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EnerNOC, Inc. (NASDAQ:ENOC)

Q4 2012 Earnings Call

February 13, 2013, 05:00 pm ET

Executives

Sarah McAuley - Director, Marketing Communications & Product Marketing

Tim Healy - Chairman & CEO

David Brewster - President & Co-Founder

Kevin J. Bligh - Chief Accounting Officer

Analysts

Patrick Jobin - Credit Suisse

Mark Strouse - JPMorgan

Pavel Molchanov - Raymond James

John Quealy - Canaccord

Carter Driscoll - Ascendiant Capital Management

Andrew Weisel - Macquarie Capital

Operator

Good day everyone and welcome to the EnerNOC Fourth Quarter and Year-End 2012 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sarah McAuley, Director of Communications at EnerNOC. Please go ahead, Sarah.

Sarah McAuley

Today’s presentation contains estimates and other statements that are forward-looking under the Private Securities Litigation Reform Act of 1995 and other federal securities laws, including but not limited to management’s future expectations, beliefs, intentions, goals, strategies, plans, or prospects. These forward-looking statements include, without limitation, statements relating to the EnerNOC’s future financial performance, the global market opportunity for EnerNOC’s energy management applications, services and products, and the future growth and success of EnerNOC’s energy management applications, services and products in general. These forward-looking statements are subject to risks and uncertainties, and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information concerning these factors is contained in EnerNOC’s filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q available at www.sec.gov. The forward-looking statements included in this call represent the company’s views on February 13, 2013. EnerNOC disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will refer to non-GAAP financial measures, including non-GAAP net loss per share, non-GAAP earnings per share, free cash flow and adjusted EBITDA. These financial measures are non-GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. The definitions of and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure is available in the press release announcing our third quarter financial results. This press release is available on the Investors section of our website at www.enernoc.com.

I will now turn the call over to Tim Healy.

Tim Healy

Thank you, Sarah, and thank you to everyone for joining us. With 2012 officially in the books, I’m excited to take this opportunity to reflect on our accomplishments over the past year, but more importantly, to convey my excitement about the years ahead. 2011 and 2012 were not without their challenges: the industry saw record low pricing in some of the biggest demand response markets and we faced a sometimes -difficult regulatory climate that created uncertainty for our investors.

But even with that backdrop, EnerNOC posted win after win: We achieved significant growth in the Australian and New Zealand markets, We effectively managed our PJM portfolio to deliver strong results under new market rules, We successfully grew our energy efficiency business, We signed multiple new utility contracts, streamed billions of data points into our cloudbased energy management platform, released dozens of new features in our software including a white -label offering for our utility customers, enhancements to our automatic fault detection engine, and support for new demand response products in international markets, and We delivered more than $115 million in customer savings… All while simultaneously implementing rigorous new processes across the organization to drive efficiencies and enhance our profitability.

I would be remiss if I didn’t take this opportunity at the top of the call to publicly thank the team that made it all happen. I have the privilege of working with the industry’s finest group of bright, relentless and good people. EnerNOC’s dedicated employees have done a great job executing such that we outperformed our initial expectations for 2012 and have set EnerNOC up for even greater success in 2013 and beyond.

So let me spend just a few minutes talking about what you can expect from EnerNOC moving forward. First, and most encouragingly, prices in PJM will return to levels that existed prior to the trough years of 2011 and 2012, which means that all of the work we’ve done to grow our customer asset base in that region will deliver significantly larger top and bottom line results starting this year. In fact, average pricing in PJM increases 79% between the low of 2012 and 2015, which is as far out as we have visibility into at this time. That significant pricing uplift coupled with the fact that we expect to recognize more almost $50 million in revenue in 2013 from Australia alone, gives us great confidence and visibility into our demand response revenue projections.

In other markets, utilities have signed second and third rounds of renewal and expansion contracts with us, a testimony to our ability to deliver reliably year after year. Most recently, we announced expansion contracts with PG&E and SCE in California, but in 2012, we also inked renewals with Salt River project in Arizona, CenterPoint, and AEP in Texas. Finally, we expanded our work with several other utilities for demand response program evaluations and planning assessments.

Our renewal activity isn’t limited to demand response. We have also extended four utility -funded energy efficiency programs in California through 2014. These are multi-million dollar, multi-year contracts, one of which is our largest turnkey industrial EE utility contract.

In 2013, we will also continue to make significant investments in our technology platform, which allows us to enhance our leadership in the rapidly expanding “data-driven energy management” ecosystem. Our technology strategy is designed to make EnerNOC the cloud-based energy data system of record for commercial, institutional, and industrial enterprises – The same way, for example, that Salesforce and Workday are the customer relationship and human resources system of records, respectively, for many companies.

At the same time, we’re rolling out robust new features for the utility enterprise that allow them to white -label our technology and deliver cloud-based services directly to their customers. These two complementary efforts are designed to ensure that EnerNOC will continue to penetrate deeper into the market and achieve our vision of changing the way the world uses energy.

