EnerNOC, Inc. (NASDAQ:ENOC)
Q2 2009 Earnings Call
July 27, 2009 5:00 pm ET
Will Lyons – Investor Relations Manager
Tim Healy – Chairman and Chief Executive Officer
David Brewster – President
Neal Isaacson – Chief Financial Officer
John Quealy - Canaccord Adams
Jeff Osborne - Thomas Weisel Partners
Michael Horwitz - Robert W. Baird & Co., Inc.
Paul Clegg - Jefferies & Co.
Sam Dubinsky - Oppenheimer & Co.
[Sean Lockman] – Ardour Capital
Please stand by. Good day and welcome to the EnerNOC second quarter 2009 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the call over to Mr. Will Lyons, Investor Relations Manager. Please go ahead sir.
Thanks [Erin]. Good afternoon everyone and welcome to EnerNOC’s investor conference call for the second quarter ended June 30, 2009. I’m Will Lyons, Investor Relations Manager at EnerNOC, and with me on the call today is our Chairman and CEO, Tim Healy, our President, David Brewster, and our Chief Financial Officer, Neal Isaacson.
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 July 27, 2009. EnerNOC disclaims any obligation to update these statements to reflect future events or circumstances.
This call also includes discussion of both GAAP and non-GAAP financial measures. Information regarding EnerNOC’s use of these measures as well as a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure is available in our second quarter 2009 financial press release which was issued today after the market closed. This release can be found on the Investor section of our corporate website, www.enernoc.com. With that I’ll turn the call over to Tim.
Thanks Will. Good afternoon everyone. Coming off an exciting Q2, I’m pleased to report that EnerNOC continues its steady march towards profitability. In my prepared remarks today I will provide an overview of our second quarter performance and evolving product suite, and briefly update some key metrics regarding our persistent growth and operating leverage.
David will then describe an exciting development that enhances our product suite and positions us for continued growth. Then Neal will round out the call with a detailed summary of our strong, second quarter financial results. In sum, you’ll hear that EnerNOC continues to execute ahead of plan and as a result we were able to once again raise both our revenue and EPS guidance for the year.
We are very pleased with the company’s second quarter performance which was highlighted by continued strong revenue, as well as GAAP and non-GAAP loss per share results. Specifically, for the second quarter we achieved total revenue of $42.4 million, an increase of 79% year-over-year. GAAP and non-GAAP loss per share were $0.29 and $0.12 respectively, which represent improvement of 45 and 70% respectively year-over-year. All of these results are above the high end of our [inaudible] for the period.
Gross margin was 42.8% for the quarter, demonstrating our continued ability to extract very high value from our megawatt portfolio. We increased our gross profit to $18.1 million, up 104% compared to Q2 2008.
Now some participants on this call may recall that we had our highest megawatt quarter ever in Q1, which is consistent with our track record of generally adding the most megawatts to our portfolio in the first and fourth quarters of the year. However, I’m pleased to point out that our significant Q1 momentum spilled over into Q2 this year and helped us to exit the second quarter with over 3150 megawatts of dispatchable, demand response capacity under management, an increase of over 450 megawatts during the quarter and over 1100 megawatts year-to-date.
To put this in perspective, over the past 12 months we have nearly doubled our recurring revenue asset base. These year-to-date megawatt additions have exceeded our internal expectations and have us well on track to achieve greater revenue goals than previously anticipated.
As a result, we are pleased to announce that we are raising both ends of our 2009 revenue guidance to a new range of $172 million to $185 million. As we have described before, a leading indicator of the operating leverage in our model is our megawatts under management per full time employee, which has increased to approximately 8.8 as of the end of the second quarter. This metric is up sequentially from 7.6 at the end of the first quarter and up approximately 70% since mid-2008, demonstrating that we are at scale and are able to manage a growing network of assets without commensurate growth in our headcount.
Most importantly, this leverage is reflected in our enhanced EPS guidance of $0.76 to $0.86 net loss per share for 2009. We added nearly 500 customers and over 700 sites to our network during the period. We believe that our rapid business expansion over the past few quarters is due to our leading technology applications and differentiated performance track record, as well as the fact that commercial, institutional and industrial customers are continuing to look inward for energy savings that EnerNOC is uniquely positioned to deliver.
A bigger and stronger network helps us to continue to deliver strong performance in our demand response events. And anyone who has set foot into our offices recently would see the flurry of demand response activity that is happening day in and day out these days. In fact, in just the first 18 business days of July, we have reliably delivered megawatt reductions in New England, Puget Sound, Idaho, New Mexico, California and Colorado. Since the beginning of June we have also dispatched demand response resources in Arizona, Florida, and Vermont.
With year-to-date performance of over 100%, our demand response network has continued to generate a strong track record of delivering clean, dispatchable, reliable resources to our utility and operator customers. These strong results reinforce that we see ourselves at a tipping point in our business as we are entering a period in which we expect to generate positive cash flow from operations in the second half of 2009, which is the first key profitability milestone that we described to investors approximately a year-and-a-half ago.
I’d also like to highlight some exciting developments in terms of our market penetration and innovative technology applications that are enabling more intelligent energy consumption. In terms of market penetration, in our largest market, PJM, we secured a large, long term growth opportunity by clearing nearly 2500 megawatts for the 2012-2013 delivery year starting on June 1, 2012. We were able to leverage our existing installed PJM megawatt base, as well as our strong financial position, to capture approximately 35% of the demand resources that cleared in this important auction. It is also important to note that all of the incremental capacity that we cleared in that 2012-2013 base residual auction was in the high value, Eastern zones of PJM.
