Earnings Call Transcript - STEM Q3 2023

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Stem Third Quarter 2023 Earnings Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Ted Durbin, Head of Investor Relations for Stem. Please go ahead.

Ted Durbin, Head of Investor Relations

Thank you, operator. This is Ted Durbin, Head of Investor Relations at Stem. Welcome to our third 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, COO; 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. Good afternoon, and thank you all for joining us today. Beginning with slide 3, our agenda will cover five items; our third quarter results, technology leadership and product announcements, and our commercial traction. Bill will then discuss our financial results. Now let's turn to slide 4 on our third quarter 2023 results and highlights. In the third quarter, we recorded $134 million in revenue, up 34% versus third quarter 2022. Revenue this quarter was negatively impacted by nonrecurring adjustments that Bill will discuss later in the call. We set a record for bookings of $676 million; the 3x bookings growth performance drove our contracted annual recurring revenue or CAR, up 43% versus the third quarter of 2022, and up 17% sequentially. Adjusted EBITDA came in near breakeven at negative $900,000 versus negative $13 million in the same quarter last year. Adjusted EBITDA reflects an adjustment to exclude an exceptional reduction in revenue. With strong revenue growth, solid margins and continued cost control, our path to profitability continues to improve. We continue to expect achievement of positive adjusted EBITDA in the second half of this year, a goal we committed to during our Investor and Analyst Day in 2022. Today, we announced an exciting new agreement with SP Energy. We will offer software and services for up to 10 gigawatt hours of storage deployments across North America. This partnership underscores our focus on growing service revenue. At the core of our value proposition to gigawatt-scale developers like SP Energy is our AI-driven technology, Athena, which continues to receive third-party recognition for its differentiation and value. Finally, we're announcing that we expect to achieve full-year adjusted EBITDA positive in 2024 without the need to issue additional equity. This is a key milestone as we move to free cash flow generation and we'll outline more specifics in our full-year earnings call in February. Please turn to Slide 5. In Q3 2023, we far exceeded our guidance for contracted bookings coming in nearly 2x our guidance and the highest quarter in company history at $676 million. The booking strength was largely driven by our entry into the bulk power system scale of the front of the meter storage business this year, particularly in the municipal and cooperative customer segment. Industry analysts expect US public power and co-ops will represent over 20% of future storage deployments, and we are well positioned to serve this market. Our solar backlog also grew significantly, up 41% year-over-year. For both businesses, we are driving consistent strong gross margins, a testament to the differentiation of our solutions. We saw a 32% increase in storage AUM this quarter to 5 gigawatt hours. We have nearly doubled our storage AUM in the past year, a remarkable achievement by the team and another measurable differentiation of the STEM solution. Solar AUM also had the third consecutive quarter of healthy growth with new customer additions more than offsetting the roll-off of some of our legacy low-margin contracts. This execution resulted in strong CAR growth, up nearly $13 million in a single quarter. Additionally, we are raising our CAR guidance for this year. In-market demand remains very strong. Falling equipment prices for both solar and storage are improving project economics for our partners. The recent clarity on some key tax incentives also remains a major tailwind for the industry. Overall, we have seen several industry analysts come out on a key debate in our sector regarding the impact of higher interest rates. And from our perspective, we can confirm their assessment that project returns are generally higher despite the increase in interest rates. We ship data from Level 10 Energy, PPA price tracker validates over a 100% increase in power purchase agreement prices from 2020 through 2023. Demand continues to be robust, and the focus by developers and asset owners is on finding ways to accelerate project timelines. Our successful project track record paired with our industry-leading software and services is particularly well suited for this market environment. As a reminder, we do not have any direct interest rate exposure by virtue of our fixed-rate debt, which have maturities into 2028 and 2030. Please turn to Slide 6, highlighting our technology leadership. We are pleased to be