EnerNOC, Inc. (NASDAQ:ENOC)
Q4 2008 Earnings Call Transcript
February 20, 2009 5:00 pm ET
Will Lyons – IR
Tim Healy – CEO, Chairman, and Co-Founder
David Brewster – President and Co-Founder
Neal Isaacson – SVP and CFO
Mark Siegel – Canaccord Adams
Nick Allen – Morgan Stanley
Ben Kallo – Stanford Group
Michael Carboy – Signal Hill
Jeff Osborne – Thomas Weisel Partners
Elaine Kwei – Piper Jaffray
Paul Clegg – Jefferies
Adam Baumgarten [ph] – Oppenheimer
Jonathan Hoopes – ThinkEquity
Richard Baxter – Ardour Capital
Pavel Molchanov – Raymond James
Good day, everyone, and welcome to the EnerNOC fourth quarter 2008 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Will Lyons, Please go ahead, sir.
Thanks, Elan. Thank you. Good afternoon and thank you for joining EnerNOC’s fourth quarter and year-end 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.
Today’s presentation contains estimates and other statements that are considered forward-looking under the Private Securities Litigation Reform Act of 1995. 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 view on February 18, 2009. EnerNOC disclaims any obligation to update these statements to reflect future events or circumstances.
This call also includes discussion of both GAAP and non-GAAP financial measures. Information regarding EnerNOC’s use of these measures as well as a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure is available in our fourth quarter 2008 financial press release, which was issued today after the market close. This release can be found on the Investors section of our corporate website, www.enernoc.com.
Now let me turn the call over to Tim.
Thanks, Will. Good afternoon, everyone, and thank you for joining us. Earlier this afternoon we released our fourth quarter and year-end financial results, which punctuated an outstanding year for our company. On this call, I’ll briefly discuss those results and describe some of our plans for the year ahead before turning the call over to my colleagues. So let’s start with a look-back at 2008.
In early 2008 we disclosed our major corporate objectives for the year. Those objectives included exceeding $100 million in total revenues, increasing our gross margin to above 36%, keeping our operating expenses between $74 million and $79 million, and exceeding 2,000 megawatts of dispatchable demand response capacity under management.
We are very pleased with our performance in 2008, as we achieved or exceeded each of those objectives. We ended the year at $106.1 million in revenues, the high end of that guidance range, a range that we increased about two-thirds of the way through the year. We expanded our gross margin to 38.9% in 2008, which is up from 36% in 2007. We did this by selling our increasingly differentiated solutions on product suite and total value, not on price alone.
We kept our operating expenses in range at $78.5 million and drove increased operational efficiencies. And positioning us for continued growth in 2009, we closed out 2008 with over 2,050 megawatts under management, a number which as of today has already exceeded 2,500 megawatts. Equally it’s important to us when our demand response network was dispatched by our grid operator and utility customer base, it performed reliably once again.
During 2008 our network delivered over 100% performance on average based on nominated versus delivered capacity in more than 100 demand response events. We are very pleased with these results. As the external environment has become more challenging, other companies have had to tamper expectations. We trenched and even changed strategies midcourse. We are pleased that we have been able to remain focus and meet or exceed all of the corporate objectives that we provided for 2008.
We believe that our performance is due primarily to a nature of our clean energy management applications that deliver cost savings and payments to commercial, institutional and industrial customers in our network usually without direct expense to them, our compelling value proposition any time, but especially now.
Our attractive applications in combination with our stable grid operator and utility customer base and our own financial strength and visibility give us confidence in the following 2009 corporate objectives. Number one, we expect our revenues to grow approximately 55% over 2008 to a range of $155 to $170 million. Number two, we expect to continue to increase our operating leverage and reduce our GAAP net loss per basic and diluted share from $1.88 in 2008 to a range of $1.00 to $1.20 in 2009.
Number three, we currently expect to reduce non-GAAP net loss per basic and diluted share, which excludes stock-based compensation charges and amortization of intangibles from $1.29 in 2008 to a range of $0.40 to $0.60 in 2009. Perhaps most importantly is number four. We remain confident in our expectation to generate positive cash flow from operations in the second half of ’09 and to delivery positive GAAP earnings per basic and diluted share for the year ending December 31, 2010.
So in closing, the fourth quarter of 2008 marked the end of another strong – another year of strong growth and solid, consistent execution for EnerNOC. Amidst a very challenging macroeconomic climate, we didn’t change our strategy; we didn’t alter our plans or scale back our objectives. We’ve invested in our systems, our software applications, and our people. And this investment has positioned EnerNOC for further differentiation, continued growth and leverage in 2009.
And in fact, we are off to the strongest start to a year in EnerNOC history. Through the first seven weeks of 2009, we have announced two new utility contracts in Arizona and Colorado worth over $35 million in combined potential revenue. We’ve added over 500 new megawatts under management to our demand response network, and we’ve developed an MBCx pipeline that is stronger than our internal projections for this point in time.