In terms of utility sales, in May we announced a partnership agreement with Green Mountain Power and Electric Utility in Vermont. Notably, Green Mountain Power chose EnerNOC as its partner in order to maximize its customer’s revenue opportunities and insure that they received the highest levels of customer service and support. While we do not anticipate that this agreement will have a material financial impact, we actually point to it as another example of a utility customer looking to EnerNOC as its preferred outsourced PR provider, in many cases to re-tool the utility’s legacy demand response or interrupt low rate program.
We have a strong utility project pipeline and expect to continue to cultivate expanded and new opportunities in the coming quarters. Now, as it relates to our diversified energy management solutions, we delivered good results during the quarter but more importantly we are very optimistic about the leading indicators for these services. Specifically in May, we signed a multi-year monitoring base commissioning energy efficiency contract with a multi-site, leading commercial property company. Under the terms of the agreement, EnerNOC will identify immediate, persistent, no cost, low cost energy efficiency opportunities at this organization’s facilities in New York and Virginia.
Meanwhile our energy procurement services team has begun to see a good pipeline of activity in certain key regions, and we’re optimistic about this team’s success achieving its goals for the year.
Due to our demand response revenue growth being greater than expected, we currently anticipate that our high gross margin, energy management solutions unit will represent approximately just 4% of our 2009 revenues. We continue to believe that leveraging our platform and market knowledge will allow us to deliver more value for our customers and increase EnerNOC’s long term market opportunities.
So as you can tell from these comments, EnerNOC has continued to gain scale and increase leverage as a leading energy applications provider, and we are poised to continue to capture demand response and energy efficiency market opportunities as they evolve. Our differentiated product suite, cutting edge technology applications and strong financial performance continue to differentiate us in the market, and we intend to leverage this leadership position when it comes to capturing market share through organic growth, strategic acquisitions and international expansion opportunities.
We believe that the momentum of our business is steadily growing. The second quarter rounded out a great first half of 2009, and positions us well for the second half of the year, a period in which we anticipate that we will reach that first key profitability milestone of being cash flow positive from operations.
And finally, I’d like to share with you the news that Neal Isaacson, our CFO, will be leaving EnerNOC later in August after a short transition period. On behalf of the entire EnerNOC family, I’d like to thank Neal for all of his diligence, hard work and many contributions over the past four years. As my good and dear friend of many years, I want to say that I will greatly miss your company and camaraderie on a day-to-day basis but wish you well in your next endeavors. Thank you very much, Neal.
Now at the same time we’re excited to announce that Tim Weller has accepted our offer to become EnerNOC’s new Chief Financial Officer. As some of you may know, Tim was previously the CFO of Akamai for several years, and also spent six years on Wall Street as a senior research analyst for Donaldson, Lufkin and Jenrette. We believe Tim’s public company and Wall Street experience will be of great value to EnerNOC. We plan to issue a press release with more on Tim’s background very shortly.
Lastly you might note we have filed a Universal Shelf Registration Statement today. We believe this is a strategically prudent thing to do at this time. Rest assured, we have no plans to change our low CapEx, high growth business model that has positioned us for cash flow creation from operations in the back half of this year and EPS profitability next year. Instead, we simply aim to be in good position to provide the company with financial flexibility for both inorganic and organic growth over the next several years. Terms of any potential future offerings would be established at the time of such offering.
I will now turn the call over to David, who will discuss EnerNOC’s leadership position in creating a more responsive, efficient and reliable electric power grid amidst a backdrop of supportive legislative and regulatory developments that continue to raise invention to increase the size of the demand response energy efficiency and emissions markets in which we operate. David?
Thanks Tim. On the last quarterly call I described the smart grid as having two layers, an infrastructure layer and an application layer. Since our inception, EnerNOC has primarily focused on building the killer applications of the smart grid, investing much of our time and our R&D efforts to enhance the scalability, security, inter-operability and reliability of our software applications, while also making some strategic tuck in acquisitions along the way. During the second quarter we augmented our existing carbon track software application by acquiring Equilibrium Solutions Corporation, or EQ, which is a developer of enterprise carbon management and energy efficiency software applications.
Those who follow our company closely know that carbon management has been part of our strategic roadmap since before our IPO. As such we are very excited about this timely acquisition which gives us a more robust enterprise scale, carbon emissions tracking platform to bring to our C&I customer base. Indeed, our customers are beginning to evaluate more robust emissions management as it relates to corporate commitments, employee retention, financial payback and in some cases pending regulation around mandatory emissions reporting and reductions.
This acquisition is very exciting to us as it relates to both the current U.S. federal policy backdrop and our strategic growth quest. EQ’s meeting software service solution enables commercial, institutional and industrial enterprises to effectively monitor, mitigate and monetize their carbon footprint through an efficient, comprehensive and auditable process. Initial stages of the integration process have gone smoothly. Once complete, we believe that the combined EnerNOC and EQ software solution will add an attractive strategic component to our expanding energy management platform, helping companies calculate and report their greenhouse gas emissions and capture energy efficiency opportunities across the enterprise.
We are excited about how the market is evolving and are eager to deliver an even stronger value proposition to the customers in our expanding network. When evaluating this opportunity, it is important to note that the market for enterprise greenhouse gas measurement reporting is projected to be fast growing. While the current market for these carbon accounting solutions in the U.S. is attractive, it is currently voluntary in nature. There is pending climate change legislation in Congress that, if passed, would institute mandatory emissions reporting requirements for approximately 30,000 facilities and therefore creating increased market opportunity for solutions like our carbon track application.
Carbon emissions tracking and management similar to demand response energy efficiency is a global opportunity. Electricity market participants around the world are looking for ways to continue to deliver reliable power while minimizing their environmental impact.
