Earnings Call Transcript - STEM Q1 2023

Operator, Conference Operator

Thank you for being here. This is the conference operator. Welcome to the Stem, Inc. First Quarter 2023 Conference Call. All participants are in listen-only mode, and this call is being recorded. After the presentation, there will be time for questions. I will now hand it over to Ted Durbin, Vice President of Investor Relations. Please proceed.

Ted Durbin, Vice President, Investor Relations

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our first quarter 2023 earnings call. Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to our latest 10-Q and our other SEC filings. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our earnings release. We will be using a slide presentation today. Our earnings release and presentation are on the investor relations portion of our website at www.stem.com. John Carrington, our CEO, and Bill Bush, CFO, will start the call today with prepared remarks. Mike Carlson, Chief Operating Officer, and Prakesh Patel, Chief Strategy Officer, will also be available for the question and answer portion of the call. And now I will turn the call over to John.

John Carrington, CEO

Thank you, Ted, and thank you all for joining us on the call today. Beginning with Slide 3 and the agenda for the discussion today: I will review our first quarter 2023 results and highlights; followed by an overview of our commercial execution, and recent business updates; I will then review our continued technology leadership and Athena execution; and following my remarks, I will turn the call over to Bill Bush who will discuss our financial results in more detail and speak to our recent convertible note offering. Now let's turn to Slide 4. Today we reported strong first quarter results including revenue of $67 million, up 63% versus first quarter 2022, which was above the high end of our guidance range. We reported another all-time record in contracted backlog, now over $1.2 billion. Bookings were up 141% year-over-year at $364 million. Our core services revenue grew 14% sequentially, and contracted annual recurring revenue, or CARR, is up 10% since the fourth quarter of 2022. Lastly, our non-GAAP gross margin was 19%, in line with our full-year guidance. We see these strong metrics as indicators of demand for our differentiated solutions and services. Looking to the right side of the page, I am excited to announce that Wood Mackenzie recognized Stem as the largest storage Virtual Power Plant operator in North America. We are also continuing to see momentum in the EV charging space, including a recent project with Sysco. Bottom-line, we are reaffirming our full-year guidance, which includes revenue growth of 65% at the midpoint and reaching EBITDA positive in the second half of this year. Accelerating services growth will be the key factor that helps us achieve our goals this year and for years to come. Moving to Slide 5 and our continued commercial execution. I am happy to report that we are seeing growth in services revenue in both the solar and storage aspects of the business. Storage services revenue increased 22% sequentially, and solar services revenue was up 7% sequentially. Both figures exclude project services. This is a new disclosure which helps isolate the software in our revenue stack. Project services revenue tends to be more variable and tied to project timing. We reported another new record for contracted backlog, which was up 120% year-over-year, driven by strong first quarter 2023 bookings. We expect bookings growth to continue through the year as customers are increasingly standardizing on the Athena platform. We are currently pursuing several significant software-only and professional services deals that we expect may close later this year. If executed, these deals will have several benefits for the company: first, they will generate higher margin software and services revenue; second, they will provide revenue sooner rather than waiting for system commissioning; third, because there will be very little hardware involved, our growth in software and services will not tie up cash on our balance sheet. CARR grew 10% sequentially and is up 39% year-over-year. This is another demonstration of the differentiation and strength of our software offering. Turning to Page 6. On the solar side of the business, we have seen some evidence of improvement in supply chain issues, labor shortages, and related regulatory actions. We are seeing improvements in 2023 and expect an upturn in 2024 as these issues work towards a resolution. Our solar services revenue increased 4% since the fourth quarter of 2022 and our backlog is