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Executives

Will Lyons - Investor Relations Manager

Tim Healy - Chairman and Chief Executive Officer

David Brewster - President

Neal Isaacson - Chief Financial Officer

Analysts

Mark Siegel - Canaccord Adams

Michael Horwitz - Stanford Group

Jeff Osborne - Thomas Weisel Partners

Michael Carboy - Signal Hill

Richard Baxter - Ardour Capital

[Brian Sterling] - JMP Securities

Jonathan Hoopes - ThinkEquity

Benjamin - Pacific Crest Securities

EnerNOC Inc. (ENOC) Q3 2008 Earnings Call November 10, 2008 5:00 PM ET

Operator

Good day, everyone and welcome to the EnerNOC Third Quarter 2008 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the call over to Mr. Will Lyons, Investor Relations Manager. Please go ahead, sir.

Will Lyons - Investor Relations Manager

Thanks Jamie. Good afternoon and thank you for joining EnerNOC’s third quarter 2008 investor conference call. Speaking today will be Tim Healy, EnerNOC’s Chairman and Chief Executive Officer; David Brewster, EnerNOC’s President; and Neal Isaacson, EnerNOC’s Chief Financial Officer.

I’d like to remind everyone that today’s presentation contains estimates and other statements relating to the future financial performance and the future growth of the company’s demand response and energy management solutions, including statements regarding the company’s ability to continue and capture market share and grow its business in terms of megawatts under management, revenues, and gross margins that may constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and assumptions that are subject to both risks and uncertainties, and involve a number of factors that may cause actual results to differ materially from those indicated by these forward-looking statements.

Additional information concerning these factors can be found under risk factors in EnerNOC’s Annual Report on Form 10-K for the year ended December 31, 2007 and Quarterly Reports on Form 10-Q as filed with the SEC on May 30, 2008 and August 30, 2008 respectively. As well as other documents that may be filed by EnerNOC from time to time with the SEC. Please refer to our SEC filings, for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Though we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

And now, I’ll turn over the call to Tim Healy.

Tim Healy - Chairman and Chief Executive Officer

Thank you, Will. Good afternoon everyone, and thank you for joining us. During 2008, we have been building steadily upon our industry leadership position, making targeted, disciplined, strategic investments to capture additional market share and further differentiate our suite of energy cost saving solutions.

In both our core demand and response business and their other value added energy management solutions, we’re continuing to experience healthy, consistent growth geographically across an expanding and increasingly diverse customer network. Of today’s economic environment undoubtedly presents challenges for most businesses. We believe that we have several unique features that will help us continue to grow in the months and years ahead. I’d like to point out three of these distinct features to start this call.

The first feature to keep in mind, about EnerNOC is this, our business involves timely energy cost savings for our commercial, institutional and industrial clients without the need for these clients to make direct expense outlays to achieve those savings. And in the midst of today’s challenging economic times, cost cutting measures across the variety of businesses and organizations are getting significant management attention. Many of these organizations may no longer have the same access to capital resources as they once did, making our solutions particularly attractive. Our demand response solutions reduce energy costs and generate cash flow for the businesses and institutions in our growing network, without them having to incur upfront or ongoing capital expenditures.

The second feature of note; is that the vast majority of our revenues come from utilities and grid operators, which are generally regarded as a strong, stable, credit worthy set of entities. In general, both types of organizations operate under long-term planning cycles more so than most businesses do. In part, due to the relatively long-time horizon required to plan, sight, permit, construct and commission new generation transmission and distribution infrastructure.

So, what does that means for EnerNOC? Let’s think about our grid operated customer. Many of whom who have already carried out the capacity procurement activities for the next several years. We participated in various forward capacity auctions that they conducted. And, we were awarded capacity amounts in excess of the amounts we currently manage in these markets. As a result we now have attractive multi-year opportunities akin to hunting license so to speak in these major markets.

As we fill these allocations, we get paid at fixed, known rates that increase over the next couple of years. Accordingly, we believe that we can expect some of our most attractive growth opportunities to the current regions where we already have important operating and sales experience.

Let’s next consider our utility customer base; most utility projects require large amounts of capital spending and take several years to build making it difficult to slowdown or eliminate planned capital projects without knowing the duration or severity of an economic slowdown or its affect on demand growth. In these situations, we believe that demand response can provide some unique value. In uncertain markets utilities can hedge their bets by turning to demand response to get quick, efficient clean capacity, allowing them to differ some of their capital spending on large infrastructure projects should they elect to do so.

We believe that these industry dynamics coupled with the credit worthiness of grid operators and utilities and the existing environmental and energy efficiency mandates they face suggest that EnerNOC has an especially attractive value proposition even bearing economic downturns.

The third and final feature I want to mention about our business is our strong financial position and revenue visibility. At the end of the quarter, we had over $58 million of cash, cash equivalence in marketable securities on hand, access to a secured credit line and term-loan facility from Silicon Valley Bank and a significant pace of contracted revenues. We have a strong recurring revenue business and our revenue visibility continues to improve as a result of both forward capacity markets and a long-term utility contracts.

Equally as important we are entering into a stage of our company’s growth during which we expect the power and leverage of our operating model to become even more discernable. In less than eight months, we begin the second half of ‘09, a period during which we plan to be cash flow positive from operations. We believe our strong financial position continue to differentiate us from our competition something we intend to leverage in the months and years ahead to help us build on what we believe is already a substantial lead in the market.

