Will Lyons – IR
Tim Healy – Chairman, CEO and Co-Founder
David Brewster – President and Co-Founder
Neal Isaacson – SVP and CFO
Paul Clegg – Jefferies
Sam Dubinsky – Oppenheimer
Sean Hazlett – Morgan Stanley
Bryce Dille – JMP Securities
Elaine Kwei – Piper Jaffray
John Roy – Janney Montgomery Scott
EnerNOC, Inc. (ENOC) Q1 2009 Earnings Call Transcript May 6, 2009 5:00 PM ET
Good day, and welcome to the EnerNOC fourth quarter 2009 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. Good afternoon and thank you for joining EnerNOC’s first quarter 2009 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 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 May 6th, 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 on our first quarter 2009 financial press release, which was issued today after the market closed. This release can be found on the Investor’s section of our corporate Web site www.enernoc.com.
With that, I’m going to turn the call over to Tim.
Thanks, Will. Good afternoon, everyone, and thank you for joining us on our first quarter conference call. As many of you saw from our press releases and related reports, the first quarter was one of continued strong growth for EnerNOC. We believe that the growing momentum of our business can be traced back to the sound strategic decisions and investments we have made in our business to date once they position us to continue winning profitable market opportunities that complement the increased leverage in our business.
We also believe that our strong start to 2009, our growing demand response in energy efficiency pipelines, and our innovative technology applications continue to differentiate us in the market, keeping us squarely on track to be casual positive from operations in the second half of 2009 and profitable in 2010.
In my third remarks, I want to touch on some key metrics related to our growth and leverage starting the quarter as well as the growing pipeline for our demand response and energy efficiency solutions. David will then discuss our recent public announcement of a technology development that we are very excited about.
Finally, Neal is going to give a detailed summary of our solid first quarter financial results. You will hear that EnerNOC continues to flourish and that our record business expansion year-to-date has enhanced our 2009 financial outlook, giving us the confidence to raise our revenue to meet this guidance this year.
This is the conference operator. I do apologize for the interruption. One moment, please.
Please, go ahead.
Okay. Thank you. Thank you very much for staying with us today. I think there were some technical difficulties. We want to thank everyone for joining us on this first quarter conference call.
And as many of you saw from our press releases and related reports, the first quarter was one of continued strong growth for EnerNOC. We believe that the growing momentum of our business can be traced back to the sound strategic decisions and investments we have made in our business to date wants to position us to continue winning profitable market opportunities that complement the increased operating leverage in our business.
We also believe that our strong start in 2009, our growing demand response in energy efficiency pipelines, and our innovative applications continue to differentiate us in the market, keeping us squarely on track to be cash flow positive from operations in the second half of 2009 and profitable in 2010.
In my prepared remarks, I want to touch on some key metrics related to our growth and leverage during the quarter as well as the growing pipeline for our demand response and energy efficiency solutions. David will then discuss our recent public announcement of a technology development that we are very excited about.
Finally, Neal will give a detailed summary of our solid first quarter financial results. In short, you’ll hear that EnerNOC continues to flourish and that our record business expansion year-to-date has enhanced our 2009 financial outlook, giving us the confidence to raise our revenue and EPS guidance for the year.
So let’s begin with some key metrics that highlight our strong execution and business momentum. During the first quarter of 2009, our CNI sales team maintained its exceptional phase, delivering record business expansion of megawatts under management in our network. Specifically, we exited the quarter with over 2700 dispatch able megawatts under management in our network, an increase of approximately 650 megawatts during the quarter. This represents the best quarterly sales performance in our company’s history, exceeding Q1 2008 by approximately 67%. And to put this in perspective –
David will comment later. Today, as we closely monitor the broader macroeconomic environment, we are pleased that our value proposition continues to stand out and that we are achieving steady gross margin expansion as we continue to grow our business. Remember, we offer CNI customers the opportunity to unlock energy savings without expense simply by joining our network, a compelling value proposition, especially challenging economic times.
And Neal will cover this later on the financial discussion, but gross margin continues to be an important competitive barometer reflecting our sales force’s ability to differentiate our demand site solutions in the market place as well as our ability to extract the most valued from our megawatt portfolio. We experienced a strong gross profit increase of $1.4 million this quarter, compared to Q1 2008 and are encouraged by the gross market trends we expect to emerge through out the year.
Our gross profit expansion, this gross profit expansion is also traceable in part to our high margin energy management solutions. Consisting of our energy efficiency application called monitoring based commissioning or MBCx and our energy procurement services platform, which continued to gain momentum and drive our market differentiation.
Our MBCx team is on track, excited to have signed 2 valuable multi year MBCx contracts with Fortune 50 customers in the first quarter. Not many of you know MBCx is our smart grid application that helps CNI customers identify immediate, persistent, no cost, low cost, energy efficiency opportunities. You can think of this solution as something like GM’s OnStar, which alerts you to a vehicle’s operational problems, combined with a Prius dashboard which shows you the car’s real-time consumption data.
MBCx applies some of that innovative thinking to a commercial building or an industrial facility using energy data streams to identify waves for buildings to operate more efficiently. Our technology application allows us to go well beyond the capital intensive, low technology lighting and H-back [ph] retrofits identified by the traditional energy services company model and delivers more than just most static management building systems. We’re excited about the prospects of this solution for a number of reasons including the fact that it had already qualifies for a new energy credit in Connecticut and it has a very attractive ROI for large CNI facilities, looking to achieve both immediate and long term energy efficiency goals.
