8-K: Stem Inc. Announces First Quarter 2024 Results, Impacted by Revenue Adjustment

Stem Inc. reported a significant decrease in revenue for the first quarter of 2024 due to a $33 million non-cash adjustment related to contract guarantees, while also highlighting improvements in non-GAAP gross margin and operating cash flow.

Summary

• Stem Inc. announced its financial results for the first quarter of 2024, revealing a revenue of $25.5 million, a 62% decrease compared to $67.4 million in the same quarter of 2023.
• This decrease was primarily due to a $33 million non-cash adjustment related to updated valuations of certain contract guarantees for hardware revenue recorded in 2022 and 2023.
• GAAP gross profit was $(24.2) million, down from $1.0 million in 1Q23, while non-GAAP gross margin improved to 24% from 19% in the same period.
• The company reported a net loss of $72.3 million, compared to a net loss of $44.8 million in 1Q23.
• Adjusted EBITDA was $(12.2) million, an improvement from $(13.7) million in 1Q23, and operating cash flow was $(0.6) million, a significant improvement from $(35.8) million in 1Q23.
• Bookings were $23.8 million, a substantial decrease from $363.5 million in 1Q23, attributed to increased variability in large, utility-scale projects.
• Contracted backlog was $1.6 billion, up 33% year-over-year but down 16% sequentially, due to efforts to upgrade backlog profitability.
• Contracted storage assets under management (AUM) reached 5.8 gigawatt hours (GWh), a 5% increase from the previous quarter, while solar monitoring AUM decreased by 2% to 26.9 gigawatts (GW).
• Contracted annual recurring revenue (CARR) was $89.3 million, up 25% year-over-year but down 2% sequentially.
• The company reaffirmed its full-year 2024 guidance for adjusted EBITDA and operating cash flow, and expects to generate more than $50 million of operating cash flow for the full year.

Sentiment

Score: 4

Explanation: The document presents mixed results. While there are positives such as improved non-GAAP gross margin and operating cash flow, the significant revenue decrease and net loss, along with the substantial drop in bookings, weigh heavily on the overall sentiment. The company's reaffirmation of full-year guidance provides some reassurance, but the negative impacts are significant.

Positives

• Non-GAAP gross margin increased to 24%, demonstrating improved profitability.
• Operating cash flow improved significantly, indicating better cash management.
• The company is focused on converting CARR to ARR, with a 42% increase expected for the remainder of 2024.
• Stem launched a new PowerTrack Asset Performance Management (APM) suite, enhancing its software offerings.
• Contracted backlog increased by 33% year-over-year, showing strong future revenue potential.
• Contracted storage AUM increased by 5% sequentially, indicating growth in the storage business.
• The company reaffirmed its full-year 2024 guidance for adjusted EBITDA and operating cash flow, showing confidence in future performance.

Negatives

• Revenue decreased by 62% year-over-year, primarily due to a $33 million non-cash adjustment.
• GAAP gross profit was negative at $(24.2) million, significantly down from $1.0 million in 1Q23.
• Net loss increased to $72.3 million, compared to $44.8 million in 1Q23.
• Bookings decreased substantially to $23.8 million from $363.5 million in 1Q23.
• Contracted backlog decreased by 16% sequentially, due to the cancellation of lower-margin contracts.
• Solar monitoring AUM decreased by 2% sequentially.
• Contracted annual recurring revenue (CARR) decreased by 2% sequentially.

Risks

• The company is subject to risks from evolving macroeconomic, geopolitical, and business environments, including inflation, interest rates, and potential economic slowdowns.
• There are risks associated with supply chain disruptions and the ability to secure sufficient and timely inventory.
• The company faces risks related to meeting contracted customer demand and managing supply chains.
• The company is exposed to potential future updates to estimates of variable consideration, which may result in future impairments.
• The company's expansion into large-scale front-of-the-meter (FTM) storage projects has led to increased variability in quarterly bookings.

Future Outlook

The company reaffirmed its full-year 2024 guidance for adjusted EBITDA and operating cash flow, and expects to generate more than $50 million of operating cash flow for the full year. They also reiterated their full-year $1.5-$2.0 billion bookings target for 2024 and expect meaningful year-over-year growth in software services revenue. Full year revenue guidance has been adjusted downward dollar-for-dollar solely as a result of the $33 million reduction in revenue.

Management Comments

• John Carrington, Chief Executive Officer of Stem, commented, 'The first quarter represented Stems continuing efforts to maximize cash flow generation in 2024 through cost control and converting receivables to cash.'
• He also stated, 'We set a quarterly record for non-GAAP gross margin, and adjusted EBITDA improved year-over-year despite lower revenue in the quarter, highlighting our focus on operating efficiency and ongoing cost management.'
• Carrington noted, 'Our first quarter performance reflected breakeven operating cash flow given continued reductions in our working capital intensity.'
• He added, 'Importantly, we are accelerating the conversion of CARR-to-ARR with a +42% increase expected for 2Q24 through 4Q24 as a result of a company-wide focus on our 2024 guiding principles.'

Industry Context

The announcement reflects the challenges and opportunities in the renewable energy sector, particularly in the energy storage market. The company's focus on software solutions and asset management aligns with the industry's increasing emphasis on optimizing the performance of clean energy assets. The variability in bookings due to large-scale projects is a common trend in the utility-scale energy sector.

Comparison to Industry Standards

• Stem's revenue decline of 62% is significant and highlights the impact of the $33 million adjustment, which is not typical for companies in the sector, although adjustments for contract guarantees are not unheard of.
• The improvement in non-GAAP gross margin to 24% is a positive sign, indicating better cost management, and is comparable to other software-focused energy companies.
• The decrease in bookings is a concern, as it is a key indicator of future revenue, and the variability due to large-scale projects is a common challenge in the industry, but the magnitude of the decrease is notable.
• The 33% year-over-year increase in contracted backlog is positive, but the 16% sequential decrease indicates some challenges in maintaining the backlog.
• The 5% sequential increase in contracted storage AUM is a positive sign of growth in the storage business, and is in line with industry trends.
• The launch of the PowerTrack APM suite is a strategic move to enhance software offerings, which is a common trend in the industry as companies seek to optimize asset performance.

Stakeholder Impact

• Shareholders may be concerned about the significant revenue decrease and net loss, but encouraged by the improved non-GAAP gross margin and operating cash flow.
• Employees may be affected by the company's restructuring efforts and focus on cost control.
• Customers may benefit from the new PowerTrack APM suite and the company's focus on higher-margin contracts.
• Suppliers may be impacted by the company's efforts to diversify its supply chain.
• Creditors may be reassured by the company's focus on strengthening its balance sheet and generating positive operating cash flow.

Next Steps

• The company intends to integrate the remaining hardware subject to guarantees into development projects, expected to be available for sale late in the second half of 2024 and operational in the second half of 2025.
• Stem will continue to evaluate the economics of these transactions based on then-current conditions.
• The company will focus on converting accounts receivable to cash more quickly.
• Stem will continue to diversify its supply chain, integrate additional energy technologies, and deploy a portion of its balance sheet to meet customer demand.

Key Dates

Keywords

Renewable Energy, Energy Storage, Software, AI, Asset Management, Clean Energy, Financial Results, EBITDA, Recurring Revenue, Backlog