Stem Inc (STEM) 2024 Q1 法說會逐字稿

Greetings and welcome to Stem Inc, first-quarter 2024 results conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ted Durbin, Head of Investor Relations. Thank you, Mr. Durban, you may begin.

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our first quarter 2024 earnings call. Before we begin, please note that some of the statements we will be making today are forward looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10-Q and other SEC filings.

Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We'll be using a slide presentation today for our earnings release and presentation on the Investor Relations section of our website at www.stem.com.

John Carrington, our CEO; and Bill Bush, CFO, will start the call today with prepared remarks. Prakesh Patel, Chief Strategy Officer, will also be available for the question-and-answer portion of the call. Now I'll turn the call over to John.

Thanks, Ted. Good afternoon and thank you all for joining us today. Beginning with slide 3 in our agenda, we will cover our first quarter results, product announcements and business updates then Bill will discuss our financial results in greater detail.

Now let's turn to slide 4 on our first quarter 2024 results and highlights. We continue to execute on our three guiding principles in the first quarter, we delivered record non-GAAP gross margin and near breakeven performance on operating cash flow. We also accelerated our pace of annual recurring revenue activations and finally, we launched another software-only product offering.

We are on a solid foundation to continue delivering against our financial targets for the full year 2024. In the first quarter, we recorded $25 million in revenue, down 62% versus first quarter 2023. Revenue this quarter was negatively impacted by a $33 million adjustment as a result of some legacy contract guarantees from 2022 and the first half of 2023, which were further impacted by accelerating market conditions, including extended project time lines and declining battery prices.

It's important to note this change had no impact on our cash flows in the quarter and as a result of a legacy contract structure, which as previously committed, we have not offered such guarantees to customers since the first half of 2023, we achieved our record non-GAAP gross margin of 24% this quarter due to a higher mix of software and services revenue, in particular, our high-margin solar revenue was up 16% year over year, and storage software wins drove AUM up 66% year over year.

GAAP gross profit was negative $24 million, primarily driven by the net revenue reduction. Bookings in the first quarter were $24 million as a result of our expansion to large scale front of the meter storage projects. The timing of our bookings has become increasingly variable on a near-term basis.

Our average project size has tripled over the past two years and we have a substantial number of projects in advanced stages of negotiations or that are expected to close in the near term. Given this strong commercial momentum, we remain confident in achieving our $1.5 billion to $2 billion bookings target for the full year 2024. Contracted annual recurring revenue, or CAAR was up 25% versus the first quarter of 2023.

In the quarter, we implemented a proactive effort to upgrade the backlog to focus on the most profitable opportunities, which caused a slight reduction to CAAR. This underscores our unwavering focus on driving cash flow generation against our full year target of more than $50 million for 2024.

Adjusted EBITDA came in at a negative $12.2 million versus negative $13.7 million in the same quarter last year. Excluding the impact of the revenue adjustments, adjusted EBITDA improved despite a lower revenue base compared to the prior year, reflecting our focus on operating efficiency and gross margin improvement.

And lastly, operating cash flow was roughly breakeven this quarter, a $35 million improvement over the same quarter last year. We are updating our revenue guidance solely to reflect the noncash adjustment and otherwise reaffirming our guidance across our key metrics, including $5 million to $20 million of adjusted EBITDA and more than $50 million of operating cash flow for the full year 2024.

Importantly, we are confident that we can achieve these goals and continue to grow our business without the need for additional equity issuance. Bill will provide more details on our financial results later in the call. We're also announcing today our next-generation PowerTrack Asset Performance Management suite for clean energy portfolios.

Let's go to slide 5 for a deeper dive into this new and exciting product. PowerTrack APM suite is a software solution for centralizing and streamlining the management of storage, solar and hybrid energy asset portfolios. It will help customers understand the commercial impact of technical decisions and the technical impact of commercial strategies, so they can more effectively manage risks and drive enhanced returns. PowerTrack APM was built by experts in the storage and solar industry on a dual foundation of Stem's industry-leading solar asset monitoring, software PowerTrack and the company's award-winning Athena AI for energy storage forecasting and optimization.