up 58% year-over-year, showing that we have turned a corner after the many setbacks the industry faced in 2022. Solar AUM returned to growth this quarter, another sign of recovery in the sector. We are beginning to capture the cross-sell opportunities we have previously discussed from legacy solar customers, and we are extending the solar offerings into Stem's distributed channel relationships. On the storage side, we continue to progress our high margin eMobility offering. We recently announced an exciting project with food distributor Sysco, where we will integrate our Athena software into their Riverside EV Hub. As Sysco noted, Athena is one of the key technologies integrating the charging infrastructure to optimize on-site energy assets, including solar and energy storage. This is also our first joint deployment with InCharge, a partnership that we announced in Q3 2022. We continue to see strong growth in our core FTM markets. Developers are standardizing their projects on the Athena platform because of the differentiated economics we offer our customers. We will discuss the impact of our software on the success of these projects in subsequent slides. Now turning to Slide 7. Supply chain is steadily improving. On the storage front, we have contracted hardware into 2024. We have begun to slow the growth of our purchasing activity as we position the business in line with long-term storage hardware revenue growth of 25% to 35%. We continue to target 65% to 85% growth of our services in 2023 and future years. This is consistent with what we presented at our Investor and Analyst Day in September 2022. Our modular ESS solution, which is targeted for our largest partner projects, will lead to the company being less reliant on contracting significant hardware supply. These customers are asking for sourcing flexibility, reduced working capital usage, and it enables us to drive additional software and services. Bill and I were in China meeting with the largest OEMs for nearly two weeks in March and plan on adding multiple Tier 1 hardware vendors. As I mentioned on the previous slide, solar supply chain is improving. There has been solid installation growth amongst our solar BTM customers. Our FTM customers are still facing some supply chain constraints, which has caused revenue conversion in that segment to lag. But we are seeing strong bookings here as conditions are expected to improve. Turning to Slide 8 and our technology leadership. Continued strong performance across markets. In ISO New-England, we cleared 72% more megawatts in the most recent auction for forward capacity versus the prior auction. The auction cleared at $2.59 per kilowatt month across the region, and we expect to clear even more capacity in the next auction. Athena continues to control leading market share of grid energy storage in that region, and this capacity will support the transition to clean energy for decades to come. In California, site events were up 110% year-over-year, and demand response calls were up 250% year-over-year. We are providing more support for the grid every year. Importantly, we saw no degradation in performance despite this increased call activity. Internally, we continue to innovate and adapt Athena with the mission of being at the leading edge of development. We are leveraging AI-assisted coding to increase productivity and look forward to discussing the impact of these initiatives in subsequent quarters. We are also investing in improving our day-ahead power forecasting capabilities to generate more value for customers. Our AI-driven software benefits from a growing data advantage as well. We run approximately 8,000 simulations per month, which means Athena gets smarter and more accurate with real-world assets that drive better results for our customers. Lastly, Athena continues to be independently validated as the industry leader, most recently by Wood Mackenzie, which recognized Stem as the largest virtual power plant operator in North America. Wood Mackenzie's VPP Market report highlights Stem's 2.5 gigawatt hours of contracted storage assets under management across 14 different grid territories and the most among VPP operators. Athena is at the heart of Stem's VPPs and provides granular, actionable energy asset insights coupled with automated intelligent dispatch capabilities that help maximize the value of renewable energy assets. Our record-setting and expanding storage software offerings are a testament to the value that Stem's premier technology and services deliver to our customers. And now I will turn the call over to Bill Bush, our Chief Financial Officer, on our financial and operating results.