Not surprisingly then, we have identified some synergistic international opportunities in the carbon accounting market. For example, the carbon reduction commitment or CRC is currently ramping up in the UK. The CRC is exemplary while steps being made to establish new carbon conscious business cultures that will be required to meet the tough 80% by 2050 national carbon reduction targets announced in the UK as Climate Change Act. This Act encourages companies such as supermarkets, retail chains, hotel chains, large offices, small to medium industrial facilities and almost all public sector organizations to reduce carbon emissions through the care and stick mechanism. We will continue to monitor this market as it develops and intend to allocate targeted headcount and investments to be at the leading edge of these evolving international opportunities.
Complementing these positive developments in the growing carbon accounting market, domestic federal legislation supporting increased energy efficiency and demand response can provide tailwinds for our business. We continue to monitor the funding opportunity announcements for the American Reinvestment and Recovery Act and the progress of the energy and climate change legislation in both the House and the Senate.
For example, both the American Clean Energy and Security Act in the House and the American Clean Energy Leadership Act of 2009 in the Senate contain peak load reduction standards for utilities as well as renewable portfolio standards that can be partially met through energy efficiency investments. It’s important to note, however, that our ability to execute on our long term strategic growth plans and our strong financial outlook are not dependent on tax breaks or stimulus funds. Our business is cost competitive today and we will continue to focus our efforts on building the cleanest, quickest to market, energy resources that can address society’s environmental concerns, help bring supply and demand into balance, enhance reliability for utilities and grid operators, and help keep electricity prices low for all rate payers.
Recent positive regulatory developments include the fact that we received approval from the Idaho Public Utilities Commission for our five year, 65 megawatt contract with Idaho Power that we announced in March. During the second quarter we started building out megawatts and recognizing revenue under that contract.
In California, we have mixed news on the regulatory front. While we are not optimistic about approval of a 25 megawatt expansion of our SPG&E clean gen contract which is a more atypical supply side generation resource as opposed to demand response, we are optimistic about receiving regulatory approval for our expanded 110 megawatt demand response contract with Southern California Edison. We expect final decisions on both of those contracts to be issued by the CPUC later this summer.
Utilities and regulators alike continue to view clean, dispatchable, reliable demand response as a substitute for new generation to provide emergency, economic and ancillary services. Finally, our innovative technology applications continue to differentiate us in the market. For example, we have received strong, positive feedback from our utility customers, C&I end users and technology partners about our latest presence enabled software innovation, PowerTalk. PowerTalk establishes secure, firewall friendly, instantaneous communications between smart devices and our Network Operations Center. We have deployed PowerTalk in over 750 sites and are pleased with the early results as it has significantly cut down on the man hours necessary per installation, enabling us to deploy a greater number of demand response sites in less time.
We believe that PowerTalk’s benefits can eventually transcend just demand and response site deployments. Looking forward, our utility customers are starting to get excited about how PowerTalk can transform the grid into an always on network of smart meters and gateways, resulting in enhanced customer service and targeted demand response and energy efficiency. We believe that they are also starting to appreciate how presence based protocols can help them with day-to-day operational challenges such as enhanced voltage management and outage detection, as well as [skate] equivalent feeds in the utility control rooms or any application that requires exchanging energy usage or management information between system components.
In closing, we believe that our timely solutions, differentiated technology and leadership position will result in continued growth, leverage and differentiation for our company in 2009 and beyond. I will now turn the call over to Neal who will provide details on our second quarter financial results.
Thanks David, and good afternoon everyone. As Tim mentioned, I soon will be transitioning to the next stop on my professional career, working again with an early stage private company in the clean tech space. I look forward to welcoming Tim Weller to EnerNOC and providing assistance to assure a smooth transition of the CFO function, and I take great pride in knowing the financial position of EnerNOC is the strongest it has ever been.
As you’ve just heard, we are excited by the growth and leverage we achieved during the second quarter, as we believe these results keep us on track to achieve our profitability targets. I’d like to provide some additional details on our second quarter financial performance as well as outline our third quarter and updated 2009 financial guidance.
For the second quarter, revenue was $42.4 million which represents an increase of $18.7 million or 79% over the second quarter of 2008, and $3.4 million or 9% above the high end of our quarterly guidance range. As Tim mentioned, we added over 1,100 megawatts to our network during the first half of 2009, driving our better than expected top line performance during the second quarter. We recognized demand response revenues of $40.9 million during the quarter compared to $21.9 million for the quarter ended June 30, 2008, an increase of $19 million or 87%.
Sales of our high margin energy management solutions for the quarter ended June 30, 2009, were $1.5 million compared to $1.8 million for the quarter ended June 30, 2008, a decrease of $300,000 or approximately 17%. This decrease is due in large part to a reduction in energy odds performed during the period.
Cost of revenues for the quarter ended June 30, 2009, totaled $24.3 million compared to $14.8 million for the quarter ended June 30, 2008, an increase of approximately $9.4 million or 64%. $21.8 million or 90% of our cost to goods sold were the revenue share payments we made to businesses and institutions in our demand response network.
Our gross profit for the quarter was $18.1 million compared to $8.9 million for the quarter ended June 30, 2008, an increase of approximately $9.3 million or 104%. Gross margin for the second quarter was 42.8% compared to 37.5% for the quarter ended June 30, 2008, an increase of over 500 basis points. This year-over-year margin increase was due in part to our sales and marketing campaigns ability to sell in our strong, diversified product suite and not price alone, as well as an effective management of our growing megawatt portfolio in certain supplemental demand response programs and capacity arrangements in order to maximize payments we received for our capacity.
