STEM, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial comparisons are with Q1 2022 unless noted. Stem provides battery energy storage hardware, Athena energy-optimization software and services, and solar monitoring through PowerTrack. The results include AlsoEnergy for the full quarter in 2023, but only from February 1, 2022 in the prior-year reported results, limiting comparability.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $67.4m | $41.1m |
| Hardware revenue | $52.7m | $31.1m |
| Services and other revenue | $14.7m | $10.0m |
| GAAP gross margin | $1.0m (1%) | $3.6m (9%) |
| Non-GAAP gross margin | $15.1m (19%) | $6.5m (16%) |
| Operating expenses | $43.6m | $38.6m |
| Net loss | $44.8m | $22.5m |
| Adjusted EBITDA (non-GAAP) | $(13.7)m | $(12.8)m |
| Operating cash flow | $(35.8)m | $(26.0)m |
Revenue grew 64%, driven mainly by higher hardware sales. Cost of revenue rose faster, up 77%, and GAAP gross margin declined. Sales and marketing and R&D expenses increased 36% and 50%, respectively; G&A fell 13%, largely because Q1 2022 included $6.1m of AlsoEnergy acquisition transaction costs. Net loss nearly doubled, with the comparison also affected by the much larger income-tax benefit recorded in Q1 2022 ($15.2m versus $0.1m in 2023). Diluted loss per share was $0.29, compared with $0.15.
Q1 bookings were $363.5m versus $150.8m. Contracted backlog was $1.24bn versus $565.1m; contracted storage AUM was 3.5 GWh versus 2.1 GWh; solar monitoring AUM was 25.6 GW versus 32.4 GW; and contracted annual recurring revenue (CARR) was $71.5m versus $51.5m.
Liquidity, debt and cash flow
At March 31, 2023, cash and cash equivalents were $117.9m and short-term investments were $87.7m, for total cash and investments of $205.6m. Net working capital was $235.2m. The company reported a $676.9m accumulated deficit and said it expects available liquidity to cover capital and liquidity requirements for at least the next 12 months. Operating cash use was $35.8m; inventory growth of $34.9m was a significant working-capital use. Investing activities provided $67.8m, mainly reflecting net sales of available-for-sale investments; financing activities used $2.2m.
Convertible notes had $460.0m principal and a $448.4m carrying amount at quarter-end, with a 0.5% coupon and December 2028 maturity. Financing obligations totaled $77.3m, including $16.3m current. After quarter-end, Stem issued $240.0m of 4.25% convertible notes due 2030, receiving $232.2m net proceeds. It used $99.8m to repurchase and cancel $163.0m principal of the 2028 notes and $27.8m for capped calls; remaining proceeds were designated for general corporate purposes. On April 6, it repaid the remaining balance of a credit agreement using part of the proceeds.
Material changes, outlook and risks
- Indexed hardware pricing: Certain Q1 purchase orders totaling about $52m tie final settlement to lithium carbonate prices in Q1 2024. Stem recorded about $42m of revenue after a roughly $10.2m GAAP revenue constraint, while recording the full related hardware cost. The final settlement could reduce revenue further; the filing says it could fall to $34m, subject to market conditions.
- Management outlook: The filing gives no specific revenue, earnings or cash-flow guidance. Management expects sales and marketing, R&D, and G&A spending to rise as the business expands and scales. It expects profitability to depend on revenue growth, planned gross margins, cost control, customer retention, supplier performance and access to financing.
- Supply-chain and market risks: Shortages and shipping delays for batteries, inverters, enclosures and related components could delay deliveries, installation and revenue, potentially through 2023. Inflation, higher interest rates, geopolitical uncertainty, trade restrictions and COVID-related disruptions may add pressure. The company also cited reliance on a small supplier base and significant customer concentration.
- Customer concentration: One customer accounted for 61% of Q1 2023 revenue. At quarter-end, three customers represented 51%, 15% and 18% of accounts receivable, respectively. Losing a major customer or seeing reduced orders could materially affect results.
- Other items: Stem recorded an $0.9m impairment of energy storage systems. It reported no pending legal matters expected to have a material adverse effect and no material change in contractual obligations. Management stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether indexed lithium-carbonate contracts settle near the recorded estimate or require further revenue reductions, and how this affects hardware margins.
- Whether rising revenue converts into improved GAAP gross margin, lower operating cash burn and progress toward profitability.
- Whether backlog and bookings convert into binding purchase orders, deliveries and recognized revenue on schedule.
- Whether supplier constraints, customer concentration and working-capital needs affect execution or liquidity beyond management’s stated 12-month outlook.
- The effect of the 2030-note issuance, 2028-note repurchase, capped-call cost and related dilution or interest obligations on future capital needs.