Stem Inc (STEM) 2022 Q3 法說會逐字稿

Welcome to the Stem Inc. Third Quarter Conference Call. (Operator Instructions)

I would now like to turn the call over to your host, Ted Durbin, Head of Investor Relations. Mr. Durbin, you may begin, sir.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem, and we welcome you to our third quarter 2022 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 incurring results to differ materially from those projected in these statements. We, therefore, refer you to our latest 10-K and our other SEC filings. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are on the Investor Relations portion of our website at www.stem.com.

John Carrington, our CEO; and Bill Bush, CFO, will start the call today with prepared remarks. Bob Schaffer, President of AlsoEnergy; and Prakash Patel, Chief Strategy Officer, will also be available for the question-and-answer portion of the call.

Now I'll turn the call over to John.

Thank you, Ted. Starting with Slide 3 and the agenda for our call today. I will review the third quarter 2022 results and highlights, followed by an overview of our strong commercial execution. Next, I will update everyone on our continued technology leadership. And finally, a new compelling offering, we believe, will enable more customer choice and enhance our margins. Following my remarks, I'll turn the call over to Bill Bush, our Chief Financial Officer, who will discuss our financial results in more detail.

Turning to Slide 4. Today, we reported strong third quarter results, including record revenue of $100 million, representing 148% year-over-year growth. I am very proud to note, this is our first triple-digit revenue quarter in company history. Revenue came in 4% above the high end of our guidance range for the quarter, while full year margins and EBITDA are tracking in line with our expectations. We achieved record results on revenue, contracted backlog, pipeline and contracted annual recurring revenue, or CARR.

Some additional specifics. Regarding contracted backlog, we have exceeded our full year plan and nearly doubled full year 2021 actuals. Record pipeline continued to see very strong momentum, bookings up 115% year-over-year. Gross margin was flat quarter-over-quarter, impacted by greater fund of meter hardware mix and also energy underperformance to plan. CARR momentum continues and seeing strong quarter-over-quarter growth.

We're also reaffirming our full year 2022 guidance on all of our key metrics. Moving to some specific Q3 highlights on the right side of the slide. In addition to our strong quarter and guidance, we have made significant progress with our technology leadership, commercial execution and supply-chain management. On the technology front, we're pleased to be recognized as #1 for innovation and optimization and trading by Frost & Sullivan, an independent research firm. Regarding bookings, $223 million, representing a 150% increase year-to-date versus full year 2021, and is at the top end of our range for the quarter. Year-to-date, we are roughly $600 million in bookings versus just over $400 million for the full year 2021. Importantly, the backlog gross margin continues to improve as our technology leadership drives pricing power.

And on the supply chain, we are advancing a plan to offer improved flexibility for our customers, which we expect to enhance supply reliability and increase our software revenues. I'll talk about these achievements and initiatives in the next few slides. Bottom line, we are executing well in a challenging macro environment. We will continue to drive growth with a focus on high-margin services and operational leverage.

Moving to Slide 5, and our continued strong commercial execution. Our CARR increased to $61 million, representing a 40% increase year-to-date, excluding the impact of the acquired CARR from the AlsoEnergy transaction. Services revenue increased 9% sequentially, and we expect our services revenue to accelerate in 2023 and beyond, as we install systems and ramp-up offerings for fleet EVs and professional services. As we discussed at our Analyst Day, we have infilled additional discipline within our sales force to ensure higher hardware margins, focusing on profitability over volume. As mentioned in previous calls, we have taken advantage of our strong balance sheet to procure additional hardware pre-IRA announcement. Our strategic supply-chain activities and technology offerings are helping drive improving gross margins in the backlog. We set another record with pipeline growth in the third quarter, increasing by 29% quarter-over-quarter to $7.2 billion.

The inflation Reduction Act has driven a sharp increase in demand as customers continue to recognize our unmatched capabilities, domain expertise and combined solution with AlsoEnergy, all of which enables our customers to capture improved project economics. And we continue to see strength in our EV fleet offering, where we booked additional marquee deals this quarter, including a partnership with InCharge, which is owned by ABB. We expect fleet EV will comprise 20% to 30% of our behind-the-meter revenue in coming years, and an even greater portion of our gross margin.