As Tim mentioned, our gross margin continues to be an important barometer of our ability to differentiate our demand response and energy efficiency applications in the marketplace, as well as our ability to extract the most value from our megawatt portfolio. Sequentially, this gross margin was relatively consistent with the past several quarters, including 42.9% in the first quarter, and we expect gross margins to remain in this general range for the remainder of the year.
Operating expenses were $22.5 million for the second quarter compared to $19.5 million in the second quarter of 2008, an increase of $3 million or 15%. Employee related charges including non-cash stock-based compensation continued to be in excess of 75% of our operating expenses. We ended the quarter with 358 employees, up from 357 employees at the end of the first quarter, and we are seeing significant operating leverage as we continue to drive efficiencies in our ability to market, sell, enable, manage and maintain a larger megawatt portfolio with our existing infrastructure and headcount, as evidenced by the 8.8 megawatts for full time employee metric that Tim described earlier. We continue to expect targeted headcount additions as we prepare for various strategic growth initiatives.
We generated a net loss for the quarter ended June 30, 2009 of $5.7 million or $0.29 per share, basic and diluted, compared to a net loss of $10.4 million or $0.54 per basic and diluted share for the same period of 2008. Our stock-based compensation expense for the second quarter was $3.3 million. Excluding this expense as well as amortization of acquisition related assets, our non-GAAP net loss was $2.3 million or $0.12 per basic and diluted share, compared to a non-GAAP net loss of $7.6 million or $0.39 per basic and diluted share in the same period in 2008.
Included in both the GAAP and non-GAAP results for the second quarter was $1.3 million of charges related to our 2012-2013 PJM ELRP auction bid or approximately $0.07 per basic and diluted share. These results were above the high end of our guidance ranges.
This better than expected net loss can be attributed to our substantial megawatt additions, cost control procedures and our scale of technology which continues to increase operating leverage in our demand response climate process.
Turning to the balance sheet, we ended the quarter with approximately $43.5 million in cash and cash equivalents, down from $54.5 million at the end of the first quarter. The decrease was due primarily to working capital needs of $4.9 million and capital expenditures of $6.9 million associated with the build out of our customer network.
We had approximately 20 million weighted average, basic and diluted shares outstanding and approximately 20.5 million shares issued outstanding at the end of the quarter. With that, let me now turn to guidance for the third quarter and for the full year of 2009. We expect third quarter 2009 revenues of between $88 million and $98 million, the midpoint of which represents more than 110% increase over last year’s Q3 revenue performance. We currently expect GAAP net income of $0.77 to $0.91 per basic share and GAAP net income of $0.70 to $0.83 per diluted share. On a non-GAAP basis we expect net income of $0.93 to $1.07 per basic share and non-GAAP net income of $0.85 to $0.98 per diluted share.
As Tim mentioned earlier, our megawatt additions and utility contract build ups during the first half of the year have enhanced our full year 2009 financial outline. Specifically, we are raising our full year 2009 revenue guidance to between $172 million and $185 million. We currently expect GAAP net loss of $0.76 to $0.86 per basic and diluted share, and a non-GAAP net loss of $0.14 to $0.24 per basic and diluted share.
In closing, we are extremely pleased with our strong second quarter performance and how it has kept us squarely on track for a strong 2009. As we continue to scale our business, we are driving significant operating leverage as evidenced by our ability to increase revenues by 79% and gross profit by 104% year-over-year while increasing our OpEx by only 15% over the same period. Based on this performance 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’d like to open up the call to questions.
(Operator Instructions) Your first question comes from John Quealy - Canaccord Adams.
John Quealy - Canaccord Adams
Congratulations folks. Great quarter. First to Neal, thanks for the past two years. Certainly best of luck and we look forward to welcoming Tim. Two questions. First on the Q3 model and guidance, given the ranges that you gave us, assuming that flat gross margin that Neal just talked about sequentially maybe 43-ish percent, do you get operating margins anywhere in the high teens to the low twenties. You know that’s approaching software’s of service multiples at full deployment. Obviously you’re very early. Can you talk about the model as we look to 2010 and ’11 in terms of when you add more megawatts and potentially more software applications? And is that the right way to look at the full year on a go forward basis do you think?
First of all thank you and I second your thanks to Neal. It’s been an outstanding time, a lot longer than just two years that Neal’s been in the trenches with us and we are going to miss him. But he’s on to some exciting things. Thanks very much for your comments and as it relates to the model looking at 2010, 2011, I think you’re pointing out one of the things that, you know, is difficult probably to recognize and understand when we’re in the high growth phase of the business that we’ve been in, the investment phase of the business that we’ve been in for the last several years. But you’re starting to see what this business looks like as it reaches, you know, more and more towards an ongoing mature business model.
And what you’re really pointing out is that there’s operational leverage below the line that we’ve been, you know, pointing to obviously because we have the benefit of looking at our forecast and looking at how that model plays out over time as we look at the contracted revenues and we look at our growth opportunities and various markets. And we look at what it takes to fulfill those opportunities, what it takes in terms of headcount to do that.
I think you’ve noticed some things. You’ve noticed that there’s been very little headcount additions. Our network operations team has remained relatively flat over the last year. Adding new megawatts of demand response to our network doesn’t require the same type of investment as it did in the early stages when we were still trying to build our footprint across, you know, North America. So I think you are seeing some of those features of our business start to take shape. You’re also noting that the company is moving more and more towards the software, the service type of model that you mentioned where, you know, the leverage that we’re generating in our business has a lot to do with the fact that we do have scalable software. That software allows us to do things that we used to have to do with people. And instead of adding bodies now, we’re leveraging the software much as the other software the service company that we like to emulate and we’d like to look like some day, you know, operate like.
