EnerNOC's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: EnerNOC, Inc. (ENOC)

EnerNOC, Inc. (NASDAQ:ENOC)

Q4 2013 Earnings Conference Call

February 13, 2014, 5:00 PM ET

Executives

Brian Norris - Senior Director of Investor Relations

Tim Healy - Chairman and CEO

David Brewster - President

Neil Moses - Chief Financial Officer

Analysts

John Quealy - Canaccord

Patrick Jobin - Credit Suisse

Sean Hannan - Needham & Company

Paul Zimbardo - UBS

Craig Irwin - Wedbush Securities

Pavel Molchanov - Raymond James

Andrew Weisel - Macquarie Capital

Operator

Welcome to the EnerNOC Fourth Quarter Results Conference Call. (Operator Instructions) I'd now like to turn the conference over to your host, Senior Director of Investor Relations, Mr. Brian Norris. Please go ahead.

Brian Norris

Thank you, Greg, and good afternoon, everyone, and welcome to the conference call. I'm joined here today by Tim Healy, our Chairman and CEO; David Brewster, our President; and Neil Moses, Chief Financial Officer.

The press release announcing our fourth quarter and full year results and management's business outlook, as well as a reconciliation of management's use of non-GAAP financial measures as compared to most applicable GAAP measures, is available on the Investor Relations section of our website at http://investor.enernoc.com. There you will also find a summary statement of operations, a summary balance sheet and a summary of key financial and operating statistics for the last eight quarters.

During this call, we will refer to non-GAAP financial measures, including non-GAAP earnings per share, free cash flow and adjusted EBITDA. These financial measures are non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. The definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in today's press release.

Today's call contains estimates and other statements that are forward looking under the Private Securities Litigation Reform Act of 1995 and other federal securities laws, including but not limited to, management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, and other statement that are not historical fact. These forward-looking statements include, without limitations, statements relating to our future financial performance, the global market opportunity for our energy intelligence software services and products, our expansion in various international markets, and the future growth and success of our energy intelligence software services and products in general.

These 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 our filings with the SEC, including our annual report on Form 10-K and quarterly report on Form 10-Q available at www.sec.gov. The forward-looking statements made today represent our views as of February 13, 2014. We disclaim any obligation to update them to reflect future events or circumstances.

A couple of calendar items before I turn the call over to Tim. We have an active IR schedule coming up, including the Raymond James Investor Conference in Florida, the UBS Investor Conference in Boston and the Pac Crest Tech Summit in San Francisco. For more information about any of these events or our EnergySMART Conference in Philadelphia, please feel free to contact me.

With that, I'd like to turn the call over to Tim.

Tim Healy

Thank you, Brian, and good afternoon, everyone. We are proud to be reporting strongest year in the company's history. Our results position us well for continued growth in 2014 and beyond. We reported revenue of $383 million in 2013, which represents growth of 38% over 2012, and full year adjusted EBITDA of $71 million, which reflects growth of 287% over 2012. We continue to see dividends from the investment we've made on the international front. Our international revenue grew by 116% in 2013 and represent 19% of our full year revenues compared to less than 1% in 2010.

Our enterprise EIS business grew by 24% in 2013, another proof point to the progress we're making, locking the full potential of our software for commercial, industrial and institutional customers worldwide. We ended the year with $149 million in cash, up $38 million sequentially and $34 million year-over-year. Our ending cash balance reflects the $90.5 million to return to stockholders in the second half of 2013 through the stock repurchase program that we announced in August 2013.

Beyond the numbers, I want to share a few other recent highlights. We are thrilled to be announcing our European expansion with acquisitions of Entelios, a leading European demand response provider with headquarter in Germany; and Activation Energy, a leading demand response provider in Ireland. Germany is one of Europe's largest potential markets for demand response with the system peak demand of roughly half a size of the PJM Interconnection in the United States. The acquisition of Activation Energy is also very consistent with our international expansion strategy and supports our plan to continue to diversify our growth over the next few years. The Irish market already has an attractive capacity market, which is opened to demand response.

Our entry into Europe builds on our recent expansion into Japan, which is a 160 gigawatt market, making it the second largest market in the Asia-Pacific region. It's 15 times larger than the Western Australia and New Zealand markets combined, and we generated about $50 million of revenue in 2013.

To accelerate our entry into Japan, we entered into a joint venture agreement with Marubeni Corp., a company with roughly $50 billion in annual revenues, to form a new company called EnerNOC Japan KK. This JV will have an exclusive license to market our DemandSMART cloud-based DR application throughout the country.

To strengthen our value proposition to enterprise users of electricity worldwide, we made a strategic investment in Genability, a San Francisco-based software company. Through this investment, we've gained certain exclusive rights to Genability's technology and tariff engine for EIS applications to serve the enterprise. This will enable us to equip our customers with tools and apps to gain more accurate energy forecast and power them to make data-driven energy management decisions and operational trade-offs in a more informed way and give them the ability to better analyze and verify the savings from energy efficiency projects and initiatives.

As we mentioned at our Analyst Day last November, the growth of our international demand response and the enterprise EIS are critical to achieving our longer-term growth objectives. We indicated then that M&A would be a key component of this growth and we point to our investment in Genability, our acquisitions of Entelios and Activation Energy and the establishment of our JV with Marubeni as initial proof points of our strong initial execution against this strategy.

