Stem Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Record software revenue of $38.4 M (up 13% YoY) and ARR of $59 M (up 22% YoY) drove a positive adjusted EBITDA of $4 M in Q2.
  • Positive Sentiment: Completed a strategic debt exchange capturing a ~$200 M discount and extending maturities to create a five-year runway, significantly strengthening the balance sheet.
  • Positive Sentiment: GAAP gross margin reached 33% and non-GAAP gross margin hit a record 49%, while cash OpEx fell ~40% YoY thanks to a 35% workforce reduction.
  • Positive Sentiment: Introduced two new software offerings—PowerTrack EMS for utility-scale/hybrid assets and AI-enabled PowerTrack Sage—broadening market opportunities.
  • Negative Sentiment: Operating cash flow was negative $21 M in Q2 due to working-capital timing and one-time severance payments, although full-year cash-flow guidance remains $0–$15 M.
AI Generated. May Contain Errors.
Earnings Conference Call
Stem Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Operator

Greetings and welcome to the STEM Inc. Second Quarter twenty twenty five Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Erin Reed. Please go ahead.

Speaker 1

Thank you, operator. This is Erin Reed, Head of Investor Relations at Stem. We welcome you to our second quarter twenty twenty five earnings call. Before we begin, please note that some of the statements we will be making today are forward looking. These statements involve risks and uncertainties that could cause our results to differ materially from those projected in these statements.

Speaker 1

We therefore refer you to our latest 10 Q, 10 ks and other SEC filings and supplemental materials, which can be found on our website. 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 second quarter twenty twenty five earnings release, which is on our website. Arun Narayanan, CEO and Brian Musfeldt, CFO, will start the call today with prepared remarks, and then we will take your questions. And now I will turn the call over to Arun.

Speaker 2

Thanks, Erin. Hello, everyone, and thank you for joining us. Q2 twenty twenty five was a quarter unlike those prior as we took many steps to stabilize and position the business for future success and growth. We've delivered record software revenue and positive adjusted EBITDA for the quarter, refinanced our debt and significantly strengthened our balance sheet, continued to manage our operating costs including a difficult but critical strategic reduction in force, and executed on our software centric strategy defined by our new BU structure. While achieving all this, we are also looking to the future, and we will announce an AI enabled PowerTrack offering today.

Speaker 2

I will also touch upon the macro environment and guidance for the year. Let's delve into these topics now. I am pleased to report outstanding results for the quarter. We reported total revenue of $38,400,000 for the quarter, up 13% year over year. Total ARR grew 3% sequentially and 22% year over year to $59,000,000 demonstrating continued momentum in our recurring revenue base.

Speaker 2

We entered into several new PowerTrack software engagements during the quarter, including Norbert Solar Farms standardization across their 50 megawatt portfolio and PowerTrack power plant controller and data acquisition support for Avangrid's 57 megawatt Camino solar project. PowerTrack continues to be the industry standard for C and I solar asset monitoring. And looking ahead, we remain focused on driving PowerTrack adoption in international and utility scale markets. For storage, our strategic focus remains centered on software and services, particularly with brownfield opportunities for managed services that enable faster revenue conversion. This quarter, we saw this strategy pick up momentum and signed multiple brownfield deals with customers.

Speaker 2

The managed services team continues to deliver proven strategic advantages across the value chain to our storage customers. Professional services continued expanding during the second quarter with a number of new consulting engagements. This included the announced Green River Energy Center project with R plus Energies, where we provided energy storage metering configuration and power flow analysis. Notably, this was not STEM's first engagement with R plus demonstrating that customers are getting value from professional services and are returning for additional support. This quarter, we also substantially enhanced our professional services offerings in energy market education and strategy and introduced customer support for navigating policy and regulatory environments and project finance advisory.

Speaker 2

Growing our software and services revenue is a strategic priority for us and we are delivering on this. Now on to another strategic priority, reducing our cost structure and driving profitability. We achieved strong GAAP and non GAAP gross margins this quarter, reflecting continued growth of high margin software and services revenue and active cost management. The strategic reduction in force implemented in the second quarter is now fully effective and represents approximately a 35% reduction in personnel costs. While these decisions and actions were challenging, these cost cutting efforts enabled us to reduce cash OpEx year over year by nearly 40% and generated positive adjusted EBITDA of $4,000,000 for the quarter, representing a $15,000,000 year over year improvement.