Based on these three distinct advantageous, the attractive nature of our cost savings business, our credit worthy attractive customer base and our financial strength and visibility, we believe, we are well positioned to continue deliver on our corporate objectives and to drive increased shareholder value.

So, as you can tell by the nature of my opening comments, EnerNOC management remains as optimistic as ever about both our near-term prospects for growth and the long-term opportunities we are pursuing. I believe that this optimism is best illustrated by the fact of several EnerNOC executives including Co-Founder David Brewster, and me made significant purchases of EnerNOC stock in the open market during the quarter. We believe, we have the right strategy, the right technology, and the right people to achieve our objectives.

In the rest of my prepared remarks in this call, I want to make a few comments about the company’s business execution during the quarter and our strategic positioning for the rest of 2008 and 2009.

I’ll then ask David to provide an update on specific market dynamics that affect the business and Neal will conclude by providing a detailed summary of our third quarter financial results.

So, let’s turn to some high level observations about our third quarter execution. During the quarter, we continue to increase our momentum in the market and delivered strong quarterly results as illustrated in the financial data we recorded earlier today. Good operator and utility customers as well as our commercial, institutional and industrial clients once again counted on EnerNOC to improve good reliability, increased operational efficiencies and lower electricity prices in the market during periods of peak demand.

Neal will get into more detail later, but our third quarter was punctuated by our record revenue performance of $44.2 million, 131% increase overall revenue in the third quarter of 2007. This year-over-year growth was the result of many things including the significant expansion of our presence in the PJM market and our continued strong performance in New England as well as the growth and diversification of our portfolio demand response and energy management solutions throughout North America.

We once again grew our demand response network ending September with over 1,760 megawatts under management, which is the capacity equivalence over 17 average size peaking power plant. These megawatts come from 3,400 different end-use customer sites in our network as of September 30, 2008 up from 3,067 customers’ sites in our network as of the end of Q2. Notably as of the date of this report, our sales pace has accelerated and we have sold approximately 100 new megawatts since the end of the third quarter, with over 1,850 megawatts in our network we feel good about our ability to exit 2008 with over 2,000 megawatts under management, which is consistent with our previous guidance.

Now, not yet included in our megawatts under management is the full capacity that we intend to source under new contract for the State of Rhode Island and the State of Vermont. These new agreements represent opportunities to enroll state and municipally owned facilities into our demand response network helping drive down government energy costs and provide a supplemental revenue stream to both welcome propositions in these challenging economic times.

Additionally, our megawatts under management total does not include the capacity that we intend to source under various utility agreements in which we have not yet reached the maximum capacity of those agreements. Similarly, it does not include any megawatts we were rewarded by grid operators in that forward capacity auctions in excess of the amounts we currently manage in those market what I described earlier as their hunting licenses.

Accordingly, we believe that some of our most attractive growth opportunities could occur in regions where we already have important operating and sales experience and a mandate to grow. Our capacity continues to perform when called upon. We have dispatched the liability based capacity in our demand response network over 90 distinct times year-to-date and delivered an average performance of 98% based on nominated versus delivered capacity across all reporting events.

This performance track record demonstrates the scalability and robustness of our network operation center and our fifth generation proprietary software application called Power Track, which is the primary application that we use in EnerNOC for notifying, monitoring, and managing our expanding network of active customers’ sites. We use this application for both demand response and our growing energy efficiency business. We believe that the scalability and versatility of this technology platform and our strong performance track record again this year truly sets us apart from our competition.

As it relates to our pipeline for growth, we are happy to report that even in the midst of the current economic backdrop utilities are actively evaluating demand response and energy efficiency proposals more now than we have seen in the past. demand response deployments by the utilities are underway and we believe that more are expected across, all across the US as demand response is gaining increase penetration levels in PJM, New York, New England, California, Ontario, and Texas. As a result we believe that the addressable market is growing.

In addition we are pleased to announce another win from our expanding utility pipeline. In the third quarter, we signed a new Clean Gen agreement with San Diego Gas & Electric. Pending regulatory approval, this contract will allow us to deliver up to 25 additional megawatts to SDG&E doubling our existing Clean Gen agreement with them to approximately 50 megawatts. We believe that this contract expansion speaks to a high level of customer service and reliable delivery on our commitments to provide clean dispatchable and reliable demand reductions to our customers.

As we develop our existing utility relationships in California, New Mexico, Florida, Tennessee Valley, and other parts of North America, we are pursuing similar contract expansion opportunities.

We believe that the California market remains fertile ground for increased levels of demand response, but it is our energy efficiency solution called monitoring based commissioning that we expect to gain accelerated traction there. As most of you are aware 2007 was a proof of concept here for this monitoring based commissioning solution. And during the first nine months of 2008, we’ve achieved strong traction in commercializing this solution and have identified significant energy savings for our initial set of customers.