recognized once again by a third-party for our technology leadership earning the sustainability product of the year award from the business intelligence group. These awards highlight products designed to help companies improve their sustainability objectives. On the commercial side, our technology solutions continue to resonate with customers in multiple markets. In New York, specifically the Bronx, we helped NineDot Energy bring the first energy storage system into service. We are co-optimizing multiple value streams for our customers in New York and building on the coincident peak prediction expertise we developed for other markets. This is another example of our ability to rapidly scale Athena at low incremental costs as we enter new markets. Between NineDot and some of our other partners, we expect to have over 700 megawatt hours under Athena control in the New York market over the coming years. Additionally, Athena is supporting NineDot Energy with customers including Starbucks, who is the anchor subscriber to the Pelham Gardens project, monetizing sustainable energy credits in New York. The system is operational and currently generating energy credits. In our solar asset performance management offering, we introduced a new application, Event Manager, which helps our customers resolve downtime issues on their assets. In the last year alone, we have onboarded over 1 gigawatt of assets to Event Manager. ERCOT, our data science team has been refining their forecasting and optimization algorithms, including what we believe is one of the leading day-ahead and real-time price forecasting engines in the market. Based on our modeling, we believe PowerBidder can offer a 10% to 40% uplift in revenue for assets in Texas versus competitive offerings in that market. Please turn to Slide 7. With the launch of PowerBidder Pro, we are introducing a new software tool for energy professionals to manage their clean energy assets. The product targets asset owners, traders, and power purchase agreement off-takers, a segment of customers we believe are underserved by current offerings in the market. PowerBidder Pro empowers these customers with active asset control. Our customers can take charge of bespoke trading strategies, tailored risk management tools and use our forecasts or input their own market forecast. We have seen strong initial customer interest for this offering with multiple gigawatt hours in the pipeline. Moving to Slide 8. Today, we're excited to announce a significant technology and commercial alliance with SoftBank Energy. This partnership is an example of our focus on growing high-margin software and service revenue. Under the terms of the agreement, we will offer our modular ESS solution and related software services to SB Energy across their 10 gigawatt hour-plus project development pipeline in North America. SB Energy is one of the leading utility scale renewable developers, and we are proud to partner with them to advance their vision of generating 24/7 renewable energy at gigawatt scale. In addition, we are collaborating to integrate our industry-leading Athena AI into the SBE digital platform. This will include the development of additional applications such as control and optimization of long-duration energy storage. Importantly, we view this partnership as a template for additional engagement with asset owners, project developers and energy trading firms to drive a programmatic approach for growing high-margin service revenue. On to Slide 9. As we highlighted last quarter, the municipal utility and electrical cooperative segment represents an attractive market for Stem. In particular, these entities are very focused on enhancing the reliability of their power networks and are seeking to drive decarbonization and greater engagement with their members and customers. In late 2022, we leveraged our winning playbook of investing early in an attractive market where we can drive differentiation through our unique software and service capabilities. We accomplished this by onboarding key stakeholders in the muni and co-op market with preferential access to Stem's deep supply chain relationships. Bill will discuss the financial details of these arrangements, but at a high level, this engagement has resulted in nearly $1 billion of contracted bookings in the last 12 months with our position in the market going from zero to over 15% market share based on expected deployments in 2024. The US public power and co-op market is expected to represent over 20% of all future energy storage deployments and is forecast to represent the fastest-growing segment of the FTM market through the end of this decade. We expect to continue our leading momentum in this exciting segment with engagement on multiple gigawatts of bulk power system projects. Stay tuned for more wins here. And now, I'll turn the call over to Bill.

