STEM (STEM) Q3 2025: Gross Margin Expands to 47% as Software-Centric Shift Drives Predictability
STEM’s Q3 2025 results mark a decisive inflection in business model stability, with software and services now anchoring margin and cash flow improvement. The company’s unified Powertrack platform and disciplined cost control have reduced historical volatility and enabled tighter guidance, positioning STEM to capitalize on international expansion and the accelerating energy transition. With recurring revenue and margin visibility rising, investors should focus on the company’s ability to scale its new EMS offering and sustain profitability into 2026.
Summary
- Margin Structure Transforms: Software and services mix lifts gross margin and compresses volatility.
- Execution on Cost Discipline: Operating expenses cut nearly in half, supporting consecutive quarters of positive EBITDA.
- International and Utility Scale Expansion: Powertrack EMS unlocks new markets, broadening future growth levers.
Performance Analysis
STEM delivered 31% year-over-year revenue growth in Q3 2025, with total revenue reaching $38 million. Recurring annualized revenue (ARR) climbed 17% year-over-year, underscoring the durability of the company’s SaaS and managed services model. The Powertrack software suite, now redefined to include all solar, storage, and hybrid SaaS revenue, posted 11% growth, while edge hardware rose 18% on the prior year.
Gross margin expansion was a standout, with GAAP gross margin at 35% and non-GAAP at 47%, reflecting a deliberate pivot away from low-margin battery hardware resales toward higher-value software and lifecycle services. Operating expenses were flat sequentially and down 47% year-over-year, a direct result of workforce reductions and ongoing process efficiency. Adjusted EBITDA was positive for the second consecutive quarter, and operating cash flow swung to a positive $11 million, demonstrating the underlying cash generation power of the new business model.
- Product Mix Shift: De-emphasizing battery hardware resale reduced revenue lumpiness and improved margin quality.
- Recurring Revenue Engine: Contracted ARR grew 17% YoY and 3% sequentially, supporting forward revenue visibility.
- Cost Base Reset: Cash OpEx reductions drove operational leverage and sustained cash flow improvement.
Backlog and bookings saw a modest sequential decline, but the company attributes this to timing in hardware sales rather than underlying demand. The recurring revenue base and international pipeline are expected to support growth as new products ramp.
Executive Commentary
"This quarter also marked a pivotal moment in our evolution as we unified our corporate identity under the STEM brand and streamlined our entire product portfolio within the comprehensive power track suite. This transformation goes far beyond surface-level changes. It reflects the deep integration of also energy's solar expertise with STEM's storage and AI capabilities."
Arun Narayanan, Chief Executive Officer
"GAAP and cash operating expenses were both flat sequentially from the second quarter of 2025. Cash operating expenses were down an impressive 47% year over year. These reductions were primarily the result of the difficult but necessary workforce reduction that took place in the second quarter and we remain focused on driving operating leverage and further cost savings across the business."
Brian Musfelt, Chief Financial Officer
Strategic Positioning
1. Software-Centric Model Drives Predictability
STEM’s transition to a software-driven business model is delivering on its promise of improved margin stability, reduced revenue volatility, and more accurate forecasting. By focusing on SaaS, managed services, and lifecycle offerings, the company has insulated itself from the inherent unpredictability of hardware cycles and project lumpiness.
2. Powertrack EMS Launch Unlocks New TAM
The introduction of Powertrack EMS, STEM’s new energy management system, is a strategic milestone. This platform bridges the gap between basic battery controls and advanced optimization, enabling STEM to serve both utility-scale and international hybrid projects. Early bookings with blue-chip customers in three countries validate product-market fit and signal incremental revenue streams in 2026 and beyond.
3. International Expansion as Macro Hedge
With domestic policy and regulatory headwinds still present, STEM is accelerating its international push, leveraging teams in Berlin and Japan and tailoring Powertrack EMS for non-US markets. This diversification reduces dependency on US policy cycles and positions the company to benefit from global load growth and the hybridization of energy assets.
4. Operating Discipline and Cost Structure Reset
Management’s aggressive cost actions—culminating in a 47% year-over-year reduction in cash OpEx—have reset the company’s break-even point. STEM is now able to scale new products and invest in innovation without material increases in fixed costs, supporting sustainable margin leverage as revenue grows.
5. AI-Enabled Differentiation
Powertrack Sage, an AI-powered analytics assistant, is on track for limited release in December, with broad rollout in 2026. This initiative aims to deepen customer engagement and streamline support, potentially driving higher retention and incremental services revenue as data complexity grows in solar and storage portfolios.
Key Considerations
STEM’s Q3 2025 results reflect a company in the midst of a successful business model transformation, but the next phase will test the durability of its growth levers and cost discipline as market dynamics evolve.
Key Considerations:
- Product Adoption Trajectory: Early EMS bookings are promising, but the pace of revenue conversion and international scale-up will be critical to sustaining growth.
- Margin Sustainability: While software mix has boosted margins, future compression from hardware deliveries and competitive pricing in new markets could pressure profitability.
- Recurring Revenue Quality: ARR growth is robust, but investors should watch for churn or pricing pressure as the company expands into new geographies and segments.
- Execution on International Strategy: Success in Europe and Asia will depend on local regulatory navigation and the ability to replicate US customer wins abroad.
Risks
Key risks include ongoing US policy uncertainty, which could delay project timelines, and the challenge of executing international expansion without margin dilution. Hardware mix shifts in Q4 and beyond may compress gross margin, while competitive pressures in new markets could test pricing power. Investors should monitor the sustainability of cost reductions and the pace at which new product bookings convert to revenue.
Forward Outlook
For Q4 2025, STEM guided to:
- Tighter full-year revenue range of $135 to $160 million
- Gross margin of 40% to 50%, with some Q4 compression from hardware mix
- Adjusted EBITDA between negative $5 million and positive $5 million
- Operating cash flow between negative $5 million and positive $5 million
- Year-end ARR of $55 to $65 million
Management highlighted:
- Tracking to midpoint or better on all metrics except operating cash flow, where working capital timing could push results to the lower end
- Raised low-end guidance for software, edge hardware, and services revenue, and for adjusted EBITDA
Takeaways
STEM’s strategic transformation is delivering measurable results, but the next year will be defined by the company’s ability to scale new products, sustain margin gains, and execute internationally.
- Margin Expansion Validated: Two consecutive quarters of positive EBITDA and cash flow signal business model resilience as software and services take center stage.
- Growth Levers in Place: Powertrack EMS and international strategy broaden addressable markets, but execution and conversion will determine trajectory.
- 2026 Setup: Investors should watch for evidence of recurring revenue durability, international bookings ramp, and continued cost discipline as leading indicators for next year’s growth and profitability.
Conclusion
STEM’s Q3 2025 results confirm that its software-centric, margin-focused transformation is gaining traction, with improved predictability and operating leverage. The Powertrack EMS launch and international push set the stage for broader growth, but the company must now prove it can sustain these gains and convert pipeline into durable revenue streams.
Industry Read-Through
STEM’s shift to a software-first energy management model reflects a broader industry migration away from pure-play hardware toward recurring SaaS and lifecycle services in the distributed energy sector. Margin expansion and reduced revenue volatility are likely to become key differentiators for energy tech players as policy and macro volatility persist. International growth and AI-enabled analytics are emerging as critical levers, with competitors likely to follow STEM’s lead in product integration and global diversification. Investors should expect further consolidation and product suite unification across the sector as the clean energy transition accelerates.