Bill Bush, CFO

Thanks, John. Starting on Page 10 with our results for the first quarter 2023. As John mentioned, we reported revenue of $67 million, which was a 63% increase versus the $41 million in the first quarter 2022. First quarter revenue was above the top end of our guidance. Most of the revenue growth this quarter came from storage sales, with growth of $5 million from solar sales. We recognized approximately $15 million of high margin services revenue, representing 22% of total revenue for the quarter. Software services revenue increased 14% sequentially. Our GAAP gross margin was $1 million, or 1%, down from 9% in the same quarter last year. Non-GAAP gross margin was $15 million, up from $6.5 million in the first quarter last year due to higher revenues and the increased mix of software and services revenue. On a percentage basis, non-GAAP gross margin was 19% in the quarter, up from 16% last year. The difference between our GAAP and non-GAAP gross margin this quarter includes approximately $10 million classified as constrained revenue. Our GAAP results reflect 100% of the cost of the battery in cost of goods sold, but only a portion of the revenue for those certain contracts. The constrained revenue represents the additional revenue we could realize based on the price of a third-party commodity index forecast for lithium carbonate. We have capped our downside with an index floor, and we may ultimately adjust revenue up or down depending on the index. See our statements on non-GAAP measures in our earnings press release for discussion of adjustments to non-GAAP gross margin. Net loss was $45 million versus a net loss of $22 million in the same quarter last year. Lastly, adjusted EBITDA was a negative $14 million versus a negative $13 million in the same quarter last year. We are executing on initiatives to drive operating leverage, including the expansion of the team in India, and we continue to drive down our cash OpEx as a percentage of revenue. We remain on track for full-year adjusted EBITDA guidance. Turning now to Slide 11 for a look at our operating metrics. Backlog more than doubled year-over-year, and increased 28% on a sequential basis to $1.2 billion. The largest driver of the backlog increase was $364 million of bookings in the quarter. End market customer demand remains strong with a significant increase year-over-year in bookings with increasing gross margins in both pipeline and backlog. We believe the backlog gives us good revenue and margin visibility in the short and medium term, that is, for the back half of 2023 and into 2024. Our AUM on the storage side of our business grew from 3.1 gigawatt hours in the fourth quarter of 2022 to 3.5 gigawatt hours in the first quarter of 2023. That's a 13% sequential increase, driven by our strong commercial momentum. Our operating AUM on the solar asset performance monitoring side of our business ended the quarter at 25.6 gigawatts, up about 600 megawatts. The industry is beginning to recover and the increase in AUM is evidence of this momentum. We have been successful at migrating customers from our legacy applications onto our core PowerTrack platform. Turning to Slide 12, I want to walk through our recent green convertible senior note offering. On April 3, we issued $240 million of green convertible senior notes. The net proceeds from the offering were $234 million. $106 million of the proceeds went straight to the balance sheet as cash; $100 million was used to repurchase and retire $163 million of principal of the 2028 convertible notes, which were trading at a deep discount; and $28 million were used to purchase capped calls to reduce potential equity dilution, with a conversion price of $11.18 per share. This convert put us in a stronger cash position and extends our debt maturity schedule, and importantly, it also puts us in a stronger position with supply chain to improve hardware pricing and payment terms. The transaction also resulted in an overall decrease in net debt. Turning to Slide 13 and our 2023 guidance. As John mentioned earlier, we are reaffirming our guidance for the full year 2023 and we are off to a great start. We are well positioned across all of our metrics for a successful year. We had strong growth in software services for the quarter and expect 75% service revenue growth this year as previously discussed. We are also focused on converting backlog to revenue and continuing to improve our operating leverage while reducing working capital usage. And with that, let me turn the call back to John for some closing remarks.

John Carrington, CEO

Thanks, Bill. Wrapping up on Slide 14 with our key takeaways. We closed the first quarter of 2023 with strong performance and momentum. Revenue was at the high end of guidance, and we set another record for backlog and CARR growth. We begin the year in a strong position with: double-digit quarterly growth in software and services with large software-only deals in the pipeline; advancing our capital-light modular ESS offering; recent eMobility bookings validate differentiated Stem software value and our partnering strategy; and finally, technology leadership with continued third-party validation. We are in a great position to achieve our full year 2023 guidance and reaffirm full year estimates. With that, I want to thank all of our stakeholders, our customers, channel partners, suppliers, shareholders, and employees. And now, let's open the line for questions please.