Bill Bush, CFO

Thanks, John. Starting on page 11 with our results for the third quarter of 2023. As John mentioned, to gain a foothold in the bulk power system market, we offered certain strategic partners preferential access to Stem's supply chain network. In certain cases, we offer a guarantee that the value of the purchased hardware would not decline for a certain period of time after purchase, generally six months. Additional details on these arrangements are provided in our earnings release and Form 10-Q filed by the company. The company accounts for such guarantees as variable consideration and updates its estimates of variable consideration each quarter for facts or circumstances that have changed since the initial estimate; as a result, the company recorded a revenue reduction of $37.4 million during the three and nine-month period ended September 30, 2023. The company does not intend to provide such guarantees in customer contracts going forward and does not expect that future revenue reduction, if any, with regard to the guarantees outstanding as of September 30, 2023, will be material. In short, this was an exceptional offering that has allowed us to enter and quickly build a leadership position in an attractive market segment, where we have executed almost $1 billion of contracted bookings in the last 12 months. And now, on to the financial results. Revenue was negatively impacted this quarter by the $37.4 million reduction in revenue I just referenced. Adjusted EBITDA and non-GAAP gross margin have been adjusted to exclude the impact of such revenue reduction. Adjusted EBITDA was negative $900,000 in Q3, keeping us on track to achieve our goal of being adjusted EBITDA positive in the second half of this year. Achieving adjusted EBITDA positive is a critical profitability milestone for us, and we remain laser-focused on this goal. We continue to drive operating leverage with strict cost controls and optimization strategies. We continue to stay disciplined on operating expenses and reaffirm the cash OpEx as a percentage of revenue for 2023 will be less than 25%. Turning now to slide 12 for a look at our operating metrics. Backlog increased 125% year-over-year and increased 35% on a sequential basis to $1.8 billion. The largest driver of the backlog increase was a record $676 million of bookings in the quarter. End-market customer demand remains strong, catalyzed by the continuing clarification of the Inflation Reduction Act and an improved supply chain and hardware price environment. Our AUM on the storage side of the business grew from 3.8 gigawatt hours in the second quarter of 2023 to 5 gigawatt hours in the third quarter. That's a significant 32% increase driven by our strong commercial movement and customer demand for Stem Solutions. Our operating AUM on the solar asset performance monitoring side of the business ended the quarter at 26.3 gigawatts, up 300 megawatts or approximately 1%, our third quarter of sequential growth. The solar industry continues to show signs of recovery evidenced by growing AUM and the backlog growth of 41% year-over-year. Turning now to slide 13 and our 2023 guidance. Full-year revenue guidance has been adjusted downward dollar-for-dollar with regard to the $37.4 million reduction in revenue. We expect to trend towards the lower end of our full-year non-GAAP gross margin guidance. We are raising our fiscal year 2023 CAR guidance by 9% at the midpoint; a steady increase in CAR positions us well to grow high-margin software and services revenue in 2024 and beyond. In addition, we expect continuing strong growth in service revenue driven by expected commissioning of systems as a result of partnerships such as the one we announced today with SP Energy. We are tightening the range for full-year adjusted EBITDA guidance to negative $25 million to negative $15 million. We still expect to achieve our goal of being adjusted EBITDA positive in the second half of 2023. 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. We continue to expect to exit the year with more than $150 million in cash and cash equivalents on the balance sheet. As previously stated, we expect to achieve full-year positive adjusted EBITDA in 2024. We see this goal as a key achievement in our corporate maturation. We will provide more details on our 2024 guidance on our fourth quarter and full-year earnings call in February 2024.

John Carrington, CEO

Thanks, Bill. Wrapping up on slide 14 with our key takeaways. Third quarter momentum driven by strong end-market demand, resulting in record bookings growth, significant storage backlog, AUM and CAR growth, solid solar asset management growth and execution, our software and services deal execution underscored by the SPE agreement. Athena continues to add additional value for solar and storage customers with new products in multiple markets, and the muni co-op momentum continues with $1 billion in contracted bookings in the last 12 months. We reiterate our expectation to achieve adjusted EBITDA positive in the second half of 2023, and finally, we're excited about the tremendous opportunity in front of us with the expectation that we will achieve full-year adjusted EBITDA positive in 2024 and beyond. With that, I want to thank our key stakeholders, employees, customers, channel partners, suppliers and shareholders. And now, operator, let's open the line for questions please.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Brian Lee with Goldman Sachs. Please go ahead.

Thomas Boyes, Analyst

Great. Appreciate you taking the question. Maybe just a quick one on the customer contract guarantee. I just want to make sure that I understand how it's structured because I know this is something we saw in the first quarter of this year as well. Originally, I thought the revenue adjustments could be made all the way up until the first quarter of next year. So is there a floor in place in that structure that we've already reached just given the declines in within garment pricing market, or did you elect to recognize the maximum amount of exposure this quarter? Just want to make sure I understand why there shouldn't be any material changes after, say, the 30th of September? Thanks.

Bill Bush, CFO

Yes, this is Bill Bush. Thanks for that question. So the contract that you're referencing is actually somewhat different than what we adjusted for this quarter. In fact, that contract is, as you mentioned, tied to the price of lithium. These contracts were not. And so there are significant differences between those. These effectively had a remarketing rate associated with them, which we've now taken what we believe to be the full downside risk associated with them. So we don't expect any material change after this transaction. In fact, we expect to be able to move on from these contracts in their totality within the first quarter of 2024.