Additionally, the energy reductions that we achieved through our monitoring based commissioning application for one particular customer, the customer in Connecticut in this case was the first to qualify for Class III renewable energy credits in that State. And it’s the first instance that a monitoring based commissioning initiative has qualified as a renewable energy source and can be accounted towards the state’s aggressive renewable energy portfolio standard. We believe that our energy efficiency solution will continue to gain momentum as new projects and opportunities develop as a result of increased utility spending on energy efficiency initiative as well as increased interest from commercial, institutional and industrial customers that are driven to find cost effective ways that permanently reduce their energy expenditures.

Lastly, subsequent to the end of the third quarter, we announced that we appointed Jim Turner to our Board of Directors. I’m excited to welcome Jim to our team, his leadership as President and Chief Operating Officer of US Franchise Electric and Gas for Duke Energy, and as a Board Member of the Electric Power Research Institute. It’s a unique inside into the challenges the utility executives face today and how EnerNOC’s technology and service innovation can help address those challenges.

In summary, we currently believe that we are well ahead our way to achieving our stated 2008 company objectives not just in revenue and gross margin terms but also in capacity additions and operating leverage. As we look to 2009 and beyond, we intend to continue to focus on executing our plan to drive efficient growth that enhances long-term shareholder value. We are very pleased with solid execution that we have exhibited during the third quarter and how we advantageously positioned the company to continue to execute this plan.

I’ll now turn the call over to David, who will discuss some recent regulatory developments and macro factors to continue to support increased implementation of our solution. David.

David Brewster - President

Thanks Tim. We have described on our previously calls demand response and energy efficiency are becoming higher priorities for both energy providers and energy users. We believe that the comfort to macro dynamics from unprecedented regulatory support driven by economic national security and environmental concern, the rising construction costs in a liquid credit markets have made it extremely difficult for states, grid operators and utilities to rely on supply sided construction or loan to meet their long term planning objectives, not to mention [NOC’s] energy efficiency goals. Little over, electricity and natural gas market prices are even more volatile than the global stock market making energy decision making increasingly challenging for all of our customers.

We believe that the current energy market volatility represents an opportunity for EnerNOC. Our sales force helps businesses and institutions make year and still on energy procurement and management decisions, helping them buy energy more cheaply. Towards that end, cross selling synergies from our two most recent acquisitions and the energy in South River Consulting are strong and accelerating, thus far we have closed over 40 megawatts of demand response with existing energy procurement services customers and we have compiled a portfolio of over 600 million kilowatt hours per year of energy procurement services business across more than 100 deals with existing demand response customers.

We currently serve a total of 533 energy procurement services customers and tend to continue to grow our energy procurement services business to drive increased shareholder value.

We also believe that the market will continue to grow for our solutions under the new administration and a stable and regulatory environment that continues to favor clean demand side solutions. The new administration stated goal is to deploy the cheapest, cleanest, quickest to market energy source which is energy efficiency. We expect the new administration to follow through on their promise to setting an aggressive energy efficiency goal to reduce electricity demand 15% from projected levels by the year 2020.

Another part of their energy plan to move electric utilities to de-couple process from electricity sales, breaking down a constructed as long presented a disincentive for utilities to break demand response to energy efficiency as true substitutes for building supply side infrastructure.

In addition some recent utility state and federal agency announcements regarding near term measures aimed at improving our nation’s energy outlook indicate that there will be increased spending for the solutions we provide. Specifically, in Rhode Island, which is among the earliest states to pass a first fuel law which gives energy efficiency preference over power supply in resource planning. National grid plans to increase its energy efficiency spend by 3X, specifically National grid expects that its proposed 3 year, $134 million efficiency program which runs 2009 to 2011 will save rate pairs $281 million over the lifetime of those measures.

In Maryland, Baltimore Gas and Electric Fire and Energy efficiency plan, aimed at reducing commercial and industrial energy usage by 15% by the year 2015. This is similar to the stated goal of the New York Public Service Commission’s energy efficiency initiative that I described on our last quarterly call.

In Colorado, Excel Energy has plans to become a leader in energy efficiency and demand side management programs in the US, with its plan to spend $138 million including $48.7 million in 2009 and $60.3 million in 2010. Excel is proposing 35 electric and natural gas efficiency programs that are designed to save over 425,000 megawatt hours of 120 megawatts and about $500 million for consumers.

Since the quarter’s end, some additional developments to consider include the following:

In Pennsylvania, a new energy efficiency law was passed, that requires utilities in the state to cut to electricity usage by 1% by May 2011 and by 3% by May 2013. The bill also requires utilities to cut peak demand by 4.5% by May 2013. Pennsylvania will establish a new statewide energy efficiency program in order to achieve these goals and Pennsylvania Utilities are required to include third parties in their plans to achieve these state-manned targets.

In the state of Michigan, there is a law passed that requires utilities in that state to implement energy optimization programs that achieve energy savings of 5.5% by the year 2015. Senate goal 2013 also directs Michigan commission to work with all customer classes to reduce annual demand and conserve energy to load management.

The North Carolina Utility Commission approved four new energy saving programs for Progress Energy Carolina. The company is completing programs designs and expects to begin offering the new programs to customers in the coming months to help it’s customers save both energy and money.

Just last week, the Maryland Public Service Commission took initial steps to issue a gap RFP for demand response resources. The commission’s initial objective to have Maryland utilities procure over 600 megawatts of demand response distributed generation for the 2011 through 2016 timeframe. The models expected to complement the existing PJM ELRP.