Please turn to Slide 6. Today, we announced that we were ranked #1 for innovation by Frost & Sullivan in its renewable energy and battery storage optimization and trading report. This is a key independent validation of our differentiation and trading in the wholesale energy market. The report highlighted our track record of delivering tangible, high-value return on investment, fully automated AI to constantly improve optimization and forecasting, which we have highlighted as a significant competitive mode. And finally, the report highlights our industry-leading team that supports the entire value chain, Athena, we showcased on our Analyst Day. The Frost & Sullivan report follows on the heels of the Guidehouse report last quarter, where PowerTrack was also ranked #1 for solar monitoring. This is clearly a powerful combination, and one we believed in when we acquired AlsoEnergy. As we continue to bring Athena and PowerTrack together, we offer customers a powerful combination of #1 ranked solutions from a flexible platform that monetizes multiple value streams across customers and assets.

Turning to Page 7. Here, we highlight our results versus some of our key performance indicators, which show the strength and depth of Athena. In late August and early September, California experienced a powerful heat wave, nearly resulting in a power grid collapse. Energy storage played an important role in stabilizing the grid, and we executed flawlessly to dispatch our assets during these flex alert days. But beyond supporting the grid, we continue to support our customers to maximize their revenues, minimize their costs and advance their sustainability goals. These accomplishments in key markets, including California and Ontario, highlight the strength and diversity of our technology platform for customers, and we expect continued outperformance in coming months and years.

Please turn to Slide 8. Next, we want to provide an update on the AlsoEnergy business and trends we are seeing in the broader solar industry where we serve as a market leader in solar asset performance management. First, we continue to observe pressures for solar developers in securing solar panels and advancing their project timelines, particularly within utility scale. At a high level, certain regulatory actions such as AD/CVD and UFLPA impacted product availability. Bob Schafer and his team at AE have been nimble despite these headwinds. And as you can see from the charts on the bottom left, we are outperforming the market, both in C&I and utility scale. We have focused our efforts on the C&I business, which has proven more resilient, but our revenues are still down on a year-over-year basis through the third quarter in both segments.

Looking at the chart on the bottom right, this caught everyone by surprise, including the market research firm, Wood Mackenzie. At this time last year, Wood Mackenzie was calling for a 13% increase in C&I and utility scale installations in 2022. Based on the updated forecast in September of this year, they are calling for a 47% decrease in 2022.

Looking forward to 2023, we're extremely optimistic. Market analysts expect installations to more than double, and we expect our solar monitoring revenues will rebound sharply next year. This has shown up in the accelerating increases in our pipeline. And from 2024 to 2025, you can see that the Inflation Reduction Act has influenced a structurally higher projected level of installations.

Moving to Slide 9. Next, I want to give you an update on our supply-chain activity. The procurement team continues to execute and have contracted well into the fourth quarter of 2023 against our backlog. Also in the quarter, we welcomed a seasoned leader, Renee Leong as Vice President of Sourcing and Supply Chain. Renee joins from ANGI, where she was responsible for a multibillion-dollar procurement and supply-chain organization. We believe there is significant opportunity in optimizing both, the supply reliability and cost curve. We are all excited with the leadership she is already bringing to achieve this goal.

Moving through the slides. We are developing an Athena unit controller with the goal of enhancing resilience to our supply chain while providing greater value to our customers. Specifically, the unit controller decouples the procurement process for the battery, inverter and balance of plant. We believe that this strategy will provide significant customer benefits, including improved flexibility of mixing and matching various hardware solutions that are all coordinated and operated by Athena AI and controls. In particular, we can enable customers to shift configurations based on use case or enable alternative configurations in the event of issues with OEM logistics or pricing. Ultimately, we expect to drive improved margins with additional software revenue at every site. Our Athena unit controller reinforces our SaaS strategy end-to-end from the edge to the core of the Athena cloud. Lastly, I want to highlight that the unit controller will be domestically manufactured by our Longmont, Colorado facility. This is another example of the synergy and integration progress we discussed at the announcement of the acquisition.