And with that, I'll take this opportunity to give a warm welcome to our newest colleagues in Germany and Ireland and to our new partners from Marubeni and Genability, two of them I imagine are listening in on this call.

So let me turn back to provide some perspective on today's marketplace for the software and services that EnerNOC is bringing to market. Every key function within enterprise that requires management reporting, decision making, business intelligence, data management and oversight are flushed with software packages, brand name software vendors and multi-billion dollar enterprise software categories, including PLM, CRM, HCM and ERP. EnerNOC is pioneering a new class of enterprise software, energy intelligence software to manage the energy function inside the enterprise.

There's another trend in the market that's more broadly shaping how business is conducted and it supports proliferation of the next-generation internet, the industrial internet, an open global network that connects people, data and machines. We believe that this industrial internet is going to enable enterprises including more and more of the global 2000 to harness the power of the global energy network, providing unprecedented visibility and control over their energy spend. And this network, which can be powered by our software, will allow customers to take control of the $2.25 trillion that is spent annually on energy.

We already monitor approximately 3% of the total US electricity consumption on our platform, representing a compelling amount of that spend today. So while we continue to be keen and focused on demand response, we see demand response as the killer application within this broader EIS context. We're steadily evolving our focus on this larger market opportunity and making key investments. EnerNOC is no longer just a successful clean tech story, but rather an energy intelligence software story. We've never been more confident of where we are and where we're going.

Our confidence is reflected in our guidance, which Neil is going to discuss with everyone shortly. Our success this year will be a measure of our ability to do three things well: number one, grow and diversify our North America business beyond the Mid-Atlantic region; second, expand internationally; and third, drive continued adoption of energy intelligence software solutions for the enterprise. I look forward to providing updates on our progress across these three fronts as the year progresses.

So that's a brief recap of the quarter and the year as well as commentary on our focus and thoughts moving forward. So with that, let me turn the call over to David for his insight.

David Brewster

Thanks, Tim, and hello everyone. I'm pleased to be with you this afternoon. I'll focus my remarks on two specific carriers: first, a deeper dive into our international expansion activity; and second, a brief update from the bridge as we continue to navigate the regulatory waters.

We have been clear about our strategy to expand internationally. The international demand response market is significantly larger than the US market and significantly less penetrated. To capitalize on this opportunity, we have over the last two years invested aggressively in markets like Australia, New Zealand and Canada. That model has worked very well and we've grown our international revenue from less than $1 million in 2010 to nearly $74 million in 2013.

Building off of this success, we are pleased with our extension in Continental Europe, Ireland and Asia, as we announced today. While our mode of entry into these markets was very different, we expect each market to be an important contributor to our growth over the balance of the decade.

Let me start with our European expansion. As Tim described, we're excited with our acquisition of Entelios, a leading provider of demand response solution based in Germany, which is an 80 gigawatt market. This acquisition accelerates our entry into Continental Europe, providing us with the immediate opportunity to deliver demand response through Entelios' existing grid operator utility and retailer customers.

Entelios has built the technology platform that meets the requirements of all four transmission system operators in Germany to deliver positive and negative demand response in Germany's reserves market to help manage system imbalances. Entelios was the first demand response company to successfully deliver load in Germany's high-value second reserves market, which today is in total size in excess of 4,000 megawatts.

We believe that Germany is right for accelerated adoption of demand response and energy intelligence software more broadly. Entelios has the team, the local market expertise and an attractive customer base of industrial and utility customers that provide EnerNOC a leading presence in Continental Europe, consistent with our geographic market diversification strategy.

In Europe, we're also excited with our acquisition of Dublin-based Activation Energy, a leading provider of demand response software and services in Ireland. This acquisition provides us with an immediate presence in the 5 gigawatt Irish market and further strengthens our ability to deliver our full suite of energy intelligence software application. Ireland has an existing capacity market, which Activation has helped to shape into the past five years. Last year, Activation generated a profit as Ireland's largest demand response provider.

On the other side of the globe, we've entered the 160 gigawatt Japanese market via joint venture with Marubeni. The JV braced together our expertise as the world's largest provider of demand response with Marubeni's vast expertise and leadership position in both the electric power sector and the Japanese market. As the world's third largest economy, Japan's electric demand is similar to that of PJM Interconnection in the United States. The electric power in Japan has faced significant challenges since the great East Japan earthquake of March 2011. In fact, today, all 54 of Japan's nuclear power stations, representing about one-third of installed electric generation capacity remain offline.

We believe that the Japanese market is ready for demand response. There is a growing national attention in Japan on intelligent buildings and smart cities and an increased focus by utilities and policymakers on the importance of demand side management. EnerNOC Japan KK has been awarded a government-sponsored DR program with the Tokyo Electric Power Company, Japan's largest utility. The project will be among the first deployment in Japan of aggregator-based quick response DR for the C&I sector.

Switching gears, I want to share a few thoughts on what's going on across the regulatory landscape. First, we continue to be bullish on opportunities in Texas, which uses about 40% of the peak electricity at PJM. While a recent report coming from the Texas PUC indicates that equilibrium reserve margin from the existing energy-only market will be higher than previously estimated, thereby reducing some of the urgency for adding a capacity market to the energy market, it also estimates that an energy-plus capacity market will cost consumers billions of dollars, with fed estimating a mere 1% price increase plus higher reliability.