Finally, and perhaps most importantly the federal energy regulatory commission recently filed a final rule associated with an earlier notice of proposed rulemaking. The final rules directs each independent system operator and regional transmission organizations to adopt or implement demand response more broadly, into their respective markets which we believe, will enable us to develop additional revenue streams to participation in capacity energy and ancillary services markets in many parts of the country. We believe this final rule should be regarded generally as a positive step to the demand response industry, specially the ancillary services provision in markets with currently underdeveloped demand response opportunities.

These developments come under heels of the New Green Communities Act in Massachusetts, ongoing demand response and energy efficiency program planning in New Jersey, significant anticipated energy efficiency investments in California, New York as well as the numerous power plants denials and delays such as in Florida and Kansas. All of these significant regulatory events that we believe substantiate the increased awareness and need of for our solutions. It’s important to note, that most of these developments have taken place in the regions in which we are focusing on building our demand response business and already have sales and operations resources in place.

We remain focused on wheeling out our quick starting capital efficient cost effective solutions in easier and further enhance grid reliability and reduce rate pair costs. We believe that these data points strongly illustrate the increasing market traction and regulatory support for our innovative demand response energy efficiency and energy procurement solutions and serve to highlight the broad trends towards demand side management becoming a more integral part of our nation’s energy future.

Now I will turn the call over to our CFO, Neal Isaacson who will provide details on our Third Quarter Financial results.

Neal Isaacson - Chief Financial Officer

Thanks David. In the Third Quarter, we continue to execute our strategic plan and position ourselves well to achieve all of our financial and operating guidance that we previously provided. I would like to take a few minutes to share some details about the quarter and how the revenue visibility that our business affords us.

For the quarter ended, September 30, 2008, we recognized record revenues of $44.2 million compared to $19. 1 million for the quarter ended September 30, 2007, an increase of $25 million or 131%. Specifically, during the quarter we continued to reap the benefits of our expanded PJM presence. As most of you are aware of my prior disclosures, we recognized all of the capacity based revenue from the PJM emergency world response program during the June to September delivery period. Therefore it is important to understand, there will be no PJM, ELRP capacity revenue from October 2008 to May 2009.

We expect to recognize PJM ELRP capacity revenue again at the beginning of the 2009-2010 program year, which begins June 2009. Sales of our high margin energy efficiency and energy procurement solutions for the quarter ended September 30, 2008 with $2 million compared to $300,000 for the quarter ended September 30, 2007 an increase of $1.7 million. We have fully integrated South River consulting and are very pleased with the high margin revenue contribution that this acquisition has provided. We intend to continue to leverage the cross selling synergies that we are seeing as a result of our acquisitions to drive more gross profit dollars for our business.

One of the neat benefits that we have from operating in our industry is that our customers long term planning cycles provide us tremendous top line revenue visibility. We have multiyear obligations to grid operators and multiyear utility contracts and we believe that our significant base of contracted revenue, strong cash position and available credit facility make us uniquely positioned to continue to grow predictably in 2009 and beyond.

So given that our business has good revenue visibility, we intend to make it a practice starting this quarter of providing some quarterly guidance. While considering what to expect in Q4, `08 and again 2009 it is important to note that Q4 and Q1 are seasonably lower revenue quarters for us than Q2 and Q3. Q3 is typically the strongest of all quarters as illustrated again this year. As such we expect the revenues in Q4 `08 to be approximately $19 million putting us inline with our annual guidance of between $101 million and $107 million. We hope that our shareholders will find this rather more detailed to be helpful as they analyze the seasonal aspects of our business.

Cost of revenues for the quarter ended September 30, 2008 were $25.8 million compared to $11.3 million for the quarter ended September 30, 2007, an increase of $14.5 million. The majority of our cards where the payments we make to the businesses and institutions in our demand response network, these payments totaled over $24 million.

Our gross profit for the quarter was $18.4 million compared to $4.1 million for the quarter ended September 30, 2007 an increase of $14.3 million. We are pleased with our year-to-date gross margin performance including the over 41% gross margin we generated in the third quarter. We believe that our overall gross margin performance is one of the highest of any demand response aggregates in the industry, and reflects the benefits to our unmatched sales force, pricing discipline and competitive differentiation.

Employee-related charges, including non-cash, stock-based compensation account the majority of our operating expenses for the quarter. Total operating expenses were $21.1 million compared to $12 million for the quarter ended September 30, 2007 an increase of $11.1 million. Specifically, of these operating expenses, employee-related charges accounted for $13.4 million and stock-based compensation accounted for $2.5 million, totaling $15.9 million or approximately 75% of operating expenses for the quarter.

With over 1,760 megawatts under management and a total headcount of 335 as of September 30, 2008, our megawatts under management for FTE metrics was 5.3, compared to 4.4 as of December 31, 2007. We believe this metric will continue to trend favorably in the fourth quarter and in fact it has trended slightly higher since the end of the third quarter to 5.4, further demonstrating scalability of our growing demand response network.

Net loss for the quarter ended September 30, 2008 was 3 million or $0.16 per share basic and diluted, compared to a net loss of $2.5 million or $0.14 per share basic and diluted for the quarter ended September 30, 2007. Let me a gain mention it, that our net loss includes non-cash, stock-based compensation charges of $2.5 million in the third quarter, representing approximately $0.13 per share or 80% of the total losses for the period. As of September 30, 2008 we had approximately $19.6 million weighted average basic and diluted shares outstanding.