Operator, Conference Operator

We will now start the question-and-answer session. The first question comes from Andrew Percoco from Morgan Stanley. Please proceed. Sorry, his line has disconnected. So, the next question comes from Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee, Analyst

Hey, guys, good afternoon. Thanks for taking the questions. First one, maybe for you, John. You mentioned a couple of times during the prepared remarks that software-only opportunities that you have pretty good visibility into. Can you kind of level set us as to where your software-only mixes today? Whether you define it on a revenue basis or on a backlog basis? And then, the ones that you have visibility into in the back half of the year, maybe just the sense of kind of scale of those opportunities? If they're FTM, BTM? And then, also to the extent that clearly they're going to be higher margin given they're software-only, is there any potential that they pull forward some of your profitability targets if those do hit as you're hoping to execute on? Thanks.

John Carrington, CEO

Yes, thanks, Brian. A couple of things. First, the software services-only deals are definitely increasing. We see the pipeline growing significantly, but we didn't announce any bookings this quarter. Once these deals are booked, we will provide more details. From a regional perspective, it's similar to our existing markets, ERCOT and CAISO. We have included this in our backlog guidance but not in the revenue for 2023. We'll see how the rest of the year unfolds. There will likely be enhanced margins related to the hardware side, which is the direction we want to take the business. In Bill's prepared remarks, you noted that the hardware segment may experience a decline, particularly concerning the modular ESS. We have confidence in that product as it is expected to generate additional software and services revenue as well. I hope I covered everything. Was there anything I missed, Bill? I think we got it. Okay. Thanks, Brian.

Brian Lee, Analyst

Thank you. That's helpful. And then, maybe just one follow-up for Bill. Appreciate the additional color and overview of the capital raise and kind of the motivation behind it. Can you speak to maybe just in the environment we're in with some of your customers maybe not being the largest investment-grade rated counterparties out there, like what the general situation is as you've been to them over the past couple of months in the mist of all these banking turmoil, working capital, payment term things of that sort? Anything that you see having to sort of shift a little bit? And maybe how your new capital that you raised here maybe helps you along in that front? Just trying to better understand the working capital ins and outs and how maybe some of the capital raise was also positioned to help you there. Thanks, guys.

Bill Bush, CFO

Thank you, Brian, for the question. There have definitely been significant challenges in the regional banking market, and it seems like this situation will persist for some time. This impacts the availability of working capital and short-term loans for some of our customers. Fortunately, most of our largest customers, who contribute significantly to our business, are supported by prominent institutional asset owners, which we have mentioned before. This means they are typically far better capitalized. When we discussed our recent capital raise, we mentioned that the funds are primarily to assist some of our smaller partners. However, the majority of our business operates through the larger industrial asset owners, so we feel somewhat shielded from these market fluctuations. We appreciate the addition of $100 million to our balance sheet, but we must manage this capital carefully as it is not unlimited. We are actively reviewing our project status and maintaining close communication with our partners to ensure progress aligns with our expectations. As of now, we have not encountered any significant issues, and we have not yet utilized any of the new capital.

Brian Lee, Analyst

Awesome. That's good to hear. I'll pass it on. Thanks, guys.

John Carrington, CEO

Thanks, Brian.

Bill Bush, CFO

Thanks, Brian.

Operator, Conference Operator

The next question comes from Andrew Percoco from Morgan Stanley. Please go ahead.

Andrew Percoco, Analyst

Great. Thank you so much. Can you guys hear me okay at this time?

John Carrington, CEO

Yeah. Thanks, Andrew. Welcome back.

Andrew Percoco, Analyst

Great. Thanks so much. Sorry about that. Just wanted to start maybe out on a comment that we've made last quarter around operating AUM doubling this year out of the contract and into the operating bucket. Just love to hear how that's trended this quarter and any context you can provide in terms of how that might trend in the second quarter and throughout the remainder of the year?

Bill Bush, CFO

Thank you, Andrew, for your question. The numbers speak for themselves. We've seen a notable sequential increase in services revenue over the past quarter, which indicates that we are successfully activating systems as planned. We are on track to meet our goals, and we're pleased with this progress. However, we need to keep a close eye on interconnection permitting, as these tend to be the longest processes involved. Most of the activity is likely to occur in the second half of the year since that's typically when projects come online. We anticipate that our software and services revenue will continue to grow sequentially, as it has in the last three quarters, reflecting our ability to bring systems online and increase operating assets under management.