Meanwhile, rule changes to the existing emergency reserve service or ERS in Texas last November have already improved the viability of the resource for aggregators and customers alike. We expect the program to fully subscribed this year for the first time as a result. ERCOT sees the value of the year-round resource. It helps keep the lights on in January when a cold snap (inaudible) large power plants offline.

EnerNOC is now number one is ERS market share and an increase in ERS market cap could be a very low cost way of increasing reliability, while the decision on a capacity market is taken. Preliminary discussions on revamping the ancillary services market in Texas could provide another revenue stream for EnerNOC and its customers.

Moving East a bit into the Mid-Atlantic region, I want to touch on two issues that we're keeping an eye on in the PJM marketplace. The first is the proposed changes in the reliability pricing model, and the second is the proposed changes related to operational flexibility. In the fourth quarter, PJM submitted to the Federal Energy Regulatory Commission a proposed revision to the reliability pricing model. Some have surveyed that this is a cap on demand response. It is not. It is okay. It only proposes caps on the limited and extended summer products. The proposal does not affect the annual product.

While these rule changes do present some challenges, we also say that there may be some interesting opportunities as well, primarily in the way of possible price separation related to the annual product and a contractually and market participants that can outperform within the confines of the new rule structure. We feel confident that the breadth and depth of our existing technology and customer portfolio will enable us to adapt and adjust to these rule changes.

The second matter that I want to touch on is the proposed modification to increase the operational flexibility of demand response. PJM has publicly expressed interest in making demand response a more flexible resource in terms of when and where it is dispatched. In their late December filing to FERC, PJM proposed a few changes, most notably the addition of a shorter lead time for dispatch and the separation of demand response into emergency and pre-emergency tranches. Again, we feel confident that the breadth of our technology and customer portfolio will enable us to adapt to these possible rule changes.

We have a couple of issues with the PJM proposal, which we have raised with FERC, but we're generally supportive of the proposed changes. Increasing the operational flexibility of DR resources would increase the value and confidence placed upon DR by grid operators and utilities, and that is a very good thing for us. One of the key advantages of DR is its flexibility, and there is no place better than PJM to demonstrate that. EnerNOC has made the investments in technological infrastructure to deliver a highly reliable and flexible resource.

Some of our competitors and legacy utility DR programs have not made that same level of investments and may struggle to keep pace with the new requirements that we believe enhance the value of what we deliver. So for us, this could be another competitive differentiator. We expect the changes to be phased in and begin to be implemented as early as this point. Here again, we will continue to monitor the situation and be actively engaged in the process.

I am confident that we will and we have time and again navigated the regulatory waters. While we do, we will not lose focus on our commitment to our customers' success. As a proof point, the capability of our new Network Operation Center was on full display during the polar vortex and cold snap across the United States in January. There were several firsts in the Mid-Atlantic region, including the first winter dispatch, the first dispatch across all sub-regions, the first morning dispatch and the first day with multiple dispatches. During all of that, EnerNOC delivered as required without issues.

I speak for the entire management team and thank the EnerNOC operations group for their incredible effort during this extraordinary time and our customers who leveraged our software and helped keep the grid reliable during those winter cold days.

Now with that, I'll turn the call over to Neil for a closer look at the numbers and our outlook. Neil?

Neil Moses

Thanks, David, and good afternoon, everyone. We're pleased to be reporting the strongest year in the company's history, highlighted by record revenue and earnings. Total revenue for 2013 was $383 million, reflecting growth of 38% year-over-year. And total revenue in the fourth quarter was $36 million compared to $42 million in the fourth quarter of 2012. This decrease was primarily related to the discontinuation of Pennsylvania Act 129 programs which generated over $9 million of revenue in the fourth quarter of 2012.

Revenue from our demand response solutions was $342 million in 2013 compared to $245 million in 2012. This increase of 40% was primarily due to growth in revenues from our PJM and Western Australia programs, driven by an increase in pricing and unit demand. Revenue from our energy intelligence software for the enterprise was $41 million in 2013 compared to $33 million in 2012. This increase of 24% was driven by revenue related to our contracts for the Massachusetts Department of Energy Resources as well as continued customer acquisition and penetration.

Gross margin in 2013 was 49.9% compared to 44.4% in 2012. This reflects an increase in revenue related to our participation in international demand response programs, where we have realized higher margins as well as the benefit of our participation in incremental auctions in the PJM marketplace. Gross margin was 44% in the fourth quarter of 2013 compared to 34% in the fourth quarter of 2012. This higher gross margin reflects a more favorable mix of revenue in the fourth quarter of 2013 as well as the recognition of certain privacy deferred revenues where the associated costs were recognized in 2012.

Total operating expenses were $163 million in 2013 compared to $144 million in 2012. This increase of 14% was primarily due to growth in headcount in the first half of 2013 across both R&D and sales and marketing to support our long-term growth plans. We ended the year with 716 full-time employees.

GAAP net income in 2013 was $22 million or $0.76 per diluted share compared to a GAAP net loss of $22 million or $0.84 per basic and diluted share in 2012. Non-GAAP net income in 2013 was $45 million or $1.55 per diluted share compared to a non-GAAP net loss of $1 million or $0.05 per diluted share in 2012. And adjusted EBITDA was $71 million in 2013 compared to $18 million in 2012, reflecting growth of 287% year-over-year.