Turning from energy efficiency to energy procurement, we have challenged our energy procurement services team, not only with aggressive year-over-year growth objectives, but also with important cross selling targets. We are optimistic about this team’s success at achieving these goals, especially in light of the proposed removal of energy rate caps in states such as Pennsylvania, where we believe we are well-positioned to unlock new energy procurement saving opportunities for existing as well as new CNI customers.
EnerNOC’s modest but steady expansion of these two areas of our energy management solutions business is particularly exciting for us, as we believe that leveraging our advanced technology capabilities and market knowledge is going to allow us to deliver more value for customers and increased EnerNOC’s long term market opportunities.
Turning back to a few more metrics in our core demand response business, we like what we’ve experienced in Q1, as it relates to our expanding utility customer base. Specifically, during the quarter, we signed seven new long term utility contracts, three in new states for us, Arizona, Colorado, and Idaho. And we captured more than 60% of a competitive RFP opportunity with four investors on utilities in Maryland.
In aggregate, we expect this long term utility contract wins to represent over $120 million in combined potential revenue to EnerNOC, further enhancing our strong financial business visibility.
Our utility demand your response project pipe line, continues to grow in those small parts due to the increasing regulatory pressure to address peak demands, rising construction cost, and popular opposition to building fossil fuel power plants as well as persistently liquid credit markets. It is extremely difficult for states, print operators, and utilities, to rely on supplies and infrastructural loan, to meet their long term planning objectives; not to mention loan fee, energy efficiency, and emerging green house gas reduction goals. And we believe that partnering with EnerNOC represents one of the most reliable, and cost effective ways to meet the long term system reliability and energy efficiency needs of these utilities.
While we’re mindful of how slowdowns in demand growth can affect utility time frames to make investments in new supplies side resources, particularly delaying some projects, especially those that might also be capital constraint, we remain cautiously optimistic. We believe that utilities are becoming increasingly attractive in the flexibility of adding quick to market demand response resources as an appealing hedge for any delays they make in adding new resources, or things that they might be considering of that nature.
Like our utility pipeline, our CNI demand response pipeline is consistently growing, as businesses continue to battle budgetary restrictions and look inward to reduce energy cost. We believe that partnering with EnerNOC represents a new revenue opportunity and delivers appealing ROI for businesses and institutions that we add to our network.
Finally, it’s important to describe the operating leverage that we’re experiencing. We have increased our megawatts under management for fulltime employee metric by nearly 50% since the beginning of 2008, demonstrating that we are at scale, and we are able to manage our growing network of assets without commensurate growth in our head count.
This leverage is reflected in our enhanced GAAP net loss per share guidance of $0.93 to $1.04. We will continue to leverage our scale in market leadership to position – our market leadership position to shape market opportunities that have value to all constituents in the smart grid, regulators, utilities, and their rate pairs.
We currently believe that this leverage in scale will also help us achieve our objectives of generating positive cash flow from operations during the second half of ’09 and being EPS profitable in 2010.
I’ll now turn the call over to my colleague David to discuss our latest technology advancement that we believe further enhances EnerNOC’s leadership positioning, creating a more responsive, efficient, and reliable electric power grid. David?
Thanks, Tim. Usually, I focus my prepared remarks on a various regulatory developments to shape the energy markets and their corresponding opportunities and challenges that EnerNOC is addressing. Today, I’d like to focus first on our latest technology innovation that we believe will enhance our lead in the market before I talk on the federal estate policy tailwinds that continue to help shape our growing industry.
Few discussions about energy markets these days fail to mention the smart grid, but fewer actually described the smart grid in a meaningful, clear way. In essence, the smart grid is all about leveraging advancements in IT communications technology and operational technology to improve system use and resilience as well as to empower electricity consumers and address environmental concerns.
Look at the smart grid as having two layers, an infrastructure layer and an application letter. Since our inception, EnerNOC has primarily focused on the application letter, investing much of our time in our R&D efforts to develop the scalability’s security and the reliability of our software application. These applications are a major differentiating factors that enable EnerNOC to deliver robust demand response and energy efficiency solutions.
This month, our engineering team is releasing the next version of our core management software which is called Power Track. This release will include enhanced fault management capabilities, quicker baseline upload capabilities, and stronger tools to facilitate effective operability between our operations and our products teams.
We’re extremely pleased with the progress that they have made on improving this platform and the flexibility at scale that is a force to us in managing our rapidly growing network, which has grown to over 5,000 demand response sites as of today. Our technology also enables us to capture multiple revenue streams in our various regions, securing recurring capacity payments, energy payments, employee services payments, system benefits payments, and increasingly, energy procurement and energy efficiency service fees.
One of the most exciting recent developments in EnerNOC is our engineering team’s latest innovation, which is called PowerTalk. PowerTalk is the first application of present technology with the Smart Grid. Similar to today’s popular instant messaging services, they use presence technology to transfer real-time information, such as whether or not a contact is online, active, or idle. Presence enables PowerTalk devices to continuously report their status and other information using a well defined standard, which is called the extensible messaging and presence protocol or XMPP, so that changing conditions are detected in real-time.
