations on a nice quarter. Maybe just following up on the bookings and the nice pickup that you're seeing here. Can you talk about maybe some of the new markets and new projects that you're seeing interest from? And is any of this should I think about as acceleration of some of the projects that were expected to be booked into next year? Or are these sort of incremental to some of the guidance that you gave in January?

Do you want to take that, Prakesh?

Sure. I'd say we continue to see accelerated demand across our major markets, which include California, Texas, Arizona and broadly, the Northeast of the U.S. In the last quarter, we also announced an expansion of our partnership with Copec and then announcing the first virtual power plant contract in that geography with -- in Chile. Incidentally, you might have seen at the COP26, the Energy Minister of Chile announced that they're going to double their commitment to deploy storage 2 gigawatts by 2030. So we continue to see South America as a strong market for us.

And then separately, we're looking to partner with our investors across the globe, including in Europe, U.K. being a specific focus, as well as in Asia and Australia. And we'll have more to talk about that in coming quarters.

The next question comes from Brian Lee of Goldman Sachs.

Congratulations on the quarter and the book. (inaudible) given the seasonality comments you made, fair to assume Q4 bookings will (inaudible) sequentially versus Q3?

I couldn't pick up all of that, Brian. I apologize. I think it was a little choppy as you railed through.

Seasonality -- go ahead. Maybe try it again, Brian, if you could.

Yes. Sorry (inaudible) a little bit better. Sorry. Sorry for the technical difficulties.

Just a question on the bookings. You sort of mentioned you're expecting typical seasonality, so bookings should be up again in Q4 versus Q3 as they exit the year?

Well, I don't think we're necessarily going to give that projection, but we do expect strong bookings in the fourth quarter. I mean it is typically our largest revenue quarter. Bookings tend to follow that, but it's -- I don't think I would say it's going to be more or less. I would just expect a strong number.

Okay. Fair enough. And then I appreciate some of the mix comments you made around the bookings this quarter, more software versus hardware. Obviously, there's implications near term versus medium to longer term. Having that as a backdrop, should we be anticipating kind of maybe revenue into next year being a tad softer, just given the rev rec timing hardware versus software, but then margins being on the higher end?

And then related to that, I guess, just in the quarter, software margins were a little bit light of expectations. Hardware seemed fine. Anything going on there? And sort of what's the trajectory we should expect as we move into next year?

Yes. I think, as we mentioned, we're going to be providing guidance on the '22 side of the world in the mid-February time frame. So I think we'll have a lot more detail to share there as it relates to the back end or the 2022 year and how the revenue might split between hardware and software at that time.

I think, into your question, in terms of the margins, as I think we've consistently said, I mean the software margins are significantly stronger than the hardware margins. So the more software we're recording, we should see an increase -- all things being equal, an increase in the gross margin as the company rolls out.

So we -- I think we've said that pretty consistently. I think through the pipe deck almost a year ago now, we showed on a non-GAAP basis, gross margin increasing. And as we add more, as we always say, like stacking of software contracts, as we stack more of the software contracts on top of each other, that should be reflected in a higher risk margin.

Yes. I'd add, Brian, that it is our first positive GAAP GM ever. So we're excited about that. We're tracking towards the 16% gross margin for -- to our plan. And in fact, we do think that longer term, as Bill said, the higher software mix will drive higher gross margins. And as also mentioned, we look forward to kind of rolling out the next year plan in February.

The next question comes from Sean Milligan of Williams Trading.

First, a little bookkeeping question. But on the service revenue line, is that 100% software-related revenue? Or is there another component of that?

That is 100% software revenue.

Okay. Great. And then just bigger picture. So some of the players that are involved in the residential energy storage market are now starting to talk about grid services. And just curious, I think when you came public via the lease back, maybe you talked about an opportunity set there down the road, so just trying to get your thoughts on that market as it develops also.

Yes. Sean, we're -- we obviously are cognizant of the growth in the residential market. I think we're pretty focused on putting more software into various markets. And I think that if resi poses an opportunity for us, we would certainly go in that direction. The nice thing about the Athena platform is we feel like it's highly translatable to a variety of markets, a variety of energy assets. And so we're not opposed to doing it. It's just -- hasn't been top of the list at this point. And Larsh, do you want to add anything to that? Or...