So now let me turn the call over to David. He is going to elaborate on some recent market trends and how we see them as positive indicators of upcoming EnerNOC growth.
Thanks, Tim. On previous calls we’ve described a number of regulatory developments that we believed would support further deployment of demand response and energy efficiency solutions in North America. I’d like to focus on just two today. First, state Public Utility Commissions are developing improved regulatory contracts that could increase the demand for EnerNOC solutions. And second, federal legislators are instituting policies that drive increased energy efficiency spending and deployment.
State public utility commissions play an important role in motivating utilities to adopt EnerNOC solutions. For example, looking back to our Q1 2008 conference call last May, we referenced a specific regulatory development in Colorado whereby the Public Utilities Commission granted Xcel Energy conditional permission to build the power plant, provided that it invest in commercial and industrial demand response. As many of you now know, EnerNOC recently won an exclusive contract through that competitive RFP with Xcel Energy in Colorado, adding another utility to our growing list of utility customers.
States like Colorado and Nevada are also at the forefront of developing market dynamics that allow utilities to benefit financially from increased investments in demand response and energy efficiency. Both Colorado and Nevada allow utilities to earn a higher rate of return on their energy efficiency investments than on investments in traditional supply side resources, making energy efficiency a more financially attractive investment than it used to be.
Specifically, Colorado’s commission allows its utilities to invest $1 on demand side management and earn up to $1.20, which is intended to be a higher overall return than what utilities could earn on traditional supply side investments. The Public Utilities Commission of Nevada was one of the first to create such a structure when it authorized to grant Nevada utilities cost recovery plus an additional 5% incentive rate of return on equity portions of energy efficiency investments.
As a consequence of a favorable regulatory environment, Nevada utilities spending on energy efficiency and demand response in 2007 was more than triple 2005 levels. We point to these states among others as leaders in spurring utility business model innovation. Our regulatory affairs team is traveling around the country meeting with Public Utility Commissions and working with utilities to spread the word about the positive impacts of demand side innovations.
We plan to continue that campaign throughout 2009 and we are encouraged by the receptivity of our nation’s public utility commissioners, many of whom are eager to find ways to implement new ideas and new constructs in their regions to realize the potential of demand side resources and to fulfill the policies and mandates of newly elected state leaders who campaigned on a mantel of energy efficiency, energy independence and clean energy solutions.
The fact we’ve been very encouraged by recent legislation in a number of states that have designed to correctly align utility incentives, similar to how US tax code tried to encourage certain behaviors among businesses and individuals, Public Utility Commissions should institute regulations that allow utilities to earn greater returns by investing in demand side resources than by investing in any other energy resource, because demand side resources are the cheapest, cleanest and fastest to market of all energy resources.
In 2009, it is our intent to leverage our unique position as a thought leader and first mover in demand response, and the investment that we’ve made in our regulatory affairs resources to help regulators throughout the country appropriately spur utilities to deploy innovative, cost effective demand side applications. We believe these applications, including demand response and energy efficiency, are what will make the smart grid truly smart, and most importantly, of real value.
Complementing these positive developments at the state level, federal tailwinds for energy efficiency and demand response have never been stronger. The new administration has positioned to drive toward a cleaner and more efficient energy economy as the centerpiece of its economic environmental national security agenda. For instance, the American Recovery and Reinvestment Act, appropriate significant funding for the deployment of smart grid and energy efficiency technologies and applications, which could lead to increased opportunities for our demand response and our MBCx solutions.
Our team is also focused on other federal legislative actions, including potential energy and/or climate bills that could follow the stimulus bill later this year. All of these pieces of legislation show that the new administration’s objectives are well aligned with the fundamental mission of our business, to deploy the most cost-effective, cleanest and quickest to market energy resources that can address society’s environmental concerns, help bring supply and demand in a balanced, enhanced reliability for utilities and grid operators and help keep electricity prices low for all ratepayers.
While we believe these pieces of legislation will be favorable for our business, they are by no means pre-requisites for us to continue to successfully scale our business. We have a solution that is cost-competitive today and that is moved well beyond the pilot stage and into a period of continued full scale of deployment. More specifically, we believe that we are well positioned to benefit from the current administration’s stated commitment to modernize our nation’s federal buildings by making them more energy efficient.
We have built scalable applications that can connect and interoperate with legacy building management systems. We have delivered demand response checks to government facilities in our network since 2003 and have recently signed contracts with the State of Rhode Island, the State of Vermont, City of Boston, and the Defense Energy Support Center, the last of which allows EnerNOC to pursue certain federal and military facilities throughout the United States.
Some other marquee customers are starting to take notice. We’ve recently signed a monitoring-based commissioning or MBCx energy efficiency contract with a Fortune 50 customer who is having difficulty turning its energy data into energy savings with its existing energy services company. We hit the ground running on this contract, identifying numerous energy saving measures right out of the gate. Our initial efforts have focused only on a single 150,000 square foot facility, which is just a small portion of this customer’s multi-million square foot campus. In other words, we are just scratching the surface of this relationship.