We firmly believe that our ability to collect, manage, and extract value from over one billion energy data points that we collect each month from our customers’ facilities puts us in a unique position to realize that vision. Coupling our team’s passion and deep energy expertise with our cloud-based energy management applications give us an advantage in the market that few can rival because it pairs our ability to collect and analyze huge amounts of data with the energy expertise needed to drive tangible value for our customers.

And, we’re working hard to spur innovation even outside the walls of the EnerNOC offices. by publishing some of our source code to our new engineering microsite, open.enernoc.com, we are fostering developer enthusiasm and creating a place where innovators can come together to create new ways to deliver value. We are also expanding our technology partner network. We’re working with numerous companies, including our recently announced partnership with Numenta, to apply the latest developments in data analysis, predictive analytics, machine learning, and data visualization, to EnerNOC’s big data application platform. These partnerships provide exciting new ways for EnerNOC to productize and monetize our data in new and interesting ways. For example, one of the projects we are working on with Numenta is a solution that leverages Numenta’s predictive analytics engine to better monetize our fast -response DR assets. But that’s really just the beginning of what’s possible.

With the advancement of our technology, our conviction is stronger than ever that we have a unique opportunity to provide our comprehensive suite of energy management applications to our existing demand response customer base. to better quantify this opportunity, we are introducing a new operating metric, which is our Peak Load Under Management, or PLUM.

PLUM represents the peak demand for electricity across our DemandSMART customer base. As of the end of Q4, the peak load for our demand response customer base, or PLUM, was between 24,000 and 27,000 megawatts. between 30 and 35 percent of that PLUM is curtailable. We believe that PLUM and PLUM % curtailable are more informative metrics than megawatts Under Management because they give a sense of all of the customer load data that we are capturing in our database, as well as the percentage of that load that we can proactively manage and monetize in various demand response initiatives for these customers.

We believe that another benefit of PLUM is that it allows investors to better appreciate the attractive energy management market opportunity that exists in EnerNOC’s demand response customer base. In 2013, we expect to increase our PLUM by approximately 4 GW, and expect our curtailable percentage range to remain at 30-35%.

Finally, I like the team we have in place to start 2013 and am very excited about some prospects we expect to welcome to our mix shortly. In 2012, we attracted a number of new technology industry veterans such as Gerry Wilson as CIO and Pat O’Neill as VP of Human Resources, as well as a number of talented product development managers and experienced software developers. We’re excited to soon welcome a new VP of Product Management, who will be joining us shortly from one of the area’s leading software companies. These technology industry hires, combined with our existing team of innovators, have put us in a great position to continue our growth as a premiere software company.

Shortly, we also expect to name our new CFO as we are entering into the final round of discussions with several finalist candidates, all of whom demonstrate the right skills, experience, and passion to lead our finance organization. The team we’ve assembled and the mission we share makes coming to work just as much fun today as it was the day I started this with David, just 12 years ago.

In summary, we have a lot of reasons to be excited about 2013. Our products are achieving unprecedented traction in the market, and we forecast 30-45% revenue growth this year. Our market opportunity is more diverse today than it has been at any time in EnerNOC’s history, with strong demand both here in North America and abroad.

As our technology advances, our ability to meet different types of energy challenges for the utility enterprise and the commercial enterprise is also expanding. And most importantly, our revenue growth, important technology investments, and market expansion initiatives are happening in lock step with significantly increased profitability for EnerNOC. Specifically, we expect our EPS to grow from a loss of 84 cents per share in 2012 to a profit of at least 60 cents per share in 2013.

Indeed, we are lookingforward to 2013 and the next several years as we capitalize on our strong position in an exciting market for innovative energy management solutions.

With that, I’d like to turn it over to David Brewster who will address in more detail some specific developments and market opportunities that we see in 2013. David?

David Brewster

Thanks Tim.

As you just heard, 2012 ended on some notable high notes and 2013 is off to an even stronger start. I want to touch on a couple of regulatory matters first because as you know the regulatory landscape continues to evolve and be important for our industry.

First, with the release of the final RICE NESHAPS rules that will permit the continued use of existing back up generators in emergency demand response programs, the environmental protection agency preserved our existing market opportunity and put to rest the uncertainty that surrounded the issue. We applaud the EPA for its thoughtful, well-reasoned decision: one that reflects our nation’s economic, environmental, and national security interests. Demand response continues be one of our cleanest, most flexible, most cost-efficient solutions for preserving grid reliability.

Second, on our Q3 2012 earnings call, we announced that we were working collaboratively with FERC toward an expeditious settlement agreement to fully resolve two FERC investigations that were ongoing at that time. I am very pleased to report that we finalized this settlement agreement with FERC in December 2012 and, as expected, this settlement did not have any impact on our previously -issued financial guidance.

Now, let me turn from the regulatory front to some exciting activities on the market development front.