This innovation enables more predictable, dynamic, and reliable distributed access to dispatch management, which is important, particularly in high value load management markets that require quick dispatch and high frequency data reporting, such as PGM Interconnections synchronized reserves march.
PowerTalk enabled devices are also firewall friendly, meaning that they enable us to leverage CNI customers’ existing network to facilitate secure, authenticated, and encrypted communication without the need to establish a virtual private network. This eliminates the need for our CNI customers to devote IT resources to help ready their facilities to participate in the mail response. And by more efficiently equipping CNI customers, we’re generally able to enroll eligible megawatts in the market’s factor, which maximizes ours and our customer’s revenue opportunity.
Finally, PowerTalk presence functionality can be leveraged and applied to applications beyond demand response, such as enhanced outage detection and voltage management as well as data equivalent fees in the utility control room or really any application that requires exchanging energy usage for management information between systems components. By leveraging XMPP, which again, is an open standard based messaging protocols, PowerTalk facilitates integration with and inter-operability among existing and future smart devices and back up of IT systems.
So why is it that technology advancement important and exciting to us? Because technology our advantage allows us to quickly capitalize on demand response and energy efficiency market opportunities as they materialize, and they evolve, and they diversify.
We, increasingly, are seeing these marketing opportunities taking shape. Federal and state policies that address energy reform and climate change continue to gain momentum. This is evidenced by the language in the American recovery and reinvestment act, plus recently proposed energy bill legislation, which include the potential for national energy efficiency standards to be mandated later this year.
Also, EPA proposed mandatory reporting of greenhouse gas emissions for large sources in the United States as well as its recent proposed fining the greenhouse gases, contributing to air pollution that may endanger public health for welfare have the potential and significantly impact carbon markets in the U.S.
We believe that these opportunities could place a premium on our solution. We would caution that these opportunities may not develop for sometime and remind everyone that our business to grow onto its current level without the need special mandates for subsidy. Our growth plans are not dependent on tax breaks or any other measure that aimed at further stimulating our fast growing market.
In closing, we believe that our technology continues to put us in strong position to enable the smart grid of tomorrow today. We are pleased that the scale in a differentiation, that our technology advancement that have afforded us so far, and we anticipate that further innovation will lead to continued growth leverage and differentiation for our company in 2009 and beyond.
I will now turn the call over to Neal, to provide our first quarter detailed financial results.
Thanks, David. As you’ve just heard, we’re excited by our first quarter record business expansion and technology enhancements, as we believe they keep us on track to achieve our profitability targets. I’d like to provide some additional details on our first quarter financial performance as well as outline our second quarter and updated 2009 financial guidance.
For the first quarter of 2009, we delivered solid revenue performance of $18.4 million, at the high end of our guidance range. The majority of our megawatts that we signed up, year-to-date for the PGM region, which as many of you know, is a market in which we recognize revenue, primarily in the second and third quarters. We continue to expect that our first and fourth quarters will be seasonally low revenue quarters than our second and third quarters, due mostly to the very visible, yet seasonal timing of the demand response market in which we participate.
For the quarter ended March 31, 2009, we recognize demand-response revenues of $16.8 million; compared to $17.6 third quarter ended March 31, 2008 at decrease of $4.8 million or 4.6 percent. This revenue decrease was primarily a result of few New England contract that ended 2008 as well as low participation in energy markets. Upon completion of the New England contract, our sales team was able to roll the majority of our existing megawatts onto those contracts into an existing New England open market opportunity.
Sales of our high-margin energy efficiency and energy procurement solutions for the quarter ended 2009 were $1.6 million, compared to $1 million for the quarter ended of March 31, 2008, an increase of $600,000 or approximately 62%. This increase is due to in large parts to our acquisition of South River Consulting.
Our first quarter, megawatt utility contract points have enhanced our financial network. Specifically, we are raising our full year 2009 revenue guidance range to between $160 million and $172 million. We continue to expect increased revenue seasonality as we expand our PGM presence and build out utility contracts across the country and we expect it to translate into second quarter of 2009 revenues of $38 million to $40 million. The midpoint of which represents approximately 65% increased over last year’s Q2 revenue performance.
Cost of revenues for the quarter end of March 31, 2009 totalled $10.5 million compared to $12.1 million for the quarter end of March 31, 2008, a decrease of approximately 1.6 million. The majority of archives of the revenue share payments that we make to businesses and institutions in our demand response network. During the quarter, these payments totalled over $8.5 million, a very timely source of found revenue for businesses in this tough economic climate.
Our gross profit for the quarter was $7.9 million compared to the $6.5 million for the quarter ended March 31, 2008, an increase of approximately $1.4 million. Gross margin for the first quarter was 42.9%, compared to the 34.8% for the quarter end of March 31, 2008, an increase of over 800 basis points. This margin increase was a result of enrolling megawatts under the utility contracts and open markets; re-enrolling megawatts from expiring contracts; a decrease in participation in low margin, energy only programs; more energy management services revenue; and effective selling overall.
As Tim mentioned, our gross margin continues to be an important barometer of our sales forces’ ability to differentiate our demand response and energy efficiency applications in the market place as well as our ability to extract the most value from our megawatt portfolio.