Turning to the balance sheet, we ended the quarter with $149 million in cash and cash equivalent compared to $111 million at September 30, 2013 and $115 million at the end of 2012. As previously disclosed, the Board of Directors approved a $30 million stock repurchase program during the third quarter of 2013. In the fourth quarter, we repurchased approximately 275,000 shares for an aggregate purchase price of $4.5 million. Since we launched the program in August, we have repurchased 606,000 shares for a total of $9.5 million or on average $15.61 per share. Cash provided by operations was $26 million in the fourth quarter and $79 million for the full year and free cash flow was $43 million in 2013 compared to $15 million in 2012.

I'd like to share a few thoughts now about how we're thinking about 2014. And before I do, I want to point out a few key assumptions. First, we continue to see the market for energy intelligence software and solutions, including demand response, as a very large multi-billion dollar market growing at least 15% per year over the next several years. We continue to be a leader in this market and we expect to see revenue growth over the next several years at least in line with market growth.

Second, we expect that the quarterly distribution of full year revenue for 2014 will approximate what we saw in 2013. Specifically, we expect about 70% to 80% of our full year revenue to be recognized in the third quarter and 7% to 10% of our full year revenue to be recognized in each of the first, second and fourth quarters.

Third, we expect full year gross margin to return to more traditional levels in the mid-40% range. While it's certainly possible that we will benefit from future incremental auction activity this year, we think it is appropriate to exclude this from our planning assumptions. On a quarterly basis, we expect gross margins to be in the mid-30% range in the first, second and fourth quarters and in the high-40% range in the third quarter.

We expect to be able to drive additional leverage in our business model in 2014, given the investments we have made in technology and geographic expansion over the last few years. Accordingly, we expect organic operating expenses to grow modestly this year by about 5%.

Finally, a few thoughts on taxes. We plan to fully utilize our net operating loss carryforwards this year. As such, we expect our tax provision to increase over 2013 levels. We believe it's appropriate to model a full year tax rate without considering the impact of today's acquisition announcement in the range of 32% to 34% in 2014 compared to our tax rate of 11% in 2013. We do not expect our acquisition activity to have a material impact on our total 2014 tax provision.

In the first quarter, we expect an estimated tax benefit of between $200,000 and $500,000. This estimate is based on the same provision methodology we used in the first quarter of 2013, whereby we anticipated that we will be able to reliably estimate the annual effective tax rate on our foreign earnings, but we're unable to reliably estimate the annual effective tax rate on US earnings.

And finally, we will continue to assess our needs for a complete valuation allowance against our other deferred tax assets as the year progresses. Our 2014 guidance does not include the potential reversal of any portion of our valuation allowance.

With that as context, here is how we're thinking about 2014. As described in today's earnings press release and in an effort to be as transparent as possible, we're providing forward guidance on both the organic and inorganic basis. We do not intend to do this every quarter. But given the breadth of the business development activity we have recently announced, we thought this would be useful for investors to better understand our business.

Let me first state that our expectation for 2014 organic growth and profitability is consistent with the high-level framework that we issued in November 2013 at our Analyst Day. Specifically, our expectation for 2014 is for organic growth of about 15% for both revenue and adjusted EBITDA. This translates into revenues of about $430 million to $450 million and adjusted EBITDA of about $80 to $84 million. It also translates into GAAP earnings per share of $0.70 to $0.80 and non-GAAP earnings per share of $1.47 to $1.57.

We have very clearly and consistently communicated our strategy for growth and market diversification. Essential to this strategy is international expansion and the deepening of our energy intelligence software platform. The business development activity Tim and David reviewed earlier accelerates our ability to implement this strategy.

We're excited to be expanding into Continental Europe and Ireland through the acquisition of Entelios and Activation Energy respectively and into Japan via the joint venture with Marubeni. And we're equally excited to be extending the technological breadth of energy intelligence software platform with a robust tariff engine through our investment in Genability.

We expect these acquisitions and investments to increase our revenue by $5 million to $10 million and to have a dilutive impact on earnings in 2014. Specifically, we believe that the combination of these business development initiatives will be dilutive to adjusted EBITDA in 2014, neutral to adjusted EBITDA in 2015 and accretive to adjusted EBITDA and GAAP earnings per share in 2016.

Inclusive of these business development initiatives, we expect full year revenues in 2014 to be between $435 million and $460 million. Further, we expect GAAP net income to be between $0.40 and $0.50 per diluted share and non-GAAP net income to be between $1.25 and $1.35 per diluted share. And we expect adjusted EBITDA to be between $74 million and $78 million. And we expect to generate over $50 million of free cash flow in 2014.

Inclusive of the approximately $30 million we have invested in these business development initiatives, we are modeling year-end cash in a range of $160 million to $170 million in 2014. This does not reflect any additional business development or stock repurchase activities.

With regard to the first quarter, again, inclusive of our business development initiatives, we expect revenues to be between $38 and $43 million. We expect our GAAP net loss to be between $1.14 and $1.20 per basic and diluted share and our non-GAAP net loss to be between $0.90 and $0.96 per basic and diluted share. And we expect adjusted EBITDA to be between negative $19 million and negative $21 million.

Thank you very much. With that, I'll turn the call back over to Brian.

Brian Norris

Thank you, Neil. At this time, we'd like to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Quealy from Canaccord.