We believe that these data points strongly illustrate increasing regulatory support at the state and federal levels and increasing customer demand for our demand response and MBCx solutions. We are pleased to highlight the broad trend toward demand side management becoming an even more integral part of our nation’s energy future.
I’ll now turn the call over to Neal who will provide details on our fourth quarter and year-end financial results.
Thanks, David. We are very pleased by our fourth quarter and full year 2008 financial performance. We believe that our solid execution on all of our 2008 corporate objectives has positioned us well to achieve our future profitability targets. Let me provide some additional color on the results that Tim described earlier.
Our 2008 revenues increased to $106.1 million, which represents a 74% year-over-year growth and is at the high end of our already raised 2008 revenue guidance range. This revenue performance was driven by the scalability of our software-enabled demand response and energy efficiency solutions and our ability to drive multiple revenue streams from the megawatt in our network. On our Q3 2008 conference call, we guided to Q4 revenues of approximately $19 million. We were able to recognize fourth quarter revenues of $19.7 million compared to $19.7 million for the quarter ended December 31, 2007.
Sales of our high margin energy efficiency and energy procurement solutions for the quarter ended December 31, 2008 were $2 million compared to $1 million for the quarter ended December 31, 2007. These services delivered $6.7 million for the year ended December 31, 2008 compared to $1.6 million for the year ended December 31, 2007, an increase of $5.1 million.
During the year, we added approximately 50 demand response megawatt under management from existing energy procurement customers. We intend to continue to leverage the cross-selling synergies that we are seeing between our demand response business and our growing energy management solutions business to drive more revenue and gross profit. This revenue performance relative to our stated corporate objectives again illustrates the visibility that our recurring revenue model provides.
In some of our largest markets, such as ISO New England and PJM, we know our capacity pricing through mid-2012. We have a solid foundation of megawatts under management, and we continue to see strong demand for our services. As Tim mentioned earlier, we expect total revenues of $155 million to $170 million in 2009. We also expect increased revenue seasonality as we expand our PJM presence and build our utility contracts across the country. We expect that Q2 and Q3 will continue to represent seasonally higher revenue quarters than Q1 and Q4. And as a result, we expect first quarter 2009 revenues of $17.5 million to $18.5 million.
Cost of revenues for the quarter ended December 31, 2008 was $12.1 million compared to $12.7 million for the quarter ended December 31, 2007, a decrease of approximately $600,000. And our cost of revenues for 2008 was $64.8 million compared to $38.9 million for 2007, an increase of $25.9 million. The majority of our COGS are the payments that we make to businesses and institutions that comprise our demand response network and are very timely in this economic climate, I might add. These payments totaled over $9.3 million for the quarter and $56.8 million for the full year of 2008.
Our gross profit for the quarter was $7.6 million compared to $7.0 million for the quarter ended December 31, 2007, an increase of approximately $600,000. Gross profit for 2008 increased to $41.3 million compared to $21.9 million for 2007, representing 89% year-over-year growth.
Gross margin for the quarter was 38.6% compared to 35.5% for the quarter ended December 31, 2007, and was 38.9% for 2008 compared to 36.0% for 2007. We are pleased to have expanded our gross margins by nearly 300 basis points for the year. Gross margin continues to be an important barometer of our ability to extract the most value from our megawatt portfolio as well as of our sales force’s ability to differentiate our demand response and energy efficiency applications in the marketplace.
Operating expenses were $19.7 million for the fourth quarter compared to $16.5 million for the fourth quarter of 2007, an increase of $3.2 million. Total operating expenses for 2008 were $78.5 million compared to $48.2 million in 2007, an increase of $30.3 million as we grow our headcount from 252 full-time employments to 345 full-time and in line with our plans.
Employee-related charges, including non-cash stock-based compensation, continued to account for the majority of our operating expenses. In the fourth quarter, these employee-related charges accounted for $13.7 million or approximately 70% of our quarterly operating expenses. For the full year of 2008, employee-related charges accounted for $57.2 million or approximately 73% of our annual operating expenses.
With over 2,050 megawatts under management and a total headcount of 345 full-time employees as of December 31, 2008, we were able to expand our megawatts under management per full-time employee metric to 6.0 as compared to 4.4 at December 31, 2007. During 2008, this metric reflected the increasing operating leverage we are achieving in our business. During 2009 we expect further operational leverage we reflected in our lower annual operating expenses as a percentage of our total revenue.
Net loss for the December 31, 2008 was $12.2 million or $0.61 per share compared to a net loss of $9.0 million or $0.48 per share for the same period in 2007. Net loss for the full-year 2008 was $36.7 million or $1.88 per share compared to $23.6 million or $1.80 per share in 2007.