From the liquidity standpoint, as of the end of the third quarter, we had cash, cash equivalents, and marketable securities at $58.2 million, as well as $30.6 million available under our Silicon Valley Bank Secured Credit Facility. This gives us confidence; given all the uncertainty in the financial markets that we have the sufficient cash resources to meet our corporate objectives or being cash flow positive from operations in the back half of ‘09.

In closing, we are very pleased with our third quarter performance, given the time and nature of our cost savings business, our attractive grid operator and utility customer base, for financial strength and visibility, we are confident and although it navigates what many predict to be continued challenging, macro economic environment and achieve our objectives of being cash flow positive from operations during the second half of 2009, and profitable in 2010.

With that I’ll now turn the call back over to the operator; we will take your questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions]. We’ll go first to John Quealy with Canaccord Adams.

Mark Siegel

Good afternoon, this is Mark Siegel for John. Congratulations on a very strong quarter.

Tim Healy

Thank you, Mark.

Neal Isaacson

Thanks Mark.

Mark Siegel

So, first I was just wondering with regard to OpEx, saw a decent sequential up-tick in selling in marketing expenses. I’m wondering from your perspective is which is indicative of new sorts of run rate levels or its just reflective since seasonality here?

Tim Healy

Sure, Mark. Really what you see in the up-tick in that you saw in marketing as you might have stepped with an uptake in revenue in the third quarter, will be the commissions that we would pay to our C&I sales people. So, if you have a strong revenue quarter, you might expect to see an up-tick in the slowing market due to the commissions.

Mark Siegel

Okay, that helps. And then with regards to your comments around post quarters megawatt activity, can you provide any further color on, volume and pricing trends that you’re seeing in marketplace?

Tim Healy

Most specifically, yes, we have seen acceleration of the, of our sale force’s capabilities there are, sales forces productivity in this, the last 30 to 40 days since the quarter closed. What I think need to be kept in mind is that we’ve mentioned majority of our growth rate right now is in regions where the prices are known and fixed and determinable. And what I mean by that is we mentioned earlier in the call that we’ve already participated in the forward capacity market, forward capacity market in PJM and in New England, those prices are fixed, those prices are increasing, from the ‘06, ‘07, ‘08, ‘09 and even into part of ‘10, those prices are increasing. So, I think what we’re seeing really is the effect of commercial and industrial customers that are concentrating on energy cost saving solutions; they don’t have initial capital out ways. And we’re seeing great pickup in that sales phase, as we go after the summer months when, yeah, it’s always traditionally a month of slower sales for us in the third quarter. So, I think we’ll see in the fourth quarter pickup like we would expect.

Operator

And we’ll take our next question from Michael Horwitz with Stanford Group.

Michael Horwitz

Hi, gentlemen, nice quarter. Couple of questions and actually Tim, you just spurred a question when you just mentioned, better productivity out of your sales force. Could you tell us how many sales people you have right now and are you willing to talk about a higher quarter now that’s your sales force is becoming more productive?

Tim Healy

No, I mean, I think we’re -- stick with the 16 to 18 that we’ve always talked about. I think it probably comes a less meaningful statistic as we continue to provide more and more revenue guidance both on an annual basis as well as on quarterly basis, as Neal, alluded to. On of the things you have to keep in mind with the sales forces is that; over this last year they’ve spent an increasing amount of their time with renewal activity of existing customers that are part of their account. They’re also not selling other products and services to our C&I customer base, our energy efficiency solution, the cross selling of energy procurement services solutions, so that we can help our customer buy energy more cost effectively.

So, I think for those that are modeling the businesses, it’s probably still fair to model it accordingly. And in sums of the number of sales people that we have, as we look that’s really a question, Michael, about ‘09 and I guess I’d go back and I’d say, ‘07 and ‘08 we’ve always talked about being our investment here. Those are the years that we’re investing in our people or processes; we were greatly expanding the sales force.

Doubling it and then doubling that sales force again, and what we talked about earlier this year, and really saw that sales force leveling off and not because of any reductions in the market opportunities but simply because at some point in time we finally expect to have a better penetration of the geographies that we want and that are most strategic. Most of our growth in 2009, we expect to come from the existing regions that we’ve already operational and as we talked about. And so, one of the benefits of those investments that we’ve made in ‘07 and ‘08 positioned us to really reap those investments, take advantage of the sales and operations personal that we’ve positioned in those markets, such that we can achieve our 2009 plan as discussed.

Michael Horwitz

Sure, okay. So, that’s helpful. But, just sort of continue down that path, what we expect 2009 to have a similar megawatt addition as we have in the last couple of years?

Tim Healy

Let me --I think, keeping in mind the following, it was our goal at the beginning of the year to grow the sales force by approximately as we mentioned on prior calls, approximately one new salesperson per month, such that we would probably end the year somewhere between 65 and 70 sales people overall. Those sales people arguably if they’re good, if we detracted the right folks, which I think we have, we have outstanding teams we’ve talked about. We put them through the training; they become productive after a number of months. We should expect that might give us an opportunity at a little bit more next year, than we did this year. So, I guess I would say the expectation is that the dynamic of the business model should suggest that if we have a few more productive sales people throughout the year, it should lead you to understanding what our role operations are going to be next year.