Thomas Boyes, Analyst

Got it. Appreciate the clarity there. And then maybe I obviously enjoyed kind of going through the PowerBidder Pro Demo at RE plus that was earlier this year. Maybe could you just talk a little bit more about how the customer response has been thus far? You know, what the timing expectation is for the PowerBidder Pro? And then what's the go-to-market deployment strategy? Is this going to be something that you primarily focus on with new customers? Or is there something in place as a way to go back to existing PowerBidder users and kind of convert them over to Pro?

Mike Carlson, COO

So thanks for the question. This is Mike Carlson. As far as where we're at the initial response, we launched it in September; we had great response at the show at RE plus and then correspondingly, a number of specific opportunities as we put it in front of customers. At a high level, the response we got is exactly what they're looking for and not able to find in other opportunities they consider. We've got proposals out in the field, some of which early indications are that they're going to move forward beginning of the second quarter of 2024. So we'll have product release at the end of this year. Production expected in the first half of next year. As far as our go-to-market strategy with it, obviously, we've got an existing customer base that is considering expanding their own capabilities beyond our service offerings that we would then continue to add Bidder Pro solution to. And then obviously, a whole new market that doesn't want to look at our managed services. They've got their own trading desk, their own risk management, and this is opening up that opportunity to bring them into our portfolio of customer base.

John Carrington, CEO

Prakesh, do you want to talk about the bulk power side, maybe?

Prakesh Patel, Chief Strategy Officer

Yes, I want to add that this offering is very well suited for gigawatt scale bulk power systems in the front-of-the-meter segment. These customers or asset owners are typically more sophisticated and require greater control when dispatching large systems into the power grid. A lot of the functionality involves custom trading strategies, which enable better control and improved risk management. This complements the momentum we’re experiencing with new co-ops and at the larger front-of-the-meter scale that John mentioned earlier.

Thomas Boyes, Analyst

Excellent. And I appreciate the color there. If I could just sneak one more in just on the same vein. For the 10% to 14% potential uplift that was referenced on slide 6, was that for the plain vanilla PowerBitter? Or is that the Pro version? I wanted to know.

Bill Bush, CFO

Yeah, that's the core Athena optimization engine. So that's across either offering. It's really our ability to optimize these assets. The PowerBidder Pro, what that allows is customers to further tweak certain risk metrics or their views of forward energy forecasts and the like, but it's available to everyone.

Operator, Operator

The next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Brian Lee, Analyst

Hey, guys. Thanks for including me in the question queue here. I had a couple. Maybe the first one just on the announcement this afternoon, SP Power, the 10 gigawatts sounds pretty robust, especially in the context of what they've done to date as well as what you've deployed to date. Can you give us a sense of I guess, the near-term or medium-term impact of that relationship, kind of how quickly do you think you can get volume deployments with them? And also maybe sizing kind of the magnitude of the opportunity. I would imagine the entire 10 gigawatts is convertible, but how are you thinking about it when you're framing the opportunity?

John Carrington, CEO

Thanks, Brian. John Carrington here. We're really excited about our collaboration with a leading developer that has an extensive and growing pipeline. We see this as the first of many multi-gigawatt projects we plan to work on, incorporating our services and software strategy along with our modular ESS solution. We anticipate that these larger projects will take more time, so this pipeline is expected to span multiple years. I'm pleased it is a multiyear effort because it indicates our ongoing strength in services and software. We expect to see more of these projects in the future. We've just signed this deal, and we're now evaluating the pipeline to understand the timing and what we can offer. This is an exciting announcement for us and represents a significant step towards our goals, as we've discussed since our Analyst Day.

Brian Lee, Analyst

That's great to hear. You had an impressive bookings quarter, so congratulations on that. I have a couple of follow-up questions. Based on the timing of signing this deal, did SP Power contribute to those bookings? If not, when do you anticipate seeing initial bookings from that new relationship? Additionally, considering the record bookings, are there any multi-gigawatt framework customers that are already included in the bookings but haven't been publicly announced yet?

Bill Bush, CFO

Yes, Brian, thank you for the question. To start, the bookings we recorded this quarter do not include any from SoftBank Energy. Generally, those are longer lead projects, and we expect to see bookings for them in 2024, followed by revenue. These are substantial projects, over 100 megawatt hours, much larger than the average. Regarding the other elements of your question, SoftBank Energy represents a software and service opportunity for us, expanding into markets where we haven't historically been active, providing a significant boost for the Athena platform.

