Telkonet's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Apr. 1.13 | About: Telkonet, Inc. (TKOI)

Telkonet, Inc. (OTCQB:TKOI) Q4 2012 Results Earnings Call April 1, 2013 4:30 PM ET

Executives

Jason Tienor

Gene Mushrush - Chief Financial Officer

Analysts

Richard Molinsky - Max Communications

Ed Stein - Private Investor

William Calliott - Davenport

Operator

Greetings. And welcome to Telkonet’s Fourth Quarter and Year End 2012 Financial Results Conference. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

Before turning today’s call over to management, permit me to read the Safe Harbor statement. Please note that during the course of this call, management will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding their opinion and expectation about future or expected events or results.

Forward-looking statements are identified by word such as anticipates, projects, expects, plans, intends, beliefs, estimates, targets and other similar expressions. These statements are subject to risks, assumptions, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied in such statements.

For more detailed information about Telkonet’s risk factors that may cause actual results to differ from expectation please see the company’s filings with the SEC that are referenced on Telkonet’s website at www.telkonet.com.

Part of the company’s presentation today includes non-GAAP numbers that management considers to be useful such adjusted EBITDA which is earnings before interest, taxes, depreciation and amortization, stock-based compensation and non-recurring items.

These non-GAAP measures should be considered as supplemental to its corresponding GAAP numbers. We encourage you to review the differences between these measures as described in today’s press release.

With that, I will turn the call over to Mr. Jason Tienor, Chief Executive Officer of Telkonet.

Jason Tienor

Thank you. And thank you to everyone for joining us today for Telkonet’s 2012 year end earnings call. We’ve been looking forward to this presentation and we are happy to share the results of the past year with you today.

We are happy to report that Telkonet exceeded its revised forecast and delivered $12.8 million in revenue in fiscal 2012, a 14% increase over the prior year. We’ve always known that Telkonet is an innovative and evolutionary company with enormous potential who develops superior products and cutting edge technology, and we are proud to say that our corporate developments and financial results are truly beginning to demonstrate this.

Our numerous high profile wins and company growth don’t begin to evidence all of the improvement in our organization, but they do prove that Telkonet is rapidly developing into the company that we’re capable of being.

Citing a recent study by Navigant Research the growth of wireless control system is estimated to increase to 36 million devices by 2020. Thankfully we recognized the upcoming proliferation of intelligent energy management systems several years ago with the acquisition of Smart Systems International and EthoStream.

While bringing together the wireless expertise and cloud-based management platform developed by EthoStream with the patented Recovery Time technology and hardware development of SSI, Telkonet has built what we believe to be the most innovative and cutting edge energy management solution in the market today with our EcoSmart Suite.

We’ve evolved beyond our roots of being an HVAC controls company to create a comprehensive platform that functions as a virtual engineer for our customers. While many of our competitors are only able to affect 40% of in-room energy consumption we’ve developed a platform that enables control over all energy consumed within a room.

This intelligence offers our customers access to numerous advantages not available elsewhere, including increased energy and cost savings through expanded efficiency abilities, increased rebates of incentives offered through utility programs, the ability to participate in demand response and load shedding programs and the comprehensive approach to efficiency and environmental responsibility.

While 2012 may have begun with the traditional seasonality of our revenue cycle in the slow first quarter, you’ll find that we ended the year with a record quarter in the most active period of our year.

By ending 2012 with a 14% revenue increase, improved financial position of $4.2 million in cash and receivables and profitability, we’ve reached the next milestone in Telkonet’s development and continue to meet our commitment to shareholder value.

We continue to reduce our debt and accounts payable to the lowest level since the current management team joined the company further improving our balance sheet and financial position.

A key addition to our corporate family in 2012 helping with the improvement in our financial strategy and development was the joining of Tim Ledwick to Telkonet’s Board of Directors as Head of our Audit Committee.

Two of the largest contributing factors to our revenue growth throughout the year were the increased investments in our sales and marketing staffing, and the increase in the average size of our EcoSmart projects.

As our cash position continues to improve, we’ve been investing heavily in our revenue growth through direct sales expansion, investment in our channel partners growth, training and resources, development of a technology demonstration room in our Milwaukee headquarters and an expanded presence at industry events and industry panels and in relevant industry publications.

As a result of these activities, we have seen the average revenue generated by our EcoSmart projects grow significantly with several markets having an average six figure project size versus approximately $50,000 in the prior year.

We’ve also seen our EthoStream Hospitality Network win greater recognition and market penetration into the full service and boutique hospitality markets providing increased margins and more loyal HSIA customers.

Additionally, our continued platform growth of the EcoSmart Suite adding the EcoGuard and EcoSwitch products has broadened our product platform and depth of savings, as well as increased the competitive benefit of our solution.