Andrew Percoco, Analyst

Great. That's very helpful. And maybe just one a quick follow-up on some commentary made earlier in the prepared remarks around supply chain management and talking through some of those Tier 1 battery suppliers that you may be adding. Can you just talk to maybe what you're thinking in terms of onshoring some of that supply chain? Any discussions that you're having here in the U.S. in terms of maybe being an anchor tenant for some of those suppliers?

Bill Bush, CFO

Yes, Mike Carlson and I are closely collaborating on this area, and it's something we're focusing on. Currently, a significant portion of our supply comes from Tesla in the U.S. and various Chinese manufacturers. We've had numerous discussions with parties interested in increasing battery production in the U.S. However, progress has mostly been limited to these conversations, and we haven't seen any concrete developments yet. We're very interested in this potential, as it could significantly enhance our overall battery supply in the future. The challenge is that most of the proposed plants are targeting late 2024 for installation, which suggests that batteries might not be available until mid-2025. So while we're actively discussing it, it's not an immediate concern.

Andrew Percoco, Analyst

Great. Thanks so much.

Operator, Conference Operator

The next question comes from Biju Perincheril from Susquehanna. Please go ahead.

Biju Perincheril, Analyst

Thank you for taking my question. I have a couple of inquiries regarding the index price contracts. Can you provide some additional details about how that system is progressing? Also, how are you managing your cost exposure in this area? Should we consider the $34 million you mentioned as a potential minimum price set in that contract?

Bill Bush, CFO

Thank you for the question, Biju. To clarify, the contract will be resolved during the measurement period in early 2024 and will be recorded in the company’s books by the end of 2023. This issue will be settled this year. As for the contract setup regarding the cost of goods sold, we have accounted for the full cost of the material, meaning there is no variability in expenses. The adjustments will be based on the index's performance. We made this decision to ensure we could effectively remove the equipment from our balance sheet, which is a major goal for us, while also retaining some potential benefits if the index trends as forecasted. This explains the rationale behind our approach.

Biju Perincheril, Analyst

Okay. That's helpful. And then maybe a follow-up. Can you talk about the Athena platform and the trading portion of that in ERCOT? When that is going to be active? And how do you sort of expect your business to evolve in our ERCOT once that is active?

John Carrington, CEO

Yeah, Biju, it's John Carrington. I expect that will be active this year. And as we've talked in the past, ERCOT is one of our largest front-of-the-meter markets. It's been a great market for us, particularly in light of some of the solar module delays that we saw earlier or middle of last year and into the second half, because most of those are standalone, if not all of those are standalone storage. As we like to call them, because there's a faster permitting cycle when it's sub-10 megawatts. So, we'll continue to grow in that market. It's an exciting market for us. And again, the Athena platform will be up and running this year.

Biju Perincheril, Analyst

Got it. Thank you.

Operator, Conference Operator

The next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Julien Dumoulin-Smith, Analyst

Hey, good afternoon team. Thanks for the time guys.

John Carrington, CEO

Thanks, Julien.

Julien Dumoulin-Smith, Analyst

Hey, howdy. Just to clarify here on pro serve. I see the disclosed quarterly dynamic. I wanted to talk about sort of how lumpy that is? And how do you think about the seasonality of that? Again, I get that there's a certain level of just, 'Hey, when a contract comes in or when it's due, you're going to recognize it.' But can you talk a little bit about the seasonality? Obviously, the business overall has a pretty meaningful seasonality to it. And how should we expect it to be the cadence of this year as you continue to ramp that business up?