This solution was built for purpose in collaboration with many of our closest customers, providing feedback on gaps in currently available alternatives. Some highlights on PowerTrack APM. This product will continuously monitor the health of individual assets, holistically track commercial performance of the portfolio and individual sites, automatically manage energy storage, warranty obligations, streamline operations center processes, and finally, measure commercial impacts of technical events to minimize risk and drive returns.

PowerTrack APM will be released to select beta customers starting this summer, and we will generally be available at the end of the year. We have already received strong interest from existing and new customers for a comprehensive tool like this, which we believe does not currently exist in the market. For Stem, this offering will drive additional high-margin solar revenue, expand our addressable market and allow for deployments on existing operating assets.

The last point is important because by targeting existing assets, we can avoid the protracted permitting, and interconnection cycles impacting the broader renewables sector. This is fully aligned with our objective of accelerating our CAAR to ARR conversion. As we outlined in our last call, there's approximately $65 million of annual gross profit embedded in the full year 2024 CAAR.

Now moving to slide 6, for an update on our progress against our guiding principles. As a reminder, in 2024, we're focused on three key items cash flow generation, building software and services, revenue and extending our technology leadership position.

First, our operating cash flow continues to improve up $1.5 million versus the fourth quarter of last year and by $35 million versus the first quarter of 2023. We made excellent progress on reducing our working capital working capital intensity this quarter as well. Second, our software revenue grew meaningfully this quarter, up 4% for solar and up 6% for storage versus the fourth quarter of last year.

Our outlook for software and services revenue growth remains positive, due in part to customer logos you see in the middle of the page. We're also making good progress in converting our CAAR to annual recurring revenue or ARR. As the chart in the middle of the page illustrates, our expectation of storage ARR activation has improved materially since the beginning of the year.

That improvement is partially driven by new software-only contracts. The improvement in ARR activation is also driven by better processes, as our team leverages our experience to help customers accelerate product timelines in the front of the meter market.

We have also streamlined our interaction with our OEM partners resulting in faster resolution of field commissioning issues. While our interconnection and permitting approval time lines remain protracted, our customer cancellation rates are in the low single digits, while which translates into a high confidence and continued expected software revenue growth.

Our focus on the municipal and cooperative market is also paying dividends. For example, the first sites of our 313 megawatt. Our storage product project with Ameresco will go live in May and will generate a significant uptick in recurring software revenue. The off-taker for this project is a cooperative in Colorado and the timeframe from booking to first software revenue will be inside 12 months for this deal, much faster than our typical FTM cycle. This validates our focus on public power market and should accelerate ARR conversion going forward.

Finally, we continue to extend our technology leadership position with software-only offerings, as evidenced by our recent product launches over the last several months as I detailed in the prior slide.

With that, I'll turn the call over to Bill.

Thanks, John. Starting on page 8 with our results, the first quarter of 2024. As John mentioned, revenue in the quarter was negatively impacted by an approximate $33 million noncash adjustment as a result of battery hardware price guarantees. We made to gain a foothold in the public power and large from the meter market.

These contracts gave customers certain price protection on their hardware purchases. Since we entered into those contracts in late 2022, and the first half of 2023 interconnection timeframes have extended in key markets, while the price of lithium ion batteries has fallen significantly in 2024 due to the impact of new manufacturing supply entering the market.

As a result, the price protection provisions resulted in additional noncash adjustments to the revenue tied to those projects. In the third quarter of 2023, we adjusted our revenue based on estimates of the non-cash variable consideration embedded in those contracts, given the protracted project timelines and decline in battery prices, we have updated our estimate of the non-cash variable consideration, which had the effect of reducing our revenue by an additional $33 million this quarter. Importantly, this adjustment has no impact on our operating cash flow in the current quarter.

We have not issued such guarantees since June 2023, and we reiterate our commitment to not issue any hardware price guarantees in the future. We are actively advancing projects under fixed price contracts based on current market conditions that we expect will consume approximately 50% of the remaining batteries subject to these guarantees. We expect that these transactions will close in Q2 and Q3 of this year, and they will not be subject to future adjustment post-close.