Through partnership integrations completed throughout 2012, we are now also able to communicate, control and coordinate with motorized draperies and shades, door locks, lighting, signage and intelligent automated panels from companies including Control4, Somfy, Saflok, Axxess Technologies and others.

Throughout a year such monumental improvements, we recognized an enormous number of significant and meaningful events. These milestones can’t be covered comprehensively, but I’d like to provide a few to demonstrate the progress that we’ve seen.

Telkonet is currently comprised of two distinct divisions, the EcoSmart Energy Management division and the EthoStream Hospitality Network. The synergies and efficiencies offered by these divisions are numerous, but each continues to recognize individual milestones particular to their business.

EcoSmart is the clean technology basis for Telkonet’s business model and provides the explosive growth and opportunity for our future. Through 2012 EcoSmart was installed in several properties located within Times Square with such prominent customers as Denihan and Tishman Hospitality.

We were also recognized as an approved or preferred vendor for such prestigious franchises as Starwood, Hilton and Marriott, and executed a master services contract to provide our energy management technology to the 600 corporate operated properties of Accor hospitality’s Motel 6 brand.

We recognized significant expansion of our international business with several projects completed abroad including a six figure installation in Dubai with Kempinski Hotels. Our educational market continued its explosive growth with new installations at NYU, MIT, Columbia, UC Davis and Northern Oklahoma College among others.

In addition, we continued growth in our each of our secondary markets completing sizable installations with the Kentucky State Parks, Sheppard Air Force Base and several retirement communities across the East Coast as state and local municipalities, the Department of Defense and the healthcare industry are recognizing the benefits of our energy management platform.

While our EcoSmart growth throughout the year was in part attributable to participation in large utility rebates and efficiency programs, we participated in several large performance contracting opportunities as well with our sizable ESCO partners including JCI, Trane, Noresco, Ameresco and others. We also successfully rolled out several on-bill financing projects with partners including Constellation Energy and World Energy.

In addition to entering into a comprehensive distribution agreement with a partner named Gustave Larson having 46 locations throughout the U.S., we continue to expand our channel distribution and create new avenues of reaching our customers.

While EcoSmart provides the explosive growth of our future, EthoStream continues to provide stability fueling development and a predictable annual growth rate year-over-year. The past year recognized several meaningful achievements for EthoStream including the completion of our Marriott HSIA Certification designating EthoStream an approved Marriott vendor which in turn has generated numerous new partnership and preferred vendor relationships.

Furthermore, the quality and value of our customers served for 2012 including Worldmark, Benchmark Hospitality, Summit Properties and an extensive list of others has generated more profitable margins and deeper customer relationships than we have had at any point in the past. Lastly, EthoStream passed the 5 million monthly user mark during the year cementing itself as one of the most trafficked hospitality HSIA networks in the world.

2013 holds great promise for Telkonet and we are incredibly excited to continue on the extensive progress that we’ve already made. The New Year had started off where we left and we’ve already successfully engaged to several innovative and profitable relationships and opportunities.

A few of the other developments that we are undertaking this year include the creation of a new Technical Advisory Board made up of prestigious industry experts, partners and customers to assist in the strategic evolution of our EcoSmart platform ensuring the best product and greatest customer value, also the completion of a traditional credit facility for Telkonet further supporting our balance sheet and securing a positive financial position.

We are also working strategically with industry manufacturers to partner in directly factory mounting our technology within HVAC equipment, so that we enter the product sales cycle earlier and ensure our inclusion in a greater number of new opportunities.

Finally, we continue to increase the average size of our deployments most directly with our concentration on the growth of our secondary and international markets and our increased focused on our channels and partners in addition to several strategic relationships and the negotiation, which will have a dramatic effect on our topline revenue opportunities.

All of these things working together continue to drive our success and performance. Through sustained focus and technology leadership Telkonet’s future is brighter than ever and we look forward to increased opportunities and successfully reaching new highs.

We are especially grateful to our Telkonet team for their hard work and exceptional leadership demonstrated throughout our organization. The growth and development of this company would not have been possible without our staff and I’d like to personally thank them all.

With that, I’d like to hand the call over to Telkonet’s Chief Financial Officer, Gene Mushrush to provide a financial summary of Telkonet’s year end result.

Gene Mushrush

Thank you, Jason, ladies and gentlemen, good afternoon, and thank you for joining us. Today, I’ll be presenting our 2012 year end financial summary. For the year ended December 31, 2012 revenues were $12.8 million, an increase of 14% compared to $11.2 million for the same period prior year.

We finished 2012 with our strongest revenue quarter since September 30, 2008. Despite a decline in EthoStream’s yearly advertising revenues, it was offset by EcoSmart’s revenue increase of 40% during 2012. This growth included but was not limited to noteworthy projects such as the Westin New York at Times Square, Columbia University, Massachusetts Institute of Technology and United States Military Academy at West Point.