Bill Bush, CFO

Thank you for the question, Julien. The seasonality will align with the natural cycle of construction projects. This means we will see many projects starting in the summer and then ramping up again in the fall. As a result, our standard business will be more back-end loaded. Over time, as assets under management grow, we may see more professional services in the first part of the year, particularly in the first and third quarters. This aligns with the construction cycle, which is closely connected to our activities. The positive news is that we are experiencing ongoing growth in our software services revenue. We had a strong quarter with sequential growth in the first quarter and anticipate that will continue. However, the most variable aspect of our business concerning services will be project services. In the fourth quarter, we saw some interesting revenues in that area, but we reported no revenue this quarter. We expect to see increased revenue in that category in the upcoming quarters, which will be the most irregular aspect of our results.

Julien Dumoulin-Smith, Analyst

Got it. And then within that 75% growth rate you guys just reaffirmed, how are you tracking within software versus kind of the broad services bucket, if you will, on this year, if you can break that out?

Bill Bush, CFO

Yeah, we're definitely tracking to the 75%. We have mentioned multiple times that we anticipate this growth, which would bring us into a total services revenue range of the high 80s to low 90s, and we are on track to achieve that.

Julien Dumoulin-Smith, Analyst

All right. Fair enough. I'll leave it there. Thank you.

John Carrington, CEO

Thanks, Julien.

Operator, Conference Operator

The next question comes from Thomas Boyes from TD Cowen. Please go ahead.

Thomas Boyes, Analyst

Thanks for taking the questions. Maybe first, I just wanted to kind of get your feelings on the utility scale solar market. As it recovers this year, we've now seen some third-party data that suggests it's still recovering, but it's a bit more muted than when we had last spoken with the 4Q results. And so, I was wondering if you could let me know how that kind of impacts the AlsoEnergy business. I think you're talking about maybe 20% to 40% percent growth in the solar part. And I'm just wondering if that's still kind of the case.

John Carrington, CEO

Yes, it's John Carrington. On the AE side related to behind the meter, we're seeing solid momentum and strength. On the front of the meter, we have very strong bookings and feel positive about that area. There is a slight revenue lag due to project delays, but we are not experiencing cancellations. However, we continue to face slowdowns in permitting and interconnection. Regardless, as mentioned earlier, we are optimistic about solar overall. The commercial and industrial sector is certainly recovering well, and from a utility perspective, it represents less than 20% of AlsoEnergy's overall business.

Thomas Boyes, Analyst

That's helpful. And then just to follow-up on the kind of the constrained revenue portion, is this with a specific customer or more like a broader approach that we could see more of over time, or is it just something in isolation?

Bill Bush, CFO

It's with a particular customer, and we don't expect to see this over time.

Thomas Boyes, Analyst

Got it. Just a quick question regarding the software-only opportunities. Are these primarily related to new projects, or are there instances where you are taking over and replacing existing hardware from a competitor?

Mike Carlson, COO

No. Actually, it's Mike Carlson. We're receiving a lot of opportunities not just from new project development but also from retrofit projects, either for underperforming assets or by utilizing new capabilities through the Athena platform.

Thomas Boyes, Analyst

Excellent. I appreciate the insight there. I'll hop back in queue.

John Carrington, CEO

Thanks, Thomas.

Operator, Conference Operator

The next question comes from Maheep Mandloi from Credit Suisse. Please go ahead.

Maheep Mandloi, Analyst

Hey, good evening. Thanks for taking our questions here. Just on the guidance, you had a nice beat Q1 on revenue. So just curious on the full year revenue guidance, how should we think about the range here? And as you kind of go in and benefit from batteries in Asia or other places at the attractive prices, could we see some upside to the revenue guidance gap?

Bill Bush, CFO

Maheep, thanks for the question. Appreciate that. I think when we look at, say, for the full year number midpoint of $600 million, I think we had a nice quarter. We beat the top end of the guide, which is important to be able to do that. But I think it's a little early to raise guidance at this point.

Maheep Mandloi, Analyst

Got it. And then, on the 75% growth rate for services, the growth similar in the solar and the storage businesses, or are you seeing any difference in those this year?