Speaker 2

We continue to focus on cost savings, while ensuring the business has the resources necessary to scale and capture the opportunities ahead. Now on to the balance sheet. This quarter, we also completed a strategic debt exchange transaction, which at the high level allowed us to exchange a large portion of our old debt for a new and significantly smaller loan that is due at a later date, giving us more time before the debt matures and more importantly, reducing our overall debt burden. We were able to capture a discount of close to $200,000,000 through our debt exchange transaction. Most of the debt we have now has a five year runway.

Speaker 2

Now let's turn to an update on our internal business unit structure. Our software centric strategy and our organization as business units help us deliver on our financial metrics and positions us to capitalize on the significant opportunities in the evolving energy landscape. As mentioned in the previous earnings call, we have organized TEM into four business units: software products, managed services, professional services, and OEM hardware. These business units help guide our internal operations. Each business unit president has full p and l responsibility, which is a simple yet critical change that is driving focused growth and investment strategies within their domains.

Speaker 2

While the new structure is supporting investment and growth within each business unit, it is also designed to enable collaboration across the business units by encouraging cross selling of each other's products. We are hopeful that this collaboration will yield tangible results in the coming quarters. We have nearly finished formalizing our internal reporting structure around these four business units. Next quarter, we plan to launch external segment reporting, which will give investors enhanced visibility into how each business unit is performing. An important note, while these four business units guide our internal operations, the external reporting segments may be structured slightly differently under the accounting rules and for investor transparency.

Speaker 2

I am pleased to say that we are already reporting a more detailed revenue breakout on our income statement in our Form 10 Q to provide clarity into our business. Our software offerings set us apart. I am pleased to announce two new software offerings today. First, let's talk about PowerTrack. I'm excited to announce that they're bringing the PowerTrack EMS offering to the market.

Speaker 2

This is a key product for us that allows us to expand into storage and hybrid assets and also into the utility scale solar space. In a way, this product fully integrates AlsoEnergy's solar C and I offerings with STEM's storage offerings. As a result, we are now focused across key markets, solar storage and hybrid assets in both the C and I and utility scale segments. The product PowerTrack EMS is a crucial offering for the market. It adds a comprehensive control layer with integrated cloud capabilities to PowerTrack.

Speaker 2

Some customers have previewed the product and we already have received positive feedback from these prospective customers. We are launching sales of PowerTrack EMS at the upcoming RE plus conference in Las Vegas in September and expect an estimated six to nine months between bookings and revenue recognition. As we discussed in previous quarters, we continue to incorporate advances in AI into our offerings. Looking ahead, we have the opportunity to bring LLM like technology to PowerTrack. The second product announcement I'm making today is in this space.

Speaker 2

Today, I'm pleased to announce PowerTrack Sage, which will allow customers to experience the capabilities of PowerTrack through a chat like experience allowing for greater interactivity, interpretation, and remedial action. This allows us to expand our customer base to new types of customers and also provide additional value to existing customers' workflows by integrating different work steps, eventually allowing them to streamline their operations. Development for this product is well underway and we hope to bring it to customers soon. Revamping our software development and taking advantage of advances in AI is a strategic priority for us and we remain focused on it. Now turning to macro environment.

Speaker 2

While headwinds from tariffs and policy uncertainty continue, we remain confident in our ability to navigate these challenges. This is driven by our team's ability to adapt and as a direct result of some of the transformational strategy changes we have made over the last year or so. Our diversified software centric model and international expansion strategy positions us well. Our software and service offerings are largely insulated from hardware tariffs. Furthermore, many of the projects in our near term pipeline are already well under construction.

Speaker 2

And as of today, we do not expect to see softening this year. Our professional services business unit actually benefits from this complexity as we have developed specialized policy and regulatory offerings to help customers navigate the evolving landscape. The largest share of our revenue today comes from The U. S. C and I solar market and we continue to view it as a strong and sustainable opportunity even without government incentives.

Speaker 2

Recent market forecast from Wood Mackenzie show installations in this key market growing in 2026. Furthermore, with load growth expected to rise, new capacity will need to be built and we will be here to support that build out with our industry leading offerings. Now on to guidance. With the close of the second quarter, I'm pleased to report that we are tracking towards the high end of guidance for all metrics, but operating cash flow for which we are tracking towards the low end of the range. Because we remain in an uncertain policy and regulatory environment, we will not be updating the ranges today, although I am very pleased to reiterate our full year 2025 financial guidance across all metrics and believe we are derisking the bottom end of nearly all ranges.