Overall, these transactions should enable us to convert accounts receivable into cash more quickly, providing us greater confidence in our free cash flow generation goals following these transactions and the $33 million adjustment, the remaining batteries subject to guarantees are currently valued at approximately $50 million.

We intend to integrate these batteries into projects, which we will expect it will be available for sale in late to second half 2024, and be operational in the second half of 2025. We will continue to evaluate the economics of these transactions based on the then current conditions.

To the extent that we are not able to integrate the remaining batteries into future projects or market conditions further deteriorate, we may update our estimates of the non-cash variable consideration embedded in those contracts. This may result in one or more future impairments.

As I said, in the third quarter of last year, these were exceptional offerings that allowed us to enter and quickly build a leadership position in an attractive market segment, where we have executed over $1 billion in bookings. In addition, we expect that these projects will give us a long-dated revenue stream of high-margin recurring software revenue.

And now on to our other financial results. GAAP gross margin was a negative 95% and was down as a result of the non-cash variable consideration adjustment to revenue I described earlier. We achieved record non-GAAP gross margin this quarter of 24% versus 19% in first quarter 2023. The year over year increase in non-GAAP gross margin was due to an increased mix of higher margin solar products and more favorable supply costs. Overall, solar revenue increased 16% year over year and solar revenue was up 15%. Non-gaap gross margin was adjusted to exclude the impact of the reduction in revenue.

Adjusted EBITDA excludes the impact of the reduction in revenue and was a negative $12.2 million in the first quarter, keeping us on track to achieve our EBITDA goal for the full year. We continue to stay disciplined on operating expenses and reaffirm our target cash OpEx as a percentage of revenue for 2024, which we expect to be between 10% and 20%.

Finally, operating cash flow was a negative $600,000, representing a year-over-year improvement of $35 million and a sequential improvement of almost $2 million. We continued to improve our working capital management remain dedicated to generating positive operating cash flow without the need to raise additional equity or equity-linked securities.

Turning now to slide 9, for a look at our operating metrics. Contracted backlog was $1.6 billion at the end of the quarter compared to $1.9 billion at the end of the fourth quarter of 2023, representing a 16% sequential decrease. The decrease in the contracted backlog in the quarter was driven by a proactive effort to upgrade the profitability profile of the backlog, focusing resources on the most compelling opportunities. We canceled around $257 million of contracts that were lower margin or expected to utilize working capital. Based on this review, we realized bookings of $24 million year over year.

And sequential decrease in bookings was largely driven by increased variability on a quarterly basis due to our focus on larger utility-scale projects as underscored by John, we continue to see strong commercial momentum and remain confident in our bookings goal for the year. We reiterate our overall guidance in the $1.5 billion to $2 billion range and have sufficient pipeline to meet that goal.

First Quarter 2024 CARR decreased to $89.3 million, down from $91.0 million as of the end of the fourth quarter 2023, a 2% sequential decrease. The decrease in CARR was due to the previously mentioned backlog review, the result in the cancellation of about $3.5 million of annual contract revenue. Storage AUM grew 5% sequentially to 5 gigawatt hours from 5.5 gigawatt hours in the fourth quarter of 2023.

Solar AUM ended the quarter at 26.9 gigawatts, down 600 megawatts sequentially or approximately 2%. As part of the backlog review, we performed a comprehensive review of both storage and solar AUM. That review resulted in a small reduction to storage AUM that was offset by new bookings in the quarter and a net reduction to solar AUM.

Turning now to slide 10, in our 2024 guidance, we are adjusting our full year revenue guidance downward dollar for dollar with the $33 million reduction in revenue we recognized this quarter. We are reaffirming our guidance across all other key metrics.

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

Thanks, Bill. Wrapping up on slide 11 with our key takeaways, we are building a solid foundation for continued growth. We had strong performance with record non-GAAP gross margin of 24%, delivered near breakeven performance for operating cash flow and are solidly on the path to our EBITDA target for full year 2024.

In addition, we took several actions to enhance the profitability and pace of cash flow generation, including trimming the backlog of lower-margin opportunities. I am most excited by the continued strong momentum in our software business with an increase of 42% expected and the conversion of contracted annual recurring revenue for the balance of 2024 as a result of our activities in Q1 2024.