Operating expenses were $19.9 million for the first quarter, compared to $18.2 million for the first quarter of 2008, an increase of $1.7 million. Employee related charges, including non-cash stock-based compensation continue to account for the majority of our operating expenses. Some headcount related expenses that we have previously expected to incur on the first quarter has shifted into subsequent quarters.
Additionally, we are starting to benefit from operating expense leverage as we drive efficiencies in our ability to market, to sell, to enable, manage, and maintain a larger megawatt portfolio with our existing infrastructure. With all of our 2,700 megawatts under management and a total headcount of 357 as of March 31, 2009, we are able to expand our megawatts under management per FTE metric to approximately 7.8 compared to 5.3 for the same period of 2008.
We anticipate increased leverages in this metric as we continue to add recurring revenue megawatts to our portfolio. Net loss for the quarter end of March 31, 2009 was $12.5 million or $0.63 per basic share, compared to a net loss of $11 million or $0.57 per basic share for the same period for 2008. This better than expected net loss can be attributed to our successful increase in gross profit, cost control procedures as well as our scalable technology, which continues to increase operating leverage in our demand response deployment process.
On a non-GAAP basis, a calculation which excludes the impact of stock-based compensation and the amortization of intangibles, our net loss for the quarter was $9.5 million or $0.48 per share basic.
As we’ve described, 2009 represents a harvest year in which we’ll begin to reap the benefits of the targeted investments that we made in our business since our IPO. We are focused on leveraging these investments that we made in our people and our technology to further drive increased operating leverage.
Early results have been favourable and we are now projecting a lower loss per share in 2009 than previously anticipated. As such, we currently expect the GAAP net loss of $0.93 to a $1.4 per share for the full year of 2009. And on a non-GAAP basis, we expect net loss of $0.33 to $0.44 per share for the year. As it relates to the second quarter of 2009, we currently expect a GAAP net loss of $0.30 to $0.37 per share and a net loss of $0.15 to $0.22 on a non-GAAP basis.
For the quarter ended March 31, 2009, we had approximately $19.9 million weighted averaged basic and diluted shares outstanding and approximately $24.4 million shares issued outstanding. In terms of liquidity, at the end of the quarter we have cash and cash equivalent of $54.5 million as well as $13.3 million available under our Silicon Value Bank secured credit facility.
In closing, we are extremely pleased with our strong first quarter performance and how it has positioned us on track for a strong 2009. We believe that we are making the right strategic decisions to continue to scale of our business and drive operating leverage, especially given the challenges presented by the current macroeconomic climate.
Our record business expansion indicates that we continue to capture the market share and drive value in all of our regions in which we operate. As we continue to scale our business and extract leverage, we remain very confident in our ability to achieve our objectives of generating positive cash flow from operations during the second half of 2009, and being EPS profitable in 2010.
With that, I now turn the call back over to the operator who will take your questions.
Thank you. (Operators instructions) And we’ll pause for a moment to assemble our roster. And as a reminder, we do ask that you please limit yourself to one question and one follow up question.
And we’ll go first to Paul Clegg with Jefferies.
Paul Clegg – Jefferies
Hi, guys. Thanks for taking my questions and congratulations on the strong performance in the guidance increase this quarter. I wanted to throw a couple of things, first of all on the year-over-year gross margin improvement. Is it possible to quantify how much of the increase is due to the MBCx and energy procurement activities given later than, or is it really just a question of being perceived as an overall better value proposition on those, with those services bundled and I have a follow up that’s more of a big picture?
Thanks, Paul. It’s a very thoughtful question I think. What we’ve seen is there are a number of factors in play in this gross margin improvement.
First and foremost, it really does relate back to the effectiveness of our sales team and the product suite that they have to sell. I think we’re winning more and more deals in competitive situations that we’re not necessarily having to compete exclusively on the revenue split. We are absolutely competing on the product sweep, the attractions to some of the value-added services to the fact that we have the national footprint and some of our customers will look to us to not only enrol them in the demand response program here in the Northeast, but those customers that have national facilities or super regional facilities who look to us, and they would provide us a little bit of a premium and the revenue split because we can enrol them in multiple programs and drive multiple revenue streams for them.
I think there’s some of it some of it, the energy procurement services, business as we’ve mentioned at the higher gross margin business in record demand response activity. The energy efficiency business, we hope that soon looks more and more substantial as we go forward and that something that we would expect to look a lot more like a software service type of business, those types of gross margins that you sometimes see in those businesses.
And I think we’re also doing extremely well with some of the enablement costs and then you have some of the natural contracts, as our contracts are longer, which means that the depreciation of some of that installation costs starts to fall off on those contracts in the later year because you know we capitalize in depreciating the installation cost, which is a component of the cost. We capitalize and depreciate that one time cost over a three-year period, so as we get more contracts during the fourth and fifth year, or more and more contracts that come up for renewal, you’re simply seeing that component of an existing customer’s cost disappear.
So all of those factors together I think are driving these increases and obviously, we’re extremely excited by it or pleased by it and we like the trends that we’ve seen moving forward this year as well.
Paul Clegg – Jefferies
All right, if I may add a bit of a big picture and arguably, a softball question that I know I may pierce here, but I do want to hear your answer. You guys talked about SmartGrid, you talked about how the industry is taking shape and structuring it. I think a lot of people are still asking themselves what it looks like several years down the road.