Speaker 2

Overall, we have delivered a very robust and defining quarter on all fronts. Our future technology roadmap, a cleaner balance sheet, and a lower operating cost structure all point to a pathway where we can deliver on our promises. Before I turn the call over to Brian to walk through the financials in more detail, I would like to formally welcome him back to the STEM team. Brian brings nearly thirty years of finance and management experience in clean technology and energy to STEM, including as the CFO of OLSA Energy for five years. Brian's experience is in complete alignment with the strategic direction the Board has charted for the company.

Speaker 2

I'm really excited to have Brian back and I look forward to Brian's support in the next phase of STEM's development. With that, let me turn the call over to Brian.

Speaker 3

Thanks, Arun, and hello, everyone. I'm excited to be back with STEM. I've spent nearly three decades in finance and operations leadership, most recently in software related clean technology and energy. I spent over five years helping manage and build PowerTrack into The U. S.

Speaker 3

Market leader in solar asset monitoring, and I'm excited to continue that journey as I see tremendous opportunity ahead as we execute our software focused strategy into the solar and storage markets. My key strategic priorities as CFO are focused on profitable growth and cash management as we look to expand each of our key business segments over the coming years. Turning to our second quarter twenty twenty five financial performance, total revenue grew 13% year over year to $38,000,000 Notably, solar software continued its strong growth trajectory, growing 20% year over year, and storage software and managed service revenue grew an impressive 53% year over year, with 100 megawatt hours of new storage assets commissioned in the quarter. This quarter, we introduced a more detailed revenue breakout on our income statement in our Form 10 Q to provide enhanced clarity into our business. You can see it further highlighted on page six of our supplemental materials.

Speaker 3

We again achieved strong gross margins this quarter with GAAP gross margins of 33% and a record non GAAP gross margin of 49%. This expansion reflects the increasing mix of higher margin software and services in our revenue base. GAAP operating expenses were down 17% quarter over quarter and cash operating expenses were down 20% quarter over quarter and 39% year over year. These OpEx reductions were primarily the result of the completion of our targeted workforce reduction in the second quarter that resulted in annualized savings of over $27,000,000 or approximately 35% of our personnel expenses. Cash operating expenses of $18,000,000 this quarter exclude the $6,000,000 in one time expenses from this reduction in force.

Speaker 3

We expect operating expenses to continue to decline throughout the balance of the year as we continue to drive cost savings across the business. The improved margins and significantly reduced OpEx drove positive adjusted EBITDA of $4,000,000 this quarter, demonstrating that our strategic realignment and cost discipline initiatives are delivering results. Operating cash flow came in at a negative $21,000,000 for the quarter, driving cash of $41,000,000 at the end of the second quarter. The decrease in operating cash flow was largely due to an outflow from working capital and $6,000,000 of one time payments related to the reduction in force implemented during the quarter. Working capital will fluctuate from quarter to quarter in the normal course of business.

Speaker 3

This quarter, due to timing with customers and vendors, accounts receivable increased and accounts payable decreased. This, combined with other one time non recurring payments, caused a net decrease in working capital and cash on hand at the end of the quarter. Based on the extensive cost reductions executed in the second quarter and the de emphasis on the capital intensive OEM battery resale business, we expect to generate positive cash from operations in the second half of the year and today have reiterated our operating cash flow guidance of between 0 and $15,000,000 for full year 2025. As Arun stated, during the quarter, we also completed a significant debt exchange transaction, which we see as significantly strengthening our financial position. The transaction consisted of a private debt exchange for the majority of our outstanding 2028 and 2,030 convertible notes.

Speaker 3

Specifically, we acquired $229,000,000 of the 2028 convertible notes and $121,000,000 of the 2030 convertible notes in exchange for $155,000,000 of the new first lien senior secured notes due in 02/1930. This transaction retired $195,000,000 of debt at a meaningful discount while extending debt maturities. Additionally, we see this transaction as materially strengthening our balance sheet by reducing medium term liabilities and overall net leverage, as well as providing enhanced financial flexibility as we scale our business. And now turning to our operating metrics. As announced during the fourth quarter earnings call, we have introduced enhanced operating metrics that should provide stakeholders with better visibility into key drivers of our financial results.