John Quealy - Canaccord

In terms of the investments in the partnerships in the Entelios and Activation deals, can you aggregate how much cash you spent or plan to spend on those initiatives or have already?

Tim Healy

Yeah, Neil mentioned, John, that in aggregate there was roughly $30 million of cash spending.

John Quealy - Canaccord

And generally those are, I would say, more towards the acquisitions versus Genability and Marubeni?

Tim Healy

It's all four. I mean there is cash going out for all four. Certainly more was for the acquisitions than the investment in Genability. But there was millions of dollars that went into the Genability investment as well.

John Quealy - Canaccord

Just in terms of EIS, Tim, can you talk about how you're tracking to the goals that you outlined in the November Analyst Day?

Tim Healy

Mostly right now, what we're looking at are some of the leading indicators. And I think we're pleased with those leading indicators. We're pleased with the progress that the team is making, particularly in executing against the very aggressive product roadmap. Genability is a key component of that, because one of the foundational elements of energy intelligence software for the enterprise is making sure that the enterprise is communicating in terms of dollars rather than kilowatt-hours, kilowatts and some of the more facility type of language and dialogue that characterizes a lot of the energy software today.

So Genability with its tariff engine is a very key component of turning all that kilowatt usage into dollars, being able to track budgets forecasts, drive decision making throughout the enterprise in a manner that makes sense. I think we like that. We've had some exciting things happen to the team as well in terms of continued additions to our enterprise sales team. We've launched the professional services team here at EnerNOC, which is supporting the software sales. We think it's going to be critical to make sure that as we're driving this new form of energy intelligence software and the enterprise that we're doing it with customer success story and our professional services team will help us deliver that customer success, so that we're going deeper into the enterprise and leveraging these customer success stories to go and sell more solutions to other entities.

So we feel good about the progress so far, but it's still early days.

Operator

Your next question comes from the line of Patrick Jobin from Credit Suisse.

Patrick Jobin - Credit Suisse

Just to follow up on John's question, if I can take it a little bit deeper. At the Analyst Day, I think you mentioned 55 accounts paying for software and four customers paying more than $1 million. And with your goal to get there 15 by 14 and 50 by 2016, how are you tracking towards that? Is it possible to share with us if that number has expanded?

Tim Healy

Primarily at this point, it's not to spend every quarter talking about whether it's 55 has become 56 and 56 has become 60. As much as that was a math for how we're looking at, what we're trying to accomplish and giving some folks a sense of how break it down internally. Obviously it's not just about the strategic enterprise accounts, which have a large enterprise spenders. Yes, we have 55 enterprise accounts at the end of last year when we talked about at November. I think what we're looking to do is to get more and go deeper into those enterprise accounts. Our conversations to date have been in line with what we've seen early on with these accounts are very interested in things like utility bill management and capital project management of their energy efficiency projects and helping them by supply agreements. And we feel really good about that.

Our goal this year is again to deepen our penetration into those accounts, turn more of them into multi-million dollar accounts. But simultaneously, there are non-strategic accounts which are also sales to the enterprise and we've talked about having hundreds of those accounts as well that are spending $25,000, $50,000, $100,000 a year in EnerNOC software. We want to get a deeper penetration into those guys as well.

So you'll us describe the progress that we're making. I think this quarter, which is primarily about making sure that we have all the different tools and applications to give us the best shot at growing that part of our business.

Neil Moses

You should look for us to sort of refresh our operating metrics that we provide on a quarterly basis, beginning in Q1. And I think when we do that, I think you'll see that we're sort of aligning those to help you better understand the progress against our strategic initiatives.

Patrick Jobin - Credit Suisse

David, just going back to Japan, if I can, with the JV with Marubeni, can you walk us through maybe milestones for how that pilot progresses and kind of your views as to when that materializes into more of a full-scale type of opportunity that the JV is after?

David Brewster

Just backing up a bit, we successfully delivered a pilot project, I believe, in 2012 also with Marubeni prior to forming a joint venture with them in the Osaka region with Kansai Electric Power Company or KEPCO, which is the second largest utility in Japan. We've now formed the JV with Marubeni based on our great working relationship with them. And we've now secured the second pilot project this time with TEPCO, which is the largest utility in Japan. TEPCO has a peak demand of about 60,000 megawatts. KEPCO is the second largest, has about 30,000 megawatts. So these are very large utilities. They're kind of these electric power companies in Japan and we hope to eventually deliver demand response in partnership with all of them.

This initial pilot is important, Patrick, because it's sponsored by the government and the intention of the pilot is to set the foundation for demand moving forward. And so it is looking deeply at how to value demand response as in avoiding cost of generation and looking at how to measure demand response to the M&V of demand response. And so it's sort of a foundational pilot. It is only running with assurance until end of March 2014, which is the fiscal year in Japan. And then we expect it will be renewed probably for another year and run until March of 2015.

So it is again foundational. It's not material in terms of our financial, but it's very important to building a foundation for Japan. And we hope in the course of the pilot and moving forward that we win some commercial sale opportunities with electric power companies. So we're in it for the long term. Japan we hope is going to be a big part of our future. It's not going to be an immediate part of our financial results.

Patrick Jobin - Credit Suisse

Do you have the 10% customers for the year?

Tim Healy

I do not have it in front of me. Maybe you can follow up offline with that.