Although we have frequently spoken to you all about the impact of Western Australia on EnerNOC’s growth, I’m equally excited to share a few more details around our recently announced deal with ERM Power, which is notable for several reasons:

It substantially increases our market opportunity in Eastern Australia – historically the bulk of our business has been in the western part of the country. Eastern Australia, known as the National Energy Market or NEM, is approximately 10 times the size of Western Australia in terms of electricity demand.

This is our first major contract with a competitive electricity retailer. As a retail electricity provider in the NEM, ERM is uniquely exposed to highly volatile electricity prices because every megawatt -hour in the NEM is traded through the spot market. Prices can get as high as $13,000 per megawatt -hour, compared to the average rate of roughly $50 per megawatt -hour, So the ability to manage customer demand during high priced hours in the wholesale market can provide significant financial benefits to energy retailers like ERM.

It represents our first major contract to provide a white -labeled version of our technology platform, instead of our typical turn-key demand response resource. What this means is that we will provide our cloud -based energy management platform to dispatch and manage assets. We are confident that this sort of “powered by EnerNOC” offering will be a major growth area for our utility solutions group in the coming months and years, particularly for retailers that have existing supply -related customer relationships.

We also signed a companion contract with ERM that will enable them to offer EfficiencySMART insight portfolio to their C&I customers. We believe that integrated demand -side management offerings, like this, in which customers can leverage the same platform to maximize participation in both demand response and energy efficiency is compelling and will become more and more common moving forward.

So, building off of Tim’s comments earlier, you can see how our investment in technology is directly helping EnerNOC separate itself from the pack and create new opportunities, in new geographies, with new customer segments.

Related to penetration of new market segments, as you will recall, just over two years ago we acquired a company called M2M Communications based in Boise, Idaho. M2M was a leader in the field of automated load control, particularly for agricultural applications such as irrigation systems.

We recently commenced full production on our fifth generation irrigation load control and monitoring device, which we call the M2. This device combines the best of M2M’s motor control functionality with EnerNOC’s communication technology to deliver robust agricultural demand response capabilities.

We are excited about the market for demand response in the agricultural sector generally and specifically irrigation load control. Nationally, farms spend more than $1.5 billion on electricity to power irrigation, representing an estimated 7 GW of peak demand. Many utilities have developed irrigation -specific demand response programs, with irrigators providing significant value to the grid through the flexibility in their operations while earning important financial incentives. We are involved in a number of these programs, and we expect to announce growth in this business in the coming months. Specifically, we are excited about a new contract for approximately 185 MW of fully automated irrigation load control for a leading utility in the Western U.S., currently pending regulatory approval. If approved, this will represent our largest contract to date in the irrigation load control space, and a capacity-based delivery model aligned with our other utility bilateral demand response contracts for C&I capacity.

With that, I’ll turn the call over to Kevin Bligh, who will provide additional color on our Q4 and full year 2012 financial results, as well as our outlook for the quarter and year ahead.

Kevin J. Bligh

Thank you, David and good afternoon everyone. I’d like to provide some additional details on our Q4 and full -year 2012 financial performance as well as outline our Q1 and full -year 2013 guidance. We achieved full -year 2012 revenues of 278 million dollars, GAAP net loss of 84 cents and non-GAAP net loss of 5 cents per basic and diluted share. For Q4, we achieved revenues of 42.3 million dollars, GAAP net loss of 96 cents, and non-GAAP net loss of 76 cents per basic and diluted share.

We saw a year-over-year revenue increase in Q4, primarily due to growth in our non-PJM revenues. The increase in revenue was primarily driven by new demand response programs, including the PJM Act 129 programs and a demand response program in Alberta Canada, as well as yearoveryear growth in our New Zealand and Eastern Australia markets, and continued growth across our energy efficiency portfolio.

The decrease in our full year 2012 revenue as compared to 2011 was primarily due to less favorable pricing and a decrease in our megawatt delivery obligations in the PJM and ISO New England programs. This was partially offset by an increase in enrolled megawatts and pricing in our Western Australia program and certain of our Texas programs and continued megawatt growth and improved performance across other regions.

Full year 2012 gross profit was 123.4 million dollars, essentially unchanged from 2011 gross profit. Our gross margin increased for the full year 2012 compared to 2011 due to improved management of our portfolio of demand response capacity, including the adjustment of our zonal capacity obligations through our participation in PJM incremental auctions and lower costs associated with our C&I contracts.

As in the past, our gross margin should follow a similar seasonal pattern to our revenues and we expect that Q3 will be our highest gross margin period. Remember that PJM and our demand response business in Western Australia typically contribute negative gross margins outside of Q3 because cost of revenues from depreciation of installation costs and related operational infrastructure is booked ratably in all quarters while the vast majority of revenues are recognized in Q3.

Operating expenses were 38.1 million dollars for Q4 and 143.8 million dollars for the full year 2012. We ended the year with 685 full -time employees, a net increase of 25 compared to Q3, and a net increase of 86 compared to year end 2011. Given our long -term vision and the size of the opportunities we target, we expect to continue to invest in sales, operations, and engineering talent, and our future guidance includes this expected increase in operating expenses. However, we expect that operating expenses as a percentage of revenues to decrease as we continue to realize improvements in our operating leverage and overall cost management.