Speaker 3

Bookings, representing all onetime and recurring revenue with executed purchase orders in the period, were nearly flat, as expected, due to typical seasonality of this metric. Contracted backlog comprising all hardware and non recurring service bookings with executed purchase orders not yet delivered to our customers grew 6% sequentially. PAR, which includes all annualized recurring revenues for systems with executed purchase orders that are not yet operating and all operating STEM customer subscription contracts, increased 1% sequentially. ARR, which includes all STEM operating recurring revenues, increased 3% sequentially and 22% year over year. Finally, storage and solar AUM increased 41%, respectively, since last quarter.

Speaker 3

These redefined operating metrics provide enhanced visibility into our future revenue. In other updates, I am pleased to report that our reverse stock split became effective on June 23, and we are now in compliance with the New York Stock Exchange listing standards. Now on to guidance. As Arun said, we are reiterating our full year 2025 guidance across all metrics, and we are tracking toward the high end of the guidance for all metrics except operating cash flow, for which we are tracking toward the lower end of the range. And now I will pass the call back over to Arun for closing remarks.

Speaker 2

Thanks, Brian. As we look ahead, I remain highly confident in STEM's trajectory and our ability to deliver sustainable profitable growth. Our new business unit structure is operating effectively with each unit driving focused results. Our strategic priorities are delivering measurable outcomes and our strengthened balance sheet provides the financial flexibility to invest in compelling growth opportunities. The clean energy transformation continues accelerating globally, creating a massive market opportunity.

Speaker 2

Our market leading software platforms, industry leading solutions and dedicated team positions us to capitalize on this transformation. Combined with our enhanced financial foundation and proven ability to navigate macro challenges, TEM is exceptionally well positioned for the road ahead. I want to thank our investors and customers for their continued confidence and trust in us, and I want to take this opportunity to also express my gratitude for the hard work and contributions of STEM's employees in achieving these results. With that, operator, let's open the line for questions, please.

Operator

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. And our first question will come from Justin Clare with ROTHMKM.

Speaker 4

Hi. Thanks for taking the questions here. And, so I guess, first off, I just wanted to start with so you're you're shifting the business, and and you have a much greater emphasis on software products here. So just wondering how we should think about, hardware sales moving forward. Any sense for, what the battery resale revenue could look like in the back half of the year?

Speaker 4

And then curious on if you're continuing to book orders for battery hardware or at this point and how that's evolving here?

Speaker 2

Jackson, can you just repeat the last part of the question? This is Arun. I got your first half.

Speaker 4

Yeah. I'm just wondering if you're continuing to book, battery hardware sales, if if that's, something that's continuing here or if you've deemphasized it and it's, you know, primarily a software focus?

Speaker 2

Okay. Okay. I understand. Justin, this is Arun. Thank you for the question.

Speaker 2

I I wanna reaffirm our guidance. In in our in our supplement, we state that we are aiming to achieve up to 35,000,000 in hardware sales. But but maybe more importantly, I think it is true that we have pivoted to becoming a more software and services centric as an organization. And for me, what is really encouraging is that that strategy is playing out, and we are able to deliver on the software outcomes that we have promised, and that comes with the associated gross margins as we had hoped to achieve as well.

Speaker 4

Got it. Okay. So then, I guess, just, know, maybe on a kinda separate topic here, just wondering, know, Sinai Solar, I think, is the largest share of your revenue today, but you you've talked about, you know, utility scale solar, and obviously, you have a storage business and a hybrid business as well. Wondering if you anticipate the mix shifting, and if you could just speak to the progress you're making on growing into, you know, utility scale solar, for example.

Speaker 2

Yeah. It's a really good question. So each market has, different characteristics. If you look at the C and I solar space, PowerTrack is a very strong player in that, and we have a a good set of customers who use the technology and very positive feedback that we receive. Utility scale is a if you imagine the market, it's basically a market in which solar assets are deployed alongside a storage asset.

Speaker 2

That's what characterizes the utility scale space. And for us to be able to play in that market, we need a compelling offering. And that offering is PowerTrack EMS. And PowerTrack EMS allows us to bring the excellence that we have within the solar capabilities of PowerTrack, but allow for that to be deployed alongside the management of energy in the storage space. And that's why this product that we're releasing very soon is so exciting for us.