Operator

Your next question comes from the line of Sean Hannan from Needham & Company.

Sean Hannan - Needham & Company

Wanted to see if we could follow up on the acquisitions. Is there a way if you can elaborate a little bit more on the capabilities? Is there any differentiated technology gain there? It sounds like you do get some of that with Genability, but can you elaborate on what you gain from a tech perspective of each and specifically if it's beyond gaining just customer penetration for those DR related deals?

David Brewster

Certainly, we'd be happy to do so. I think we've talked a little bit about Genability. We'd love to provide any more context on that that would be helpful. With regard to the European acquisitions that we announced today, we do pick up technology from both entities, primarily from Entelios in Germany. And what we pick up from Entelios is a technology platform that is purpose-built to deliver reserves in the European context. So European markets have reserve programs. These are ancillary services to balance supply and demand. Germany has the market that's open to demand response to not only provide what's called positive demand response which is the typical type of demand response that is reducing load, but also negative demand response which is actually increasing load.

And through Entelios, we acquire a platform that enables us to immediately participate in those markets. Their technology meets the requirements for all four of German transmission system operators to deliver those reserves. As mentioned in the press release, they were the first demand response company to deliver load in the secondary reserves market, which is very attractive to us, which is very fast-acting ancillary services to participate in the market there.

They've also been able to secure contracted utilities in Europe that bring their reach beyond just the German market, particularly we mentioned one deal that brings them to Austria. And this actually is leveraging their technology in a way that's very similar to what we announced a couple of weeks ago with our newer product, the EnerNOC Demand Manager. It's basically a SaaS solution for utilities to have the back-end technology to deliver demand response. So it's a very good match for us. But what we really gained in short, Sean, is the capability to participate in reserves markets right now across Europe.

Sean Hannan - Needham & Company

Neil, I think you commented in terms of we've got a little dilution this year, neutral next year and then accretive to EBITDA in '16. I'm just trying to get a sense of what's the level of accretion or is this really more on the margin based on the scale at that point? I'm talking about the acquisitions and as you look out, I believe you had indicated these will be accretive to EBITDA by '16? So just trying to get a sense of really what that means?

Neil Moses

Well, I mean they are part of our growth strategy over the next three years where we talked about kind of a three-year business model with 15% revenue and EBITDA growth. And we haven't given specific guidance around how the acquisitions will contribute to that beyond 2014 other than to say they'll be EBITDA-neutral in 2015 and EBITDA-accretive as well as GAAP EPS accretive in 2016.

Sean Hannan - Needham & Company

I was looking for something a little bit more defined, but perhaps we can follow up offline.

David Brewster

Yeah, we talked and not in terms in adjusted EBITDA, we also talked about our three-year international growth strategy and the incremental revenue that we're looking to contribute from the international market. And Europe has the potential to be a big part of that.

Operator

Your next question comes from the line of Paul Zimbardo from UBS.

Paul Zimbardo - UBS

Could you perhaps provide some color and elaborate on what you're seeing as the impacts of some of these rule changes like the increased operational characteristics like emergency versus pre-emergency? And could you go into a little detail when you said there's changes you not as supportive of, what those were?

David Brewster

As we talked about two fundamental areas of change, one is with regard to the clearing of demand response in RPM. Essentially what PJM is looking to do is moving demand response from our limited products to the annual products, (inaudible) they might be interested in doing that. As demand response matures in the PJM market, becomes a bigger part of the overall resource mix, they want to make sure that they have the software amount of availability. We deliver any of the resources in most of our other markets, so we think we're able to deal with that and transition customers to that, to the annual product. If it gets approved or sorry has been approved, it would affect not until the '17, '18 delivery year.

The other rule change is the operational flexibility. Again, we are pretty much aligned with PJM in terms of increasing the value of demand response. We have the technology and the customer base to do that. So that's going to phased in if it's approved by FERC over the next few years. And specifically, to answer your question what we didn't agree with was PJM has proposed a shorter lead time for demand response. And they want to make it a default where you need to basically opt out of that. And we think that a better solution will be a market-based solution that will be based on variable if you have a higher strength price for the shorter lead time and let the market dictate based on customer needs, based on actual market principles as opposed to sort of caps amended. So it's that simple.

We've expressed that to FERC. Otherwise, we're highly supportive of the proposal.

Tim Healy

So in other words to say it is we'd rather not be administratively set, but market set, and they looked at it as more of just an administrative thing to make administrative as a default to a shorter lead time to see if their customers are going to need a longer lead time and there could be some price separation if that occurs. And we think that's always good for the market.

David Brewster

Yeah, we've worked closer with PJM throughout this process. So it's been a productive collaboration.

Paul Zimbardo - UBS

You mentioned 15% revenue and EBITDA growth rates, what portion of that roughly could you say is related to PJM?

David Brewster

I think in our Analyst Day, essentially the amount of that is related to PJM when you look at 2016 versus 2013.

Tim Healy

Yeah, I think another way to say it is ideally for us, we see ourselves managing a portfolio of resources in 2016/2017 that's not that dissimilar to the portfolio of resources that we expect to be managing in 2014. And what we'd like to do is as you've seen, we'd like to turn our focus and our attention and turn these operational sales, marketing, deployment field operations resources that we have around SaaS, we'd like to turn them to other parts of the country. And we're quick to do that. We've done that before. We did that when New England was our focus and PJM became a focus. And then I think besides just looking at other demand response opportunities domestically, a lot of these folks are already in position, already trained on more than just deploying and selling our demand response products.