Moving to Slide 10 and to share the great progress we've made integrating AlsoEnergy. We introduced a unified customer experience at RE+. The RE+ Conference, which served as a launch for our product integration included demos and multiple use cases for the combined platform. The event resulted in a significant increase to our pipeline, and we continue to see strong commercial demand as a result of new features and product vision we communicated to our customers and partners. Our unit controller and related hardware manufacturing processes have been consolidated into the Longmont, Colorado facility, resulting in over 30% savings in COGS, but also a meaningful reduction in facilities expenses as we exited a high-cost location in Burlingame, California.

Thank you. And now I'll turn the call over to Bill Bush, our Chief Financial Officer.

Thank you, John. Starting on Page 12 with our results for the third quarter 2022. But before I begin, as I've noted in prior calls, the call that we closed AlsoEnergy transaction on February 1 of this year, and that will impact the comparability to last year's results.

As John mentioned, we reported record revenue of $100 million, which is 150% increase versus the $40 million in the third quarter of 2021. We also have exceeded last year's total revenue of $127 million by 64% through the third quarter. Year-to-date revenue was $208 million, an increase of 178% on a year-over-year basis. The quarterly revenue performance surpassed the Q2 2022 performance of $67 million, or an increase of 49%. Most of the growth came from hardware sales on FTM and BTM partner storage projects, and about $17 million from the addition of AlsoEnergy. We also recognized approximately $14 million of high-margin software and services revenue, representing 14% of total revenue for the quarter.

Our GAAP gross margin was $9.1 million or 9%, up from 8% in the same quarter last year. Non-GAAP gross margin was $12.4 million, up from $5.2 million or 139% increase in the third quarter last year due to higher revenues and an increased mix of software and services revenue. This is the third straight quarter of positive GAAP gross margin, highlighted by our growing base of our software and services offerings. On a sequential basis, this represents a 16% increase in GAAP gross margin, reflecting the strength of our commercial offerings. On a percentage basis, non-GAAP gross margin was 13% in the quarter, in line with 13% last year. Net loss was $34 million versus a net income of $116 million in the same quarter last year. That swing is almost completely the result of a large noncash gain in the third quarter of 2021 from the then outstanding common stock warrants. We retired all of those warrants last year, and we do not expect significant gains from warrants in the future. And lastly, adjusted EBITDA was a negative $13 million versus a negative $7 million in the same quarter last year. Adjusted EBITDA was negatively impacted by higher operating costs from additional hiring as we continue to build out our teams and advance our technology road map and operational breadth to take advantage of market opportunities. Third quarter bookings were $223 million, up more than 2x versus bookings in the same quarter last year. This was the second highest bookings quarter in the company history, and $600 million of bookings for the 9 months ended September 30 is 150% ahead of what we booked in all of 2021.

Moving from our financial results to our operating metrics on Slide 13. Our backlog more than doubled year-over-year from $312 million in the third quarter of 2021 to $817 million in the third quarter of 2022. The backlog increased 12% on a sequential basis from the period ended June 30, 2022. The largest driver of the backlog increase was the $223 million of new bookings in the quarter, offset by revenue recognized during the quarter of some project cancellations and contract amendments. We believe that backlog gives us excellent visibility in the short and medium term. That is for the fourth quarter of '22 and into 2023. With our expected Q4 bookings and commercial momentum, we see a path to exceed $1 billion in backlog by year-end, giving us significant visibility into 2023 revenue and beyond.

Contracted annual recurring revenue, or CARR, ended the quarter at $61 million, up 5% sequentially and 42% up since December 31, 2021. This offer metric highlights the long-term high-margin revenues we expect the business to generate. Our contracted AUM on the storage side grew from 1.4 gigawatt hours in the third quarter of 2021 to 2.4 gigawatt hours in the third quarter of 2022. That's a 71% year-over-year increase, again, driven by our strong execution on the sales and operations side of the business. Our operating AUM on the solar asset performance monitoring side ended the quarter at 25 gigawatts, down 7 gigawatts from the prior quarter.

During the quarter, we conducted a review to migrate or terminate customers from legacy software platforms that were unprofitable, which caused a sequential decline. I will discuss more on the next slide. We ended the quarter with $294 million in cash and cash equivalents on the balance sheet. In the last few quarters, we have strategically deployed some cash to secure storage hardware for our customers and drive greater adoption of high-margin recurring revenue. This cash flow recycled back to the balance sheet when the systems are delivered, but the net effect has been the use of cash. We are evaluating some nondilutive financing tools and structures to allow us to continue to deliver energy storage systems to our customers without relying as much on the cash on our balance sheet. In addition, we continue to evaluate inorganic growth opportunities which would meet our strategic and financial framework and would, if successful, finance those activities in line with our long-term financial targets, which focus on maximizing cash flow generation.