We posted gross revenues of $6.9 million compared to $6.2 million over the same period prior year, an improvement of 10%. Gross margin percentage remained consistent with our historical average range of 50% to 55%. We ensure that margin has not been compromised in order to achieve revenue growth.

Telkonet incurred year-to-date operating expenses of $6.5 million compared to $8.8 million for the same period prior year, included in prior year’s result was a non-cash $3.1 million goodwill impairment charge related to Smart Systems International, a business unit purchased in 2007.

Excluding this charge operating expenses increased by 10% -- 12%, excuse me, driven primarily from professional fees and expenses associated with our revenue initiatives, but later in the form of additional headcount and sales and project management.

For the year ended December 31, 2012 we reported operating income of $370,000, compared to an operating loss of $2.6 million for the same period prior year. We reported year-to-date net income of $390,000, compared to a net loss of $1.1 million -- $1.9 million in the prior year.

For two consecutive years Telkonet has had positive EBITDA adjustments of $832,000 and $955,000, respectively. We reported $1.2 million in cash and equivalents at December 31, 2012, compared to $960,000 in the prior year, an improvement of 21%.

As noted in our Form 10-K filed this morning in January 2013, $382,000 of operating cash was used as collateral to meet a performance bond requirement related to a federally funded contract.

Project installation began in March 2013 and the moneys will remain as restricted cash until completion estimated to be in September of 2013. We improved our current ratio and short-term liquidity measurement from 0.8 to 1.1 for the year ended December 31, 2012.

We reported a working capital surplus measured as current assets was current liabilities of $415,000 at December 31, 2012, an improvement of $1.2 million compared to prior year.

A significant component of a short-term liability still remains to sales tax obligation. Presently we have successfully executed and paid in full voluntary disclosure events in seven states totaling approximately $43,000, another state will be paid $29,000 in installment over the next 10 months.

Voluntary disclosure agreements have been submitted but we still await acceptance qualification in an additional 27 states. The remaining states either offer no voluntary disclosure program, have no sales tax requirement or registration was completed. We confirm that one customer had self assesed for transactions spanning multiple years in multiple states resulting in a liability being reduced by approximately $151,000.

In closing, a strong fourth quarter put us in a favorable working capital position to begin 2013. But as discussed previously, federally funded contracts require performance bonding. Historically, we have been required to escrow in cash a significant percentage of the contract amount in order to fulfill the bonding requirement.

In an effort to counter this we are pursuing traditional lines of credit for the short-term capital need, which will allow us to execute significant multiple projects concurrently without impeding operating cash.

Although, proud of what was accomplished during 2012, we look forward to the prospects and challenges of 2013. Once again thank you for your interest and to our shareholders specifically thank you for your continued support.

I’ll now turn the call back to Telkonet’s President and Chief Executive Officer, Jason Tienor.

Jason Tienor

Thank you, Gene. With that, I’d like now to hand the call over to the operator for questions. Operator?

Question and Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of [Gary Cavanaugh] [ph]. Please proceed with your question.

Unidentified Analyst

Yeah. Congratulations on your improvement year-over-year, pretty impressive 28.3% up on your product revenue?

Jason Tienor

Thank you, Gary.

Unidentified Analyst

In looking at the topline there for the total net revenue, the product sales increased 28.3% but the recurring decreased 6.75%. Now, I’d kind of like to get a little bit better handle on how that with the linkages between those two things, I’m kind of looking at recurring as service contracts or maybe as part of the EthoStream process and does that lag your sales increase. In other words, can we expect the recurring to be increasing albeit time lag relative to the year-over-year ’12, ‘11?

Jason Tienor

No. That’s a great question, Gary. It’s actually a pretty simplistic answer. There are two major components to our recurring revenue. The one being the support revenue apply towards both our EthoStream, as well as EcoSmart business model, the second being a component of advertising that’s utilized for our EthoStream Hospitality Network.

The advertising for last year alone was, I’m sorry the reduction from last year’s number alone was $364,000 over 2012. What that means is, advertising is fairly variable revenue for us. We work with partners that locate and secure advertising contracts that we utilize on that portal that’s provided to the 5 million monthly users for our EthoStream Hospitality Network without having much control over what the advertising market is or how successful our partners are at locating advertisers requiring or asking for space on our network that’s where the revenue drop was from the prior year.

The more significant or a larger portion of our recurring revenue is that support component. For EthoStream, currently I believe that component is about $400,000 monthly, specifically for high-speed Internet access support. We are adding another significant component to that for our per room support on the EcoSmart side as well. It’s a EcoCare program that we initiated last year, that we are signing up each of our new EcoSmart networked customers to on an annual basis. So you should see that component of the revenue climb, but you have to separate both the advertising from the support revenues.