When you guys are in your internal strategy meetings, you’re thinking about what it does look like a couple of years down the road or five years down the road. What do you identify as the biggest threats to the current business model that you’ve built and what sort of plans are you making to adapt to those threats, to continue to capture value in the long run?
I’m not sure that I’d necessarily call it a threat. I think it’s the potential opportunity, as much as it is just a challenge of ours and the challenge is that the demand response is now our real resource. It’s not something that was just outside of the market in special programs. It’s now being integrated into a more and more of the independent system operators, regional planning initiatives.
It’s being given opportunities to shine and being given opportunities to increase the amount of revenue that the demand response resource can actually achieve through insulated services programs through being used more, as a capacity resource being used as an energy resource in the market. And so I think that it’s just we’re in the early beginnings of demand response and what has been asked to do. It’s been asked to be primarily a capacity, an emergency resource in the past and we’re going to see it need to be more dynamic in the future.
By dynamic, we mean that we need to see this resource be used by the utilities more frequently. We’re seeing that in our contracts. They’re asking for us to dial it up and dial it back more frequently. I think we’re seeing rules evolve in certain markets. We believe we’re going to be advantageous to us with our technology while we can dial up demand response and make it a much more dynamic resources, so it’s not just a master blast to every resource in our portfolio to say, shut everything off as we possibly can right now, but it’s more of a dynamic resource that’s like a dial where you can dial the man down, dial it down a little bit more and then dial it back up ,in order to match some of the needs of the grid operators and the utility system control rooms.
So I think the strategy that we’ve employed was we felt that it had the opportunity going this direction. If we’ve get some regulatory tailwinds, at first it was supportive of putting demand response more on the playing field of allowing it to be part of it as a supply to that resource, that we would need the technology and the scale in order to actually achieve that opportunity.
So I think, first and foremost, that’s probably one of the threats that demand response perform in the manner that it’s going to be asked to perform, as we come to a bigger and bigger part of the market. And we like at least where we positioned ourselves and I think, as we continue to evolve our platforms – David today talked about PowerTalk and how it’s going to allow us to visibly see our assets and control these assets and do more with these assets in a more dynamic world.
I think we like where we’re positioned but I guess if I picked one thing, that would be the thing that I’d think is the most important. We’re going to see the evolution in this market accordingly.
Paul Clegg – Jefferies
Thanks very much.
And we go on next to Sam Dubinsky, Oppenheimer.
Sam Dubinsky – Oppenheimer
Hey, guys, couple of quick questions. Historically, it seems like Q1 has been the lowest gross margin quarters to the company. How should we think about gross margins going forward this year in terms of seasonality? And I have a couple of follow up questions.
Sure. In terms of what’s going on, I think we’re having is seeing that our programs are evolving in the way we’re operational in certain markets to that and seasonality associated with them. Those seasonality things have taken an even more acute effect in 2009 than before. I think we mentioned the last time we're on the call that we would be expecting more than 50% of our revenues to be recognized in this year's third quarter. You're seeing part of the effect here is that we have revenues that in the past might have been recognized in the first quarter that are being deferred to the third quarter and some of those – some of the gross margin effect – I think I'd ask Neal to add his perspective in terms of what he seeing on our financial this year to give you a better color on that.
Yes, sure. I think Sam, when you look at our gross margin performance historically, there was some (inaudible) in the quarters and now, as we continue to build our portfolio we're starting to see a kind of a smoother transition so when you do a comparison, yes, you're going to see it looks like much higher quarter-over-quarter, but when you compare the first quarter to the second, third, and fourth quarter prior years, you always saw it took [up. Now, what you're going to start to see because we're expanding all over the country and because we're becoming less dependent on anyone particular contract is you're going to see it starts to level off.
Sam Dubinsky – Oppenheimer
Okay. So with the working base of about 43% to 44% is that the way you think about it or we see a big uptake in Q3 and then lumpiness in Q4 or –
Yes. I appreciate the question and I'll think we go back to the fact that we've seen two years in a row now, we've seen gross margin improvement and in order to get that gross margin improvement, especially when the bulk of our revenues every year are things that come from the prior year. Their contracts that we already have with the gross margin is pretty much set for the duration of that contract, so in order to get the gross margin improvement from one year to the next, it really means we're probably doing really, really well getting new customers into our network and enhancing that base gross margin number in order to move it up as substantially as we have.
That said, I think what we're going to stick with right now is that we like the trends that we're seeing. I don't think that we want anyone to get carried away, that this trend can continue in some sort of a linear fashion. I think that it's just that again, what we're seeing is gross margin improvement in the business. It's something that comes because we think that this is not a business, that is at all commoditized at this point. We think it's a business that is very much differentiable from one company to another, and from one offering to another.
And we think these similar things that we're adding into the mix, our energy procurement, our energy efficiency, and just the improvement in our scalability is really adding to this gross margin improvement. But we're not giving any guidance this year on gross margin, we're simply saying that we like the trend that we're seeing and that there's nothing ahead of us right now because if it’s any cause for concern that the gross margin is going to get away from us.
Sam Dubinsky – Oppenheimer
Okay. And my last question is, it seems you guys are definitely making a lot progress on the expense side. Could you run through your customer acquisition cost again? Specifically, what are the new upfront cost for adding megawatts and also maintenance cost for megawatt today?