On our conference calls and in our filings since our IPO we have consistently drawn attention to the significant stock-based compensation charge component of our operating expenses. We believe reporting our earnings per share on a non-GAAP basis, a calculation which excludes the impact of stock-based compensation and the amortization of intangibles, will be useful to investors and financial analysts as they assess our ongoing operating performance.
On a non-GAAP basis, our net loss for the quarter was $9 million or $0.45 per share, and $25.2 million or $1.29 per share for 2008. Now that we have exited an important period of investment in our business, we expect to drive significant operational leverage and will be evidence in our lower loss per share in 2009. As such, we currently expect GAAP net loss of $1.00 to $1.20 per share for the year. And on a non-GAAP basis, we expect net loss of $0.40 to $0.60 per share for the year. As it relates to the first quarter of 2009, we currently expect GAAP net loss of $0.70 to $0.75 per share and a non-GAAP net loss of $0.55 to $0.60 per share. For the quarter ended December 31, 2008, we had approximately 19.8 million weighted average basic and diluted shares outstanding.
In terms of our balance sheet, at the end of 2008 we had cash, cash equivalents and marketable securities of just under $63 million as well as approximately $16 million available under our Silicon Valley Bank secured credit facility. We believe that we have sufficient liquidity to meet our corporate objectives moving forward.
In closing, we are extremely pleased with our strong fourth quarter and full-year 2008 performance, especially given the challenges presented by the current macroeconomic climate. We remain very confident in our ability to manage the growth of our energy cost savings business, drive increased operational leverage and achieve our objectives of generating positive cash flow from operations during the second half of 2009, and achieving profitability in 2009.
With that, I’ll now turn the call back to the operator who will take your questions.
(Operator instructions) We’ll have our first question from John Quealy with Canaccord Adams.
Mark Siegel – Canaccord Adams
Hi, good afternoon. It’s Mark Siegel for John. Just a quick question in light of the recent stimulus activity that’s out there. Do you see demand response, RFPs and activity accelerating near-term and what's your outlook for the pace of new megawatt additions this point forward in ’09?
Hi, Mark, thanks. You are basically asking a very timely question about the stimulus package. And I think one of the things that we want to make sure everyone understands is that, to be clear, we don’t need things in the stimulus package in order to build EnerNOC into a profitable business. We really believe we've had the right business model since we were founded to get the profitability and to grow the business and position it for future growth without any government subsidies. That said, I think we are encouraged by a number of things that could lead to some pickup in the utility RFPs. We’ve got indirect as well as direct opportunities that are coming out of the stimulus package. If you think about some of the indirect opportunities, as David Brewster mentioned, the federal government is basically signaling to the state Public Utility Commissions that they expect that the state Public Utility Commissions are going to put appropriate incentives and appropriate regulatory structures in place that are going to spur more demand side initiatives. So we think that will be good for demand response. We think it will be good for energy efficiency. It’s going to take us getting out there and helping achieve those regulatory constructs and help our utilities and Public Utility Commissions get those things in place, but clearly the federal government is sending a pretty strong message indirectly. We also believe that as more dollars is spent in the smart grid itself that the killer applications of the smart grid like demand response, and some would say probably our monitoring-based commissioning is another killer application in the smart grid. Those are probably going to catch some of those tailwinds as well. So we think it bodes well for us again indirectly. If you want to look directly, go back to what my colleague David Brewster mentioned, which is if federal and military facilities are being impacted by this, they are expected to improve their energy efficiency, they are expected to spend dollars to bring their – make their buildings more modern as it comes to their energy expenditures. And then the second direct opportunity is that the energy efficiency dollars are projected to go up. There are dollars allocated in the stimulus package that are going to increase the amount of state spending in energy efficiency. So you combine all that together and we would expect to see over the next year or two years increased activity and increased opportunities for both demand response as well as energy efficiency. And then you mentioned – you had a second question, which was the megawatt additions and where we see that. We’ve gotten off to – just like last year, we got off to a very strong start. There is some seasonality to our selling as people understand because we have urgency; urgency associated with external deadlines that are deadlines to get our megawatts into certain open market programs like PJM that have certain deadlines in the second quarter of the year so that we can start earning that revenue late in the second quarter and then into the third quarter. There is urgency associated with some of the new contracts that we’ve signed that have us needing to get megawatts into our Q and into our deployment pipeline as early as possible in the year so that we can have those ready to meet certain deadlines that are part of some of our contracts or bilateral arrangements. So you’re seeing a lot of that develop – we also spent a lot of time last year in the third and fourth quarter building that demand response pipeline. And then what it allows us to do is it allows us to get those megawatts under management in this first quarter like you’re seeing. And then we get our sales team that can spend time going back and harvesting some of those customer relationships, which is what we expect them to do. After they have started to deliver those first capacity checks to these customers, it allows them to go back and start to up-sell them for energy procurement services, energy efficiency, and have that same sales team go back in three months or six months after that relationship is started to try to up-sell those customers with more services. So we are excited about where we stand. And we think that the first quarter will probably just like year be our strongest sales quarter in terms of megawatts under management additions, and you will see that reflected throughout the year.
