Stem (STEM) Q1 2026 earnings review
Profitability Pivot Works, But Software Growth Stalls
Stem's strategic pivot away from low-margin hardware to a software-centric model continues to yield major profitability improvements. While total revenue decelerated, falling 11% YoY to $29.0 million, this was an intentional byproduct of eliminating hardware resale. The true story is margin expansion: non-GAAP gross margin reached a record 52%, driving a fourth consecutive quarter of positive Adjusted EBITDA ($2.0M). However, the underlying software growth engine is showing signs of fatigue. Annual Recurring Revenue (ARR) was completely flat sequentially at $61.2M, and Managed Services ARR actually shrank. The company reaffirmed its FY26 guidance, implying a steep back-half weighted acceleration in software sales that carries significant execution risk.
🐂 Bull Case
The intentional wind-down of the low-margin hardware business is fully visible. Non-GAAP gross margins accelerated to 52%, up from 46% a year ago, permanently shifting the company's profitability profile.
Stem delivered its fourth consecutive quarter of positive Adjusted EBITDA, proving that the aggressive 2025 cost-cutting and workforce reductions are durable.
🐻 Bear Case
Software, services, and edge hardware revenue grew only 4% YoY to $29.0M, a sharp deceleration from the 25% YoY growth seen in FY25. ARR growth was sequentially flat.
After generating positive Operating Cash Flow in the second half of 2025, cash flow reversed to negative $8.3M in Q1, eroding the cash balance to $36.6M.
⚖️ Verdict: ⚪
Neutral. The operational discipline is commendable, and margins are excellent. However, a software company trading at premium multiples needs aggressive ARR growth. A sequentially flat ARR quarter paired with a return to cash burn makes the reiterated FY26 guidance look highly ambitious.
Key Themes
Record Gross Margins via Revenue Mix
Accelerating. The transition away from battery hardware resale is doing exactly what it was designed to do: inflate margins. GAAP gross margin expanded from 32% in 25Q1 to 38% in 26Q1, while non-GAAP gross margin surged to 52%. By shedding empty-calorie hardware revenue, Stem's gross profit dollars actually grew YoY despite the 11% drop in total sales.
ARR Stagnation and Managed Services Decline
Decelerating. Total ARR landed at $61.2 million, virtually unchanged from $61.1 million in Q4 2025. More concerning is the underlying mix: Managed Services ARR reversed, dropping 4% sequentially from $20.4M to $19.5M. For a company banking its future on recurring software and services revenue, flat sequential ARR growth in Q1 creates a steep hill to climb to hit the $65-$70M year-end target.
M&A and Partnerships to Complete the Stack
Stem is actively augmenting the PowerTrack platform. The April acquisition of Vienna-based raicoon GmbH brings automated fault detection into the fold, which should accelerate issue resolution for solar assets. Concurrently, a co-marketing agreement with Nuvation Energy creates a fully North American-made BESS control stack, strategically positioning Stem to win bids where domestic sourcing and security are mandated.
Cash Flow Reverses into Negative Territory
Reversing. Operating cash flow swung to an $8.3M outflow, compared to an $8.5M inflow in 25Q1 and an $8.2M inflow in 25Q4. While H1 seasonality is typical, the company ended Q1 with only $36.6M in cash and equivalents (down from $48.9M in Q4 2025). Achieving the FY26 guidance of $0-$10M in positive OCF will require near-perfect working capital execution in the back half of the year.
Macro Uncertainty Looms Over the Supply Chain
Management continues to flag macroeconomic and geopolitical risks, including global inflationary pressures, interest rates, and the uncertainty surrounding the 'One Big Beautiful Bill' (OBBB) and import tariffs. While Stem's software is largely insulated from direct tariffs, its customers' hardware installations are not. Delays in site commissioning directly delay Stem's ability to recognize software revenue and AUM growth.
Other KPIs
Accelerating sequentially. Up from $21.3 million at the end of 25Q4. Stem added $15.0 million in bookings during Q1, offsetting $10.6 million in hardware revenue and $2.3 million in project services converted during the quarter.
Stable. Solar AUM grew 4% sequentially to 37.5 GW, proving steady adoption of PowerTrack for solar monitoring. Storage AUM was completely flat sequentially at 1.7 GWh, aligning with the stagnant ARR figures.
Guidance
Stable. Management reaffirmed full-year guidance. With Q1 delivering only $29.0M, Stem needs to average over $45M per quarter for the rest of the year to hit the $165M midpoint. This implies an expectation of severe back-half acceleration.
Stable. At the $140M midpoint, this represents flat growth compared to the $141.4M delivered in FY25. Given the 4% YoY growth in Q1, this target appears achievable but underscores the lack of top-line hyper-growth.
Stable. Reaffirmed guidance implies a significant acceleration from FY25's $6.7M. With $2.0M generated in Q1, Stem is on pace but requires volume leverage in Q3 and Q4 to clear the midpoint.
Stable. Hitting the $67.5M midpoint requires adding $6.3M in net new ARR over the next three quarters. Given that Q1 added roughly zero sequential ARR, this metric demands aggressive acceleration.
Key Questions
Managed Services Contraction
Managed services ARR declined 4% sequentially to $19.5 million. Was this driven by customer churn, proactive contract pruning, or a slowdown in brownfield site conversions?
Path to the ARR Target
With Q1 ARR essentially flat sequentially, what specific product lines or geographic regions give you the visibility to confidently reiterate the $65-$70 million year-end ARR target?
raicoon Monetization
Regarding the raicoon software acquisition, is this technology being integrated as a standard feature of PowerTrack, or will it be monetized as a premium add-on to drive ARPU expansion?
Hardware Resale Strategy
Guidance still allows for up to $40 million in battery hardware resale this year, yet Q1 saw significantly reduced hardware sales. Do you expect this to be highly concentrated in a single quarter, and how will it impact gross margins in that specific period?