Yes, let me go through the very specific sense. I think a lot of it will flush out as the year progresses. Let's talk about some of broader trends that we're seeing associated with it.
Think about when we went public and we have some of our first public numbers published. We were primarily a bi-coastal company. And by being a bi-coastal company if we took on a new project in a new region, that meant really bringing in new bodies to those regions. New regulatory affairs people to deal with the regulatory agencies that exist in those new regions, be it at the Southeast or down in Texas or the Midwest, the Southwest, it meant bringing in new regulatory affairs people, bringing in new marketing people, certainly bringing in new operational personnel and new sales people.
What we're seeing now if you look at the map, you see that there's very few parts of the country now where we added a new utility contract. We don't have someone in that region, in that time zone somebody in our regulatory affairs group that can easily start to absorb the additional activities associated with those new contracts. I think what you're seeing is that we are getting some operational leverage because it used to be the minute that we hired or the minute we got a new contract in a region, it meant probably hiring a body. And you can't hire a partial body. You got to hire a full body.
And now that we have those bodies we can start to leverage and improve their operational efficiencies such as they can cover more of the US and absorb this new market opportunities for us. And I think what also seeing, Sam, is you're seeing us expand in the current regions that we're in, like PJM, where we feel very equipped to continue to grow at a very strong phase in that region right now.
So I think you're seeing improvements and I think as we start to see trends developed we may want to introduce the metrics to that account or to that aspect that would help people start to trace some of those very important metrics that you're talking about.
Sam Dubinsky- Oppenheimer
Okay. Great. Thank you, guys.
And we'll go next to Sean Hazlett, Morgan Stanley.
Sean Hazlett – Morgan Stanley
Hey guys, how are you all doing today?
Sean Hazlett – Morgan Stanley
Two quick questions and most of these are based on operating expenses. First, would it be possible just to get your guidance on operating expenses for the year on a run rate basis or what your target is? And then the second question is, with respect to your power talk deployment, do you have as sense for roughly how that particular application may either reduce expenses or improve gross margins, just kind of a rough percentage over the year?
Well, Sean, first of all, in terms of operating expense guidance. We chose this year, as you see, to give revenue guidance and bottom line guidance and to manage the business accordingly and hope that that would provide our shareholders and potential investors a good insight into the business. Your second question, let me turn to David Brewster who I think would love to talk a little bit more about that and where we're going with that and our particular technology development.
Sure. And Sean, we put out a press release about this pretty recently, but we've deployed PowerTalk now in about 250 devices out of the approximately 5,000 sites in our network, so I think it's too early out of the gate to tell you any sort of definitive answer on what's going to do to gross margin with only 250 sides to put. But we're adding them extremely quickly now and new enablement and I think we'll have much more insights moving forward.
But at the high level strokes, if you think about it, one of the long poles in the tent for us in terms of enabling devices at customer sites is getting secure access to the customer’s local area network. And so in order to do that, we obviously needed to engage to the customer's IT department so they could set up a VPN for us, a virtual private network to get on to that network and with PowerTalk, that's no longer necessary.
It’s a firewall friendly device solution that we can talk about, but it really takes out that part of the process so it's going to make enabling site quicker, it's going to reduce the expense involved in getting the device installed, but also very importantly as I mentioned briefly in the remarks, it's going to enable sites and bring them on under our network quicker which is going to unlock revenue quicker for us and our customers. So it's good on both ends of the equation and I think we'll have more insights as we deploy more of these devices.
And Sean, I think the team is also excited. The network operation center here is excited because one of the first questions we were asked today is, what are some of the things that are coming down the pipe that is going to be challenges for any demand response company or the demand response market? And if you're going to operate a resource that needs to be as dynamic in real time as a supply side resource needs to be, the enhanced visibility here is something that I think the network operations in our team is very excited about and I think it'll allow us to manage our portfolio.
It's a portfolio management tool that will hopefully allow us to continue to achieve the kind of performance levels that we've achieved where we've been able to deliver on the demand response capacity commitment that we've made to our grid operators and utilities in the past and this is the way that we hope to continue to be really strong in that metric as well.
Sean Hazlett – Morgan Stanley
All right, thank you.
And we'll go next to Bryce Dille, JMP Securities.
Bryce Dille – JMP Securities
Hi, guys. Thank you for taking my call and congratulations on the quarter.
Bryce Dille – JMP Securities
My question has to do with the MBCX product. Can you talk about the traction of this solution maybe outside of the well established demand response markets?
Sure. So Bryce, one of the things – our margin based commissioning solution is something that back in 2007, we started to deploy that at, basically, a few demand response customers that were very interested, willing, eager to see us beta something with them. The team’s making intuitive sense then, they were curios to learn a little bit more, so I would say that it was as time to make sure that this had some legs.
I think 2008 was about us trying to commercialize that product and 2009 is about us trying to scale it now. And by scaling it, getting it to more customers' hands and really developed a robust pipeline, and allow us to start to really predict what we're going to see from that in terms of financial impact for our company. What we're encouraged by is that – you're absolutely right, it hasn't necessarily needed to be applied to customers that we're working with at their demand response facilities and in fact, some of the customers that we referenced. We asked several Fortune 50 customers now as well as some state universities and some other customers that are all using the monitoring base commissioning software application, are paying us for it, and assigned to substantial valuable contracts.