We’ll go next to Nick Allen with Morgan Stanley.
Nick Allen – Morgan Stanley
Good afternoon. You guys mentioned that you had a clear visibility in capacity pricing through 2012. Could you give me an indication of how that’s trending or what that looks like? And then also, for your revenue guidance for 2009, what percent of that is your energy management business?
Sure. You’re looking for color on the fact that we have pricing visibility all the way up to 2012. Again, a lot of our business or – if you take a look at the two ways that we are selling our demand response solutions; in open markets where you have forward capacity market structures. And as forward capacity market structures have basically made clear what the pricing is in those markets in a lot of case for 2011 and all the way up to 2012. And the other part of our business where we are selling demand response in a bilateral arrangement in our nation’s non-restructured, vertically integrated markets, where we have bilateral arrangements for the utilities, those bilateral arrangements also spell out the pricing. And these have been five, eight, ten-year bilateral contracts, so we know what the pricing is and what we’re going to receive in terms of the overall payment for those megawatts under management with those. That’s really what drives having that visibility. And I just want to get your second question since I didn’t write it down, I apologize. Not sure if you got cut off, what was the second question? What percent of business going forward? 6% of our business approximately would be monitoring-based commissioning and the energy procurement services activity. That’s about what we are projecting next year.
Nick Allen – Morgan Stanley
Okay, thank you.
We’ll have our next question from Ben Kallo with Stanford Group.
Ben Kallo – Stanford Group
Hi, guys. I was wondering if you guys could give us some more information on – maybe David, on Act 129 of PJM and maybe how that affects the business in the PJM region in 2009 and 2010.
Ben, just because we have a lot of different things floating around, can you – I'm sure we know the Act, but can you tell us what Act 129 is referring to, so –?
Ben Kallo – Stanford Group
It mandates certain level of the demand response capacity there in the State of Pennsylvania.
I think you are talking about PJM within the State of Pennsylvania?
Ben Kallo – Stanford Group
We’ve been actively engaged with the PUC in Pennsylvania and are pretty encouraged by the PUC’s position with regard to third-party aggregators in particular. We are all over the opportunity, and we are looking very much forward to opportunities to engage with the utilities in the State of Pennsylvania to look for driving both demand reductions and energy efficiency reduction. So it’s – Pennsylvania is a state for us that has got a very large and growing number of commercial and industrial accounts there for us. It’s got a very, very favorable PUC with regard to third-party participation. It’s a real leader, both at the regulatory level and the legislative level. So Pennsylvania is a state that we are very excited about, and Act 129 in Pennsylvania is a great opportunity for us. Above and beyond Act 129, I think Pennsylvania has taken a real leadership position as well in terms of letting energy efficiency really get credited towards their portfolio standards and really providing incentives in the right place. And so it’s been a leader, and I think it’s increasing the leadership position in the state.
We’ll have our next question from Michael Carboy with Signal Hill.
Michael Carboy – Signal Hill
Good afternoon, ladies and gentlemen. Tim, I think I could get you to comment a little bit on the sort of dynamic tension that I think exists within the utilities now as they look out at energy efficiency. On the one hand they express a very strong, clear preference for ensuring reliability in systems. Yet they are also torn between trying to facilitate customer choice and driving more energy efficiency and demand response. And sometimes with that comes network instability. How do the utilities manage that? And do you think that that has a bearing on a greater emphasis on demand response in the near-term rather than a mad rush into AMI? Or do we see AMI unfolding contemporaneously with demand response?
First, thanks for the question. I think it’s a pretty thoughtful question. We recently were talking to one of our Board members, Jim Turner, who is President of Duke Energy. One of the things that he pointed in particular that I think is related to your question is just how attractive demand response is right now because of the very dynamic you are talking about. The difficulty in the credit markets, the uncertainty of not knowing whether demand is going to grow, whether it’s going to shrink, how long there is going to be uncertainty around what the demand levels are in the various regions moving forward, all of that leads to some challenges that our utility customers are facing right now. And one of the things that we’ve had pointed out to us by Jim and others is that demand response provides a really interesting flexible resource. It can be a hedge, it can be a financial hedge, it can be an opportunity to basically not have to make a bet necessarily on how significant demand is going to grow or whether it’s going to stay flat. It allows our utilities to not have to access the amount of capital and deal with the challenges of accessing the capital markets in order to try to plan for the future, in order to try to meet the reliability objectives that are there. I think David Brewster on this call pointed out that the challenge that we all have and that utilities face is that currently, in most states, with the notable exceptions that David talked about in Colorado and Nevada and some other things that we are seeing, which give us some optimism, the challenges that the utilities incentives aren’t necessarily aligned to allow them to make those very strategic, very valuable investments in demand response and energy efficiency simply because the incentive constructs aren’t properly aligned. Why does the utility want to make an investment in energy efficiency that's basically going to cut even further into its demand growth? Well, it wants tom especially in the case of demand response, because it can be a flexible resource for them in ways that investing in large peaking plants or even large base load plants cannot be. And so our challenge or our opportunity really is to try to do what David described on this call, spend 2009 getting out there working in collaboration with the Public Utility Commission and the utilities to try to get some of these regulatory constructs right, either through the incentive structures that David talked about getting demand response and energy efficiency to be a regulatory asset that the utilities can earn some sort of return or find other creative incentive structures such that they can really take advantage now like never before and go after demand response opportunity that would afford them that type of flexibility.