Well, I think that's right. I think we have the opportunity to help to drive different kinds of assets in the virtual power plants, the scalability and the capability of the Athena platform will lend itself to doing that. But as John pointed out, and you heard from Prakesh, we have a lot of things that we're focused on right now. And that's just not at the top of the list, Sean.

And I think I'd add one other thing, Sean. When you look at capacity and grid services, if that's your focus, and the utilities are certainly looking for that in grid operators, it takes a lot of houses to do the C&I or other things that we're doing. So from a customer acquisition cost standpoint, we feel like the C&I behind the market is compelling as well as it provides a lot of functionality for the grid operators and the utilities.

One of our typical customer sites in the C&I space is several hundred homes. So that's high leverage for the utilities, if we can get one of those commercial customers as opposed to having to get hundreds of homes. But it's still early to think about the volume of homes that are installing batteries. And so we're not ignoring it by any sense, but those commercial customers are low-hanging fruit.

Okay. And then just one more, I guess, when you talk about the stand-alone ITC for battery storage, just trying to think about the adoption there. Because I guess, in theory, you could deploy Athena more quickly into that segment than maybe what's modeled in terms of the revenue being seasonally heavier in the second half of the year, like that could change that dramatically, I would think, correct?

Yes. I'd say that -- look, it's included in the house reconciliation, 30% for 10 years, as you know. I would -- we have not included this in our plan to this point. And look, some of the numbers we hear, 25% upside from a TAM perspective with Wood Mackenzie. We get 3x with BNEF. But our view is 2023 and beyond is probably more likely as far as upside in a significant manner. And a lot of it's going to be when it's passed, quite frankly, and what's in the ITC.

We're bullish about it occurring. We like what we see. We have lobbyists we speak to, obviously, in Washington. They're very supportive and bullish around this. So we're excited about it. We think it's the -- certainly the right direction for the industry. And look, I think the Build Better Back Act (sic) [Build Back Better Act] really recognizes energy storage as a critical missing piece to accelerating the clean energy transition. And by including ITC for energy storage, they'll just accelerate that. So we feel good about it occurring. And again, I want that under script. It's just not been included in our long-range planning in any way.

Okay. I guess my question was more like if it were to go through, do you think the deployments into that would kind of have the same seasonal variance that your current business does? Or would it be different? And maybe that's just -- it's just too early to tell.

I think it probably is a little early to tell. But more than likely, there's still -- at the end of the day, these are tax-advantaged investments, and they are generally going to track the tax calendar as opposed to something else. So we would expect to see that, but I don't think we have enough information to say really one way or the other at this point.

(Operator Instructions)

And the next question will come from Brett Castelli of Morningstar.

Yes. Just first one on -- in terms of the balance sheet and the $576 million of cash. Just curious in terms of priorities there. You mentioned securing supply, but curious maybe beyond that.

Well, I think the supply is, for sure, front and center, particularly given all of the news that you see these days around that particular topic. So we've spent a lot of time -- and our procurement team has spent a lot of time making sure that we've got the equipment that we think that we need. But as we've also said, we are interested to be acquisitive. And we'll see where that goes. But those are probably the 2 most primary uses of cash over the longer term as well as just basically funding the business principally on the technology side.

Okay. And then in terms of the pipeline, the $2.4 billion 12-month pipeline, are you seeing any software-only opportunities in that? Or is that -- is that pretty much all hardware plus software at this point?

No. We definitely see software-only opportunities as well, and that tends to be more on the larger side of the FTM projects. And I think as we've said in the past, our customer base are really our partners, solar development partners tend to vary fairly significantly in terms of sophistication. And so the larger projects tend to be driven by much more sophisticated counterparties who, in some cases, actually have procurement departments themselves as it relates to batteries. And so in those cases, you more likely see a software-only.