But in terms of projecting out to what it’s going to look like in 2010 and 2011, you know, we’re able to provide the guidance that we’re providing right now. I think you know the direction that the business is headed. We’re certainly optimistic about that. There’s an awful lot of work to do to get to where we want to go, but you know the results that we’re seeing now seem to be the kind of results that you would expect if the company was healthy and staring at an awful lot of growth moving forward.
John Quealy - Canaccord Adams
In terms of the visibility into 2012 at PJM, you talked a little bit about it in the footnotes this afternoon to the Q but can you expand a little bit in terms of the competitive advantages that the balance sheet gave you looking into PJM and obviously in relation I know you talked about buying a shelf and keeping your options open, but can you talk a little bit about how the balance sheet helps EnerNOC moving forward?
So it’s a couple of different assets on the balance sheet or at least a couple of different assets here that give us a competitive advantage. First and foremost, it’s important to appreciate that a lot of our nation’s competitive electricity markets are still evolving. And we’ve been having you know a little bit of influence and a little bit of say as to how those markets have evolved, and one of the things that we’ve tried to espouse is that there needs to be a commitment by the demand response providers, similar to the way some buy side resources need to commit that they’re going to be on the hook for delivery.
We’re very confident in our ability to deliver. Our track record stands as, you know, an important barometer of our ability to deliver. So we’re willing to put financial assurance in place in order to hold our seat at the table, in order to reserve our right to deliver megawatts to grid operators like PJM and New England or in the case of bilateral contracts where occasionally utilities or frequently utilities will you know require in their bilateral contracts who are actually putting forth a financial assurance.
And one can think of this as putting up some financial collateral to insure that we’re on the hook to deliver these megawatts when the time comes. And in the case of the PJM auction, there was financial assurance required in order to bid ahead and commit to deliver to PJM the megawatts that we were delivering to PJM or committing to deliver to PJM in 2012-2013 delivery year. And because of our strong balance sheet, because of the cash that we had on hand, because of our relationships with certain financial partners, we were able to put ourself in a really advantageous position that it’s our opinion and our belief, we believe that not every other demand response provider, not everyone else that wanted to participate in demand response, was necessarily in quite as advantageous a position in terms of their financial strength.
The second piece of that is the fact that our existing megawatt portfolio can basically serve to fulfill a portion of our forward capacity commitments in some of our markets, meaning that because we have megawatts under management, because we’ve registered them in these forward capacity markets today and we can identify those demand response by going, we can secure a place for those received capacity revenues in the forward capacity markets simply because we have those under management currently.
In other words, we believe that there is some, you know, value that accrues to being bigger, to having more megawatts under management today, and that value is that we can leverage the resources in our mix to essentially avoid having to place financial assurance that somebody else who didn’t have a portfolio of megawatts would have to place in order to reserve their right to deliver megawatts and receive that value in these forward capacity markets. So we think, that’s where we’re using our balance sheet to our strength and we think that, you know, it continues to behoove us to make sure that we have a strong balance sheet as we look out, you know, years and years into the future and continue to try to go after the growth opportunities we see in front of us.
Your next question comes from Jeff Osborne - Thomas Weisel Partners.
Jeff Osborne - Thomas Weisel Partners
Congratulations on the strong results. Just two quick ones for David. I was wondering you mentioned PowerTalk and the faster installation times. Can you just talk about what we should think about in terms of the savings per megawatt as you’re installing them going forward in terms of an OpEx basis? I’d imagine the ongoing costs of operations of those megawatts would be lower as well with PowerTalk versus your prior technology.
To answer the question, I would first of all I wouldn’t think about it so much as a cost per megawatt because it’s much more site specific than it is capacity specific. And it wouldn’t really reduce, Jeff, the ongoing cost of managing those megawatts. What it’s really going to do is help us with the enablement process. So it’s going to enable us to engage much faster to get in and out much faster, to make it much less intensive for the end use customer to get up and running in our network. And the reason for that is what we’ve talked about before. It’s sort of a way for us to access and get behind a firewall in a much less invasive and much more secure and much faster measure.
So I’d just leave it at that. I wouldn’t think so much as ongoing costs. I’d think about sort of scalability, get growing our network faster and being able to scale it faster.
Jeff Osborne - Thomas Weisel Partners
And then the last one for you is just can you comment? You mentioned international opportunities for the company. I’d imagine there’s a lot of opportunity in heavy renewables penetration like Scandinavia and Germany and the [inaudible]. You know, is it realistic to think that EnerNOC would have a contract in place over the next six to 12 months in markets like that and that could possibly be used of proceeds from the shelf that you’re preparing?
Well, you’re spot on in the sense of some of the drivers overseas and a lot of the driver in overseas markets is very heavily weighted towards balancing mechanisms in the markets, particularly due to the high level of intermittent renewable resources and the desire to grow those resources in those markets. It’s a demand response that is increasingly being looked at as sort of a good dancing partner for intermittent renewables in terms of firming up that resource.
We also see really attractive carbon management opportunities. We talked about the carbon reduction commitment in the UK. So we’ll continue to monitor these markets. I think one of the real advantages that EnerNOC has had to date has been being early in markets, to be a first mover to help shape our market rules and to help secure some early market share. So we’ll continue to be opportunistic. We’ve been looking at these markets for a long time. We see a few places that are attractive to us and we’ll be opportunistic in terms of putting, you know, limited, targeted investments in place until we have a path to revenue and then we’ll up that investment.