Operator

And we’ll take our next question from Jeff Osborne with Thomas Weisel Partners.

Jeff Osborne

Hey, guys. I just wanted to take you brain a little bit on M&A which you thought the future held there in the space? And also just give any comments on, if you’re participating in the price space market, in the PJM market or any other territory?

Tim Healy

Yeah. Well, thanks for, thanks for being on the call and thanks for those questions. I guess starting with the M&A activity, I guess you look back in EnerNOC’s history, we have made five acquisitions in our history. We think that way to grow for us however has been primarily through organic growth. We have seen what we believe to be very good return on the investments that we make in our company’s organic growth activities, when we find strategic opportunities of course, we’re going to take a look at them. We have adequate cash resources to execute on our plan but our plan is to discontinue to be opportunistic, it’s not necessarily focused on any particular acquisition activities, we have made two within the last year, I guess year and a quarter now. But there is nothing specific that we need some acquisitions in order to make our plan. And, your second question if you go just remind me again I didn’t read at them?

Jeff Osborne

Capacity how do you think about that?

Tim Healy

How I think about what I’m sorry?

Jeff Osborne

Broadening out behind just the capacity market into the price based market, and the day ahead market do you see any involvement?

Tim Healy

Well, we focused primarily as most people know on providing a reliability based resources and so what you can think of is, it’s characterized primarily as non-voluntary resource it’s as we proven in the megawatts under management in our network have high value because of that feature among many others. So, we have focused a lot best on energy based or voluntary programs, and as a result I think we’ve been a little bit less susceptible in some cases and in other cases as we have susceptible to some of the changes that go on in energy prices and the volatility that exist in that market. I think our solutions are universal and up fit, when we see opportunities, strategic opportunities to help our customers participate in those energy markets, and we’re driven to do so. We will participate in those and hopefully that will be successful for us.

But again, most of our growth next year is focused on weather we identifiable, capacity obligations and capacity opportunities in some places. If you want to add some thing to that David.

David Brewster

This is David, I’ll add just that we are pretty encouraged and excited by the Federal Energy Regulatory Commission final rule that I talked about in which they basically orders ISOs and RTOs across the country to further integrate demand response and basically what that means is to go beyond just sort of the auto market, sort of emergency programs that have characterized the industry and fully integrate these resources not only in the capacity markets but into energy markets and ancillary services. So, we were excited about that the ancillary services market I think are particularly encouraging where the same technology that we have and many of the same customers that we have can participate in these more frequent shorter term ancillary services opportunities that basically another revenue stream on top of our capacity revenue.

Operator

We will take our next question from Michael Carboy with Signal Hill.

Michael Carboy

Good afternoon ladies and gentlemen. Let me just follow up on that point David, what do you see as the FERC timetable for actually having firm rules put in place these facilities connect on?

David Brewster

The ranges across the Board essentially each ISO and each RTO is in different stages of their market development and so FERC has sort of given the ISO and RTOs an overall mandate and then it’s up to those individuals ISOs and RTOs to sort of implement and come back to FERC with an implementation strategy. And so, we see sort of different phases depending on where the market is. But, the thing is like New York is little bit further along in terms of creating an ancillary services market for demand response. [MYSO] is a market where we see FERC paying lot of attention in terms of getting more penetration into the demand response market. At the PJM and New England are also have the ancillary services opportunities already in place and I think PJM is most of that in terms of synchronizing those program.

Tim Healy

And when those sort of probably accompany a little longer miracle that we were, I think the first company in PJM to have a demand response resource participate in PJM’s ancillary services market. So, there is evidence that this is the right way to go, there is evidence that as David said the system operators are going to take different amounts of time to figure this out. But, the over arching mandate now from FERC is that this should afford demand response source increased opportunities to bring those multiple hopefully recurring revenue streams as well.

Michael Carboy

Let me try and comment it in a different way. FERC has issued this November, what amount of time do the ISOs and RTOs have to submit a proposal and then how long FERC take to evaluate and convert into a formal rule?

David Brewster

So it’s more then the note that came out earlier this year, the notice of proposal we are making, this is actually the final rule and again it’s dependent upon the existing situation in those ISOs and RTOs, we can’t give you a firm date because FERC is not mandating a firm date, what FERC mandating, they do this type of work to sue their processes and stakeholder groups and create market rules that allow demand response further penetration. So, there is not a firm sort of deadline in that regard.

Neal Isaacson

Okay. So, if you are looking for some additional color on that, one of the things that EnerNOC did in 2007 and again in first part of 2008 was we increased our regulatory affairs personnel and the very support that we have in various parts of the countries. So, that David talks about that stakeholder process, one other things that we try to do is to be an active participant with our directly sources and our outsource resources to make sure that we can try to be helpful in those markets, to bring those processes as quickly as we can. But, the phase of change is one that needs to take its time and we’ll see those opportunities hopefully develop over the long term because of the tailwinds from FERC in this case and then I think the supporting tailwinds that state by state we’re starting to see as well that David talked about in this call.

Michael Carboy

Right and Neal can I ask you to elaborate little bit on the pick up and unbilled receivables on the balance sheet and also provide a little bit of clarifying commentary on the remark in the press release about expense levels trending inline with recent operating guidance. Sort of what that means?