Unidentified Analyst

Okay. Let’s set aside advertising because it sounds like it’s a little bit too complicated to get a handle on. Can we make one assumption here that, as your installed base increases obviously your sales increases, your installed base increases, can we kind of expect then to see later on the recurring revenue also to increase because of that installed base?

Jason Tienor

Correct.

Unidentified Analyst

Okay. Now that may not be percentage - per percentage, obviously we are trying to model this so. But can we, at least assume for 2013 that 2012 recurring revenue will be at least flat?

Jason Tienor

Correct.

Unidentified Analyst

Okay. Now, I’m assuming that there will be no further impairments in - goodwill impairments in 2013. I’m sorry, yeah, 2013, if there wasn’t in 2012 but there was in 2011?

Jason Tienor

Unfortunately, that’s an answer I’m going to leave to Gene to elaborate further on. But it’s an annual calculation done by the audit group themselves as to determine whether there is an impairment for the company or not, simply by stating that there was none this year, would not be correct in assuming that there will not be one next year. It will be based on 2013’s performance, as to whether that would be an impairment or not.

Unidentified Analyst

Okay. And the slope of the increase in the cost of sales for products, obviously I’m assuming that you’ve added a lot more sales effort in there well, actually your sales efforts under SG&A but that went up also. Can we expect that the sales will go up the same percentage year-over-year for 2012, 2013 or will it moderate in relation to the increase in product sales in 2013?

Jason Tienor

We are targeting a higher sales volume for 2013, based specifically on as I mentioned during the presentation, the increased expense due sales and marketing resources that we added as the year grew in 2012. We’ve almost doubled our direct sales force here within the company, targeting EcoSmart as well as have added a lot more expense into our channel sales partners, providing more resources and more vendor trade as well as more platform capabilities for them to increase their sales efforts. So those expenses, we expect will have a direct correlation with increased product sales.

Unidentified Analyst

Can we anticipate a 50% increase in product sales in 2013 over 2012 then?

Jason Tienor

That’s a pretty high number. I’m going to say yes or no, but there is a significant expectation for sales growth. As we saw, as you saw through the year, last year, quarter-over-quarter product sales continued to increase. So we do have a cyclical nature to our business, but just having seen what we are doing and as you will hear in 45 days on Q1 sales call, you will see the growth of the beginning of this year will continue to carry throughout the remainder of this year. So, yeah, we have a significant expectation for product sales growth.

Unidentified Analyst

I understand it will be a pretty high bar to hit. I’m just kind of joking with you on that. Obviously, we put ranges on those but it seems like 25% might be pretty reasonable.

Jason Tienor

It is a reasonable number. I look at the fact that we did 14% this year with a incredibly slow first quarter to the year. If you look, we actually had a reduction in quarter-over-quarter, year-over-year in 2012. So that being the case, that bar wasn’t unreachable for 2012.

Unidentified Analyst

Okay. Now, then on your research and development and I’m going to get off here because I know somebody else wants to ask a question. But on your R&D expenses, can you give us a little bit of feel for that for 2013? You had 984,000 in 2012, I assume that’s not going to go down in 2013 but I don’t know, maybe you are cross training, you are going to move people around here.

Jason Tienor

Now that’s a pretty astute observation. Simply said, the way that we’ve maneuvered through the last several years in the economic downturn and the restructuring of Telkonet was minimizing those expenses and performing all of those cross-training activities that we were able to maximize our efficiencies. But moving forward, I have to say that in order to maintain the evolution and the technology leadership that we have set up to be a leader in this industry we have to make sure that we are providing the appropriate amount of attention to our research and development.

I do not expect those costs to go down. I do expect them to increase. I do not expect them to increase drastically. We manage those costs simply said with the operating cash flow that we have and with the product pipeline that we are looking to release our - and milestones that we are looking to release our new products based upon. So we have a pretty firm hand on those, but I absolutely would agree with you. You are not going to see them go down.

Unidentified Analyst

Would my assumptions of that holding steady in 2013 over 2012 is probably a little naïve, would 10% sound reasonable?

Jason Tienor

That’s a reasonable figure. Much like your guesstimate on the revenue side, while 25% isn’t out of reach, 10% is kind of a good measuring stick for how far you want to keep your expenses from increasing year-over-year. You don’t want to see them increase much more than that number on any measuring platform.

Unidentified Analyst

Well, guys, my compliments. Apologies for a while and thanks for putting it through. This looks like, this is starting to -- your focus is starting to payoff here.

Jason Tienor

No worries whatsoever. I appreciate the questions. They are all very good questions. I’m sure that everybody appreciated the answer. But we appreciate your continued support and please don’t hesitate to contact us if you have anything else you like us to respond to.