Our income tax provision was 1.7 million dollars for Q4 and 1.8 million dollars for the full year 2012. The 2012 income tax provision was primarily related to non-cash income taxes that result from tax deductions from certain of our previous acquisitions. We use additional non-GAAP measures -- adjusted EBITDA and free cash flow -- to monitor growth trends in our business. For full year 2012, our adjusted EBITDA was 18.4 million dollars. capital expenditures were 15.9 million dollars, and free cash flow was 15.2 million dollars. So, the business continued to generate cash internally, even in a challenging year. We ended the year with 115 million dollars in cash and cash equivalents, an increase of 27.7 million dollars from where we ended 2011. This increase was driven primarily by cash from operating activities.

Now let me turn to guidance, starting with some key assumptions. Given the continued volatility in foreign exchange rates, our guidance assumes an Australia dollar pegged at 1.05 U.S. dollars and a Canadian dollar pegged at 1U.S. dollar. Our guidance does not take into account the potential impact of any future acquisitions, the effect of any potential public offering or other financing arrangement that could impact the Company’s EPS outlook.

With that set of assumptions, we expect first-quarter revenues of between 28 and 34 million dollars. We expect a Q1 GAAP net loss of 1 dollar and 5 cents to 1 dollar and 20 cents per basic and diluted share. These are based on basic and diluted shares weighted average shares outstanding of 27.3 million.

We expect 2013 to be a strong growth year overall, particularly with the higher pricing in PJM. For the full year we are reiterating our previous revenue guidance and raising our adjusted EBITDA and EPS guidance. We expect full year revenues to be in the range of 360 to 400 million dollars. We expect GAAP net income for 2013 to be in the range of 60 to 85 cents per diluted share. These estimates are based on diluted weighted average shares outstanding of 29 million. Full year adjusted EBITDA is expected to be between 62 and 77 million dollars. We expect stock -based compensation expense to be between 13 and 15 million dollars, amortization of intangibles to be approximately 7 million dollars, depreciation expense to be between 21 and 24 million dollars, and interest and other expense, net, to be between 0.5 and 1.5 million dollars. The estimated tax provision is expected to be between 3 and 5 million dollars.

We expect gross margin for the year to be greater than in 2012, driven by delivered performance and improved portfolio management of our demand response asset base and lower costs associated with C&I contracts. We expect gross margins to have similar seasonality as revenue, with the highest margins in Q3. With respect to taxes, we expect to offset a substantial portion of our forecasted income in 2013 with previously reserved deferred tax assets, which will result in a low effective tax rate for the year and is reflected in the overall forecasted tax provision above. However, as our profitability increases we will continue to reassess our need for a complete valuation allowance against our deferred tax assets. If we conclude, based on sustained levels of profit in 2013, that a portion of our deferred tax assets are realizable we will reverse a portion of our valuation allowance which may result in an overall income tax benefit for 2013 and a more normalized effective tax rate in future years.  There is no reversal of a portion of our valuation allowance included in the guidance provided above. The reversal of the valuation allowance will not affect our cash tax payments. We will continue to update our tax expectations as the year goes on.

Let me now turn the call back to Tim Healy.

Tim Healy

Thanks Kevin. And thank you everyone. To wrap up, we experienced some headwinds in 2011 and 2012, particularly in PJM. But we were able to generate strong free cash flow, develop new regions and product offerings while investing in our technology platform, bolstering our regulatory compliance function, and sharpening our focus on profitability.

In summary, for 2013, we expect growth from PJM megawatts and pricing, growth in most other demand response markets and continued growth related to our energy efficiency applications. Our balance sheet is strong with $115M of cash and equivalents. We have a demand response platform of almost 14,000 C&I sites, the industry's leading brand and technology, and a great team, leaving us strategically well -positioned to take advantage of known positive trends in the market in future years.

So we will now open it up to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Patrick Jobin from Credit Suisse. Your line is open.

Patrick Jobin - Credit Suisse

So first question just on the efficiency business; can you talk a little bit more about the monetization potential. Am I correct assuming if we use like the new plum metric is there a way to see how much of that is represented in efficiency or how should we see that number of sights penetration etcetera proceed in ‘13? Then I have a quick follow up. Thanks.

Tim Healy

As you just were able to tell the plum metric is a metric that gives folks (inaudible) our demand response portfolio and the energy management opportunity that exist just in that response portfolio, and there are some customers that we are not doing demand response for, we are actually serving with our energy efficiency applications. In today's release although I didn't talk about it on the call, in today's release we did note that we now have 2100 sites that have our EfficiencySMART inside deployments, 600 of those were added in 2012 over 600 were added in 2012.

A portion of those they were added the portion of those 2100, our customers that we are serving for demand response that’s a key part of our strategy, some of those 2100 sites are ones that we are not serving for demand response. But I think what we do want to continue to make sure people recognize and understand is that there is a larger opportunity to leverage our demand response asset base that continues to grow and serve that asset based with other products and services and that's part of the reason that we introduce the plum metric.