John Carrington, CEO

Hi, Brian, just to add on that, the other series of deals we announced this quarter, which range from 200 to 313, the 1.3 gigawatt hour segment, involves a partner with whom we're using a similar approach to software services. This model seems to be effective.

Brian Lee, Analyst

Okay. No, that's great. And then the sort of reiterations around EBITDA as well as the view here that you'll be positive in fiscal 2024 on adjusted EBITDA, maybe I know you're not going to give full guidance metrics because we're not there yet in the calendar. But as we think about you transitioning into becoming a positive EBITDA company going forward, starting next year, can you just, at a high level, give us a sense of are you embedding gross margin expansion off this year's level? Is it just purely scale-driven higher volume and revenue growth that's getting you to the adjusted EBITDA positive view for the full year, kind of maybe some of the workings around how you get to that outlook for next year without maybe giving us the exact ingredients? Thank you, guys.

John Carrington, CEO

Yes. As you noted, we are not providing full year guidance for next year. However, starting with this quarter, we are very close to breakeven, with a loss of $900,000, which is a significant improvement from the third quarter, despite not seeing a major increase in revenue, which is mostly driven by hardware. Cost control remains crucial for us. Looking ahead to 2024, we anticipate continued growth in software, which usually leads to high-margin revenue. There are two key components: we expect an increase in hardware sales next year, but more importantly, growth in software and services, with Mike and his team actively expanding our Proserve initiative. This will lead to margin expansion and overall increased volume. Combining these two revenue sources along with continued cost control in 2024, we are positioning ourselves for a positive EBITDA year.

Operator, Operator

The next question comes from Joe Osha with Guggenheim Partners. Please go ahead.

Joe Osha, Analyst

Thanks. It's great to be here. How is everyone today?

John Carrington, CEO

Joe, good to hear from you.

Joe Osha, Analyst

Yes. Couple of questions. First, just looking at the working capital accounts, I mean there have been some really dramatic swings here, particularly guys made some good progress drawing that inventory number down, still quite a beefy receivables number. Just wondering how I should think about these in Q4? Just in general, how these numbers are likely to trend over the course of the next several quarters as your business continues to grow? And then I have another question.

Bill Bush, CFO

Thanks for the question, Joe. I want to mention that we have reiterated our guidance of a minimum cash level around $150 million. This suggests that from our current position, we expect to generate cash in the fourth quarter, which means we plan to accomplish two main objectives. First, we will continue to reduce our inventory similar to how we did between Q2 and Q3. Additionally, we will also work on decreasing receivables, which will contribute to our cash collection efforts. As a result, our balance sheet should strengthen and we expect to have more cash compared to our current situation.

Joe Osha, Analyst

Okay. That's for Q4, but looking ahead, you have this business and congratulations on the progress. However, this business requires a significant amount of working capital compared to its size. How should we view it moving forward? How will you manage these figures over time?

Bill Bush, CFO

I believe there will be a mix of effects. First, the modular ESS will reduce our working capital needs, leading to lower inventory and fewer receivables while maintaining the same amount of cash. Additionally, we will generally have less inventory on the balance sheet for non-modular deals as we change our equipment purchasing approach. In the past, we were purchasing equipment on longer timelines, but now the market has shifted to more spot-type buying, allowing us to take advantage of favorable pricing and terms. Consequently, I expect inventory to keep declining as part of our balance sheet, and receivables will also decrease. As we effectively manage our receivables and convert them into cash, we should be in a strong position. This quarter, we achieved over $100 million in collections while reducing inventory and accounts payable. Therefore, I anticipate that our balance sheet will improve over the next few quarters, resulting in more cash.

Joe Osha, Analyst

Okay. Thank you. And then shifting gears, just looking at your software and recurring revenues, really two questions. If I look at that storage software number, $8.1 million, it's up around 33% from the same number last year. Your storage AUM, as you reported, has more than doubled. So, the optimist in me wants to believe that this implies that there is some kind of significant hockey stick embedded in the software number as these projects are commissioned. Is that a fair way to think about it?