This acceleration of ARR activation is a key focus of the organization, and as we highlighted in our prior quarter call, represents a substantial value unlock. At this run rate, there is approximately $65 million of annual gross profit embedded in the full year 2024 CARR.

In addition, we continue to add software only wins, signing up sophisticated renewable asset managers and energy market trading firm. The momentum in our software offerings is augmented by our accelerating pace of new product releases.

We announced today the introduction of our next-generation PowerTrack Asset Performance Management suite, which we expect to further build on the strong uptake of our software-only offerings, evidenced in the recent release of PowerBidder Pro. We continue to invest in our India Center of Excellence, which is driving enhanced productivity across our software development teams. We expect to continue the rapid pace of new product introductions, cementing our leadership position in the industry.

Before I close for questions, I wanted to announce a couple of people updates. Lars Johnson, our Chief Technology Officer, retired on April 18. Lars shared his personal path forward with me almost two years ago. And since then, we've been working together on a succession plan to ensure a smooth transition with a particular focus on our software strategy.

We hired Albert Hoffeldt to serve as SVP of Technology who has extensive experience in shipping SaaS solutions and in particular, building robust utility-scale software for next-generation distributed generation assets. Lars and Alberta have been working closely together in developing the transition and strategy for the Stem technology team. Eight years ago, Lars joined stem to lead the company's hardware and software engineering teams, driving the evolution of our Athena platform.

Lars has helped us scale our global technology team and has extensive industry knowledge and customer engagement has been instrumental Stem's growth and recognition. Lars will continue to consult for the company, supporting key product initiatives. We wish Lars and his family all the best in the next chapter, and he will always be part of the Stem family. During our last earnings call, I also mentioned that we were initiating a search for a board member with software expertise.

I'm thrilled to announce that Gerard Cunningham has joined this Stem board effective April 19. Gerard brings extensive experience in the technology, software services and most importantly, the AI sector. He founded several companies in the data science space, and most recently was a partner at McKinsey, where he cofounded and led the global clean technology practice. In addition to launching the AI for sustainability initiative, Gerard was also a leader of the Mackenzie's digital business building practice.

With that, I want to thank shareholders, employees, customers, channel partners, and suppliers.

And now, operator, let's open the line four questions, please.

(Operator Instructions) James West, Evercore ISI.

Hey, good afternoon guys.

Good afternoon, James.

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

Hi, James, thanks for the question. This is Bill Bush. So I think we're very confident in the revenue goals that we've laid out. And I think the reason for that confidence is based in the projects themselves. And so while I would agree, it is possible that we could have some shifting.

There's also other projects which we can move in. So I think we've got the ability to I wouldn't say mix-and-match, but we certainly have the ability to hit the goals with the pipeline that we have. So we're quite confident in where we are. I mean this, I mean, I think the first quarter is always a tough quarter because you have like we guided to the 8% revenue number. On net of the adjustment, we basically did a little bit better than that.

But I mean it's a small number and that's been true for a long time this business has always been pretty cyclical and it hasn't really changed. And so I think the only thing that has changed is the size of the projects which we're working on which we've talked about at length in other calls. So I think what you're seeing is a bit more variation.

We certainly saw that in terms of bookings this quarter. But ultimately, what we're trying to make sure that we're focused on is positive EBITDA and generation of cash flow. So I think those are goals that we did reasonably well with this quarter.

Some $600,000 negative operating cash in the quarter, I think it was really an accomplishment for us. And certainly, where we are from an EBITDA standpoint is actually ahead of where we are. I think when we think about it every day, it's cash flow generation gross margins. This quarter, of course, we had record non-GAAP gross margins, which I think is super important for us in terms of meeting those cash and income goal or really EBITDA goals. And so I think all things being equal, I think the business is on track to be able to achieve the goals that we laid out.

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

I think that interconnection and permitting have always been a problem. And I think this year in particular, I think we've seen some additional slowdowns to what we've seen in prior periods. But I think on the other side of that, I would say, other things can happen as well. I mean, the United project, which we've talked about at length was actually some of the first. There's four total sites there on that project, 313 megawatt hours in total.