What we're finding is that especially with some of these big customers, the ones who have millions of square feet of industrial facilities or commercial office facilities, or even universities that are state wide. We’re finding that their deployment at – a very small site deployment at first, 150,000 square feet of – 85 million square feet of overall state. And in (inaudible) months of us showing delivering on what we’re committing to deliver, which is the percentage savings on their energy bill by just identifying anomalies. Identifying changes in schedule, identifying things that are just quick fixes, quick enhancements to the way energy is being used. We’re finding that the sales cycle for the next 150,000 or 1 million square feet is taking days.
And that’s pretty exciting to us to see that kind of attraction. So at first, we thought maybe this is going to be very much like demand response were we see thousands of new customers, and those thousands of new customers that will be delivering ten of thousands of dollars of revenue per customer to us. I think we’re thinking about our monitoring base commissioning a little bit differently right now. And then that maybe that it is a concentration of large customers that extend with us to drive million of dollars per customer as they drive this through their big facilities and their big foot prints, across the US in particular.
So that’s one of the learnings that has gone on as we scale this year. I think we’re excited about that and what it means is it’s no longer about us just operating only in parts of the country where we have demand response opportunities. It really opens up the entire country to us now. We can operate in Saint Louis, Missouri, or we can operate in Sarasota, Florida, or we can operate in Nebraska for that matter. So I think that’s exciting to us as well. And that’s what we mean by excitingly, we’re opening up new markets, or new – the size of our market is probably expanding as we expand the commercial opportunity for monitoring basic commissioning.
Bryce Dille – JMP Securities
Maybe just a follow-up and this can be maybe just a yes or no. With that then, do you see your ability to sell even in an existing demand response market’s capacity just that much faster now that you’re getting this uptake?
Meaning, in existing markets? Or in new markets that we are – ?
Bryce Dille – JMP Securities
Say, you do have a couple of Fortune 50 companies that operate in the PJM. Are you just seeing uptake in megawatts that much faster now because of this type of relationship?
I think what we’re seeing is a little bit different. If some customers, when we’re going out to compete for a competitive opportunity in a new market with a new utility, and we now have a very strong commercial relationship with a customer and we may have several facilities in that particular utilities region, it makes our RFP – our response to their RFP look very differentiated when we bring some these large customers with substantial footprints with a large energy spent, and a strong interest in expanding what they do with EnerNOC in that new utilities region, I think it probably differentiates us in the eyes of some utilities that they know. We are already going to have a base of customers that are already operational and we already know their facility inside and out, and that’s exciting to us. So I think it’s more that than it is the latter.
But it also helps us compete for the commercial and industrial customers; it might not accelerate the rate of (inaudible). But as we’ve always talked about, it helps us compete on product suites and we’re now talking about price. We’re getting excited about the different suite products we bring to the equation, which helps our gross margin.
Bryce Dille – JMP Securities
Okay. Thank you, guys.
And we’ll go next to Jesse Pichel, Piper Jaffray.
Elaine Kwei – Piper Jaffray
Hi, this is Elaine Kwei for Jesse. Thanks for taking my question. I was wondering if you could talk about what types of partnerships or business opportunities you might be exploring in the Smart Grid value chain, either up strings or the generation portion or bouncing toward the N-meter and within the business?
Hi Elaine, thanks for that question. David and I both take that question and address it. It goes back to the fact that there’s no doubt in our minds that demand response is very much in the early innings and there are going to be a number of interesting partnership opportunities that are tried by some. Some things might be successful and some things might not make sense when they play out.
Probably a lot of folks don’t know just the number of partnerships that we have – a lot of quiet partnerships that we have, some of the acquisitions that we’ve made, the acquisitions of companies that we struck partnerships with, the Energy Procurement Services companies that have strong energy advisory relationships with, commercial and industrial customers that have been partners of ours, and there are a number of others that we’ve identified as being good strategic partners.
I think what we’re going to see is that as we get into some of the later innings here of demand response and the smart grid industry, there’s no doubt going to have more activity as it relates to partnerships. What we hope to do in our strategy is, that if we can emerge as the undisputed clear leader in what we believe, and what others are calling, the killer application of the smart grid, that we want to make it so that anyone that is developing an even broader vertical solution, would want us to be a part of that broad offering. So as we start to see partnerships develop, our hope is, and we’re absolutely having conversations to this effect, our hope is that we become a compelling addition and that we are sought after adder to those partnerships.
I don’t know, David, is there anything you have for us some on a lot of smart grid initiatives right now?
I think you hit the nail on the head. We bring it back to what we said in the remarks the sort of the application layer to the smart grid and there’s the infrastructure layer. Demand response is an application of the smart grid and in that sense we’ve been doing the Smart Grid since our company’s inception and we’re not really looking at so much to do in anything new.
We’re looking to really accelerate in what we do, and in terms of partnerships, we’re certainly looking to a lot of utilities, to really further implement PowerTalk and the applications that we have, to do things with PowerTalk that are not only downstream to the CNI customers but upstream into the utility control rooms. But really, we’re looking at this as an opportunity to do what we do, and to do it better and to do more of it.