Prakesh Patel, Chief Strategy Officer

I think there are two factors impacting that. Last quarter, we had exceptional performance in the market, whereas in the prior quarter, we saw significant market participation but not as much in Q3. Additionally, our average deal size has been increasing significantly. So, as you mentioned, we do expect to see these larger systems coming online, which will lead to noticeable increases in the software annual recurring revenue reflected in our income statement. This is definitely a trend we are observing.

Joe Osha, Analyst

So I'll hand it off to the next caller. Thank you.

Operator, Operator

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

Andrew Percoco, Analyst

Thanks so much for taking the question here. I just wanted to follow-up on just what you're seeing on the hardware side of the business in terms of price and availability of supply. I know it's a pass-through for your business, but can you just discuss how it's impacting customer project economics in light of the rising cost of capital environment and therefore demand for your services?

John Carrington, CEO

Sure. And it's been a pretty dramatic change. I mean, as you look at the, you know, say batteries just in general, And I think this also falls down to part of the solar business also. But availability prices are down and we expect that to continue, which is in part why, we're referencing, that we're, we feel like, we're going to be shorter on inventory than we have in a faster place of purchase orders. Because, at this point in time, finding why long-dated supply agreements is going to be a tough ask I think. So for us, that's what we're seeing in the marketplace today, But the market has shifted dramatically in the last year. So I think it's something that we've got to be pretty watchful of over the incoming time period. You are seeing a lot of new supply coming into the market right now, which is really driving. And not just in the US, but also in China. So you have the likelihood of declining prices.

Prakesh Patel, Chief Strategy Officer

Hey, Andrew, this is Prakash. One other thing I'd add is just the equivalent price decline we're seeing available from OEMs alone is offsetting the impact of higher interest rates in project economics. So it's a really positive environment with not only that trend, but the fact that, as John highlighted, power purchase agreement pricing has continued to be very robust. So overall, we're seeing much better project economics and significant demand.

Andrew Percoco, Analyst

Got it, That's a super helpful data point. And maybe just to follow-up on the prior question on just software services growth. What do we need to see or what needs to happen within your business to get closer to that 75% year-over-year growth rate target? I think you've been lagging behind that so far this year. What needs to happen practically within the business, and maybe in what time frames do you expect that to happen?

Prakesh Patel, Chief Strategy Officer

This is Prakash. I'd say a big part of it is getting the systems interconnected and permitted, and we talked about how the broader market has seen challenges. We've moved up the size scale. These projects have been more complex, larger projects generally. There is some light at the end of the tunnel with some recent actions on the federal side at the FERC level as well as at the state level. So we're hopeful these things start to normalize, let's say in the second half of 2024 and beyond. The other piece is, as we announced today, engagements with large asset owners or developers on a programmatic way to drive services revenue. What's really compelling about that is that's not tied to project timelines or actually It's not tied to interconnection timelines, right? Because we can earn service revenue even earlier in the project life cycle where we're helping them develop project performance or system design, things of that sort. So it should smooth some of the seasonality. And as John mentioned, we're engaged with multiple of these parties and looking to continue the momentum we're seeing in that space.

Andrew Percoco, Analyst

Super helpful. I'll take the rest offline. Thank you.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey, guys. It's Alex on for Julien. I'm just curious, I mean, congrats on the wins in the media and co-op space, definitely one of the more interesting places that we are definitely seeing, I think, storage crop up. I thought this slide where you showed your sort of the market share you guys built in ISA Northeast and then what's happening, we'll say, beyond in the median comp space is interesting. I mean, what sort of share do you guys think you could take in that space? And what sort of competitors do you run into? How do you drive differentiation? And I guess like one thing you guys have been very good at is sort of carving out niches and dominating in those niches. So just curious how far you can really push that with these announcements.

John Carrington, CEO

Yes. On the municipal cooperative side, this market aligns well with our capabilities. These are generally smaller entities, unlike the larger investor-owned utilities that typically have a vast team of engineers to develop software or a substantial balance sheet to acquire hardware. We can provide a comprehensive STEM solution to these customers, who are very progressive in their desire for distributed generation and increased customer engagement. We've entered this market at just the right time. As John mentioned, we’ve grown our market share from 0% to 15% in less than a year. We see potential for further growth and will continue to pursue this opportunity.