We’ll go next to Jeff Osborne, Thomas Weisel Partners.
Jeff Osborne – Thomas Weisel Partners
Yes, great. Good evening. Congratulations on the continued strong performance and outlook. Just two quick ones. One, I was wondering on the MBCx side, can you just talk about the sales channel? You mentioned some indirect opportunities. Are you partnering with any of the Siemens or the Johnson Controls or Honeywells or any other ASCOs? And then secondly, could you just provide a quick update on what you are seeing in the California market and the regulatory issues that that particular region has?
Sure. So let me tackle the first and then I’ll turn it over to David Brewster to talk a little bit about California. EnerNOC has traditionally done a lot of work with our partners, and our strategic partner list is growing. And we’re going to be taking a look at all the opportunities, whether it’s with the big ASCOs, whether it’s to do some ASCO work ourselves, those are all part of the various strategic opportunities that we are looking at. We do believe that those are some companies that are going to be positioned for some growth. What we think we have with our monitoring-based commissioning is something that’s very valuable to an ASCO or to an ASCO business model, which is the cost-effective measurement and verification as well as the cost-effective adder in terms of being able to achieve more energy efficiency savings through data and information, because that’s really what our monitoring-based commissioning is. It’s applying data to try to find operational, behavioral-based cost savings, low-cost no cost energy saving solutions. So it’s a complement to the existing energy services company model. And I think it’s a place where we’re going to be spending a lot of our strategic time over the next several years, finding ways to bring that to market. Right now, we have a very direct-to-market strategy. It makes sense for us to have our current sales team out working with our existing customers that we’ve just delivered a demand response capacity check to spend some time telling them that we’ve got all this data now, we can hook up to your building management system and we can drive some additional cost savings for you. So we think right now we have enough of a pipeline that’s being developed directly that we don’t necessarily need the energy services companies, but I definitely wouldn’t rule them out. As for California, let me turn that to David.
Yes. Nothing really new to report on the California regulatory front. I think things are right on track with where we thought they would be. And we’ve described on previous calls there is ongoing proceedings at the PUC for both demand response program filings by the IOUs as well as energy efficiency programs that were filed by the IOUs. And I think those are progressing. They are making – particularly on the demand response side, they are making steady progress, just where we thought. We have a contract with Edison, Southern California Edison that's part of that. And we feel good about where things are standing. California, as people on the call all know, is a bellwether state. It's an important state. California is doing some important work right now related to the cost-effectiveness of demand response that we think is going to be very helpful moving forward, that’s going to create more standardization and more of a norm in the industry of exactly how to measure the benefits of demand response, something that's been lacking in the past. And so we are still as engaged as ever in the regulatory side in California, and no new development to report. We are right on track with where we thought we’d be.
We’ll go next to Preetesh Munshi with Piper Jaffray.
Elaine Kwei – Piper Jaffray
Hi, this is Elaine Kwei for Preetesh. Yesterday we attended a smart grid event in Washington DC with FERC and state PUC regulators, as well as established and start-up companies in smart grid. And given that many technologies are being developed for the purpose of giving energy consumers better information about their usage that would encourage and conserve or shift consumption to off-peak periods, what do you see as the continuing role of demand response if smarter grid in itself results in voluntary reduction of demand and greater consolidation of user data utilities?
Can you just repeat the question that you asked at the end?
Elaine Kwei – Piper Jaffray
What do you see as the role of demand response in conjunction with the development of a smarter grid that purportedly would give consumers – energy consumers enough information on enough granularity that they themselves could perhaps see the value of their energy consumption at any given moment in a day and then voluntarily reduce that consumption?
