STEM, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Stem provides energy-storage hardware and software-enabled services, including its Athena optimization platform and PowerTrack solar monitoring software.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $92.9 million | $66.9 million | $160.4 million | $108.0 million |
| GAAP gross profit / margin | $11.9 million / 13% | $7.8 million / 12% | $12.9 million / 8% | $11.4 million / 11% |
| Operating loss | $(34.9) million | $(29.8) million | $(77.5) million | $(64.8) million |
| Net income (loss) attributable to Stem | $19.1 million | $(32.0) million | $(25.7) million | $(54.5) million |
| Adjusted EBITDA (non-GAAP) | $(9.5) million | $(11.1) million | $(23.2) million | $(23.9) million |
Q2 GAAP net income was driven by a $59.1 million net gain on extinguishment of debt, not operating profitability. Diluted EPS was a loss of $0.26, compared with basic EPS income of $0.12, reflecting the filing’s treatment of the debt gain in diluted EPS. Hardware revenue was $76.6 million in Q2 and $129.3 million for the first half; services and other revenue was $16.4 million and $31.0 million, respectively.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $75.4 million and short-term investments were $62.8 million, totaling $138.2 million. Net working capital was $305.3 million.
- First-half operating cash flow was $(201.2) million, compared with $(32.6) million a year earlier. The outflow included increases of $72.2 million in receivables and $137.1 million in inventory; deferred revenue increased $56.0 million.
- First-half investing cash flow was $88.5 million, largely reflecting net proceeds from investment sales. Financing cash flow was $100.3 million. Cash declined $12.5 million from year-end to $75.4 million.
- Convertible notes had a $522.5 million carrying value: $297.0 million principal remaining on the 0.5% 2028 notes and $240.0 million principal on the 4.25% 2030 notes. Stem issued the 2030 notes, used about $99.8 million of proceeds to retire approximately $163.0 million principal of the 2028 notes, and spent $27.8 million on capped calls. Financing obligations totaled $77.1 million.
- Management said available cash was sufficient for capital and liquidity needs for at least the next 12 months, while noting that future financing may be needed if cash generation or other plans fall short.
Changes, outlook and risks
- Revenue rose 39% in Q2 and 48% for the first half, chiefly from increased hardware demand in front-of-meter and behind-the-meter partnership sales. First-half GAAP gross margin fell to 8% from 11%, as cost of revenue grew faster than revenue.
- Bookings were $236.4 million in Q2 and $599.9 million for the first half. Contracted backlog was $1.364 billion, versus $726.6 million a year earlier; contracted storage AUM was 3.8 GWh, versus 2.4 GWh. Solar monitoring AUM was 26.0 GW, versus 32.1 GW. Contracted annual recurring revenue was $74.9 million, versus $57.6 million.
- Remaining performance obligations were $767.0 million at June 30, up from $363.8 million a year earlier. These are contracted amounts, not a guarantee of when or whether revenue will be realized.
- No numerical full-year guidance is provided in the supplied filing text. Management expects sales and marketing, research and development, and general and administrative costs to rise as the business scales. It cited continuing shortages and delivery delays for batteries, inverters and related equipment; if they persist into the second half of 2023, project delivery and revenue timing could be affected.
- Customer concentration is material: Customer A represented 58% of Q2 revenue and 35% of receivables at June 30. The filing also identifies dependence on a small supplier base, execution and profitability risks, macroeconomic and geopolitical uncertainty, and risks tied to upfront-funded DevCo projects.
- Q1 2023 hardware purchase orders totaling approximately $52 million used lithium-carbonate-indexed pricing. Stem recorded about $42 million of revenue after a $10 million constraint; final revenue could be reduced to $34 million depending on the settlement price. The filing adds the constraint back in its non-GAAP gross profit and Adjusted EBITDA reconciliations.
- Two putative securities class actions were filed in May and July 2023 against Stem and certain current and former officers and directors. Management said it believed material loss from pending legal proceedings was remote; litigation outcomes remain uncertain.
- Management concluded disclosure controls were effective at a reasonable-assurance level. The filing reports no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash use and inventory growth convert into delivered projects, collections and improved gross margins.
- How much of backlog and remaining performance obligations becomes revenue, and on what schedule, given supply constraints and cancellable partnership bookings.
- Customer and supplier concentration, including the continuing revenue and receivables exposure to Customer A.
- The eventual settlement of lithium-indexed purchase orders and the effect on reported revenue and margins.
- Debt service, potential dilution from convertible notes and equity awards, and whether liquidity remains adequate if operating cash burn continues.
- Developments in the securities lawsuits and any changes to the company’s outlook or risk disclosures.