Turning to Slide 14, where I'll provide some additional detail on our solar AUM metric and the implications to the business. First, a quick history. As far back as 2012, but really beginning in 2017 and 2018, AlsoEnergy acquired multiple solar asset monitoring software platforms and the customers who came with them. In the last few years, AlsoEnergy fully consolidated several of those platforms and initiated that process with others while migrating customers onto the core PowerTrack platform. Today, we have 2 legacy platforms, what we would call noncore, where we have not fully migrated all of those customers on to PowerTrack.

You can see from the chart the bottom left side that the customers of these noncore platforms only account for about 5% of the total AlsoEnergy ARR, which itself is a subset of our total corporate ARR. With those noncore software applications accounted for a disproportionate amount of our solar monitoring AUM, as you can see in the chart in the middle. This quarter, we conducted a review of those 2 legacy systems, and we decided to phase them both out and are working to migrate customers over to PowerTrack. Some customers are choosing to migrate over, but others terminated their contracts with us, which drove the large drop in AUM versus the second quarter.

Today, we estimate, we have about 3.5 gigawatts of AUM. They are still on these legacy systems and expect about half of that eventually will move to Powertrack. I want to emphasize that terminating these platforms will be accretive to gross margin despite the potential loss of ARR. As part of this process, we also conducted a review of our billings relative to AUM and decided to remove customers in Russia and the Ukraine, who, for obvious reasons, have not been paying their bills in recent months. I want to emphasize that we do not expect these terminations to have a material effect on the recurring revenue. In fact, we are shutting down platforms that have had a much lower ASP per megawatt and that have a negative contribution margin to the business.

You can see from the bottom right chart that this is not just a financial decision. These systems have many bespoke features, which are hard to maintain and have some security challenges associated with them. We expect to retain a significant portion of the customers that are on these noncore systems and will want to come to PowerTrack. These customers will gain the benefit of a more robust and secure system.

Lastly, it's important to recognize that this change in AUM does not have a material impact on the $6 billion retrofit opportunity that we've highlighted in our Investor and Analyst Day in September. That retrofit analysis looked at core PowerTrack AUM, which is principally focused on high-impact states like California and Massachusetts and New York, so should have no material impact on our ability to cross-sell storage into the AlsoEnergy solar asset base. Bottom line, AUM dropped because we are shutting down some legacy unprofitable platforms. We do not expect this to have a material impact on our recurring revenue. And in fact, shutting them down should increase our contribution margin, which helped us to drive to our EBITDA-positive goal. As we emphasized in our Analyst Day and given the choice between optimizing the presentation of operating metrics and the increasing free cash flow, we will always choose the latter.

Finally, on Slide 15. We are reaffirming our guidance for revenue in the range of $350 million to $425 million to the full year, non-GAAP gross margin of 15% to 20% and adjusted EBITDA in the range of negative $20 million to negative $60 million. For revenue, we are confirming the full year revenue guidance. Top line for the business continues to be lumpy based on the increased importance of the FTM business and its large hardware component. To non-GAAP gross margin, we expect to trend towards the bottom end of the range. This is really a function of the higher mix of storage hardware versus software and services this year. The biggest driver of this mix shift is the weakness in the solar monitoring business that John has already discussed.

AlsoEnergy is outperforming the industry. We expected a greater contribution from that high-margin software and services business than we are seeing this year. As we have seen in prior periods where the business was slowed by regulatory impacts, we are confident that the solar business will bounce back next year. In fact, while projects pushed, we have not seen any material cancellations, and our pipeline continues to grow significantly. Despite that margin profile, we expect our adjusted EBITDA is coming closer to the midpoint of our range. That's driven by cost control, and we have been prudent in our head count additions and shifted our hiring to lower-cost locations.

On bookings, we are lifting the bottom end of the range to $850 million but keeping the top end at $950 million as our sales force continues to exceed expectations. Lastly, we are maintaining our CARR guidance of $65 million to $85 million.