Well, I mean, first and foremost, we’ve always positioned demand response as the application that really makes the smart grid valuable. I mean, we’ve gone back and we’ve looked at or tried to compare what’s going on in the smart grid to the early days of the Internet. And you had your infrastructure providers who were able to get data from one place to another, but until that data was actually a part of some sort of valuable application, all you have was bits of data that were flowing back and forth. But then you had the applications that came along that suddenly made that data of value. I think – David, I think you have some more that you wanted to add to this, but –
Yes. And I think you’re probably referring to the NAHRO conference down in DC that you were at, and we were down there as well. I think that the – as Tim was saying, the data provision to the smart grid is only part of it. It’s the application that actually takes that value and turns it into data – and turns it into value in terms of energy savings. And I think particularly on the commercial and industrial side, there is a very, very important role for service providers to actually help C&I customers to translate that data to look at the unique nature of their operations to device strategies, to implement those strategies, to develop the software to automate the process, to be an aggregator and actually pool customers so that they are participating in wholesale markets as an aggregated pool and mitigating risk. There is always going to be a very, very strong role for third parties to be service providers.
We’ll go next to Paul Clegg with Jefferies.
Paul Clegg – Jefferies
Hi, congratulations on a strong quarter. Thanks for taking my question. Most of my questions have been answered. But actually, Tim, you referred in your opening remarks to the difficult operating climate. And I was wondering if you see any of your competitors having trouble in this environment. And if so, in what way? Are you talking about capital and liquidity issues, or what were you referring to there specifically in the opening comments?
Yes. I think it’s a number of things. Thanks, Paul. Without a doubt, our financial strength has been an advantage to us. It’s been an advantage in working with our utility customers who – they demand financial strength in order to sign five, eight, ten-year agreements with us, the way the forward capacity markets work with financial assurances. The fact that in 2008 we were able to get a $35 million debt line that allowed us to go out and put financial assurances up, essentially reserve our spot at the table and allow us to be a large part of the market and have market opportunity for our commercial and industrial customers as well as new commercial and industrial customers that we’re going to go after for the next several years allowed us to uniquely position the company. And so we have seen it. We’ve seen it with some of the smaller, under-funded competitors that for one reason or another have not been able to find the funding. I think the position that we’ve been in, we've been able to become such a large presence in the open markets position us extremely well. And I think we’ve also seen even the competitive suppliers that have had their headaches and challenges and distractions. And by no means do we think the game is over. We’ve got so much work in front of us, and the demand response opportunity is too attractive an opportunity to call that game over right now by any stretch. These guys have – they see the same immense market opportunities that we do. And if those distractions get behind them, they are going to be there and we’re going to be competing side-by-side. But at least in 2008, and I think the same was true in 2007. You saw us not have to go and compete on price. We competed on a valuable suite of solutions. We saw that having the energy procurement services part of the business where, as you know, we bought two companies in that business and really expanded it over the last 18 or 20 months. Those things really advantaged us and allowed us to expand our gross margins, which is really the true measure in our estimate of how we’re doing against the competition.
We’ll go next to Sam Dubinsky with Oppenheimer.
Adam Baumgarten – Oppenheimer
Hey, guys. This is Adam Baumgarten [ph] for Sam. Just a few quick questions. How many megawatts were earning revenue in quarter?
We don’t provide that information, Adam. What we’ve done is we’ve provided the guidance that you’ve seen, provided the next quarter’s guidance for revenue. We find it just to be a lot simpler and a lot more straightforward than to try to describe what megawatts are earning what dollars on what day of the month, and what month of the quarter. So instead we’ve decided to provide the guidance that you see now, and we’re really shifting away some megawatts under management. We’re also providing EPS guidance now so you guys can really see the operational leverage that we’ve been able to achieve and we’ll continue to achieve in a business.
Adam Baumgarten – Oppenheimer
Got you. Okay. Also, what was the C&I salesperson headcount as of the quarter, if you guys can provide that?
Again, another one that because of providing the guidance that we do, lesser relevant factors, especially when salespeople are selling more than just megawatts these days. What we did do last year is we said that we were going to grow by about a salesperson a month. And we stayed pretty much on track with that. We didn't have to retreat from that. That was in our plan. That's what we tried to do. And I think the same thing is going to occur this year. If we can continue to be adding another new salesperson a month, bringing that salesperson in, training them, getting them up to speed over a six-month period of time, making them a productive resource for us, I think we’ll be in good shape this year as well.
We’ll go next to Jonathan Hoopes with ThinkEquity.
Jonathan Hoopes – ThinkEquity
Thanks. During the prepared remarks, I think, Neal, you mentioned the Silicon Valley Bank facility was around $30 million and I think, Tim, I heard you say $35 million. Can you tell me what that number is and how much of the facility has been drawn down as a backstop to ensure your performance?
Sure. Well, the facility was $35 million. And we have drawn down just about $19 million, so we’ve got $16 million available.
Jonathan Hoopes – ThinkEquity
Okay, great. And then if I could ask, are you aware of a policy initiative or a framework that would provide renewable energy credits for demand response investments or initiatives?