Speaker 2

It allows us to tap into that space. In the storage space, EMS can be used as well as the fact that the strength that we have in stem is that we are able to provide managed services to our customers in the storage and hybrid spaces. And in these spaces, we rely on the capabilities that we have in technical experts in the organization, but also the fact that we have technology like Athena that's used to make managed services so successful. And then across the full spectrum, including projects that have not been commissioned, we are able to bring professional services to bear.

Speaker 4

Got it. Okay. And then just one last one here on OpEx. I think I heard that it's expected to continue to decline through the end of the year here. Was wondering where do you think you could be at the end of the year?

Speaker 4

And what could the kind of run rate be as we move into 2026?

Speaker 3

Yes. Thanks. This is Brian. I'll take that one. Yes, we obviously don't give future guidance on kind of forward looking statements that way.

Speaker 3

But I can say, as we get into the second half of the year, we are going to continue to reduce our cash OpEx. The team is still working on what I would call non personnel related savings. So there's a continued effort to bring that OpEx in line with the size and the revenue and the margins we're generating. So you can look for that. I think we do produce cash OpEx.

Speaker 3

I think we showed that it went down to about $18,300,000 this quarter compared to $29,000,000 year over year. So that's a great decrease already. We do expect to you'll see more coming into the third quarter and that we will manage toward that run rate.

Speaker 4

Okay. Sounds good. I'll pass it on.

Speaker 2

Thank you, Justin.

Operator

And I believe we have some investor questions, if management would like to go over those.

Speaker 2

I realize today is a busy earnings day, and I'm trying to represent some of the investor questions as well as questions that we receive frequently from retail investors online. And maybe just a couple of questions, and Brian, you can maybe comment on them. Can you give a little bit more color to the recent debt deal and why it is such a big important transaction for us?

Speaker 3

Yeah. Thanks. Yeah. So as we talked about in the call, you know, this is a important important improvement to our balance sheet for this company. You know, we did a we did an exchange of about $350,000,000 of aggregate principal debt in this company and converted that into $155,000,000 of debt.

Speaker 3

And there's really two key benefits around that. First, we obviously reduced the outstanding debt by approximately $200,000,000. It's really a gain and a capture for the company that we won't have to that deleverages the company significantly. Secondly, in doing so, we we pushed out the maturity. So we pushed out the maturity of about $297,000,000 of debt that was due in 2028 and reduced it to about 68,000,000 in 02/1930.

Speaker 3

So that extends our our first debt maturity now is is significantly reduced, and the majority of this is now five years out. So it's a it's a great, I think, win for the company. It comes with very reasonable covenants, and I think it was a really good strategic move by the company to kinda get that taken care of and deleverage the balance sheet.

Speaker 2

Good. And then one other question that we get is around cash. Right? If you look at cash OpEx for the quarter, we were able to manage the cash very well, but the ending cash position is lower. But how does that reconcile with how we think about going to the company and end of year guidance that we have stated of 0 to $0 Yes.

Speaker 3

So we reported, as you saw there, about a $21,000,000 operating cash flow reduction in the quarter. And if you look at what that what drove that as compared to a $4,000,000 positive EBITDA quarter, really was driven by a use of working capital outflows. If you look at our balance sheet or our cash flow, you'll see that we actually, for the first time in four quarters, increased accounts receivable, which is great. It's just due to timing of deals, and this is all current. So we're happy to see that, that the business is stabilizing on that front.

Speaker 3

And on the other side, we made some pretty significant paydowns against just vendor payables and our accounts payable as well as onetime payments. For example, the risk that we talk about, about $5,900,000 of cash outflows that had to go out of the business to kinda help right size the cost and the operating expense of the company. So, you know, as as you look at the balance sheet now, you're gonna start to see a lot more stabilized working capital as I mean, we've kind of now with the focus on software and the move away from this OEM battery business, I think you'll start to see a working capital stabilize, and we will expect to start generating cash flow into the second half.

Speaker 2

Okay. Very good. Thanks, Brian. So with that, I wanna thank everyone for joining our second quarter earnings call and look forward to speaking with you during our third quarter earnings call in the fall. Thank you, everyone.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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