And in fact, the biggest deal the company has ever done, the electrodes deal now almost a year ago, 345 megawatt hours of battery capacity is a software-only contract. So we certainly have history associated with those sorts of deals. And ultimately, as we've always said as well, AUM is the best measure of this business long term. And so we're really driving software-only deals drive AUM. And we don't need to have the hardware to accomplish our business goals. So we'll take them both ways, and we'll just kind of -- we'll continue to advance in the markets that we're active in.

Got it. And maybe last one. On the stand-alone storage ITC, can you remind us in terms of your business today? Is it mostly solar plus storage? Or what percentage is sort of already storage-only sort of...

Yes. So really, I mean, it's kind of been a historical transition. I mean we started as a storage-only player. And about, I'll say, 2, 2.5 years ago, we started seeing more and more solar plus storage, which is really the predominant amount of the contracts that we signed these days, although that's not -- that's also turning a little bit as well because you see some of the markets, particularly the Texas market is an area where we saw a lot of storage-only deals this last quarter.

So there's really an ebb and flow to it. So it's hard to say exactly what it's going to be, but we're active on both sides. And from our standpoint, the types of services that we provide are not really substantially different. It's really just a question of whether or not there's a solar system attached, which generally is going to increase the complexity, which we've always said Athena thrives in complexity. So we like those sorts of installations.

The next question comes from Joseph Osha of Guggenheim.

This is actually Hilary on for Joe, and I had 2 questions for you guys on the e-mobility pilot, which sounds super exciting, so congratulations. First off, just hoping you could kind of speak to the e-mobility in terms of how big the growth driver that might be kind of in the near to midterm.

And then secondly, I think you mentioned that you had actually beat out a competitor for this contract. And I'm not sure if it's too early to say, but I was wondering if you could share kind of any early feedback from conversations with some of these additional customers and if you're finding similar results where there's no real competitive offering or perhaps the competitive dynamic there is a little different.

Yes. This is Larsh. Let me talk a little bit about the project and sort of how we got the opportunity there. There was a system integrator and a battery supplier that provided the actual battery equipment for this project. And then there were a number of DC fast chargers that were part of the project that Penske have put in place for this particular location.

And when it came time to put some of the operating requirements together, it became clear that the software available from the OEM wasn't going to be able to do some of the things that were needed. So that's when we got the opportunity. So this would really be called another software-only deal in this EV e-mobility space.

The nature of the system and the operation here is designed to show how the battery can protect the demand charges that our customer might face for such a large EV charging facility as well as to make sure that the interconnection and the required capacity from the grid tie is not going to be exceeded even though you're putting in these large fast chargers, which can really drive tremendous draws from the grid.

So the battery is there to help mitigate both the cost as well as the actual electrical power capacity at that site. And what we're showing now is we've been able to do that to the tune of dropping that particular peak load by 40%, which really makes it easier for people to install fast charges more quickly without having to go through utility upgrades as well as protect them from cost exposures related to demand charges, including other operating characteristics like time-of-use charges and some of the different programs that we're helping this particular customer work with.

So maybe, Prakesh, do you want to talk a little bit about some of the markets dynamics?

Sure. One of the things we're seeing in the market, the demand for EV charging infrastructure and the build-out of fleet operators in that space is well covered by many of the research houses. And it seems that the demand we're seeing aligns with how they're forecasting growth there. But the other piece that we think is missing and we're working to quantify is the impact of increased electric vehicle penetration on the grid that utilities are facing. It's really a dynamic similar to what you might experience during COVID with everyone on your block using Internet and you have a slowdown in your services.

Similar effect is happening on the electrical grid as more Teslas and other electric vehicles are entering neighborhoods, and we're seeing many utilities pull forward their CapEx for things like distribution upgrades or other solutions to ameliorate that. And we're engaged in dialogue with these utilities, and these are unanticipated or previously planned network upgrades, which are being pulled forward. So we haven't seen that picked up in some of the research industry reports, but we think that's an important trend that could accelerate potential demand here.

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

You bet. Thank you for joining us on our third quarter earnings call. We are certainly pleased with our strong execution in the first 3 quarters of the year and the momentum we're carrying into this quarter and next year. And we look forward to speaking with you during our fourth quarter earnings call in February. Thank you all again.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.