And those sites have started turn on here just within the last few days. And so from that standpoint, that system became a booking a revenue event, and now a software event in a year. So I would say one of the things that we've talked about as well in the past is really shifting the business away from projects where, say the customer has less control over what's going on from an interconnection standpoint.

So really, we've moved much more into the Municipal Power and public power markets, which have different interconnection schemes than maybe what some of the classic C&I projects have. And so for sure, I think the news is generally not great for C&I projects in terms of interconnection.

I think we are seeing slowdowns there, but that's becoming a smaller part of the overall business of the company. And so that's how we're combating that. That negative headwind is by moving away from projects, which are particularly susceptible to those delays.

Okay, got it. Thanks, Bill.

Jon Windham, UBS.

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

Hi. John. This is Prakesh Patel. I think the way we really differentiate ourselves in the market is through the project economics that we deliver for customers using our software. We consistently talk about in prior quarters, and provide examples of how our software delivers much better project returns than competitive solutions.

And so there's a multi-prong approach to driving is that uptake either by engaging with asset owners and having them specify or push down to project developers, that you might use Stem software in projects that will finance, or directly engaging with these project developers and engineering procurement firms and helping them through the bankability as well as advancing their projects.

One of the things we talked about this quarter is the fact that we dramatically accelerated the activation of our storage projects. If you look at for the balance of 2024, that's about a 42% uplift from what we thought would happen at the beginning of this year in January. A lot of that is blocking and tackling and helping those customers move through and advance their interconnection time lines and the like so that subject matter expertise, the differentiated software economics, it's really what drives our competitive advantage on the solar storage.

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

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

Got it. Perfect. Thank you so much.

Yeah, let me just add on to that to give everybody, this is John Carington -- give a quick explanation of the revenue adjustment to level set everyone, we've been focused on guarantee contracts from accounts receivable to cash. And there was a significant reduction in project values as a result of deteriorating market conditions. But we did transact with our customers to resolve about 50% of the hardware subject to these guarantees. And we expect to close those in the second and third quarter of this year and have updated the value of the remaining hardware.

So I would also add, I think this is an important component of this -- that this legacy guarantee structure enabled our rapid growth into the utility scale market, and it resulted in over $1 billion of executed customer contracts, and those contracts will drive significant recurring software revenue.

So I just want to add that point, if I could please. So letsgo to the next question.

Andrew Percoco, Morgan Stanley.

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

So I think -- let me start with the last question first. Thanks. Thanks for that question, Andrew. So this is Bill Bush on the line. We are done, but I would also say that we're constantly reviewing the components of the deal. I mean, I think we've done a lot of things in the last year, year-and-a-half that have driven us towards a positive EBITDA outcome and this is just one of those efforts.

I mean, we cleansed the AUM on the solar side. Now just about a year ago, we've done a number of things in terms of projects. And so we're always trying to make sure that we've got maximum leverage in the backlog. And these projects were really for a combination of reasons. We determined that they just weren't projects that the company should be working on that they either had low margin profiles, were in territories where we didn't have enough leverage your concentration, were customers that we believe to be non-core to the total business.

And so there's a lot of different reasons, and it was a pretty big effort across the team, but we're trying to make sure that we have maximum leverage across our employee base to work on projects which generate cash for the business. And so that's really the result of all that work.

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

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

Yeah, Andrew, thanks, for the question. So I think as it has been true for a while, the first quarter gross margin is typically the strongest. So you'll recall last year we were at 19%. We ended the year at a total of 15%. So we feel like we're obviously, again, this is a relatively small part of the total year, but we're trending in the right direction from the standpoint of margins.

So we're four or five points higher than we were last year. And so that when folks say, hey, do you have confidence in the guide in doing things like that gives you the ability to have confidence in that guide that you started 5 points higher on a comparative basis last year at 19% went to 15% for the full year. And this year, we're starting at 24%. So we feel like the midpoint of that guide is defensible. So we're feeling pretty good about where we are.