Elaine Kwei – Piper Jaffray
And have you seen any shifts in regulatory attitude towards demand response, in consideration of a value proposition of DR? And are there any states or regions that you see specifically becoming more aggressive with demand response?
Yes. We talk about it a lot, but increasingly we see tail winds for demand response all over the place, not only at the state level but at the federal level. We can look to states like Pennsylvania with Act 129 and there’s a lot going on in New York right now, really and particularly around New York City where they’re trying to increase demand response, Ohio, Michigan, Virginia, we can talk about all these.
I think Maryland’s an interesting one. Maryland is really looking to fortify their reserve. They called upon demand response to be a huge component of new additions that they’re looking for in the state of Maryland. The Maryland Commission ordered that the IOUs in the state of Maryland, the utilities, to procure demand response. There was a competitive solicitation and EnerNOC won 50% of that with the four IOUs in the state of Maryland, so that’s a very exciting one.
So there’s a whole bunch of states where we see a lot of activity on this where there is a lot of reception on demand response. And then at the federal level, we look at some of energy bills that have come out, the discussion draft of the Waxman and Markey bill, which includes a very important component for the smart grid peak reduction goals, which is excellent. And you see a lot going on at FERC with the order 719 ruling. So there is just an increasingly strong receptivity and interest in demand response as a clean and reliable energy resource.
I’ll just add one component to that which is I think that we are seeing here that we are being asked to comment more and more helping state regulators think about the various ways to apply utility tenets properly. Because at the end of the day, one of the things that can be a real catalyst to the business is when you see the public utility commissioners recognize that the utility is staying in a very good position to adopt more and more demand side measures. The stronger and more clear and more advent pages some of their incentives to do so are.
So the more we can see demand response and energy efficiency look like supply side resource to utility, the more we could see utility actually make money by investing in a demand response resource, I think the better it is for the market as a whole. And I don’t think we’ve seen quite this level of interest in sitting down and talking to us from state regulators, about what we perceive to be some of the most effective utility and infrastructures out there. So our regulatory affairs team is very excited about the receptivity that we’ve been given over the last six or seven months, to sit down with regulators and describe our perspective and I think that’s also a very strong team moving forward and we need to watch that.
Elaine Kwei – Piper Jaffray
That would have been my next question. Thanks so much, guys.
And we’ll take our final question from John Roy, Janney Montgomery Scott.
John Roy – Janney Montgomery Scott
Hey guys. I have one last question on PowerTalk. In my experience, when you start talking about breaking into the firewall obviously the security issues come up, and obviously that’s something that’s on a lot people’s line with the grid. Can you give us a little color on how that’s going in terms of convincing people that’s not a security issue? And does that create, hopefully, a barrier to entry to others, that’s going to give them the sense for the business?
I think the key here, John, is that PowerTalk is built on XMPP, extensible messaging and presence protocol. This is a standard that’s been around for a long time. There are communities. This is an open standard that’s developed and deployed, and is extremely secure. We built it on a technology platform that has that security level built in and I think we’ve done a lot, specifically around PowerTalk to add to that to make it even more secure in terms of the encryption and the security layers around Power Talk.
So we think as we discuss this more with stake holders, particularly utilities and these customers that we serve, I think that we’re going to get very – they’re going to get people very comfortable with the technology, and specifically around the security because there is very, very good thought process, and we think it’s sort of the industry’s depth standard for security in fact.
John, I think it also goes to the fact that there’s an opportunity here. And there’s an opportunity to really try to move this issue forward, even further than it is right now. Yes, EnerNOC has been thinking about this for quite some time. We’ve been thinking about it in part, because as David described, one of the challenges that we always have to overcome whenever we work with any of our commercial, industrial, and institutional customers IT group is security issues. They don’t like people coming in and establishing connections that they’re unfamiliar with their facilities, on their networks, and with their energy assets at their sites.
So I think as we continue to evolve, there’s going to be an opportunity to use that as a differentiation in the market place. I think one of the things you saw that we did last year was we strategically thought about who we’re going to add to our Board of Directors, and you looked at what we did. We took someone very close, nearby to us, who had been head of a security company for quite some time, a public security company. He’s been very thoughtful about being on our Board of Directors and thinking about those issues and interacting with our IT, as well as our operations and engineering team as we think about these initiatives moving forward.
I don’t think it’s something that’s anywhere near where it needs to be yet, but I think we’re certainly feeling good about being ahead of the pack and being very comfortable that we’re addressing the immediate needs that we see in front of us. And we believe that we have a strong plan for making sure that we address what’s coming tomorrow in this arena as well.
John Roy – Janney Montgomery Scott
And that does conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Tim Healey for any additional or closing remarks.
Thank you. Well, thank you everyone, for joining our call this afternoon. As you’ve just heard, we are experiencing record demand for our services and this lead to the best start to a year in our company’s history. We believe that we continue to demonstrate disciplined, strategic growth that will grow EnerNOC’s market leadership and deliver share holder value.
During 2009, we intend to continue to drive our technology innovation, to capitalize in demand response and energy efficiency market opportunities as they arise, and we really couldn’t be more excited about the start of this year. So we want to say thank you again for joining us. We look forward to updating you again in about 90 days on our Q2 conference call, hopefully with more progress and more great news. Goodnight.
And this concludes today’s conference. We thank you for your participation.
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