Well, I can address that. I mean, there are a couple of states right now that are sort of on the forefront of that. We announced a press release I think sometime in early 2008 about State of Connecticut and how our monitoring-based commissioning energy efficiency solution got credited towards Connecticut’s RPS standard. So that’s an example there. Nevada has got something similar. What we’re excited about is seeing what happens. I mean, the – again, we don’t need federal policy to really drive our business, but they could be a positive incremental gain for us. And what we see on the – down the pike after the stimulus bill here is potential for comprehensive energy bill or potential climate bill, and there is a lot of talk that you’ve heard about, I’m sure, in terms of a national RPS or energy efficiency resource standard. This would basically take something similar to what we have in Connecticut and make it on a national basis. There is certainly strong advocates that are looking at RPS standards and pushing for including energy efficiency. It levelizes [ph] for some states that have less of renewable resource, they could count energy efficiency towards that standard. It would probably be the most cost-effective way to achieve RPS standards. We think energy efficiency is the cleanest resource there is. And so we are optimistic. We are working it, and we are optimistic to see what happens and we’ll see what comes.
(Operator instructions) We’ll go next to Richard Baxter with Ardour Capital.
Richard Baxter – Ardour Capital
Hi. I guess some of my questions were already asked. But I guess the growth target or the arc for megawatts under management, it’s sort of similar to what you’re doing prior – targets are sort of similar to what you’ve been doing previously. But you said you’re also emphasizing more of the up-selling opportunities to the MBx. And I guess, can you talk about how you are using your sales force to also resell – excuse me, go into do – sorry about this. I guess the main point is how your sales force is focusing both on growing the megawatts under management plus also some of the other application suites.
Sure. I think what we tried to bring up in one of the earlier question – or one of the earlier answers we gave to one of the questions was, we’ve had a sales force in the first seven weeks of the year, has already gotten out of the gates and sold over 500 megawatts of demand response, a lot of it in the open markets of PJM. We’ve been selling everywhere. We’ve been selling under our brand new contract that we’ve announced in Arizona and Colorado. So the team is off to a great start. Why shouldn’t investors expect that team to continue on that kind of a pace? And so all we are trying to suggest is that the first quarter we do intend that to be – or expect that to be, I should say, probably the largest quarter for megawatts under management additions this year. And then what happens to that team is it’s going back – that sales team is a team that’s going back and developing a business relationship with these new customers and throughout the year helping them with energy procurement services opportunities, identifying energy efficiency opportunities. This sales team also has to work on renewals. It’s another piece of the business that we need to continue to focus on. We’ve done extremely well historically with our renewals. And so this team is busy throughout the year, but the first quarter is where the team is almost exclusively focused on megawatt under management additions, and that’s what you are seeing in the results that we’ve been able to generate so far.
We’ll have our next question from Pavel Molchanov with Raymond James.
Pavel Molchanov – Raymond James
Thanks for taking my question, guys. Following up on what you said in the press release about the increase in megs under management per person from 4.426, do you have a goal for what they could be over a certain time frame? Or maybe a better way of asking that is, is there a limit to where you think that can go?
Well, it’s a great question. I mean, the megawatts under management per full-time employee, I think of that and I think our team thinks of it as a leading indicator. And by leading indicator, if you consider this, we started 2007 basically at 4.0 megawatts under management per full-time employee. 2008, we started the year at 4.4 megawatts under management per full-time employee. We started this year at 6.0 megawatts under management per full-time employee.
We’re already up to 7.0 as of today, you know, right around 7 I guess I should say. It’s really a leading indicator because what we’re able to do now is manage more megawatts this year relative to the number of employees. And the number of employees that we have – the largest component is our employee-related expenses of our operational costs. So I think what you’ve seen is we started the year in such a fashion that allows us to confidently describe that you should see the operational leverage of this business really kick in this year.
That’s why we projected the EPS numbers that we projected. That’s why you’re going to see that increased operational leverage show itself not in that metric, but show itself what matters, which is in the financial statements of the company throughout the year. So – I appreciate everyone’s comments. I think we’re going to bring the call to a close. And we want to thank you again for joining the call today. As we’ve discussed, 2008, it was really a pivotal year for EnerNOC. We started the year with very lofty expectations of ourselves and we wanted to meet and, in many cases, surpass those expectations by delivering what matters, which is solid results.
And even amidst the backdrop of an economic climate like the one that we’re in, we did that. And I think it says a lot about the market opportunity ahead of us and the enviable position that EnerNOC has put itself in as a trusted energy services provider. We are showing no signs of slowing down in 2009. Quite the contrary, we are off to one of the best starts and I think it’s the best start in company history. The regulatory environment is evolving in a way that’s favorable to the market we play in.
And we continue to demonstrate that disciplined strategic growth that will grow EnerNOC’s market leadership and deliver shareholder value is what we’re going to achieve in 2009. I’d like to take a moment to thank the entire EnerNOC team who worked tirelessly throughout 2008 and they built the company over the past year to its leadership position. And I really look forward to working with them and updating all of you on great news three months from now on our Q1 conference call. Good night, everyone.
That concludes today’s conference. You may now disconnect at this time. We do appreciate your participation.
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