Obviously, as we ship more hardware, the margin is going to decline. I mean, there's no doubt about that the sale of hardware is a lower margin product than software, but software as a total part of the business is increasing.

One of the things that, John talked about in his prepared remarks, was the CARR to ARR cycling, and we expect to see a lot more of that in the rest of the year. So all of those things, though, end up in a positive cash flow profile. And that's really where, I think when you think about margins, thinking about cost controls, all of that stuff you think about like what are the projects that you're working on are those positive in terms of the total guide for the business? And so we feel like the EBITDA number that we've given is definitely defensible. And as is the cash flow number. I mean, we had a pretty we had flat cash on a on a sequential basis, which is fairly unusual for us.

I mean, in that, typically as you're coming out of the fourth quarter, you're starting to really pay down accounts payable as your hardware under standard terms, and we were able to maintain our cash position and we feel like there's a lot of receivables out there that we can collect and build that $50 million number that we've talked about a bunch.

So it's always hard in the first quarter because it is a small part of the total year. But I would say, when we look at where we are and what we have in front of us, the goals that we've laid out are achievable.

Great. Thank you. I'll take the rest offline.

Thank you.

Thomas Boyes, TD Cowen.

Great, thanks. Thanks for taking my questions. The first one, you had great to see PowerTrack announcement. I just wanted to get more insight maybe into the go-to-market strategy for the solution as it's deployed to customers exiting the year is the goal to leverage it primarily first with hybrid deployments are the key the flexibility to address of solar and storage and take advantage from some brownfield opportunities.

The reason that I ask is I'm just looking at the interconnection queue exiting 2023 around think, 80% of all of the new capacity requests were for solar for storage. So just wondering how you're thinking about that?

Thomas, John here. Yeah, I'd say the PowerTrack APM suite in general is really a software-only solution that we are targeting to help management of really storage solar and hybrid energy asset portfolio. So it's really across the board and it's interesting it's another one of these projects whereby our customers have asked us to build a platform that is not available in the market today.

And we have a core team specifically focused around software only that is out talking to a variety of different types of customers, bringing that back to our developers. And that global development team is doing a tremendous job, particularly as you think about our India Center of Excellence, pulling all that global network available that we have to develop these products.

We're doing it much quicker and much more aligned to what our voice of customer that we're getting as far as what is missing in the market and Stem's filling that void and really excited about the PowerTrack APM, an uptick in the interest by customers. And again, as we said, that's something that we'll have available at a demo this summer. Interestingly, enough we've got multiple customers interested in doing the demo and then more broadly at the end of the year. Prakesh, something you wanted to add?

Hi, John. This is Prakesh. As far as the market definitely, this is another example of a solution that can work in existing storage, our operating storage assets. So it's applicable for brownfield as well as new build. So it's another way for us to access software services growth without waiting for interconnection improved.

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

That's really what this is for cash. Again, it's really what Bill laid out earlier is we took a screen of our they're subscale customers that are difficult to serve is at a lower margin contract. And one other thing I would hit on insight and is this was especially true on the storage side. Will it tie up additional working capital, if any of those? And then we would collect that and it was reviewed and then unless it's a very strategic customer, we opted to cancel that agreement. So that's really what drove all this activity.

Got it. Understood. I appreciate. I hope back in the queue. Thanks.

Thank you, Thomas.

Justin Clare, ROTH MKM.

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

So I think -- when I think about the backlog generally, I mean, we're always taking a look at how durable that backlog is and really well, what I mean by that is saying from a margin standpoint. So I think that the evaluation that we did was really targeted to that. As we're looking at projects which are cancelable prior to a PO being placed.

Are we able, particularly in this market for hardware, we're able to create a situation with a customer where we have a positive cash flow environment. So that's really the gist of everything. And I think can we -- so if the question is then can we refresh that backlog with better projects? I think the answer is yes. And when we've reaffirmed the guide of $1.5 billion to $2 billion in total bookings. I think from that standpoint, I think we're in a good position. Ultimately, the question is going to be how quickly can you collect on that accounts receivable?