With that, let me turn the call back to John for some closing remarks.

Thanks, Bill. Turning to Slide 16. We have strong confidence in our business performance and reaffirm our full year guidance. Despite the challenging macroeconomic backdrop, customers view energy and sustainability as strategic imperatives. As their energy bills continue to rise, we are experiencing significant growing interest in our energy storage and solar monitoring solutions, consistent with the focus on achieving budgetary and ESG targets.

Looking ahead into the fourth quarter, and into 2023. We continue to see an improvement in pricing power as reflected in the increase in gross margin profile of our contracted backlog. Separately, our strategic supply-chain activity positions us to serve as a critical partner to corporates and renewable project developers. And most importantly, we continue to drive commissioning of our deployed systems as seen in the accelerating high-margin services revenue. As we close out the year, and into the coming years, we will be guided by a focus on maximizing future cash flows.

On Page 17, to wrap up, we're excited by our strong commercial and operating momentum heading into the second half of 2022, with record revenue above the high end of our guidance and record bookings of $600 million year-to-date, representing 150% year-over-year growth. We continue to be recognized by our customers with validation by third-party research firms as a market leader across both, the energy storage and solar asset performance management. In the quarter, Frost & Sullivan highlighted the strength of our technology platform, ranking us #1 in digital platforms for renewable energy and battery storage optimization. We are pursuing a strategy to enhance resiliency in our supply chain for the benefit of our customers with the introduction of the unit controller strategy. And our teams are driving operational rigor in activating systems to accelerate high margin services revenue. We introduced a unified platform, integrating Athena and PowerTrack in the quarter, and we continue to advance the vision of one team as we consolidate manufacturing and drive a focus on operating leverage through expanding the AlsoEnergy and Stem organization in India.

In summary, we are optimistic on the trajectory of the company in achieving EBITDA positive in the second half of next year. And we are within striking distance of executing on $1 billion of bookings volume this year. In closing, we are proud of the platform we have built over the last 12 years, which wouldn't be possible without our people. Stem and AlsoEnergy have built the leading clean energy intelligence platform through the innovation, collaboration and rigor that come from our talented employees. We are attracting the best talent with deep domain expertise, critical as we facilitate the clean energy transition. We are reiterating our guidance and very well positioned for 2023, a year we fully expect solar to rebound, driving further combined strength with the PowerTrack and Athena unified software solutions.

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

(Operator Instructions)

And our first question comes from Brian Lee.

I guess, starting off, the line of sight to exit '22 with $1 billion of backlog. That's super encouraging and appreciate the forward-looking data point there. Can you give us a bit more around kind of expectations for mix of that, hardware, software, FTM, BTM, and then kind of what the implications would mean for kind of the margin profile across that backlog?

Thanks, Brian, for the question. Appreciate it. So I think that in general, we are starting to see BTM bookings become a more predominant piece of the backlog, though still smaller. I mean we're still definitely weighted towards FTM, which, of course, has those lower hardware margins associated with it. The other thing that's happening that we're seeing in general, though, is that the margin -- and this is where Alan's team has really been super successful as they've been able to drive the gross margin of those bookings higher than what we've seen in the past. So what that would mean is, better gross margins on the software components, better gross margins on the hardware. So of course, as I mentioned, FTM is still, in general, a low gross margin provider for us and probably will be for the foreseeable future.

Okay. Fair enough. And then just my second question is related to the backlog here. So if I look last year or coming into this year, you had, I think, about $450 million of contracted backlog. This year, you're talking about basically double -- more than double of that, entering into the new year. How should we think about backlog conversion? Because clearly, you converted a lot of last year's, the $450 million and then you got revenue guidance, which you're reiterating here, which will put you kind of in that high 3s, low 4s, if you execute. What does that $1 billion of backlog exiting '22? Kind of what sort of context should we use in terms of conversion? Or how should we be thinking about your ability to translate that over the next 12 months?