Unidentified Analyst

I’ll do. I’ll jump back in the queue. Thanks a lot for taking my call.

Jason Tienor

You bet. Have a great afternoon.

Operator

Our next question comes from the line of Richard Molinsky from Max Communications. Please proceed with your question.

Richard Molinsky - Max Communications

Great. Terrific end to the year. Love what you guys have been doing. I had actually one quick question. With the EcoSmart, when you are going through a -- with a contract, you say them, we also provide this Internet service with the Series 5 PLC and say look, besides this we could help your -- make up the customers by coming into the hotel and offer them those services to them. If you have, have you been converting some of those people over from these companies over to the Internet service?

Jason Tienor

Thank you very much for the comment, Rich and again, a great question. Absolutely, in fact that’s one of the areas that we’ve seen significant progress on throughout 2012. Much of our EthoStream network in prior years is made up of, what we would call economy and limited service grant properties where the majority of that network was made up of economy and limited service properties.

But we saw a lot of growth in our EthoStream business through 2012, was as I mentioned, our full service and boutique brand properties. Those are much higher end and much more concerned about the customer’s experience and also not as expense sensitive when it comes to making sure that they are providing the best value for the customers.

So while we are talking with them on EthoStream side, we are making the EcoSmart, conversation efforts as well as on the EcoSmart side having a EthoStream conservation. And what we’ve seen over the last year is a number of our larger groups initiated one or more of their new build properties with both sides of our solutions, both our EthoStream and EcoSmart network.

Richard Molinsky - Max Communications

All right. Well, thank you. I appreciate very much.

Jason Tienor

Thank you. Have a great afternoon.

Richard Molinsky - Max Communications

Thank you. You too. Great job.

Operator

(Operator Instructions) We do have a follow-up question from the line of [Gary Cavanaugh]. Please proceed with your question.

Unidentified Analyst

Well, that was quick. I want to ask you on your product revenues, that was a pretty sizeable increase year-over-year. Could you give us a little bit of better understanding of what kind of product mix that was? Did the product mix change a lot between 2011 and 2012 over the 24-months period roughly in 2012, what is that product mix?

Jason Tienor

Our 2012 product mix between the two divisions was a 40% growth approximately on EcoSmart. So we saw a significant expansion of our EcoSmart platform, which was expected. If you recall, we released EcoSmart as a product and a platform in February of 2011. So the first year of gaining sales and gaining traction in the market started to materialize through 2012, as you saw not just for our direct sales but with our partners, a lot of those engagements such as Kentucky State Parks or the new universities but through very large ESCOs in which the sales cycle can be as long as 12 to 18 months.

That being said, EthoStream maintains a pretty consistent and logical revenue climate. We believe it’s between 10% and 15% on an annual basis. The decline in advertising revenues over 2012 dropped from about 15% down to 10%, but otherwise it maintains a pretty consistent growth rate. So what we really target at this point is EcoSmart new products developments and moving beyond simply being an HVAC company, which 2012 entirely revolves around.

In 2013, we released two new products which are a plug load device and a wall switch that communicates comprehensively across our ZigBee network, so that we can now control all in-room energy consumption, basically being able to turn off a room, turn on a room or control any individual components of that room based on any number of measures, occupancy, demand response or load shed, scheduling, et cetera. We expect to see a significant revenue increase as we move ahead by being able to offer multiple products into individual customers that we have not seen in the past. I hope that was fair enough for you, Gary.

Unidentified Analyst

Yeah. That sounds like, we are off a lot of the focus of the client’s attention is right there in the individual rooms, trying to get more control over ‘em. Now you mentioned load shedding, which kind of brings us another element here, which seems like there is a lot of integration that goes on with what you are doing, and more and more integration as time goes on which so often is. You are talking about performance contracts.

The performance contracts that I’m familiar with in industry over the years was most companies that would fit in and they would counter products that would reduce power consumption and they would meter all of that and they would have a historical record of it. And they go back and part of their performance -- part of the income that you receive is how well it actually does perform in real life based upon actual measured savings. Is that part of what you do, when you are talking performance contracts is that what you are talking about or am I off on that?

Jason Tienor

It is close but you are off. What the partner who contracts us, perform our installs does is similar to what you are describing except they come in and we will take one situation to give you an example. They come in to a university and they evaluate all of the university’s energy consumption, needs, patterns, energy generation, et cetera and they will come back to the university, recommending certain changes or certain additions or certain renewables to be added to their mix.

The university then has the ability to choose, which of those suggestions they want to implement and move ahead with contracting that and will call them an ESCO or energy service company to perform those measures. How that has been done is through a performance contract where the ESCO will actually pay for and perform those efficiency measures or renewable installations. And then they will receive their payments based on the savings that the university recognizes from those implementations and that’s what we will pay down, what you could consider the performance contracted itself for the ESCO.