And I think these are deals that we really restructured such that the velocity of the cash flow is higher. So I think those -- it's starts at looking at the first piece, which is what's the margin profile of the project, what's the time line associated with the project and then what's the cash flow velocity associated with it. And so we think that we're going to replace the backlog with projects which are more favorable for the business than those that went away.

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

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

Okay. I appreciate it. Thank you.

Brian Lee, Goldman Sachs.

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

Yeah. Hi, Brian. This is John. Thanks. Good to hear from you. I think the ones that we consider to be out of scope would be below the gross margin targets that we set for the business. And that was one of the thresholds. As I mentioned, I think the other important component is we really looked at what installations are total megawatt hours or what other metric you may have. That would actually be enough to spread those costs out to make it compelling. To do 15 sites in Des Moines, Iowa was not a great outcome for the company.

So that was another lens we looked at, but certainly the contribution margin to align with guidance and then obviously looking at markets where we had critical massive systems. And by the way, that could change if local legislation and state legislation changes, we could go back into that market.

I mean, the nice thing about our model is there is a certain flexibility that we have if things change to move very quickly because a lot of these customers have multi-sites in a variety of states and we're their preferred supplier. So we can go where they need to go wherever the market dynamics change in favor of that contribution margin equation that we mentioned earlier.

Okay. Understood. That's helpful. And then on lease hardware revaluations, I think it might be maybe the second time, you've seen some of this. And then you also cited there's another $50 million of contracts that could potentially need to be revalued. I mean, noncash consideration, obviously, but still it is impacting the outlook in terms of some of your KPIs that the market and investors follow.

So can you just the thought process around identifying potentially $50 million still left through the balance of this year, early next year. Do you have a high confidence level of being able to remarket those? Is this more of an auditor decision, whether you get to actually pull the trigger on taking that out of the numbers or not?

What's the thought process because it feels like you're still subject to another headline risk on this number. If it does get to a point later this year where you decide you have to take it out of the revenue outlook again?

So thanks, Ryan, for the question. This is Bill. When we looked at the variable consideration, we're constantly in on a quarterly basis, taking a look at all of the potential variable consideration components. So I would say it's not really an auditor decision. This is a management decision.

We just looked at what we saw is the implied value of the underlying projects and how that the equipment that we own interplays into that. And did that math, we determined that we were we were going to need to make an adjustment to that variable consideration.

So I mean that analysis will continue. I mean, the good news is we do have a robust portfolio of projects because ultimately, the equipment while an integral part of any storage project, it is not the only way you think about it. I mean the other question, of course, is like what's going on in the revenue side of the project and other factors.

So I think the market for the equipment for say, the valuation of the equipment reflects the current market conditions. So that's how we did the analysis. And certainly I wouldn't disagree with you that there is more risk in that $50 million of remaining equipment. But I think we've got a portfolio of projects, which we can place it into. And so we're confident that we can do that.

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

Yeah. So you're absolutely right. First, we are not issuing guarantees (inaudible) gotten super short on contracts. Because I think one of the things that we've seen in the say the lithium market is that there's been a lot of supply that's come into the market here in the last and maybe six months and maybe and really starting to see the impact of that in the last couple of months.

And so battery prices have even though I mean, it's almost become distanced from the lithium index. I mean, if you don't know how closely you follow it, but the index has actually increased since March, almost 15%. However, battery prices have declined pretty dramatically across all of the major manufacturers during that same time period. So and I would say delivery time frames have gotten probably more aggressive than they have been in the past.

So this really which went into the valuation of the variable consideration conversation that we're having before. So I think one of the things that we've done is we've gotten really close with our customers and said, when you really need the equipment less, which is a difference from maybe a year or two ago when folks were more than willing just to buy things, just to make sure that they had them for when the projects were ready. Now people are holding off and buying when they actually need the equipment.

So the good news, I think for us is that two things are going to happen. One, the battery delivery is going to be more reflective of the current market conditions. And because of the batteries are purchased at closer to their installation dates, you should see a speeding up of CARR to ARR, which is exactly what happened in the first quarter here. So I think one of the things that we're trying to do is really shift the business from where we were. I mean, depending on how long folks have been following the company used to be really a straight BTM company and now we're really we've changed both the model of moving to FTM, but also the type of FTM that we that we pursue.