Yes. So I think, first, I'd say that in February, we're going to give '23 guidance. So we'll be able to provide a lot more color at that point in time. But in general, one of the things -- and I think we've talked about this in the past is that the implementation date of the systems is extending. And so I think, we've said in the past, the BTM system was anywhere from 6 to 9 months. That's definitely getting closer to a year these days. And FTM systems, which were as fast as a year in the past, now are much closer to 18 months, and in some cases even longer. So the benefit of having that big backlog, of course, you get a lot of visibility into '23 and into '24. And so that's really how we're able to predict where we think we're going to be. It's definitely buttressing our ability to create I think -- what we think is a defensible and executable business model that we present to you guys. And so we'll have a lot more on that in the February timeframe.

And our next question comes from David Peters.

Just on the pipeline, 29% growth sequentially, it's pretty substantial, and I guess, evidence of what IRA means for you guys. Can you first just give a breakdown of kind of how that stands, batteries versus solar monitoring? And then just confidence in converting these into contracted customers, right? Do you see the historical conversion rate changing at all versus what you experienced previously, just given, the sheer size of the pipeline is so much bigger at this point?

Thanks, David. I'll start and Bill can jump in. Look, you're right, the pipeline has significantly increased. We see that being driven by the IRA certainly as well as more markets opening. And you rightfully highlighted that the growth has been significant. And we're seeing it really across the board. In the U.S., ERCOT, Texas continues to be strong. And as alluded to in the solar side, which you mentioned, I think the total year 2022 has been impacted by some of the things that Bill noted in the remarks around weaker and other situations related to the regulatory side. We look for a strong next year on that front. And as Bill mentioned as well, we'll circle back on that in our next -- our February call, we look forward to the 2023 side of the business. I don't know, Bill, if you want to add anything else on the pipeline side.

Yes. I mean I think one of the things that we are definitely seeing, David, you alluded to, is pipeline growth off the IRA. And so that -- and I think, at the Analyst Day, we talked about a much higher level of calls and conversations. We pointed to our ability to cross-sell into the AlsoEnergy pipeline. And of course, as we mentioned in the prepared remarks, the reduction in the AUM. It does not impact that. So we still expect to be able to sell a significant amount of storage into that 41,000 primarily C&I customer base that Bob and his team -- but in general, I would say, at a high level, much like we've talked about in the backlog, the pipeline is still weighted towards the FTM side, 75-25, FTM-BTM, and it's generally coming out of the states where we're doing a lot of work: New York, Massachusetts, California, of course, Texas, and then with some green shoots in other places that U.S. Solar has been successful. And in large part, where Bob and the team have built a pretty impressive AUM base.

Okay. Second question just on the gross margin guidance for '22. I understand you're at low end. I think mostly just some project delays on the AlsoEnergy side of the house. But I just want to confirm, are you expecting to see any kind of knock-on effect into '23 from the FTM hardware shift or anything like that. I just kind of want to clarify what the expectation of this is for next year, if any?

No. I think actually the knock-on effect is going to happen on the other side of this as we really expect a big pop out of the solar side business. And then I think that's been -- that was displayed in the slides. I think we actually talked about that in calls in the past where we think solar has been -- was admittedly slow. I mean, I think it's just -- that's just the way the market has worked out. And we think that there's going to be a really interesting snapback, and we're well positioned to take advantage of it. And that really endures positive to lead to us because it's all in the software and services business. I mean if you look at the business model that Bob and the team built, I mean you're looking at a 60-plus percent gross margin or contribution margin. And so it doesn't take a lot for that to have impact. I mean, of course, this year, it's hurt us the wrong way. I mean, that's pretty obvious.

But next year, we're really thinking that, that's going to pop in our favor. So we're excited for '23 from that standpoint. We've got a growing base of CARR, and that means that there's more -- going to be more software that we're going to be -- i.e., systems that we're going to be operating and generating really high gross margin product off that. So I think '23 is going to be well positioned, all consistent with what we talked about in September, which was a high CAGR in the software and services side.

And we have a question from Maheep Mandloi.

This is David Benjamin in for Maheep. You talked about that services CAGR. Can you talk a little bit about -- give some color around how you see that going into 2023?

Yes. Thanks for the question. So in between what the comments I just made and certainly those that we made in New York, I mean, we're really bullish on what software and services is going to be able to do for this business in '23. The business model is predicated upon us being able to deliver those services. They're super high margin. They generate a lot of cash flow. It's -- when you think about what we did from the AUM standpoint, we took that number down. But we're actually -- it's going to -- it's a cash flow-driven reason.

