Stem (STEM -19.43%), a leading provider of software and solutions for the clean energy industry, released its third-quarter earnings on Oct. 30, unveiling a mixed performance. Despite an ongoing strategic pivot towards high-margin software and services, the company's total revenue fell to $29.3 million, below management's guidance range of $30 to $50 million, and a stark decrease from $133.7 million in the same quarter last year. This was largely due to a decrease in hardware sales and contract adjustments. However, non-GAAP gross margin improved significantly to 46%, well above its guidance target range of 25% to 30% for the full year.
| Metric | Q3 2024 | Q3 2024 Management's Guidance | Q3 2023 | % Change |
|---|---|---|---|---|
| Revenue | $29.3 million | $30 million to $50 million | $133.7 million | (78.1%) |
| Non-GAAP gross margin | 46% | N/A | 12% | 340 basis points |
| Adjusted EBITDA | ($3.5 million) | N/A | ($900,000) | N/A |
Source: Management's guidance from the Q2 earnings report published Aug. 6.
Company Overview and Recent Focus
Stem specializes in clean energy management solutions, primarily through its AI-driven Athena platform, which optimizes energy storage and solar asset performance. The company provides comprehensive offerings such as battery storage, edge hardware, and professional services, relying on long-term contracts of up to 20 years. Athena's capabilities include optimizing energy operations and participating in energy markets, making it integral to Stem's competitive edge.
Recently, Stem has shifted its focus away from hardware and towards a software and services-centric model. This strategic pivot seeks to capitalize on the reliability of recurring revenue from software in contrast to the volatility of the hardware market, and enhance its gross margins.
Quarterly Performance and Strategic Actions
In the quarter, Stem demonstrated notable shifts in its financial metrics and strategic posture. Revenue declined significantly from $133.7 million a year ago to $29.3 million, primarily due to reduced hardware sales and adjustments linked to contract guarantees. Nevertheless, the company improved its gross margins, recording a GAAP gross margin of 21%, up from negative 15% in the same period last year, thanks to a greater focus on software and services.
Despite a net loss of $148.3 million, largely attributed to a $104.1 million bad debt expense due to impaired receivables, Stem made gains in its contracted storage assets. These grew to 6.0 gigawatt-hours (GWh), a 20% increase year over year. Solar monitoring assets under management also expanded by 8% to 28.5 gigawatts (GW).
The quarter witnessed leadership changes as John Carrington stepped down as CEO. Executive Chairman of the Board David Buzby took charge as interim CEO, and signalled an internal restructuring aligned with the company's new strategic priorities. The company faced challenges in bookings, reporting a sharp decline to $29.1 million compared to $676.4 million the prior year. This reflects ongoing industry challenges and the company's strategic pivot.
Outlook and Future Considerations
Stem has revised its full-year 2024 guidance for revenue to a range of $135 million to $155 million, down from the previous range of $200 million to $270 million. This adjustment mirrors the current market conditions and the strategic campaign to reinforce a service-oriented business model. Management envisions increasing software services revenue and reducing capital usage to achieve operational efficiencies.
Furthermore, operational cash flow expectations were updated to a range of $0 to negative $30 million. Management previously was projecting operational cash flow of greater than $15 million.
Stem's strategic realignment presents opportunities for growth, particularly as the demand for integrated clean energy solutions expands. Investors should monitor Stem's adaptation to market dynamics, especially its proficiency in leveraging Athena's capabilities and forming strategic partnerships to drive further expansion. Special attention should be paid to its ability to navigate project delays and the potential for continued adjustments in financial guidance in the coming quarters.
