Stem's Q3 2025 Earnings Call: Contradictions in Strategic Shifts, Hardware Sales, Software Growth, and Cost Management

Date of Call: October 29, 2025

Financials Results

• Revenue: $38.0 million, up 31% year-over-year
• Gross Margin: GAAP gross margin 35%; non-GAAP gross margin 47% (expansion driven by higher-margin software & services mix)

Guidance:

• Full-year 2025 revenue guidance tightened to $135M–$160M (prior $125M–$175M).
• Software & services revenue expected $125M–$140M; battery hardware resale capped up to $20M.
• Gross margin guidance raised to 40%–50%.
• Adjusted EBITDA guidance narrowed to -$5M to $5M (company says it is currently tracking above the midpoint).
• Operating cash flow guidance -$5M to $5M; Q3 cash flow was +$11M and timing of working capital could push performance toward the low end.
• Year-end ARR maintained at $55M–$65M.

Business Commentary:

• Revenue Growth and Strategic Realignment:
• Stem, Inc. reported third quarter revenue of $38 million, up 31% year-over-year.

• This growth was driven by the company's strategic realignment, adoption of a software-centric strategy, and expansion into new markets.

• Positive EBITDA and Cash Flow:

• Stem achieved its second consecutive quarter of positive adjusted EBITDA and generated positive operating cash flow.

• The positive results were due to disciplined cost management, increased software and services revenue, and improved operational efficiency.

• Software and Services Revenue Growth:

• PowerTrack software revenue grew by 10% year-over-year, with ARR expanding by 19% year-over-year.

• The growth was attributed to the successful integration of AlsoEnergy's solar expertise with Stem's storage and AI capabilities, and continuous improvement in the PowerTrack platform.

• Managed Services and Cost Management:

• Recurring revenue from managed services grew by 14% year-over-year.
• The company maintained its focus on cost management, resulting in flat operating expenses and further efficiency gains through AI implementation.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted $38M revenue (+31% YOY), second consecutive quarter of positive adjusted EBITDA, and $11M positive operating cash flow; stated they have "reduced the historical volatility in our business" and "derisked the low end of nearly all guidance ranges," emphasizing margin expansion and operational stability.

Q&A:

• Question from Justin Clare (ROTH Capital Partners, LLC, Research Division): So I wanted to start with the guidance. And so with the update here, it looks like you're guiding to the midpoint or better across all the metrics. But just looking back to what you said last quarter, it sounded like you were tracking toward the high end of the guidance based on your comments from last quarter. So just wondering, has your outlook moderated somewhat given the new ranges? Or maybe you could speak to the potential to kind of deliver at the high end.
  Response: Still tracking to the midpoint/high end on most metrics; main change is reduced, more conservative OEM battery resale range (now up to $20M); other ranges were tightened rather than materially moderated.

• Question from Justin Clare (ROTH Capital Partners, LLC, Research Division): Okay. Got it. That's helpful. And then just on the gross margins, it looks like in Q4, you could see a slight compression. I'm wondering, is this only really due to a mix shift with a little bit higher sales of the battery hardware or should we anticipate any other notable change to the gross margins by business line? And then I guess just looking beyond Q4, how should we be thinking about the gross margins by business line? And definitely appreciate the added disclosure here that you provided this quarter.
  Response: Q4 compression is driven by mix (higher edge hardware deliveries at lower margin); over time margins should improve as OEM hardware is deemphasized and software/services mix grows.

• Question from Justin Clare (ROTH Capital Partners, LLC, Research Division): Got it. Okay. And then maybe just one more. Bookings in Q3 modestly lower than Q2. But again, that sounds like it's more a deemphasis of the battery hardware sales. But wondering with the release of PowerTrack EMS, can you talk a little bit more about the demand that you're seeing, the potential to see an increase in bookings potentially in Q4 here and just what you're seeing at this point?
  Response: PowerTrack EMS has strong early customer interest, opens small utility-scale (≈20–100MW) and international hybrid markets; early bookings with blue‑chip customers in three countries and expected revenue conversion in ~6–9 months.

• Question from Jonathan Windham (UBS Investment Bank, Research Division): Any commentary or color you're getting from your customers. There's obviously a lot of moving parts going on right now, particularly around batteries with [indiscernible], but also with solar and some of the [indiscernible] guidance. Just love your thoughts on what you're seeing in sort of the top of the funnel, how demand looks in general for the industry and for you?
  Response: Customer engagement and top-of-funnel conversations remain steady; no material deterioration in demand momentum noted.

• Question from Jonathan Windham (UBS Investment Bank, Research Division): You're into the turnaround, you're delivering on gross margin expansion very nicely. EBITDA is positive. How do you think about your goals for them because the market is always on to the next thing. When do we get to operating income positive, when do we get to net income positive? Once how do you think about that path or alternatively, if you don't want to answer that question, which I would understand, is how do you think about laying that out to investors and here's the path we're on a time line to sort of get longer term.
  Response: No specific timeline given; management declined to give dates, said strategy is working, and they will provide more formal multi-year/profitability detail on the next earnings call and via prior investor materials.