And so I think one of the things that we've done is the business in general, and you can see that through the operating leverage as well the operating expense leverage. We're super focused on where we are from a cost standpoint and from where we are from a margin standpoint. And so as we look at where we're going to be in '23, we're really focused on that 65% to 85% CAGR for the software and services business. That's what's going to drive the company to a position where we think that we're going to be, which is cash flow positive in the second half of '23.

This is Maheep here. Sorry to jump in over here. And apologies, I was between calls and might have missed this. Just given on the factory procurement side what you're seeing for '23 and '24, and in the past few months, kind of talk about competition from the EV industry for vendors? But just curious on the latest thoughts on that.

Yes. Thanks, Maheep. Good to hear from you. I'd say that, on the supply fees were contracted well into the fourth quarter of next year. And I would say, some projects even into 2024, particularly around the BTM supply, we are going into 2024. That's an area that we're excited to have supply locked in because we do -- as Bill mentioned a moment ago, do see some nice growth around BTM.

I think one of the things that we're watching closely is just the logistics piece is the fourth quarter, there's a lot of activity, a lot of export and import. So just from a port standpoint, we're monitoring that and obviously, doing anything we can to make sure our product is expedited and gets here on the timelines that we expect them to.

Got it. And so we have visibility through Q4 of '23 now?

Yes. On the supply side.

Correct. That's right. Yes. Sorry.

Yes. I mean I think one of the things I mentioned, Maheep, in New York was that we're definitely -- if you asked us that question 6, maybe 12 months ago, we would have said, yes, we're relatively short. We're buying less than a year out. We're now buying 18 months and more from an expectation of installation. So it's definitely -- which is one of the things we highlighted in terms of the balance sheet, that we're using the balance sheet to be able to secure supply. We think that's commercially differentiating for ourselves and a benefit to our customers. And so we're definitely continuing to develop relationships with suppliers. As John mentioned, the unit controller, that's certainly part of that as well, where we're doing other things rather than buying just batteries or energy storage systems.

And so I think it's really -- it's an opportunity for us to expand what we're doing, and make sure that we've got enough product at the right time in the right orientation for our customers.

(Operator Instructions)

And we have a question from Brett Castelli.

Maybe just sticking on that same theme. Bill, I think you mentioned in the prepared remarks the potential use of financing tools to procure hardware. Can you elaborate on what maybe you're contemplating there?

Sure. So right now, our financing tools are somewhat limited, generally cash. And then, of course, we're working terms with our primary suppliers. One of the things that we've been working on is bringing in some nondilutive structures, more than likely a revolver of sorts, that we're able to increase the amount of product that we're able to secure for customers. So what we're trying to use is, leverage the balance sheet into a debt structure revolving capital facility, something like that, that would allow us to secure a higher level of supply than we have today.

Got it. Okay. And then my follow-up is just, can you touch on the working capital dynamics as the business maybe shifts to more software-only deals? It seems like that could be a pretty material tailwind for working capital, but maybe when do you -- is that correct? And then when do you expect to see that materialize?

I think, you're right. But I would also say that one of the things that's going to be true about this business for a while is we're selling -- we're going to be selling hardware. And hardware in and of itself, consumes working capital, whether -- even with the working capital facility, we're going to have to put some cash out for that. So we would expect a declining amount of capital for the acquisition of hardware. But we are pretty much in any model. I mean, I think we provide some guidance split between software and services and hardware growth. We're still expecting to see hardware growth in the business which means that you're going to need some sort of support to be able to do that.

I mean, even with the expected declines in price, you're still talking about a pretty darn big number. And so I think, what we're going to continue to do is, look for alternatives than what we're doing today and make sure that our balance sheet has the ability to be able to support our customers and make sure that, as I mentioned, that product shows up when they need it.

And we have no further questions in queue.

Okay. And in closing, I want to thank everyone for joining us on our third quarter 2022 earnings call. We look forward to speaking with you during our 4Q call in February of 2023. In addition to full year and fourth quarter results, we'll provide guidance, as mentioned here today for the full year 2023. Thanks again, everyone.

That concludes today's conference call. Thank you for joining and have a pleasant day.