Stem, Inc. (NYSE:STEM) Q1 2024 Earnings Call Transcript

Stem, Inc. (NYSE:STEM) Q1 2024 Earnings Call Transcript May 2, 2024

Stem, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Stem, Inc. First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. Durbin, you may begin.

Ted Durbin: 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 will be using a slide presentation today. Our earnings release and presentation are on the Investor Relations section of our website at www.stem.com.

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.

John Carrington: 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 timelines 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 had 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 CARR, 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 CARR.

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 non-cash adjustment and otherwise reaffirming our guidance across our key metrics, including $5 to $20 million of adjusted EBITDA and more than $50 million of operating cash flow for the full year of 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 five for a deeper dive into this new and exciting product. The 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 a portfolio and individual sites, automatically manage energy storage warranty obligations, streamline operation 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 renewable sector. This is fully aligned with our objective of accelerating our CARR 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 CARR.

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 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 on converting our CARR 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 timelines remain protracted, our customer cancellation rates are in the low single digits, which translates into a high confidence in 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 hour storage 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.

Bill Bush: Thanks, John. Starting on page 8 with our results for the first quarter of 2024. As John mentioned, revenue in the quarter was negatively impacted by an approximate $33 million non-cash adjustment as a result of battery hardware price guarantees we made to gain a foothold in the public power and large front-of-the-meter markets. 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 non-cash 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 marketing 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 expect will be available for sale in late Q2 and second half of 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 marketing 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 continue to improve our working capital management and remain dedicated to generating positive operating cash flow without the need to raise additional equity or equity-linked securities.

Turning now to slide nine 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 cancelled 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. The 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 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 of 2023, a 2% sequential decrease. The decrease in CARR was due to the previously mentioned backlog review that resulted 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 the 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.

John Carrington: 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 in 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 firms. 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 18th. 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 Albert 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 to scale our global technology team and has extensive industry knowledge, and customer engagement has been instrumental to 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 the Stem board effective April 19th. 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 co-founded and led the global clean technology practice, in addition to launching the AI for sustainability initiative.

Gerard was also a leader of the McKinsey’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 for questions, please.

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Q&A Session

Operator: [Operator Instruction]. The first question comes from the line of James West with Evercore ISI. Please go ahead.

James West: Hi, good afternoon, guys.

Bill Bush: Good afternoon, James.

James West: So, understanding that you kept your revenue guidance and most of your guidance generally the same, ex the non-cash charge, a lot of it is back in loaded here. I’m curious about, the confidence that you have in hitting those revenue targets 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 are these projects where they could slip?

Bill Bush: 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 could 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, you know, 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. You know, 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 project which we’re working on, which we’ve talked about, you know, at length in other calls. So, I think what you’re seeing is, you know, 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. You know, $600,000 negative operating cash in the quarter, I think, was really an accomplishment for us. And certainly, where we are from an EBITDA standpoint is actually ahead of where we were.

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.

James West: Okay. That’s very helpful, Bill. Thanks for that. And then, maybe just a 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? Are they possibly getting better? How do you guys feel about those issues?

Bill Bush: You know, 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, you know, other things can happen as well. 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 to 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, you know, 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, you know, that’s becoming a smaller part of the overall business of the company. And so, that’s how we’re combating that negative headwind, is by moving away from projects which are particularly susceptible to those sorts of delays.

James West: Okay, got it. Thanks, Bill.

Operator: Thank you. Next question comes from the line of Jon Windham with UBS. Please go ahead.

Jon Windham: Hi, great. Thanks. I wonder if you could just sort of help talk through 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.

Prakesh Patel: Hi, John. This is Prakesh Patel. I think, you know, 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-pronged approach to driving that uptake, either by engaging with asset owners and having them specify or push down to project developers, that you must 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 timelines and the like. So, that subject matter expertise, the differentiated software economics, is really what drives our competitive advantage on the storage side.

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

Bill Bush: That’s right. Exactly. It’s a reduction in accounts receivable, reduction in revenue.

Jon Windham: Got it. Perfect. Thank you so much.

John Carrington: Jon, let me just add on to that to give everybody – this is John Carrington – give a quick explanation of the revenue adjustment to kind of 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, let’s go to the next question.

Operator: Thank you. Next question comes from the line of Andrew Percoco with Morgan Stanley. Please go ahead.

Andrew Percoco: Great. Thanks so much for taking the question. I guess I just wanted to start with a few questions on this backlog cleansing effort that you guys are doing. I guess, first, when were these projects hooked? And I guess what’s changed? Were there changes to the customer, maybe credit quality 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 kind of evaluating the backlog? And could there be additional attrition from here?

Bill Bush: So, I think – let me start with the last question first. 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 or concentration, were customers that we believed 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. Yes, 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.

John Carrington: 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 very much around a focus, as Bill mentioned, on contribution margins. So, it was the right thing to do for the business. And, as Bill said, that project’s complete.

Andrew Percoco: 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 as the low point, just given your seasonality on volumes. But gross margins on an adjusted basis were 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.

Bill Bush: Yes, Andrew, thanks for that question. So, I think, as 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 kind of 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? Doing things like that gives you the ability to have confidence in that guide. That you started five points higher on a comparative basis. Last year we were at 19%. Went to 15 for the full year.

And this year we’re starting at 24. So, we kind of 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 margins are 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, 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, think 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 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 you, 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.

Andrew Percoco: Great. Thank you. I’ll take the rest offline.

Bill Bush: Thank you.

Operator: Thank you. Next question comes from the line of Thomas Boyes with TD Cowen. Please go ahead.

Thomas Boyes: Great. Thanks. Thanks for taking my questions. Bill the first one, great to see kind of PowerTrack announcement. And 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 kind of the goal to leverage it primarily first with hybrid deployments or is kind of the key to flexibility to address both solar and storage and take advantage of some brownfield opportunities? The reason that I ask is just looking at the interconnection queue exiting 2023 around I think, 80% of all of the new capacity requests were for solar for storage. I was just wondering how you were thinking about that?

John Carrington: Thomas, John here. Yes, I’d say the PowerTrack APM suite in general is really a software-only solution that we are targeting to help the management of really storage solar and hybrid energy asset portfolio. So it’s really across the board. 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 uptick and 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.

Prakesh Patel: Hi, John. This is Prakesh. As far as the market definitely this is another example of a solution that can work in existing 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 approval.

Thomas Boyes: Great, and I appreciate the color there. Maybe I just wanted to dig in a bit on the solar AUM decline. Similarly with this really for those legacy contracts that ended up not making the transition from the initial pruning efforts that you had kind of around the analyst day or is this exiting business with new customers that are just not hitting an even higher profitability threshold that you’ve kind of used?

Prakesh Patel: It’s really what Bill laid out earlier is we took a screen of are there subscale customers that are difficult to serve? Is it a lower margin contract? And one other thing I would hit on is and this was especially true on the storage side will it tie up additional working capital? If any of those hit then we would flag 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.

Thomas Boyes: Got it. Understood. I appreciate it. I’ll hop back in the queue. Thanks.

John Carrington: Thank you, Thomas.

Operator: Thank you. Our next question comes from the line of Justin Clare with ROTH NKM. Please go ahead. Mr. Clare, please go ahead with your question.

Justin Clare: Yes. 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 would essentially offset this?

Bill Bush: 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 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 are 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 reaffirmed the guide of $1.5 to $2 billion in total bookings.