Jeff Osborne - Thomas Weisel Partners
And just one quick clarification, the international markets would be the same direct sales force model? You wouldn’t seek any channel partners in that region as well?
What we’ll do, we’re going to evaluate all opportunities and some markets are more akin and more sort of better aligned for us to go direct. In other cases if we see opportunities to do more of a channel partner arrangement where there’s feet on the street, we’ll do so. We’ll be opportunistic again.
And Jeff to be clear, you know, channel partner arrangements are nothing new to us. You know I think we haven’t exactly highlighted it in the past and spent a lot of time on our channel partner arrangements, but you know it is one of the ways that we’ve gone to market in the past. And domestically, so you know we have some experience working with partners. We tend to be pretty selective and you know we tend to really favor the ones that can produce the level that our, you know, in house sales resources can produce for us. But it’s something that we’re familiar with and we’ll continue to leverage all the opportunities that we have to go to market.
Your next question comes from Michael Horwitz - Robert W. Baird & Co., Inc.
Michael Horwitz - Robert W. Baird & Co., Inc.
Congratulations. Great quarter. Maybe a quick question about margin and then a bigger strategic question. How do I look at, since you’ve had such stellar growth adding megawatts here in the first six months, if I look out into 2010 how should I think about energy management solutions as a percentage of revenue? And then when I think about how that could affect margin or your ability to take these new megawatts and earn supplemental revenue on them, how that might affect margins out in 2010 and beyond? Will we expect another acceleration of margins?
Michael, yes, thanks for the question. It’s an insightful question. You know, first and foremost the way to think about the energy management solutions business and in particular the really exciting high growth piece of that business is the monitoring base commissioning, the energy efficiency piece which is the data driven, the marriage of IT and energy information to come up with analytic, you know, analytic evaluations and recommendations of ongoing persistent energy savings. Just through data. Not through large retrofits and lighting projects and [inaudible] backed, you know, capital intensive huge projects at facilities, but more looking at data to try to drive operational energy efficiency in a persistent, consistent manner. We’re excited about that part of the business.
But at the same time it has to be kept in perspective because the core piece of our business is growing at, you know, historically has grown at such a high rate that some of the growth that’s going on inside of that monitoring base commissioning business is, you know, dwarfed in many respects by the much bigger numbers and the overall growth that’s happening in the rest of our business. So the way we’ve looked at it here and what we’ve done operationally is we’ve tried to incubate that business. We hired a general manager about two quarters ago, maybe three quarters ago, who leads a full team. And we’re thinking about that as an incubated business inside EnerNOC that’s leveraging the cross selling opportunities that we have to go to the thousands of customers, a subset of which we can identify that we think are prime targets for monitoring based commissioning.
But we’re setting modest goals. We’re setting the modest goals that a start up company would start when it’s starting a new business inside of it’s own walls. And we think it’s one of the most exciting parts of the business. We think that if it were a stand alone company it would probably be chased right now by venture capitalists trying to make, you know, significant investments. And what we want to do is make sure that it’s in a position to accelerate those investments as we continue to gain traction. But in terms of, you know, predicting what it’s going to be in 2010, you know we really believe that it’s going to be a high growth piece of the business but it’s always going to be difficult to keep up. Because even if it’s growing at 100% or 200% or 300%, it’s just a lot of small numbers and large numbers that makes it really difficult.
What it is doing, it’s helping us in our sales process currently. It’s helping us differentiate ourselves and our sales process. A lot of customers are getting excited about the fact that when they do demand response with EnerNOC they’re taking the first step towards a more comprehensive, energy efficiency opportunity for them. They’re getting more data. They’re getting familiar with the power track application that is the first step in identifying that persistent, consistent savings through monitoring based commissioning.
We’re really trying to sell the total value proposition to the commercial and industrial customer. And so what we really want to do is, let’s wait a little bit more. Let’s get some more traction, get some more customers under our belt and really see what we can do. And hopefully sometime in 2010 we can start to provide a little bit more color, a little bit more detail around exactly how that’s starting to impact the numbers that are flowing through the bottom line, which is really where we want to see it. Especially considering that this business we believe at maturity will have a much higher gross margin than the underlying core demand response business. Because it is so software intensive. It has fewer people to drive the revenue value than the, in our opinion, than the demand response core piece of our business.
So it’s what makes us so excited about it, but we recognize we still have a lot more work to do in order to, you know, make the numbers start to show up on the page.
Michael Horwitz - Robert W. Baird & Co., Inc.
And then just strategically as you read, as we all read about AMI and smart grid, do you think about making acquisitions in more consumer facing applications that may be a little bit different than your strategy when you went public and only focusing on C&I. Do you feel like you may be broadening that because you’ve developed such an expertise around this? And as you see these other companies talk a lot about it, maybe they don’t have the expertise you have, especially on some of the functionality that you could overlay into the consumer marketplace?
I think you’re making an interesting observation, and the observation is one that we’re making which is that, you know, there still is a lot of innings to be played in the whole smart grid, advanced metering infrastructure, demand response, you know, baseball game that we’re watching unfold. We’re very much in the early innings.
And I think utilities will probably continue to experience and start to acknowledge that just because you may purchase some smart meters and engage in some sort of advanced metering infrastructure deployment doesn’t necessarily mean that you’ve gotten yourself down the curve in terms of what it takes to run an effective demand response program, be it for commercial and industrial or for residential. A lot of studies that we’ve seen have suggested that price signals alone aren’t necessarily going to do much more than maybe have some effect on some load shaping, but I’m not sure that price signals alone are going to be able to send out signals that allow for utility to actually have some sort of a reliable, dispatchable, you know, capacity resource like the reliable, dispatchable capacity resource that we’ve built.