And so I think one of the things that we're going to be seeing from us is quicker conversions from bookings to hardware revenue events and quicker from car when basically when that hardware is delivered to when the actual software starts working. And so I think for us, that's really our strategy is shortening those time frames such that there's quicker conversion and from a booking to revenue and particularly on the software side.

And I think from a guide or contracted level, we're about 40% for 2024. So about right, Bill Sorry, Brian, go ahead.

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

Joe Osha, Guggenheim Partners.

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

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

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

Well, I think we had. So in the fourth quarter presentation, we had a slide around CARR and ARR, where we laid out didn't give specific numbers, but certainly graphically showed where things were. And so I think one of the things that we have seen generally is around when we had the $91 million, which was of course, the CARR number as of the end of 2023, about half of that was IRR or so.

And so I think one of the things that we're trying to do is get that number higher as a percentage. And so the numbers that John gave you or gave the call a few moments ago, give you give credence to the fact that there is an increasing rate of CAR to ARR conversion.

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

Yeah, I think we've been pretty transparent about that receivables number. I mean, last quarter it was just over a little bit over $300 million. And I think we talked in the call then like we expected to be able to reduce that number by around $100 million and return that cash to the balance sheet. So that's really -- that's the target for us. I mean, I think depending on what time of year you're talking about, I think probably a number between $175 million and $225 million receivables is probably the right number for us, depending on what period of time we're talking about.

I mean, that's an important distinction. But I mean, for sure, we got a little heavy on the receivable side. And our goal is to reduce that one of the questions that we get a lot is like, hey, you have to raise cash that would I mean, I consistently answer that by saying we're going to collect our receivables and that will be the way that we raise cash.

So yeah, I think we saw the first spots of that this quarter, net of the adjustment that we've been talking about receivable to decline by around $30 million AP came down as well. So I think we're going the right direction from a cash generation standpoint. And we feel really confident that we can make that $50 million number that we laid out for the year.

Yeah, and I wasn't casting versions. I was try and understand.

None were taken.

And that's helpful. So $175 million to $225 million that's helpful. Thank you. Yeah. And then my last question is we hear a lot and I think we've some questions you've called alluded to. We're hearing a lot about on Sungrow, Canadians, and some of these guys showing up with combination, the inverter solutions and customers self-integrating as well.

Are you all seeing that? And I'm curious, does that potentially represent an opportunity for you guys? And as you think about the software only part of your business as more of these the Chinese guys show up and sell directly?

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

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

Okay. Thank you very much.

Thanks, Joe.

Kashy Harrison, Piper Sandler.

Good evening and thanks for taking my questions. Just two from me. First one, is on the GAAP gross margins for software and services. Looks like it got quite a bit better year over year, and I think quarter over quarter as well. Can you speak to what the driver was of that improvement and how sustainable are the current software gross margins?

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

Got it. That's helpful. Thanks. And then my next question is on the bookings side. Specifically, $23.8 million I get that it's lumpy. It's FTM, but that's still a pretty big drop from the [$364 million] last year. And so I was just wondering if you could share some context on what happened with bookings this quarter. Are you seeing anything change in the market or was this about in line with what you expected? I know you shifted away from quarterly bookings. Just any color on market would be great.

Yeah, actually, John, Carrington here. Look, I'd say a couple of things. It is lumpier for sure, as we've expanded into the larger scale front of the meter storage projects. The timing of these bookings certainly moved around. It's exactly what I saw when I was at First Solar, incidentally. And so I've seen this playbook before.

And I would also add that our project size has tripled over the past two years. And we have a substantial number of projects that are advanced stage of negotiations that Bill mentioned earlier are expected to close in the near term. So I think we feel good about the total year. As we mentioned, the commercial momentum, we remain confident in achieving our $1.5 billion to $2 billion bookings target for the full year. But yeah, it's just landing the plane every quarter on a bookings metric is tough as you get bigger and bigger projects.

Got it. Thank you.

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

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

Thank you. This concludes today's teleconference. You may disconnect your lines. At this time. Thank you for your participation.