Unidentified Analyst, Analyst

Got it. Makes a ton of sense. Just as far as the bookings themselves as a bit of a follow-on. Obviously, this is a really outsized quarter for bookings. Your guidance is maintained on the full-year basis, but CAR is up. I guess I'm just trying to kind of reconcile those sort of moving pieces. Were these sort of pulled forward relative to some other projects that may have shifted out that may have been in late-stage discussions. Just I guess sort of clarify, if you can, the interplay between the bookings in this quarter, the maintained full year and CAR going up relative to your prior expectations?

Bill Bush, CFO

Yes, thank you for the question. This is Bill. I want to highlight a few points. Firstly, this quarter has set a record for us in bookings. However, as you noted, last quarter's figures were slightly lower, which indicates some variability in our deals. Similar to what we said in the second quarter, bookings do not equate to revenue, so we do not feel pressured to finalize a deal within a specific quarter unless the terms are favorable for us. That's our perspective on it. We have consistently mentioned that a midpoint target of $1.5 billion is reasonable for us, and I believe the fourth quarter will help us achieve this. Currently, we are just under $1.3 billion, and this presents an opportunity for us to continue signing deals in attractive markets. Recently, there have been numerous transactions, and as Prakesh pointed out, the municipal and cooperative sectors have been particularly fruitful for us, along with our core markets in California, Texas, and New England. We are actively seeking profitable deals that allow us to implement more software and services, and as Prakesh noted, the municipal and cooperative space is a promising area for such opportunities.

Unidentified Analyst, Analyst

Got it. Thanks, guys. I’ll take the rest of mine.

Operator, Operator

The next question comes from Sean Milligan with Janney. Please go ahead.

Sean Milligan, Analyst

Hey, everyone. I appreciate you taking the questions. I want to revisit Joe's inquiry and delve a bit into the details regarding supplemental revenue. The storage software services revenue for this quarter was $5.5 million, a decrease from $7.7 million in the previous quarter. Prakesh, you noted that there was higher market participation last quarter, but I would like your insights on whether there were any other factors at play. My understanding is that there was some revenue from the SPE in Vegas contributing to that figure. If we exclude that, it suggests about a 60% decline in the core storage software revenue quarter-over-quarter. Any thoughts you have on this would be appreciated.

John Carrington, CEO

Yes, thank you for the question. There are a couple of factors at play as we move through the quarters. First, as we mentioned last quarter, we had a considerable amount of market participation revenue, which affected the numbers. Although it appears as a sequential decline, the core business is actually experiencing a slight increase, although not significant. It's important to note that interconnection remains a challenge affecting our software revenue growth. In particular, regions like New York with its improved program and Texas are showing significant delays in bringing systems online. Consequently, while we might complete hardware sales, software sales are not occurring within a typical timeframe. The positive aspect is that there are no cancellations, meaning software revenue is merely delayed, which is reflected in the CAR difference. Although CAR continues to grow, this growth is not currently visible in the income statement, directly reflecting market conditions related to interconnection.

Prakesh Patel, Chief Strategy Officer

The other thing I'd add is some of the apps we've been rolling out recently focused on this trend generally. For example, PowerBidder Pro and Event Manager can be utilized by existing assets and customers. This means we're not solely reliant on interconnections and new developments. This is a significant aspect of our overall product roadmap.

Sean Milligan, Analyst

Okay. That's helpful. And then, just to build on that in the response there. If you look at CAR, I guess, the third quarter of last year, you were $61.5 million, now you're $87.5 million. Just wanted to confirm, one, does CAR include project services business? And if not, I think if you look at the implied run rate of the storage and solar, you're kind of up $5 million on an annualized basis year-over-year. And just is there like an average time frame to turn on storage business that we should think about, like in terms of how to model unlock an additional CAR over the next 12 to 18 months? I know you haven't given guidance on how far CAR extends. But is there something you're seeing in the portfolio on how long it takes to turn on storage assets?

Prakesh Patel, Chief Strategy Officer

Yes. So a couple of points in there. So first, I would reference you back to the investor presentation that we had in September. There's a pretty detailed slide on the various types of projects and the timing that it takes to get them through all the way into interconnection operations. So, just to point that out to you. I think that's available on our website. And to the extent you have any questions about that, we can pick those up later. So that's the first part. I think the second is that to your point, we are seeing growth in the software and services line item and CAR does not include cars software. That's just really a software line item. It does not include items that would be non-recurring. So imagine that to be, like I mentioned, software and service contracts that are long-term, that generally have solar-style adjustments associated with them that would typically last anywhere on the solar side, say, three to five years, storage side, 10 to 20 years.