The other element of it that I think is important as it relates back to the technology piece of the equation that we are making sure that people have understanding of and that is we are streaming enormous amount of data into our network operation center as a result of the activity that we engage in for our customers for demand response primarily.

Over a 1 billion data points a months it’s close to 1.3 billion or 1.4 billion data points per months that’s flowing into our network operations center. And what we've seen develop over the past three to six, nine months is that there is an ecosystem developing around this big data opportunity in energy and so introducing the PLUM statistic was also to give folks a sense of just how much information is out there for us to monetize, to leverage and to use within that ecosystem as we are starting to see other applications for this energy data opportunity. I know you had a follow-up question; I am not sure if my answer addressed what you are asking as it relates to PLUM, but certainly if you have some more questions on that I'll be happy to try.

Patrick Jobin - Credit Suisse

The PLUM metric is perfect and I'm excited to now have that visibility. The second question, it’s somewhat unrelated, but if you look at or something that comes up pretty frequently is incremental auction participation; I mean given your resources are more nimble and can go in and out of markets faster than a traditional supply side resource. Is there any way for you to give us any color on what impact that might have had in the year or in your outlook or anyway that we should think about that?

Tim Healy

And again the impact of going in and out meaning what again Patrick?

Patrick Jobin - Credit Suisse

Incremental auction participation in PJM, part of the phase-in rules as part of the changes that transpired and yeah just trying to understand, if it is a benefit, how much of a benefit, etcetera? Thanks.

Tim Healy

Yeah, so let me touch on that, first and foremost incremental auctions have been a part of the PJM marketplace and frankly other competitive wholesale markets for a number of years. Its not something that’s any new news to the EnerNOC business model to the demand response business model over the past several years.

The only thing that's really new in the incremental auction story is the fact that as we alluded to and as we touched on in our comments today, there was a measurement and verification change that occurred a year ago in PJM. And PJM determined that it would not be fair to participants to be negatively impacted by that rule and they would be allowed to right size their portfolio through the use of the incremental auctions and for the next three delivery years you would not suffer any negative financial consequences if the incremental auction pricing went in the wrong direction.

So that mechanism was a mechanism that PJM put in place in order to accommodate some of the changes in a way portfolios needed to be managed by certain demand response providers and so we were one of, I believe other demand response providers that has used that incremental auction in order to right size our portfolio in order to make sure that we weren't stuck delivering megawatts that we had expected to deliver under an original set of M&V rules that might be more difficult for us to deliver under new M&V rules.

In our particular case, well, we don't break down the financial data for a number of reasons, you know, what we can tell you is that the capacity that we expect to deliver in PJM is growing every year between 2012 and 2015, which again is as far out in the future as we have been allowed to take positions in the PJM market.

The other key component that I think is important to note and it gets back to the PLUM statistics is in the business of serving customers, we don't like to have to trade out of our positions in response to rule changes, that's not our business, that's not what we are trying to do; what we are trying to do is bring customers into our networks so that we can manage their energy management activities for them. That’s an important part of what we do business -- what we try to do and what we intend to do business for these customers on the future.

Trading out of these positions, limits our opportunity to serve customers with a whole suite of energy management applications that we think have a very high lifetime value to EnerNOC and to the bottomline profitability of this business. So we don’t see the incremental auction activity as being anything other than a tool that has been part of the portfolio management activity for us; it was part of a portfolio management activity in ’12, it continues to be part of the portfolio of management activity in ‘13. It picked up slightly in 2012 and ‘13 because of the M&V rules, but I don’t see it as being anything that is of some nature that changes the fundamental aspect of what EnerNOC is delivering to the marketplace.

Operator

Thank you. Our next question comes from Paul Coster of JPMorgan. Your line is open.

Mark Strouse - JPMorgan

Hi. It's actually Mark Strouse on for Paul. So you guys have had some pretty solid contracts announcements since the last call and I am just a little curious why the revenue guidance was just reiterated; I mean, were those deals already baked in the guidance or is they kind of, you know it’s going to take some time to build out those megawatts and it's more of a benefit to back after 2013, 2014 kind of thing?

Tim Healy

I think you hit on it right there. It’s more of a benefit to the back half of ‘13 and ‘14 and beyond. These are contracts that are multi-year agreements. A lot of the work, as you know, goes in upfront to enabling the megawatts and registering the capacity being ready for, a lot of times being ready for particular delivery date, may be a summer month, may be some period in the future. So I think these are exciting to us because they continue to represent good growth, continued traction in the marketplace and they increase the contracted backlog that we have which is an important metric that helps us to look at our growth, not just in 2013, but in many years and into the future as well.

Mark Strouse - JPMorgan

Perfect, makes sense. Okay, and then just lastly a quick modeling question, can you just remind us how the PJM [rev’s] going to be this year, is it all in 3Q or is there one month in the second quarter?

Tim Healy

It will be as it was in 2012, again, it will be all in the third quarter at least for the capacity revenue which is the vast, the lion share of the money that we earned in the PJM marketplace so that will be recognized in the third quarter; all four months.