The upside for that ESCO is that they will contract out for some period of time and they will recognize those savings throughout that entire window. That is the performance contract. Since we are a sub contractor to the ESCO, they will contract us based on our platform and if we provide cloud-based real time management and monitoring of those savings that’s what allows them to understand and rely on the savings numbers that we provide.

Unidentified Analyst

I see. So does the ESCO actually work with universities, work with -- say in that particular case to define the utility contract for possible load shedding?

Jason Tienor

They absolutely can.

Unidentified Analyst

Okay. So the ESCO does that and then -- so the ESCO is kind of like your middleman to the client, is it or do you actually, do you sell to the client or do you sell mostly to the ESCOs?

Jason Tienor

It’s all determined based on the individual opportunity but in the largest majority, specifically around the educational phase we work through the ESCOs.

Unidentified Analyst

Okay.

Jason Tienor

Very often, you will find the educational institutions, especially of the size that we are dealing with have implemented performance contracts with us most previously and they have implemented several phases with those ESCOs previously. When an ESCO learns about us, when we start working on what we do and how we can be implemented on site, we find that they can create a new phase for existing performance contracts using our technology because dormitories are a space that has historically been left alone because they didn’t fit that model or building automation systems didn’t fit that model, that’s where we come in. And that’s actually a key statement there in understanding that customer is not a competitor to building automation systems. We are actually complementary to them and some of our largest ESCO partners own energy management -- I’m sorry, building automation systems of their own.

Unidentified Analyst

I see. So there, now do you provide training then on your products to the ESCOs?

Jason Tienor

We absolutely have to, correct and what we hope to continue to grow is that training. Thereby, enables the ESCOs provider their own integration efforts and installations, whereby releasing Telkonet from needing to perform all of the installation of the opportunities that we become engaged in. That becomes a bottleneck for us, if we have to have hands-on with every opportunity but by appropriately training and providing the resources as I mentioned during the presentation for these partners, we are able to remove that bottleneck and thereby increasing the potential flow of products out our doors.

Unidentified Analyst

I see. I see. Okay. Now and going back up to the cost sales and the revenues, specifically on the product side, your sales increased on the products, your sales increased 28.3% and you said 30% of that was due to EcoSmart. Now on the product, cost of sales increased 23.7%, which looks like your margin or your scalability is working for you because your revenue increased 28.3%, your cost only increased 23.7%. Am I off on that or is that just a coincidence, or is there some odd things that happened there that caused that, or is it really truly because your margins are little bit better on the EcoSmart?

Jason Tienor

No. You are absolutely right and that’s one of the areas that we concentrate on quite a bit, Gary. In that, we try to find the efficiencies that can be recognized both in manufacturing, in procurement as well as in support of our channels relationships.

By maximizing those efficiencies, we’re able to increase those margins. And we hope to continue doing that with new products as we’ve got new product releases and we’re able to scale the production runs of our products themselves.

Unidentified Analyst

You are kind of extending my feeling of Telkonet into the fact that everything you guys look at now is efficiency internally, externally, whatever?

Jason Tienor

Yeah. You are absolutely right. If you look at lot of the other products that we work with, that might seem to be necessary in our space or things that our competitors manufacture where we don’t enter like door locks or safes, systems of that nature. The reason that we don’t enter into those is because they don’t do efficiencies.

They are simply other products within our same environment. And the way that we’re able to enter competitive bids with them head to head is by partnering with the appropriate organizations and by integrating our solution very in-depthly with their products as I mentioned that we partner with Control4, Somfy, Axxess Technologies to utilize door signs, lighting, blind motors. Those are all conscious decisions. They are not products that we want to enter into but in order to remain competitive on the bidding process we need to have a close relationship, integrated relationship with somebody who provides those.

Now that being said, we also look towards those same products to ensure that there were some value of them to our overall rollout and into our platform. Take for instance, motorized blinds were great.

You wonder, why would we want our ZigBee network to communicate to them. Well, in order to maximize efficiency, if I turn off the HVAC, when you leave the hotel room, if the sun is still beating on that hotel room, it’s baking the room until the person comes back in. And that’s going to decrease the efficiency because now the HVAC system has to work harder in order to cool that room back down again.

But if I’m able to close the blinds when the room goes unoccupied, I thereby removed solar load as well and reduce the strain on the HVAC system and cooling the room when somebody reoccupies it.

Unidentified Analyst

You want to gain full control over the room, the same way you want to regain -- you want to gain full control over your internal processes in Telkonet itself?

Jason Tienor

Yeah.

Unidentified Analyst

Very smart. You’re working on both sides of the equation there and that’s quite impressive. I have known for a long time that you’ve been doing since -- except to these increased smart things but a little bit of screening your ways through different market segments. And I like to focus that you’re planning at this time, sounds really good. I’ll get back in the queue, let some body else get in here.