We like to focus on the commercial and industrial side. We think it’s where a lot of the low hanging fruit is. We think it’s strategic to the strategic road map where we believe there’s a lot of opportunity that’s lying on the ground for us, related to helping customers better manage their energy. There’s you know a lot of Greenfield opportunity where customers are searching for experts to help them with energy efficiency, help them with their carbon management accounting, help them with other interaction with energy markets on a regular basis.
And we do see the numbers being more exciting to us because of that. So it’s not that, you know, we’d rule anything out but I think that there hasn’t been much of a shift from, you know, where we were back in ’06 and ’07 in saying that our focus is on the commercial and industrial, institutional demand response market. And our focus is on being the best demand response resource provider that we can possibly be, building the best applications, building the best back office settlement verification, monitoring, energy management applications.
And we’re always going to look strategically to figure out if a piece of those can be repurposed to help some other part of the smart grid. For right now there’s just so much opportunity in front of us in the commercial industrial sector that I think you can, you know, feel pretty rest assured that our focus will continue to remain there and there’s ample opportunity to improve that part of our business day in and day out.
Your next question comes from Paul Clegg - Jefferies & Co.
Paul Clegg - Jefferies & Co.
Congratulations on the strong quarter and also best of luck to Neal. Let’s see. Several of my questions have been answered here but maybe coming back to the shelf. Can you give us some detail on the timing of the $50 million offering and who will be selling shares there? And can you confirm basically senior management’s not going to be selling any material amount?
Yes. Sure, Paul. Thanks. Yes, we filed the shelf today and it goes back to, you know, what I tried to articulate in the earnings call which is that we just believe simply that the timing is right right now to file that shelf. We believe that, you know, we don’t have any plans to change our business model. There’s nothing new that’s coming forth. There’s no urgency anywhere around, you know, anything specific to our business. We just think that it’s the right time. It’s opportunistic of us to put ourself in a position to manage the financial part of the business the same way that we’re managing the sales, operations, marketing, regulatory affairs pieces of the business. Always try to keep ourselves in the right position.
And as you’ll recognize it’s just a registration statement, it’s not an offering. So we’d be, you know, getting ahead of ourselves to start talking about things that just aren’t there yet.
Paul Clegg - Jefferies & Co.
And then I guess on that point then, it’s not that you need additional liquidity to achieve your internal megawatts under management goal through 2010 let’s say. This is more about balance sheet strength and making it easier for you perception wise for you to win utility, new utility contracts and support larger open market bids?
Yes, I think it’s a combination of that. I think you know we look around and we do have, you know, a lot of exposure to a lot of different and interesting things that are evolving in the market today. There are partnership opportunities. There are new business development opportunities. And there could be some acquisition opportunities.
But we’ve always been like that. We’ve always tried to look at those, tried to be really opportunistic and I think this is just another example of us continuing to be opportunistic, putting ourselves in the position to make sure that we can continue to be the market’s leader. We believe we’re the market’s leader. We’d like to continue to be in that position and we believe that financial strength is always a good thing to have as the market leader.
Paul Clegg - Jefferies & Co.
And once again, Neal, congratulations. Could we get a comment though on how long his departure has been in the works and maybe a little more detail on what he’s planning to do?
I don’t think there’s anything about his departure being in the works. I mean we announced it today and, you know, that’s really all there is to it. I mean Neal has been a full time employee here working more hours than I can count. And he’s doing the same again. Was here all weekend and I’ll tell you we’re definitely going to miss him but we’re excited about Tim Weller’s arrival.
Your next question comes from Sam Dubinsky - Oppenheimer & Co.
Sam Dubinsky - Oppenheimer & Co.
Just a couple of quick ones. Not [top] on the shelf too much, but it seems like $150 million is fairly large relative to your market cap. So I’m just wondering if you’re looking at acquisitions, how do you evaluate them? Are you looking at small ones or large ones? And should we think of them as being accretive within a certain time period? Maybe just talk about how you could use those funds.
Sam, well first and foremost I don’t think that we really look at it as large ones or small ones. I think we look at what’s strategic and what fits and why it fits. You’ve seen in the past I think we’ve made a total of six acquisitions. And those six acquisitions have been, you know, to date one of basically a couple to three things. They’ve been about strategic customer acquisitions or geographic expansion opportunities. I mean you look at our Solarity acquisition way back in 2006, I believe. You look at our Pinpoint Power acquisition in 2005. We looked and we said they have great customer relationships. With Solarity there was a number of California focused demand response opportunities and demand response customers and utility customers. With Pinpoint Power there was an arrangement with us in New England that was attractive to us, plus, you know, a dozen to two dozen commercial industrial accounts that were significant and important for us.
Those were customer related acquisitions first and foremost. They weren’t technology. There wasn’t anything to that effect. And when we made our Equilibrium acquisition and in ’06 I believe it was when we made our eBid Energy acquisition that gave us some of the pieces of our power track platform those were more or less technology acquisitions that were consistent with our technology roadmap and our strategic roadmap.
We’ve also made some customer acquisitions of two companies in ’07 and ’08. That’s SRC and, or I should say MD Energy in ’07 and SRC in 2008. Both of those had a lot to do with evolving along a strategic roadmap where energy procurement is helping customers with energy procurement was identified as very, very attractive for us. And the customer roster of these small consulting firms of about, you know, 8 to 10 to 12 to 15 people each looked very attractive in terms of what we could do in terms of some cross selling.
We’re going to continue to look at those same things. So it’s never been about how many people they have, how big are they, do they have $50 million in revenue or do they have $0 in revenue. It’s about trying to fit those things in, in we believe a very well defined strategic roadmap, product development roadmap, and overall business landscape that would help us accelerate what we’re doing on an organic basis.