Mike Carlson, COO

We haven't provided specifics on the growth rate yet. The key issue for solar is that there is an anticipated rebound in the latter half of the year, and we're beginning to see the potential for that. You may have reviewed the presentation and noted some of the revenue growth in our solar business. While we remain hopeful, most of our revenue at this stage is likely to come from the storage segment.

Maheep Mandloi, Analyst

Okay. And then, just lastly on the EV charging opportunity here, is any of that right now in the backlog? Just trying to understand the growth. When should we see that either in booking or revenues for you guys?

Mike Carlson, COO

Yes, it's primarily in the backlog. The projects are to be installed, and we expect that in subsequent periods.

Maheep Mandloi, Analyst

Okay. Thanks. I'll take the rest offline.

Operator, Conference Operator

The next question comes from Justin Clare from Roth MKM. Please go ahead.

Justin Clare, Analyst

Hi, thank you for taking our questions. I wanted to follow up on the structure of your battery hardware contracts. It seems that in Q1 there was a unique customer agreement. Could you discuss how you're approaching the cost structure for your battery hardware business in relation to pricing and what your plans are moving forward?

Bill Bush, CFO

Sure, Justin. This is Bill. I agree that the contract we signed in the first quarter was unique and likely won't be repeated. Regarding the standard part of our business, we continue to execute on the typical cash payment structure to our vendors. Generally, this involves making a deposit of between 10% and 30% of the purchase price when the purchase order is accepted, followed by payments throughout the construction cycle, and paying in full when the equipment is received or released at the dock. This method will be common moving forward. Most contracts we're entering now, which reflect industry norms, include some form of lithium index, often a rolling index, minimizing variation in any specific quarter. I expect this trend to persist. In the current reduced index environment, there will likely be price declines, which are beginning to be openly discussed in the market. We are starting to achieve some of these reductions and will pass them on to our customers.

Justin Clare, Analyst

Okay. Great. And then maybe just one more. On the storage hardware business, can you just talk about how the margins are evolving in the backlog? I think you've shifted your focus a bit to prioritize profitability, then I think you're also moving potentially up in size in terms of the size of the projects in the FTM market. So, how should we think about those factors and just how the margin profile is evolving here?

Bill Bush, CFO

Yes, this is Bill. The margin profile of the backlog is generally improving. The total contract value of the backlog has been increasing sequentially for over five quarters. This improvement is partly due to changes in the commission plan, where people are now compensated based on gross margin rather than other factors. Operationally, our focus on profitability is showing positive results. When considering the backlog from a contractual perspective, most of these are contracted deals through capacity agreements with manufacturers or equipment orders outside of those agreements. Overall, we are in good shape from that standpoint. I believe you had another question, but I can't recall it at the moment. I apologize.

Justin Clare, Analyst

I was wondering if the larger FTM projects might have lower margins compared to smaller ones. If you are moving towards larger projects, could there be some downward pressure on margins?

Bill Bush, CFO

We are definitely moving up in size, which is a true statement. However, as we progress, we are observing two key points. First, when moving up, we tend to collaborate with fully integrated developers who have their own procurement systems, so we may not be purchasing the equipment ourselves. As a response to this, we are focusing on the modular ESS. For the largest projects, we will likely acquire a smaller percentage of the equipment involved. We've tried to communicate this through our bookings number. For 2023, the midpoint of our bookings is $1.5 billion, which is an increase from $1.1 billion—a relatively modest growth compared to 2022, where we grew from $400 million to $1.1 billion. We do not anticipate that level of growth this time, largely due to the effects of the modular ESS, as we will be booking deals where we are not the purchaser of record. This arrangement has two benefits: we can offer more services for which we will charge, and we will avoid the working capital flow required if we were buying the equipment. Thus, when we consider large projects, we aim to take advantage of providing services for larger platforms, which we believe we can achieve through the modular ESS program.

Justin Clare, Analyst

Okay. Great. Very helpful. I'll pass it on.

Operator, Conference Operator

The next question comes from Brett Castelli from Morningstar. Please go ahead.