Jason Tienor

I appreciate it, Gary.

Unidentified Analyst

Thanks a lot, Jason.

Operator

Our next question comes from the line of Ed Stein, a private investor. Please proceed with your question.

Ed Stein - Private Investor

Hey, Jason. Great quarter, great year.

Jason Tienor

Hi Ed. Thank you very much. Hope you’re doing well.

Ed Stein - Private Investor

Yeah. Thank you. We used to worry about your getting orders and growing the business. Now, it seems like the concern might be, can you get it all done that you got on your plate. Specifically, the joint venture was somebody like Constellation reduce the requirement of your bonding because you’re piggybacking with them or is it same as it was before?

Jason Tienor

That’s kind of a loaded question only because there are several different factors at play, one being the size of engagements we repeat on them; two being the number of opportunities that we have in the queue with them; three being who the end customer might be, is it military, is it education, is it direct hospitality customer. 40:46

Because there are some of these factors that that’s not really a question that I can answer. But I’ll say this, by having partners like Constellation, definitely increases the size of our pipeline, definitely makes it easier to have multiple opportunities at play because they can work with us, provide their own integration, provide their own installation and moving their sale entirely through from an initiation to completed installation.

The more partners that we have like that, obviously as I mentioned, the larger the pipeline and the topline revenues become. And lastly, when we have relationships like we do at Constellation, they provide alternative financing measures to our customers, thereby removing one of the largest inhibitants to our customers moving ahead with projects.

Ed Stein - Private Investor

That’s great. Are you finding the banks are beginning to work with you more as you build credibility and as your -- the size of your contracts grow?

Jason Tienor

I’m definitely having more conversations, Ed.

Ed Stein - Private Investor

Okay. Well, conversations sometimes lead to good results. So far, you seem to be doing your share of good results.

Jason Tienor

Thank you.

Ed Stein - Private Investor

Keep up the good work.

Jason Tienor

We will. We appreciate your support. Keep an eye on us.

Ed Stein - Private Investor

Okay. Thanks Jason.

Jason Tienor

Bye.

Operator

Our next question comes from the line of [Colin Roister] from the American Capital Partners. Please proceed with your question.

Unidentified Analyst

Jason, great job. Just want to give you a heads up. I just went over 10 years of holding all these shares.

Unidentified Speaker

Jody, you want me to re-poll again after the last...

Jason Tienor

Hold on a second, Colin. Guys, you are on the main line? Thank you. Thank you very much, Colin. I appreciate it. I know that you’ve been a long time holder. And I appreciate you taking the time to participate.

Unidentified Analyst

Well, the other thing was thank you also, for Thursday’s close, because that’s when we printed our monthly statements. You need a little pat on the back.

Jason Tienor

I appreciate but it’s not me. We will take it anyhow.

Unidentified Analyst

But now risk to risk, you are hanging in there. I do have one question and it always pertains to the share price from our shareholder. Are there anything in the works for ‘13 to broaden. I know, a year or two ago, you were trying to get some investor contact and some eyeballs from the institutions. Have you made any progress there or do you plan any?

Jason Tienor

Absolutely. One of the things that we did last year already, and we started putting the roadmap into it for 2013 is increasing our penetration into the institutional market, not necessarily for their active participation because obviously a lot of the institutions that we speak to has a share price requirement, hopefully.

Unidentified Analyst

Right.

Jason Tienor

So making sure that they are aware of us and watching the growth, the development and the improvement of the company is key. So that when we have passed the milestone of that market for them, they were already there. They are knowledgeable about the company in our efforts and they can participate immediately.

So some of the things that you’ve seen I believe over the last couple of months is due to those efforts. You’ve seen a lot of -- we've seen a lot of people join in our investor newsletter and join our investor mailing list, simply because we’ve been able to get the news of Telkonet has changed its new direction and our improvement out to a lot more people and those people are carrying out further. So we’re definitely broadening our shareholder base. We’re definitely bringing the master of change and where we stand today.

And I think a lot of people are picking up the press that we’re putting out as well, Colin. And that you see we’re making some significant relationships happen and those relationships themselves are generating significant roughening on their own.

Unidentified Analyst

The other factor is if anybody wants to go, look at the -- who has been doing a lot of the buying. Buyers tend to do that because one of the Directors bought shares at the open this morning. So that speaks volume even though we had a tough day. Over the last couple of months, there have been a lot of 144 information being put out by you’ll. In that glance, really appreciate it. You put your money where your mouth is.

Jason Tienor

That’s one thing, Colin as we never had a doubt of where we could go and what we could be. I think this is just evidence of that the fact that we’ve been buying and in fact that we’re showing the results that we said we would be able to reap. We only intend to have much larger and greater results moving forward. So I hope you will stay with us.