Neal Isaacson

Sure. So, the unbilled revenues that we’re taking about, it’s important to again understand where that comes from, and its comes from the way the program rules work within PJM, because we’ve been ruled so many megawatts in PJM we got it over 400 additional megawatts year-over-year in the PJM marketplace. So, that we have over 500 megawatts under management there. Because the program runs, well the program here runs for 12 months but the delivery period is for four months June through September basically the revenue that we generate from October of 2008 through May of 2009, we have recognized that revenue in Q3 but it’s classified in the balance sheet as unbilled revenue. Does that make sense?

Michael Carboy

On commentary front?

Tim Healy

Say again?

Michael Carboy

And then on the expense comment?

Neal Isaacson

Right. So, the expense comment, I mean we expect to come in right within our [APEX] guidance.

Michael Carboy

SO, you’re not changing the hold APEX guidance?

Neal Isaacson

I’m sorry.

Michael Carboy

You’re not changing the old APEX guidance then?

Neal Isaacson

No, we are not. We expect to come in from the upper end of our range but within our range.

Michael Carboy

Terrific, thank you.

Operator

We will take our next question from Richard Baxter with Ardour Capital.

Richard Baxter

Good evening. I may have missed it. What was the revenue for the energy management solutions in Q3 and what do you feel that is major drivers in this going forward through ‘09?

Tim Healy

The revenue for the energy management first for the quarter was $2 million and we are seeing significant revenues coming from our energy procurement solutions and we are starting to generate revenues from our energy efficiency programs as well.

Neal Isaacson

And Richard, think about that. Some of things to keep in mind again go back to some of the comments that David made, the reason what we decided to invest in ‘07 and again throughout ‘08 in the energy efficiency part of our business was in case we felt that there was a likelihood of increased spending by states in utilities as well as perhaps by commercial and industrial customers in energy efficiency and I think David listed a number of the positive trends that we have seen as states continue to turn to that resource to meet some of the things that may have previously been met through supply side resources are other means.

Richard Baxter

Okay. Thank you.

Operator

And we’ll go next to [Brian Sterling] with JMP Securities.

Brian Sterling

Hi, guys congratulations on a good quarter. I apologize, I may have missed it but I believe in Q2 period you broke down the PJM revenues from the megawatts enrolled in the ELRP, have you done so for the Q3 period?

Tim Healy

Well, we’ve not actually done so in the Q3 period again its important to understand how the program works, not really the main driver here is the fact that we’ve added so many megawatts in this period again as I mentioned on the last answer I provided, we added over 400 megawatts of new capacity in the programs. It’s a 12 month program but roughly four month delivery period of June to September.

David Brewster

And another thing you can keep in mind, you know, if you go back to that Q2, what you saw there was probably one fourth you know, as you look at that number you saw that one fourth of the effect and so now you are seeing the other three fourth of that effect because as Neal was talking about it, it’s a four month delivery period one of those month with the delivery period in Q2 we saw one fourth of these factored it there you are not seeing the other three fourth of the effect during the Q3 period of time. So, hopefully that give you some help and puts it a little bit into a context and give you some relative numbers to work with them.

Neal Isaacson

And substantially all of our megawatts in the PJM market are in the capacity base program, the ELRP program which is really our focus there, to focus some of the other market opportunities. But, because we recognize revenue, consistently in our programs there is not a breakdown the specifics of each program.

Brian Sterling

Okay. And then just one may be housekeeping, on the 1,760 megawatts have you broken out how many your earning revenue as of the Q3 period?

Neal Isaacson

No we haven’t, again as Neal mentioned, you know, we really believe that the way to get your arms around what the company is achieving is to look at the performance that we’ve achieved obviously year-to-date but also we’ve try to be helpful in giving you annual revenue guidance, and giving quarterly revenue guidance so that we can essentially take all of the different variables out of that as best we can and give you a better sense of what you are expecting going forward.

Brian Sterling

Okay, very good. Thank you guys.

Operator

And we’ll take our next question from Jonathan Hoopes with ThinkEquity.

Jonathan Hoopes

Hi, (inaudible) on behalf of Jonathan Hooks. Congratulations on the strong quarter. And I have two questions, one of them is that, have you worked on operating performance towards profitability, would you sacrifice top line growth to get breakeven or can you do both?

Tim Healy

Well, thank you for that question. Thank you for being on the call I think that’s a fantastic question. We believe that we can do both as long as we do both prudently and what I mean by that is you we are operating on the same plan that we’ve had for quite some time because we do have you know long-term contract in many cases a lot of visibility into what next year’s revenues could be for us, visibility into what part of 2010 looks like for us. And so, that allows us to manage the other part of the business, the operating part of the business effectively. We’ve talked for a while now about you know, very disciplined growth plan disciplined growth plan that as it continuing to grow in 2009 continuing to grow in 2010 but you know it took as you saw making some strategic investments in 2007 and again in 2008 in order to put us there. We now, I think we have alluded to it, so let’s talk about it more directly, we believe that the majority of our growth in 2009 is expected to come from the areas of the country from the regions to grid operators and you know from the lots of utilities they were already working with as we continue to fulfill the obligations as well as the opportunities that exist in some of these existing markets where our resources already are.