Sean Milligan, Analyst

I'm analyzing the numbers for this quarter, and it suggests that the storage business's software revenue is around $4 million to $5 million annually. Currently, most of the software revenue is coming from the solar segment. I'm trying to understand when we will see increased storage activation and more Athena revenue appearing. I noticed what seemed like a shift in the first half of this year, but it seems that was more about market participation rather than genuine recurring revenue.

John Carrington, CEO

Yes, I think we are seeing an increase in solar revenue and software revenue today. The reason there isn't more storage revenue is related to the time it takes to get these storage products interconnected. The CAR aspect is really about what will happen in the future; it is always transitioning into a recurring revenue metric. This year, particularly in places like New York and Texas, we have had difficulties getting those projects completed. This includes challenges with interconnection and supply chain issues that have delayed individual projects. The good news is that these projects are still active, and the CAR will eventually convert into GAAP revenue.

Sean Milligan, Analyst

Okay. That’s helpful. Thanks.

Operator, Operator

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

Justin Clare, Analyst

Hey, guys. Thanks for taking the questions here. So first off, I just wanted to ask about the expected timeline for delivering the first modular ESS solution or a software-only sale. So in Q3, was there any revenue associated with the modular ESS or software-only sales? And just trying to get a feel for how that scales up looking forward for here. So thank you.

John Carrington, CEO

Yes, thank you for the question. We anticipate that modular ESS systems will start being installed in the first half of 2024, but this is contingent on the interconnection processes. We have been focused on software-only solutions for a while now, with the first system dating back to 2018 when we managed the portfolio in Southern California, applying software to it. These efforts have been ongoing for a considerable time.

Justin Clare, Analyst

Got it. Okay. All right. And then so shifting gears, just on the SB Energy agreement, I was wondering if you could share a little bit more detail on how that structure. Is this something where you have kind of the right of first refusal to supply the 10 gigawatt hours of projects there? Just wondering how that agreement moves through into contracts and flowing through into your bookings there.

John Carrington, CEO

Yeah. This is John. Look, I don't want to go too far into the specifics on the contract, but suffice to say that we will be working very closely on every storage platform and project that they have. And I think what's really exciting is we will be able to integrate Athena into the digital platform as well. So, more to follow, we'll certainly keep everybody updated on that. But it's, like I said earlier, a massive and growing pipeline. And as I also stated earlier, I really am excited about the fact that we view this as a model or a template to carry on to other large bulk power developers to further drive our services and of our strategy.

Operator, Operator

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

Abhi Sinha, Analyst

Thank you for including me. I would like to inquire about STEM energies, acknowledging that it's a long-term project. When can we expect to start seeing revenues, possibly from events in 2024 or 2025? Additionally, could you elaborate on how you compare the economics of these larger projects to the smaller ones that have been announced? I'm trying to understand the profitability differences between the larger projects and the smaller ones.

John Carrington, CEO

Hi. This is John. On the first part of your question, we're working through the project specifically, and I hate to keep talking about interconnection. But it's going to be predicated on that. There's a chance in 2024, possibly 2025 it moves around. So it's hard for us to say right now when the first project is going to be operational and interconnected more importantly, but we'll obviously cover up to speed. And it was hard to understand the second part. I think it was around the economics?

Prakesh Patel, Chief Strategy Officer

Hi. This is Prakash. Yeah, generally, this engagement should deliver higher-margin projects than when we're selling hardware into a particular customer, right? This is purely a software and services engagement. So the services we deliver any time in the project lifecycle that those are around 30% to 50% gross margin, and the software is 80% GM.

Abhi Sinha, Analyst

All right. So that's one. So that economy does not change even if such a big project comes in there. I mean, you still maintain that kind of profit margin.

Prakesh Patel, Chief Strategy Officer

That's right. Yes. These are just leveraging our capabilities. It's not discounted or anything of that sort.

Abhi Sinha, Analyst

Got it. Thank you.

Operator, Operator

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

John Carrington, CEO

Yes. Thanks. I want to thank everyone for joining the third quarter earnings call. And we certainly look forward to speaking with you during our fourth quarter earnings call, which will take place in February.

Operator, Operator

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