Unidentified Analyst

Just don’t make me wait another 10 years.

Jason Tienor

No, sir.

Unidentified Analyst

I’ll hang in there with you. Don’t worry.

Jason Tienor

I really like that.

Unidentified Analyst

Thanks again, guys, great job. Thanks

Jason Tienor

You bet.

Operator

(Operator Instructions) Our next question comes from the line of William Calliott from Davenport. Please proceed with your question.

William Calliott - Davenport

Hey, Jason.

Jason Tienor

Hey William. How are you?

William Calliott - Davenport

I’m doing fine. Thank you. I’m doing fine. Without taking lot of time, could you walk us through Stanley and Constellation on how those contracts get done?

Jason Tienor

Sure, sure.

William Calliott - Davenport

If Constellation gets -- do you get their, do you get the business for your sales force or their sales force. Once you get the contract, do they pay you or does -- how does that whole thing work?

Jason Tienor

You actually take two pretty different relationships. We’ll talk about Constellation on the first hand. Constellation actually runs a program very similar to those that -- there is a program here in Wisconsin named Focus on Energy. We participated over in the west coast with PG&E's Cool Control Plus. It’s actually a saving incentive and rebate program.

But in their particular situation, they are providing an on-bill financing alternative whereby they are trying to attain customers, new customers and deregulated energy territories and in addition to, signing up new customers, one of the incentives they provide most customers is their ability to finance new efficiency initiatives for the customer as well as save them on their actual energy cost.

In doing that, they’ll add the cost of those efficiency measures on to the bill and they’ll take the savings of the customer recognized as the payments toward those investments that they are making. That type of relationship is very advantageous both to the customers owe to us because they with a type of relationship we have at Constellation and how close we are.

They are aware of customers immediately that are looking for measures that might help them reduce their energy expense. So they will bring new opportunity to us as well as when we sign up new customers and we look at what territory they are in or what energy purchasing region they are in. If we find that they’re in a deregulated territory, we’ll add this as a suggestion or an alternative for them and we’ll begin the conversation with Constellation.

So it’s kind of two-way relationship that works very well. It’s the ability for customers to get something in today that they might not have the capital available for. On the other side, you have a relationship with Stanley Energy. Stanley Energy is more of a strategic partner or value added reseller relationship whereby they have great relationships through other measures and other affiliations. And they are able to go back to those customers and take their knowledge of the energy efficiency market and provide us as an alternative and opportunity for those customers.

They are then able to work together with those customers to implement measures including us, including energy purchasing, including locating the relevant rebates and incentives for those customers and put together a holistic package that enables the customers to move ahead without really having that much experience or knowledge of what it is that they are doing. So it’s much more of a strategic and value-added relationship in their part.

William Calliott - Davenport

Well, with Constellation, let’s say, they get you a big contract that you get one and use them. How are you pay? Are you paid up front…

Jason Tienor

We pay…

William Calliott - Davenport

… or is it over the life?

Jason Tienor

Yeah. It’s actually different. The way that the program was run that we’re working with them under last year was actually working through the customer. And the customer works directly with Constellation. So it’s actually a chain-linked reaction. They remodeled the program for this year. And that, now there are two separate agreements, one with the Constellation and the customer and another with Constellation and Telkonet. So we are actually paid directly by Constellation themselves.

William Calliott - Davenport

So there is still -- you don’t have to drag out the revenues now?

Jason Tienor

Correct.

William Calliott - Davenport

Now, with Stanley, are you giving them obviously a piece of the contract?

Jason Tienor

That’s correct. It holds the sense on what type of engagement it is, whether it’s an agency agreement or whether it’s a VAR agreement with respect to who the customer is. So there is different models of how they are incented to bring us into a relationship but absolutely they are involved in the compensation of our growth contract.

William Calliott - Davenport

One other question, in your opening comments, you mentioned, somebody mentioned MIT and Colombia. Are those done or they are going to get it done this summer when school…

Jason Tienor

Both of those projects -- both of those are institutions that had projects with them already. One project carried over from 2012 into 2013 for its closure but they both completed at least one dormitory building if not multiple.

William Calliott - Davenport

Well, thanks Jason. Appreciate it.

Jason Tienor

Thank you, Bill.

Operator

There are no further questions in the queue. I’d like to turn the call back over to management for closing comments.

Jason Tienor

Thank you very much Operator. Thank you everybody who joined us today for 2012 year-end earnings call. We appreciate your continued support and again, Gene and I are happy at any point to answer any questions you may have. Please feel free to contact us either here at the office, 414-223-0473 or directly at ir@telkonet.com. Again, thank you everybody and have a great afternoon.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!