Stem ‘continues to expect positive adjusted EBITDA’ in second half of 2023, full-year 2024

The California-based technology company is largely focused on the US market, and made its name a few years ago as an early exponent of ‘storage-as-a-service’ business models for commercial and industrial (C&I) customers, sharing electricity bill savings in return for reduced electricity consumption from the grid at peak times while also playing energy stored in customers’ battery systems into grid services markets.

It does this through its AI-driven software platform Athena, which it has also begun leveraging to manage renewable energy assets. It also does smaller front-of-the-meter (FTM) battery storage and solar-plus-storage projects. The company has also diversified geographically from its California home market to the East Coast US and elsewhere including Texas’ ERCOT.

While it also recorded an increase in net loss, rising to US$77.1 million versus US$34.3 million a year before and lowered its 2023 guidance, company leadership has claimed Stem is on track to achieve positive adjusted EBITDA for the second half of this year, and be adjusted EBITDA positive throughout 2024.

Indeed, CEO John Carrington said that with adjusted EBITDA for the quarter at negative US$900,000 versus negative US$13 million in Q3 2022, Stem had almost achieved breakeven already.

The CEO had been clear when Stem listed publicly in 2021 that it would take time to achieve profitability, and indeed in August Energy-Storage.news noted that it was among a slew of energy storage companies that went public through SPAC mergers, only to see their average share price plunge by 80% as a result.

The company confirmed it would be expecting to reach EBITDA positive status during 2023 in announcing its Q1 2023 results, and narrowed its losses significantly in reported Q2 figures.

Hardware cost reduction, high-margin software to drive profits

In response to a question from financial analyst Brian Lee at Goldman Sachs, Carrington said that two main factors driving Stem toward profitability are “cost control” over hardware as well as the higher margin software and services deals that it expects to represent a growing portion of its activities.

On the hardware front, Stem is launching its own modular energy storage system (ESS) solution, which Carrington said will “drive down working capital usage”, although he noted that interconnection delays have slowed down progress on its rollout. While the company had hoped to have some in the field this year, they are now expected to be installed in the first half of 2024.

On the same day quarterly results were released, 2 November, Stem announced a technology partnership with SB Energy, the US renewable energy developer backed by Japanese telecoms company Softbank and sustainable infrastructure investor Ares Climate Infrastructure.

The “multi-year technology and commercial alliance” will see Stem’s AI-driven software combined with SB Energy’s Digital Platform for new front-of-the-meter (FTM) energy storage and renewables infrastructure.

Stem will also be a preferred partner to supply its energy management system (EMS) to the developer’s North American pipeline of energy storage projects in markets including California’s CAISO and ERCOT over the next five years, representing a claimed 10GWh of capacity.

There were a couple of bumps in the road for the company’s finances during 2023 in that the value of some contracts changed with volatility in the supply chain, primarily due to the well-reported spikes in lithium raw materials costs.

There was also some downward adjustment to the tune of US$37.4 million due to specific terms around some hardware contracts, but Stem said it expected both hits to be non-recurring.

Stem updated its full-year 2023 guidance, from a previously guided US$550 million to US$650 million of revenues, to between US$513 million and US$613 million due to that US$37.4 million. Adjusted EBITDA guidance was lowered from negative US$35 million to negative US$5 million to between -US$25 million and -US$15 million.

Stem’s contracted backlog at the end of Q3 stood at US$1.84 billion, a 35% rise from US$1.36 billion at the end of Q3 2022, while its contracted energy storage assets under management (AUM) increased by 32% sequentially to from 3.8GWh in Q2 2023 to 5GWh and its solar monitoring AUM increased 1% sequentially to 26.3GW from the signing of new contracts.

While Carrington said Stem would not yet be issuing guidance for 2024, he said the growth in revenues in Q3 brought it “really close to breakeven”.

The CEO said demand for clean energy solutions remained strong despite rising interest rates – the recent subject of Tesla boss Elon Musk’s ire – and tailwinds from the Inflation Reduction Act (IRA) tax incentives were picking up, especially after the recent publication of guidance from the government on how they will be applied.

“We still expect to achieve our goal of being adjusted EBITDA positive in the second half of 2023,” Bill Bush, Stem’s chief financial officer (CFO) said on the earnings call.

“We define that as the sum of the third and fourth quarters being adjusted EBITDA positive, so with the third quarter in the books, we have confidence that we will be adjusted EBITDA positive in the fourth quarter of this year,” Bush said.

The CFO added that achieving full-year positive adjusted EBITDA in 2024, as Stem expects to, would be “a key achievement in our corporate maturation,” with guidance to be provided in February when Stem’s Q4 and full-year 2023 results are announced.

Earnings call transcript by Seeking Alpha.