Operator

Thank you. Our next question comes from Pavel Molchanov of Raymond James. Your line is open.

Pavel Molchanov - Raymond James

Can I go back to the EPA ruling from January, again the prior question was, no increase in revenue guidance. What was there anything in that ruling that led you to raise expectations for any financial metrics either this year or next?

David Brewster

Sure. I will jump in, this is David. We gave guidance in the last call, and we articulated that and encapsulated the full range of outcomes from EPA. Had EPA not made such a wise decision here, it would have required retrofitting some units which would have required some diesel oxidation catalyst and potential some other upgrade equipment which would add cost, it wouldn’t have change the revenue necessarily but it wouldn’t had more cost for the company, here to the extent for customers to the extend those upgrades were going to happen, so with the rule coming out the way we expected to it removes some of that potential cost, so it did have an impact on us in terms of looking at our EPS guidance.

Tim Healy

Here we also kept the revenue range that we gave was a fairly high revenue range at the end of last year. So certainly if there are some modest shifts, those shifts are happening within that range and obviously positive news usually shifts here those types of things in the positive direction, but we still maintain the current revenue range that we have.

Pavel Molchanov - Raymond James

Okay and then question on the non-DR side, you guys have had a pretty healthy uptick $6.7 million in Q1 up to a $11 million in Q4, so almost a double, should we assume a comparable rate of non-DR growth in 2013?

Kevin J. Bligh

We like what's happening in none-demand response part of the business, we haven't specifically guided to that part of the business but I think we’ve certainly seen increased traction, we like our technology solutions, we like our technology solutions and how those technology solutions are being adopted by the marketplace and we certainly try to give as much color as possible in terms of the growth in demand response part of the business giving you a plum metric, peak load under the management metric to suggest that there will be an additional four gig watts of peak load under management, you can develop your range for the amount of demand response growth that may imply and certainly be expected there would be continued growth in the energy efficiency part of the business this year and in the other non-demand response components of the business. But at this point, it’s still a smaller piece of the business. The main story for EnerNOC continues to be demand response but we are excited about what the future holds for the other parts of the business.

Operator

Your next question comes from John Quealy of Canaccord. Your line is open.

John Quealy - Canaccord

Tim, so quickly if we can shift gears a little bit on the big data side, I know at DistribuTECH, you had a nice little announcement working with the company that does big data and algorithms and things like that, can you just walk us through a little bit longer term, you guys have thousands of customers and have real time data that's very helpful but has it really been meshed out in an application specific way. So you seem to be at a good gate keeping perspective of trying to exploit this market beyond traditional energy efficiency applications, can you talk about as much as you want to this strategy or your thought behind what we could and should see from EnerNOC in a sort of 12 to 24 months period about this?

Tim Healy

Sure, I mean I think what, it’s more of an extension of what we've been doing already that we are most interested in, and what I mean by that is when you look at the energy efficiency business that we are running, we are leveraging the data already. We've got two technology products, two data driven technology products Insight portfolio and Insight control. Inside portfolio leverages meter data and tries to find trends in that meter data and we've had to-date to build the technology solutions, the algorithms, the filters, the various features and functions of that software to identify those meter level trends.

And the same thing exists for the control application that we have Insight control, in this particular case we are leveraging more of the building management system data looking for trends, going down to a very granular level to try to identify where there are opportunities to save our customers money by looking at the data that's coming off their building management system running that through filters, algorithms and I think what we are seeing now John that is that there's an ecosystem out there of other entities that don't have the data, don't have the data collection capabilities necessarily but are starting to build some of the applications that could help develop even more trend, analytics big data analytics and partner with us to bring solutions to our customers that EnerNOC hasn't necessarily built or even contemplated building at this point, but some of that development activity, some of that investment that's happening outside of EnerNOC in an overall big data, big energy data ecosystem is something that would likely have the potential to want to turn to EnerNOC to leverage what we believe is the largest real time energy database in the world and try to turn that into valuable applications for our commercial industrial customers.

For instance, we think that we can do things that might achieve better forecasting of our customers’ demand through some of the things that we are seeing in the marketplace. That would help us nominate our customers in demand response markets better. It would help us increase the amount of demand response or more accurately calculate the amount of demand response opportunity we might have and reduce the exposure that we might have or the amount of cushion that we need to cover in order to make sure that we're not exposed to shortages, penalty, short fall calculations and so forth.

Economic demand response is something that we think we can do more off and we can leverage some of the data and information to help our customers pick times when there are opportunities for them to change their schedules, change their production activities in response to some of the pricing forecasts that we can do through some other data and information that we've been collecting.

There is benchmarking that’s not a part of as bigger part of our product suite now as we think it could be in the future and we foresee customers that may want to benchmark. How are my weekend energy consumption levels relative to industry norms and I never really try to look at that because I haven't had the real time data and I haven't had a set of tools and frankly, I am not in at my facility on the weekends to try to see it in real time.