• Question from Thomas Roche (Barclays Bank PLC, Research Division): Do you foresee the business benefiting from the hyperscaler data center build-out in any way? I know you've typically been more focused on C&I and smaller utility scale customers, but has there been any internal strategy discussions around trying to go after hyperscaler customers with either your solar or storage offering?
  Response: No active push yet; management is monitoring the data-center market as it shows early signs of shifting toward renewables and views it as a potential future opportunity.

• Question from Thomas Roche (Barclays Bank PLC, Research Division): So you guys have -- you've cut a fair amount of OpEx here in the last few quarters. Would you say that it's safe to assume that we're at a decent quarterly run rate here on a go-forward basis?
  Response: Major OpEx reductions are largely complete; cash OpEx was about $20M this quarter and that run rate is a reasonable baseline while the company continues to pursue incremental savings.

Contradiction Point 1

Business Strategy Shift and Hardware Sales Focus

It highlights a contradiction in the company's strategic focus on hardware sales and the emphasis on software products, which can impact investor expectations and operational planning.

Has your outlook moderated with the new guidance ranges? Can you discuss the potential to meet the high end of guidance? - [Justin Clare](ROTH Capital Partners)

2025Q3: We are still tracking towards the midpoint or high end of all guidance ranges. The main difference is the deemphasized battery hardware resale business, now ranged up to $20 million. - [Arun Narayanan](CEO)

How should we think about hardware sales moving forward? What could battery resale revenue be in the back half of the year? Are you still booking orders for battery hardware, and how is this evolving? - [Justin Clare](ROTH Capital Partners)

2025Q2: We are aiming to achieve up to $35 million in hardware sales. Our strategy has shifted to becoming more software and services-centric, which is delivering the expected outcomes and associated gross margins. - [Arun Narayanan](CEO) and [Brian Musfeldt](CFO)

Contradiction Point 2

Operational Profitability and Cost Management

It involves the company's approach to operational profitability and cost management, which are critical for sustaining long-term growth and shareholder value.

Has your outlook become more conservative with the new guidance ranges? Can you discuss the chances of achieving the high end of the guidance? - [Justin Clare](ROTH Capital Partners)

2025Q3: We are still tracking towards the midpoint or high end of all guidance ranges. The main difference is the deemphasized battery hardware resale business, now ranged up to $20 million. - [Arun Narayanan](CEO)

How are tariffs affecting new U.S. storage project bookings? Are customers prioritizing domestic vs. Southeast Asian or Chinese battery sourcing? Are customers delaying contracts or continuing to sign deals? - [Justin Clare](ROTH Capital Partners)

2025Q1: We are on track to deliver more than $100 million in adjusted EBITDA for Q1 and for the year. - [Doran Hole](CFO and EVP)

Contradiction Point 3

Software Revenue Growth

It involves differing explanations for the growth in software revenue, which is a critical aspect of the company's revenue strategy.

Why hasn't software revenue increased with the significant growth in storage operating AUM? - [Justin Clare](Roth MKM)

2024Q4: The disparity in software revenue and storage operating AUM growth is attributed to a one-time reduction in fourth-quarter software revenue related to SPE deals. - [Doran Hole](CFO)

Has the new guidance softened your outlook? Can you address the potential to hit the high end of the guidance? - [Justin Clare](ROTH Capital Partners, LLC, Research Division)

2025Q3: Software revenue was $22 million, up 42% year-over-year, driven by the integration of technology assets from AMS and our growing portfolio of virtual power plants. - [Arun Narayanan](CEO)

Contradiction Point 4

Operating Expenses and Cash Flow Management

It involves differing statements about the company's ability to manage operating expenses and cash flow, which are crucial for financial planning and investor confidence.

Will your OpEx run rate remain stable going forward? - [Thomas Roche](Barclays Bank PLC, Research Division)

2025Q3: We've significantly reduced OpEx. While we'll continue to explore savings, we expect to maintain a stable run rate. - [Brian Musfeldt](CFO)

What do you expect your position to be by year-end? What is the run rate outlook for 2026? - [Justin Clare](ROTH Capital Partners, LLC, Research Division)

2025Q2: We expect to continue reducing cash OpEx in the second half of the year. We are managing towards this run rate, and you will see more efforts to align OpEx with the size and revenue of the business. - [Brian Musfeldt](CFO)

Contradiction Point 5

Strategic Focus and Product Emphasis

It concerns the company's strategic direction and product prioritization, which can impact its growth trajectory and market positioning.

Has your outlook moderated with the new guidance ranges, and can you discuss the potential to hit the high end of the guidance? - [Justin Clare](ROTH Capital Partners)

2025Q3: The main difference is the deemphasized battery hardware resale business, now ranged up to $20 million. - [Arun Narayanan](CEO)

What is the nature of PowerBidder Pro contracts and the rationale for deemphasizing the product? Was the decision due to differentiation challenges or other factors? - [Thomas Boyes](TD Cowen)

2025Q1: The decision was based on the growth potential and our ability to execute on our software strategy. We believe focusing on PowerTrack and associated offerings is the best approach. - [Arun Narayanan](CEO)