But on energy intelligence software for the enterprise, it goes beyond the demand response technology that we're offering to our commercial and industrial customers.

Neil Moses

And maybe just one more final point here. We said on Analyst Day that PJM represented 60% of our revenue in 2010, that it would represent about 45% of our revenue in 2013. And in fact, that's exactly what they represented. Patrick, that answers your question from earlier. PJM was 45%. (inaudible) was 12%. And then we said PJM would represent 30% in 2016. And it just so happens to Brew's point earlier or David's point earlier that the amount of revenue derived from PJM at 30% of our revenue in 2016 is approximately equal to the amount of revenue we derive in 2013 when it represented 45%.

Operator

Your next question comes from the line of Craig Irwin from Wedbush Securities.

Craig Irwin - Wedbush Securities

You mentioned the polar vortex multiple times and obviously press release today that you responded to PJM's request, but on the same day, PJM commented to FERC saying that the low response rate of demand response in the off-season was a real reason they needed to make some of the changes that they're requesting. Can you maybe share with us what your response rate was during the period that you were called? And this obviously touches against the issue of annual DR. Can you maybe indicate to us what you see as the best characteristic or best qualities of the demand response that you could register annual DR? Is this behind-the-meter generation? Is this industrial load? And how you would see that unfolding? I mean the modeling that PJM has put out there suggests that there's fairly substantial changes coming. I was just hoping you could give your perspective?

David Brewster

We can't speak to other providers for performance. So I can't speak to that. What I can say is , as I think you know, the other DR products, the extended summer and the annual products didn't exist in 2013. So 2014 is the first year, starting June of this year, is the first year where we have multiple products in PJM. And so I think the indication of how customers perform prior to having an annual product when customer is not in the compliance period to deliver in 2013 is probably not the best judge of how DR would perform during winter months.

I think the best judge of that is looking at programs around the world that have annual demand response resources and looking at the performance of demand response, which for EnerNOC has been quite strong. So as we alluded to, we have multiple dispatches. Our customers really came to that outside of the compliance period when there wasn't an annual product. They responded. We were very pleased with their performance. We commend them for doing what they've done. And so we're looking forward to transition, as we mentioned, to more annual product, if and when there is price separation between the summer products and the annual products.

Tim Healy

Just in the simplest terms, I think today would be a difficult comparison to make to suggest that you can compare the January performance when the January performance was for resources that were not annual resources. Those were resources that were under our best efforts type of compliance activity. When the compliance activity isn't annual compliance activity, which for the first time that Dave described will happen on June 1st of 2014 when that product is in the market, I think the market needs to look at that point and see what is the compliance activity of annual products that have an annual compliance obligation window rather than a summer compliance window.

And I think David made the point, our statistics suggested that the resources that we have such as the resources that we've operated throughout the US and now throughout the globe have done very well in annualized compliance windows. Obviously we've published statistics in the past that have suggested that the average of our portfolios over 100% net average is an average of all of our resources throughout our entire portfolio. And our portfolio is only about 40% or 50% PJM. So obviously, we're seeing that annual demand response is a viable product. And we just would like to see the price separation at the end of the day, because obviously that's something that would benefit a company like ours with that technology and customer base throughout their annual demand response resources.

When you have some annual response already that we did in earlier auctions, because we're getting excited about the opportunity to deliver annual demand response to PJM even without very much price separation at all in prior demand response auctions. So I think we've beaten that question the best, so hopefully that provides a little bit of context of how we see the annual marketplace shaping up. But there's still a lot of unknown to come in front of us.

Craig Irwin - Wedbush Securities

My second question relates to the auction arbitrage. So obviously at your Analyst Day, you laid out very clearly that you want to take a more conservative view about the future participation of close out megawatts arbitrage. And you've removed a large chunk of that from your guidance for this fiscal year. There're multiple points in the market, multiple contexts in the market that are suggesting that you may have already taken off capacity for '14 that would lock in this profit already if we were to see a PJM filing, which we've not seen filing was accepted by FERC, which is obviously the second if. But can you maybe frame out for us in a little bit more detail whether or not a positive outcome would have a positive impact on your financials this year, obviously positive being something that would allow the arbitrage to continue? And if there was the elimination of the arbitrage, if there would be any impact in '15 following the roll-off of megawatts or maybe already closed out, or if that is already something that you've taken out of your guidance?

David Brewster

It will have no impact. None of our guidance includes any inclusion of any profits from incremental auctions. So I think Neil was pretty clear on that. A couple of generators have used the arbitrage to describe the situation. It's not arbitrage. It's the market. Both demand response and generation uses incremental auction to adjust positions. And it's an important mechanism in the market. But in terms of expectations of profit, no.

Tim Healy

Yes, we have in the past already reconfigured our position in prior incremental auction to adjust what we think we could deliver on June 1st of 2014. So that activity is already built in to our forecast for 2014. You're correct about that. And it was nothing different than what we've done since the first day we entered the PJM marketplace. We've already suggested our positions in various realms, which is simply a way that all resources are dealing with the fact that you three-year forward capacity market and it's very difficult for generators as well as for demand response providers to perfectly manage down to the single kilowatt exactly how many resources you're going to have in each market. In some cases, we've gone in and said we need to deliver more megawatts than we initially did. And so we've gone in and increased our obligation to PJM. In other cases, we've gone in and said we're going to be able to deliver fewer megawatts in particular zones, particular regions for one reason or another.