EnerNOC can give me some trend analytics around that. Data anomaly is a third and last, or I guess the third and our fourth is, there are opportunities we think to measure the efficacy of energy efficiency investments that there are various entities, whether it's financial entities, whether it's utilities or C&I customers with large portfolios, they want to measure the efficacy of their energy efficiency investments and can do so with some of the big data analytics that we can bring to market.

Those are a little bit different than a pretty straight forward approach that we have with Insight portfolio and Insight control right now. We're right. Those are looking primarily at how can we simply reduce our customers’ energy consumption by noticing trends, making sure that they are on their night setback modes that they understand their peaks and so forth.

We think there is a lot more opportunity in the big data space some of it will build and a lot of it we think we will partner with, all of it we think we will have the opportunity to leverage the largest database of energy and frankly one of the largest customer databases or customer sets in the marketplace right now.

John Quealy - Canaccord

And thank you for that answer but my last question coming back to the concept of M&A, 2012 clearly proved that the cash flow of the business in 2013 we are going to see it lift, can you talk about the teams relative appetite for acquisition and beyond perhaps smaller acquisitions may be to little bit more transformative type deal for EnerNOC? Thanks guys.

Tim Healy

John I think nothing has changed for EnerNOC we continue to be looking at things in the same manner that we have looked at things over the last five, six, seven years. We have always tried to be opportunistic. We have always tried to stay consistent with our M&A strategy that strategy is one where we want continue to build out the various energy management applications that we have brought to market. We want o get better at demand response. We want to be the best demand response provider in the marketplace. We want to build as much as we can in the energy efficiency side of the business. We have partnered with some companies and we have bought some small companies in each of those arenas.

I don’t think it changes all that dramatically moving forward. I think we are very excited about the organic growth that we have been able to achieve. We are also very excited about the profitability and I think we are going to continue to focus on the things that are core to that continue to operate the business, expand in the markets that make sense to expand, be opportunistic when opportunities arrive but at this point in time I don’t see that we have any transformative M&A activity that’s on a near-term horizon for us right now.

Operator

Thank you. Our next question comes from Carter Driscoll of Ascendiant Capital Management. Your line is open.

Carter Driscoll - Ascendiant Capital Management

If I heard correctly in your prepared remarks, can you talk about $50 million, so I am assuming that incremental bump from the $40 million (inaudible) from Western Australia for trans growth, that is my first question and then can you talk about maybe your composition of the marketplace in Eastern Australia, how many competitive providers are there, are there handful (inaudible) with significant blueprints or that are very competitive marketplace where you have to decide at the number of them to make a significant impact and what is the timing of one producer (inaudible)?

Tim Healy

Hey, Carter your first question got a little cut off, I don't know if there was still mute on, so we didn't really catch the first obviously the second have to do with Eastern Australia, the competitive dynamics in Eastern Australia and maybe just the you know maybe David Brewster since he is running our international markets and international development activity can certainly provide some more color on that but can you repeat the first question which have to do, I think with Western Australia because we didn't catch that question.

Carter Driscoll - Ascendiant Capital Management

Absolutely, my first question was if I heard correctly in prepared remarks you talked about $50 million opportunity, I was trying to post that between western and eastern with two other trans payables potentially of that incremental $10 million the contract that you announced there whether there were some other dynamic in Western Australia that had changed?

David Brewster

Carter, this is David. It's a little bit both; we were exceeding our expectations in Western Australia. I think we said $40 million in the past is probably over $40 million coming from the 240 megawatts we have in Western Australia where the capacity price is there for the current delivery year. We are exceeding our expectation there by bringing our customers, bringing them on early, bringing other opportunities into the mix, and so we are going gangbusters in WA and in Eastern Australia we are layering in some of these things. We have a couple of small network utility programs, certainly ERM is going to be additive to that in 2013. So we are very excited in the reason and New Zealand which we sort of manage in the same organization New Zealand is also doing great for us as well.

Carter Driscoll - Ascendiant Capital Management

Next question is you guys obviously are largely behind the impetus to push the EPA or to extend it’s rules on stationary generators, and is there a particular rationale why you are pushing for a $100 annually obviously PJM started at 60 hour requirement. So help me walk you through the process that apply other markets or are you, or was that just the number you are aiming for to get as high as possible the EPA happened to go along.

David Brewster

No I think its to accommodate you know there's different markets with different rules and I think EPA again spent two years looking at this issue, looking at the markets and looking at new needs and coops and all the interested parties that rely on these resources as a backstop to keep the grid operational. So I think it was probably that, I think it was probably just a more elegant solution as well, because there was already a 100 hour operating provision for testing and maintenance and so essentially this was the most elegant solution to say that a 100 hours, nothing changes, there's no increase in that 100 hours.

Now in addition to testing and maintenance that same hours can be applied for emergency demand response which makes a lot of sense because if you think about it a lot of entities out there are required to operate and test them. If you are looking at the hospitals and data centers, there's requirements by law to test units and so I think EPA looked at this and said if there's DR, emergency DR events it’s going to offset the need for testing, let's just basically roll them together and say that the 100 hour limitation is the most elegant way to address this, its’ for testing maintenance and operation of emergency DR.