So if we see some technology that’s really exciting that we think our customers are demanding, we believe that that’s something that we’d want to go after. If we believe that there’s an entry into a new market, be it domestic or international, and that requires an acquisition, we’ll take a look at that and we’ll try to, you know, make sure that we can integrate that fully. We have an integration plan in place as quickly as possible.
But, you know, to us there’s no, you know, because we can remain open minded right now and because we have a very, you know, we believe a very competitive or a very differentiated channel with our over 5,000 customers in our network that can be very attractive to a company that’s been out there building some technology, hunkered down and is now looking for a means to go to market with that technology in an integrative, aggressive, quick to market way.
So that’s the way we’re going to look at our acquisitions moving forward. What can the pieces be come together more than, you know, something that we have in our minds or in our sights right now that is some monster acquisition and some monster absorption of some new piece of business that, you know, would surprise people. We don’t expect to be out there engaging in a whole lot of activity that’ll be a surprise. We simply think that we’ve got a very well defined, very strategic roadmap and we’d like to have the resources to execute along that organically and inorganically and this is part of it.
Sam Dubinsky - Oppenheimer & Co.
And then I have a separate question. Do you ever just tell me what the headcount in the energy management business is? And how we should think about growth of energy management impacting OpEx in 2010?
You know it’s interesting because it’s a really great question, but it’s, we don’t have a separate energy management business unit. There are some folks who take care of energy management that are in operations. We have some folks that take care of energy management activities that are in engineering. We have folks that are in sales that are selling pieces of our energy procurement to their customer base.
So to give you a number for energy management would be to, you know, most likely understate it because there’s such an overlap of that piece of the business in terms of it crossing into other elements of the business. What we’re trying to do, in fact, especially with, you know, our announcement today about Gregg Dixon, we’re asking Gregg to come in. He’s been, you know, one of the key executives, the key sales and marketing executives of the firm for quite some time and with that to really focus on what we believe is a really exciting time in our business and an exciting time in the industry to do even more integration, more cross selling of our solutions across our customer base. So that we can introduce our carbon management solutions to the thousands of customers that we have in our network.
So we can introduce many times for the first time our monitoring base commissioning solutions to the demand response customers that we have. And in order to do that it’s going to take better marketing, better cross selling, better management of the many channel partnerships that we have. And increased focus on the product development activity that’s going to enhance what those products do in response to what our customers, new customers as well as our existing customer base, is asking them to do.
So to give you there’s X number of people in our energy management solutions unit would be a number that really is a nonsensical number at this point in time.
Your next question comes from [Jesse Bishop] – Piper Jaffray. Mr. Bishop, go ahead. Hearing no response we’ll move on to our next question. Your next question comes from [Sean Lockman] – Ardour Capital.
[Sean Lockman] – Ardour Capital
I just wanted to ask a quick question about just a general strategy with the Equilibrium acquisition and what opportunities do you see there and how you guys sort of intend to monetize that and grow that business.
Sure. So I think we announced that, you know, it’s a small tuck in acquisition as David highlighted today and I think when we first announced it we made sure people understood. This was a small company right in our backyard, in a space that is, you know, continuing to garner investor attention, continuing to garner, you know, customer attention. And we believed that it was strategic to have that technology in our portfolio.
The way we expect to go to market with it is again going back to what I was just talking about we have a team of business development managers, think of these as our sales resources. We have an inside sales resource team and an outside sales team. These guys are in charge of going and putting our portfolio of offerings in front of our demand response customers, in front of new customers. And our team is now becoming equipped as we integrate this to go and offer carbon management accounting solutions. And we offer it right now. You know we’re testing a bunch of different business models. You know, to date it’s been much more of a software as a service or a subscription based model. We believe it’s well aligned from a technology, architecture standpoint to be very similar to the way that we’re going to market with our monitoring based commissioning solution.
It’s actually a helpful add on to the monitoring based commissioning solution, because a lot of customers are looking at ways to track their energy efficiency savings so they can report that figure either to upper management or across company wide initiatives, and our carbon management accounting solution has the ability to track the energy efficiency savings as they’re occurring.
So it’s a product that, you know, now is another arsenal in our sales force’s, you know, overall kit that they go to market with and their incented to sell it. They make commissions on it. And we’re going to continue to, you know, evolve that and again we believe that in 2010 we’ll start to get a little bit more granular about some of the progress that’s being made. Right now we’re making sure that we have, you know, all the pieces in the puzzle to you know put what we believe is a really interesting overall energy management platform together for the C&I customer base that’s getting larger and larger as we grow.
We’re also really excited with where the market rules are moving and it’s sort of evolving past sort of just carbon inventory and now people are really focused on what the corporate response is. So as Tim was mentioning it really dovetails nicely into our energy efficiency solutions where our MBCX solution is a way for customers to actually take corporate action to reduce their emissions and then do the sort of enterprise accounting of those measures. So we’re pretty excited about how it fits in and where the markets are evolving.
[Sean Lockman] – Ardour Capital
And at this time we have no further time for questions. We’d like to thank everyone for joining us today. That does conclude our conference.
Well thank you all very much. I just in closing want to make one comment and that is that I’d like to say thank you to all the employees who put together a phenomenal first half of the year. One final thank you to Neal for years and years of phenomenal service at EnerNOC. We’re going to miss you. I’ll miss you personally. We wish you best of luck in your next activities. And again thank you to everybody out there for participating in today’s call. We’ll talk to you again in about 90 days. Bye now.
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: email@example.com. Thank you!