Brett Castelli, Analyst

Hey, guys. Just picking up on that same topic. Can you remind us just the timeline around the modular ESS sort of when that will be ready?

Mike Carlson, COO

So, this is Mike Carlson. We're putting proposals out in front of customers right now for the solutions. And we've got our first implementation underway. We're looking at it being complete and energized end of second quarter, beginning of third quarter. And then as we continue to bring on more of the Athena-certified platform, we'll just continue to increase that modular solution availability throughout the year.

Brett Castelli, Analyst

Okay. And then on software pricing, just any comments there either on the storage side or the solar side? Are you kind of holding pricing flat or raising pricing on the software side?

John Carrington, CEO

Well, this is John. We announced a double-digit price increase last year with the solar monitoring side of our business and that was very successful, zero customer attrition. At this point, we're I think standing firm and we'll update everybody if that changes.

Brett Castelli, Analyst

Great. Thank you.

Operator, Conference Operator

The next question comes from Abhi Sinha from Northland Capital. Please go ahead.

Abhi Sinha, Analyst

Thank you for fitting me in. I have a couple of questions. Previously, you mentioned several factors contributing to the revenue lag, including supply chain issues, interconnection, permitting delays, cost inflation, and import restrictions. I know you mentioned some relief in supply chain issues, but I’d like to know your perspective on permitting delays, cost inflation, and import restrictions. What are you observing in those areas?

Bill Bush, CFO

Thanks for the question, Abhi. This is Bill. We're currently navigating some of the ongoing issues in the solar sector. Recently, the CRA passed which adds some complexity, although we prefer not to speculate on political matters. It's evident that the solar side of our business is improving, as indicated by the sequential growth. While we don't directly purchase solar equipment, our customers are reporting better conditions. On the storage side, we are observing positive trends with new capacity and lower prices entering the market. However, we continue to face challenges with interconnection, which we've discussed before. This issue won't be resolved quickly; it requires simplification of applications and hiring at local utilities. We're seeing a significant increase in demand reflected in our bookings, where we reached $364 million this quarter, matching our figures from 2021. This high demand also means a surge in interconnection applications that we need to address over time. We're monitoring the situation closely and noticing some improvements, especially in our main markets of ERCOT and New England ISO, but it's still a work in progress.

Abhi Sinha, Analyst

Thank you. Can you provide an update on the progress with the partnership with ChargePoint? When can we expect to see revenue from it and have there been any operational or execution challenges so far?

Prakesh Patel, Chief Strategy Officer

Yes, this is Prakesh. I think across the board, our EV partnerships are starting to bear fruit. We're seeing growth in our pipeline of opportunities. We announced this first deployment with the ABB-InCharge partnership at Cisco. On the ChargePoint partnership specifically, the initial focus is deploying the NEVI funds for deployment of EV infrastructure. So we'll talk about customer wins as those roll through, but the pipeline continues to look strong and the economics are fairly compelling. So, we're optimistic take there?

John Carrington, CEO

Yeah. And to unpack Cisco a little bit more, it's pretty exciting in the sense that they've announced that they're going to electrify over 2,800 trucks by 2030. And this whole fleet electrification trend is something that we've seen in other customers. But it's significant growing. And again, we feel like the partnerships that we have are very compelling because when you think about the charging side of the meter you will, they don't understand behind the meter as well as we do. That's really where Stem began its target market. And so we have that domain expertise. So, the combination is natural and to Prakesh's point, the NEVI funds really will open this up and we think accelerate growth significantly.

Abhi Sinha, Analyst

Got it. Sure. Thanks. That's all I have. Thank you very much.

John Carrington, CEO

Thank you.

Operator, Conference Operator

This concludes the question-and-answer session. I would like to turn the conference back over to John Carrington for closing remarks.

John Carrington, CEO

Great. I want to thank everyone for joining us on our first quarter 2023 earnings call. We look forward to speaking with you again during the second quarter call.

Operator, Conference Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.