Carter Driscoll - Ascendiant Capital Management

And my last question is obviously you progressed I think pretty significantly at least for contract on the energy efficiency side in the State of Massachusetts and were you able to use that contract to leverage other municipalities, obviously you've done what I'd call a lot of singles and doubles and really build up the customer site there. Any other potential discussions with some large entities of that type of contract size that you are currently negotiating and/or (inaudible).

Tim Healy

I think the $10 million [MASD] our contract was and still stands as part of the largest energy efficiency contract that we've signed. There have been other states that have signed contracts with us that are very similar to the Massachusetts contract not quite the same size obviously, and in addition what we like is that we continue to work with [MASD] and we are and there's more opportunity for expansion with [MASD] that we found which is obviously another benefit so it didn't stop with the first contract, the first $10 million opportunity with them. There are a number of other deals that we’ve signed. There have been some multi million dollar deals at commercial facilities for our energy efficiency applications.

You know, generally the prices on the energy efficiency applications will vary according to how many sites a customer has, how large their energy bill is, how expansive the deployment might be. It's not that unlike software. Since it is software, it is very much like settling software. You know, there are X number of sites or seats or some other metrics that we generally use. We're generally targeting an ROI for our customers so that it’s a very attractive return on their investment and then we're selling them a software subscription fee as part of the deal. So we're excited about that and we love to find more common wealth of Massachusetts opportunities. We've seen a few and you know, the team is working hard to make sure that we're in front of other opportunities that might look similar.

Operator

Our final question for the call today comes from Andrew Weisel of Macquarie Capital. Your line is open.

Andrew Weisel - Macquarie Capital

Just a couple quick ones here keep within the hour hopefully. First question is on rule changes in the PJM in Texas. In the past, (inaudible) during the power emergencies and shortages were kind of dispatched it to zero, which gave you some energy revenue but the purpose of that was to kind of suppress the peak. It seems like both of those markets which are PJM especially is big for you, should give some uplift to the revenue, to the energy revenue as oppose to capacity revenue. Is that something that was built in to your guidance range or is that something that’s incremental from when it was initially provided?

David Brewster

So what we have typically done is basically assumed bare minimum operation in this market from an energy perspective. When we look at our guidance we are not layering in a lot of expected energy revenue, it’s basically based on our capacity revenue and if there is requirement for testing if we get energy payments during audits or tests or a bare minimum number of hours of operation we’ll include that. But additional hours of operation will be upside of the plan. Not sure exactly what you are talking about in PJM for example we’ve always gotten energy payments with dispatch on. I am not sure…

Andrew Weisel - Macquarie Capital

The question is how high the super peak power places can be. I believe some of the real changes now were to allow these price spikes.

David Brewster

Got it…

Tim Healy

In Texas that’s correct, there have been some changes to increase the maximum price. I am not sure if that’s necessarily been the case in PJM, but if you are referring to Texas yes.

Andrew Weisel - Macquarie Capital

Okay my next question is I know you guys need to be very careful in how you might enter this. But as we look to the upcoming auction any very high level thoughts on kind of how DR might clear loader to last year where for the first time a lot of DR bids were bid in but didn’t clear. Any thoughts on how the overall industry bidding may change because of that, whether that’s in terms of pricing, location or both.

Tim Healy

No we continue to remain optimistic that the trends that we have seen over the last three or four years in terms of at least for EnerNOC where we have continued to expand our portfolio, we think we have bid thoughtfully and strategically. It’s our intent to continue to grow our overall portfolio in PJM, so we are certainly optimistic, but I think we are the same as everybody out at this point. We are paying attention to other experts and analyst and other reports that are circulating out there that give a sense of what other peoples guess are as to pricing trends and so forth.

We haven't seen anything that suggest there is going to be any dramatic or wild changes in any particular element of the upcoming PJM VRA. So we stand ready to provide our bids and continue to grow in that market place, grow in the right places with the right customers that want to continue to participate in what we believe is one of the most cost effective and valuable resources in the PJM market place.

Andrew Weisel - Macquarie Capital

Okay, great and then just lastly could you just repeat your comments about the future tax rate, so you are clear on 2013 expectations but I missed a little bit of what you were saying about how the model out the GAAP tax rates for the longer term?

Kevin J. Bligh

Well, I think our provision for 2013, and the guidance we gave is $3 million to $5 million that is the provision. We have reserves on the books that if the accounting rules tell us to reverse them, we will reverse them whether that happens in 2013 or 2014, we can't say at this point in time but for purposes of the guidance that we have given we’ve not reverse them, and if we were to reverse them there is a potential that our tax provision will go negative.

Tim Healy

I want to thank everyone for taking time today to join our call. We look forward to connect with you all again soon. Good bye now.

Operator

Ladies and gentlemen that concludes your EnerNOC fourth quarter 2012 conference call. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.

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