So this is something that again has existed in the marketplace and we see these rule changes as if they occur, fine, our guidance stays the same, nothing changes with our three-year outlook, nothing changes with how we run our business. If it doesn't and if the rule changes are not instituted, then we'll continue to adjust our portfolio accordingly. We don't see that it has a material effect on how we're thinking about the next three years.

Operator

Your next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James

Can you give us a sense of what the addressable market is for DR, particularly in Ireland and Germany and maybe relate that to the size of PJM or some of the other domestic opportunities that you guys have capitalized upon historically?

David Brewster

PJM is roughly 170 gigawatts, it is growing, but roughly 170 gigawatts. Germany is roughly 80 gigawatts. Ireland is roughly 5 gigawatts. DR is very preliminary in those markets. There's much less penetration than what we see in the PJM.

Tim Healy

One thing to keep in mind is David mentioned the Ireland market. I think it's interesting, even though it's only a 5 gigawatt market. This 5 gigawatt Ireland market is 25% margin than Western Australia. And as many folks know, we've been able to generate the lion share of the $50 million worth of revenue that we're bringing out of Australia and New Zealand. The lion share is coming from basically a 4,000 megawatt capacity market.

So I'm not sure we want to overemphasize how important Ireland is, but we sure like the team that we have acquired. We love the fact that they are the leader in the capacity market and we've seen the capacity market even in the size of 4,000 megawatt or 5,000 megawatt markets can be quite attractive places for us to go deploy our software and leverage what we've been able to do so successfully in markets in United States.

Pavel Molchanov - Raymond James

The first ever capacity auction according to the government is supposed to take place sometime this year for the UK, are you planning to participate? And if so, what do you think the opportunity looks like if you can quantify that?

David Brewster

I mean we'd love to participate. It's a market that we have a presence in, we have customers in. And we've been actively engaged in helping to shape the rules of that capacity market. There's still a lot of work to be done to finalize the details of that market. But you're correct, it'd be an auction that's supposed to happen I think sometime this fall for delivery into winter of 2018. So we're going to continue to try and get the rules right. I certainly would love to see the market rules materialize.

Tim Healy

And in terms of some potential near-term opportunity than 2018 for a market like that, people should keep in mind that PJM introduced the same type of construct many, many years ago. And while they were getting for demand response to be integrated into the capacity market, like it is today, they had a demand response capacity market program on a site called IRR and we were able to generate a significant amount of new business without having to take a three-year position as that marketplace was taking shape. Not sure that's going to happen in places like the UK and elsewhere where they're thinking about capacity market constructs, but certainly it's one of the things that we're going to have conversations with to see if we can get them in response one of the fastest to market resources that really doesn't need a four-year type of timeframe in order to get that resource ready to be participating and adding value to a market.

So we'll see if that resonates with some of the market designers, but that's certainly part of our strategy to have those types of conversations to see if we can get demand response and the capacity construct into these markets even earlier than four years from now.

Operator

Your final question comes from the line of Andrew Weisel from Macquarie Capital.

Andrew Weisel - Macquarie Capital

Going back to PJM, I understand that one of the rule changes is it's not a cap on DR, but it is a cap on the limited DR. My question is in the past few auctions, how many of your customers, maybe what percent of your customers would be willing to view not only the limited, but also the annual? And is there any trade-off in gross margin where the customer might demand a better, a bigger percentage of those PJM revenues from you?

David Brewster

As we said a couple of times, we have customers around the world that participate in annual demand response. So yeah, I think the majority of customers would be willing and able to participate in the annual DR. It depends on price. In recent auctions, there has been a little to no price separation between the summer-only and the annual product. So that explains why EnerNOC and I think few participants have participated in the annual product. Why would you take on more obligation if there is not a differentiation in the pricing? So yeah, with the right price, absolutely, the majority.

Andrew Weisel - Macquarie Capital

I understand that customers can put in multiple days, you could put in a bit for each of the three types of products. In the past few auctions, what percent of your customers put in a bid for the annual at some sort of higher price?

David Brewster

Obviously, we don't get into the specifics of our bidding strategy. But the majority of EnerNOC's customers would be willing and able with the right price.

Andrew Weisel - Macquarie Capital

I'm asking how many have roughly? I'm not looking for a number, but is it a majority that has put in a bid at some sort of higher number?

David Brewster

Yeah, we're not going to talk about it.

Tim Healy

One thing to keep in mind is that PJM also has some interesting dynamics associated with the measurement verification of annual resources. If we looked our portfolio right now, a lot of our customers would perform extremely well in an annual product.

So with that, we'd like to thank everyone for joining this evening. We look forward to seeing as many of you as possible during the outreach period and updating you on our continuing progress during our next conference call. And welcome to our new colleagues across the globe. And thank you, everybody, have a great night. Take care.

Operator

Ladies and gentlemen, this conference will be available for replay after 7:00 PM Eastern Time today through February 28th. You may access the AT&T Teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 315196. International participants dial 320-365-3844. Those numbers once again are 1800-475-6701 or 320-365-3844 with the access code 315196.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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