We think in regard to that growth and you know that really doesn’t become a question to us of growth that some sort of dramatic cost I guess I would say its more about disciplined growth going after the installed base in the recurring revenues that are enabling us to see the growth is probably projected for us next year.

Jonathan Hoopes

Thank you. And also I have another question, it’s -- just wanted to know about the effect of the economy on your interaction with commercial and industrial customers and also what effect the economic slowdown has on the utilities?

Tim Healy

That’s also a very good question and I think the first thing to keep in mind on that is the type of business that we operate in and who we are and what we do and let’s break it out first and talk about grid operators and utilities and then we will talk about the commercial and industrial customers in our network and look at each one accordingly. The utilities, it is our belief that in some of the conversations that we have had with our pipeline and conversations that we have had with others in the utility industry, suggest to them that one of the appeals of our business is the flexibility as well as the capital efficiency of a demand response resource. All I mean by that is that if the utilities are thinking about trying to cut back on some of its capital spending. It is sort of an all or nothing type of equation for them at times. You can’t build a third of a power plant per se whereas we can come in and offer a more flexible or demand response resource at a certain size and in a certain timeframe usually a fairly quick timeframe, utilities don’t really have that luxury in many cases of scaling back and reducing the amount of resources that they put into their network according to their long term planning. So we think, our resources are going to be somewhat attractive in that case and we think we are going to try to leverage that attractiveness in our continued conversation with utilities.

I guess, that also keep in mind as we talked about on the call that we have already been awarded certain bids in the grid operator regions in which we operate and those bids means that we now have an opportunity to grow in that, there is no longer a factor associated with the lower growth in the region is no longer a factor, those were plans that were made prior to us bidding into those four capacity markets and so we have got the opportunity to grow in those regions.

Now if we look at the commercial and industrial customers, commercial and industrial customers probably one of the first appeals of our business is the fact that we are not asking them to come and spend money with EnerNOC for our demand response business, we are asking them to instead become a part of our network and if you reduce your electricity demand at peak, we will pay you to do that. For our energy procurement services business, we are also not asking our customers for the most part to pay us. We are asking for them to allow us to help them reduce their energy costs and by reducing their energy costs, we hope that we can find some immediate cost savings for them, often times that cost savings is paid for by the competitive suppliers who are counting on us to bring them new loads for their competitive supply offerings. So, I think it is a fairly attractive business model but we have to operate prudently and we don’t know how long a protraction in the economic climate will be. We know that right now it feels good relative to especially the last couple of months seeing the pickup in our sales pace as we have seen that we believe bodes well for continued growth in the future.

Operator

And we will take our final question from Benjamin with Pacific Crest Securities.

Benjamin

Hi guys, thanks for taking my call.

Tim Healy

Hi Ben.

Benjamin

As you mentioned here, sales forces is working on some customer contract renewal efforts. Does that mean you are seeing a little churn in your customer base? Or can you talk about your success rate in signing end customers backup when contracts expire?

Tim Healy

We have definitely prided ourselves on our renewal rates. I don’t think that it hasn’t because of strategic reasons, because of competitive reasons. We haven’t given out our renewal rates in the past and that wasn’t something that we wanted to go into on this call. I think what is important is that we have been able to able continue our steady growth of additional megawatts under management in our network. That megawatts under management number is the net number, that nets out any renewals that didn’t happen because the customer didn’t want to renew and any renewals that didn’t happen because we didn’t want to renew that customer. There are times when we choose not to continue to work with the customer for one reason or another. But we had good steady growth, the 16 to 18 megawatts for sales person number, is the number that is inclusive of the work that they need to do selling more solutions, a bigger portfolio of solutions than we’ve had in the past. And it’s also a number that is inclusive of having to go and we opt for renegotiate and renew our existing base of customers. I think you’ve seen the base grow, you’ve seen the megawatts and their management grow. And we feel really good about our performance in that regard.

Benjamin

Okay. And looking at the PJM capacity auction results for next year, you can see overall our demand response participation pretty much they’re buying in terms of the megawatts. I know, you guys don’t give the number of megawatts you want. But, can you tell us if you expect to grow inline with that market slower or faster than the overall PJM capacity market, for demand response in 2009?

Tim Healy

I wish, we could, but for strategic reasons, we don’t think that’s appropriate for us to do at this point.

Operator

And that does conclude our question and answer session. At this time I’d like to turn the call back over to you Mr. Healy for concluding remarks.

Tim Healy

Okay, thank you very much. And thank you everyone again for joining us this afternoon to discuss our Q3 financial results. As we mentioned, our business continues its healthy and disciplined growth. We’re really proud of that fact, we were able to achieve record revenue and increased operational leverage in the business, as you heard Neal described. We like the fact that we feel very fortunate to have such a strong balance sheet and the increased visibility in our business that we described today. And importantly, we continue to be laser focused on our past to profitability. In Q3, again, it’s reflective of our ability to execute against each milestone that we’re setting and we’re telling you about along the way. The tailwinds for demand response and energy management market remains strong. And we really do look forward to future calls to discuss the progress of our business. And we thank you again. Good night everyone.

Operator

That does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

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Source: EnerNOC Inc. Q3 2008 Earnings Call Transcript
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