EnerNOC's (ENOC) CEO Timothy Healy on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: EnerNOC, Inc. (ENOC)

EnerNOC (NASDAQ:ENOC)

Q1 2014 Earnings Call

May 08, 2014 5:00 pm ET

Executives

Brian Norris - Director of Investor Relations

Timothy G. Healy - Co-Founder, Executive Chairman and Chief Executive Officer

David B. Brewster - Co-Founder, President and Director

Neil Moses - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer and Treasurer

Analysts

John Quealy - Canaccord Genuity, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Andrew M. Weisel - Macquarie Research

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the EnerNOC First Quarter Results Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to your host, Brian Norris. Please go ahead.

Brian Norris

Thank you, Ryan, 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, our Chief Operating Office and Chief Financial Officer.

The press release announcing our first quarter results and our business outlook, as well as a reconciliation of management's use of non-GAAP financial measures as compared to the 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 5 quarters.

Please note that we've modified our presentation of revenues to be consistent with the way we now look at the business, which is along end-user customer groups, grid operators, utilities and C&I enterprise. This is how we will present revenues going forward, and we have updated prior periods to reflect this change in the presentation. You will find this reflected in our income statement and in our summary of financial and operating statistics.

During this afternoon's 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 measure 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 statements 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 could involve a number of factors that 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 reports on Form 10-Q, available at www.sec.gov, as well as on our Investor Relations site. The forward-looking statements made today represent our views as of May 8, 2014, and we disclaim any obligation to update them to reflect future events or circumstances.

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

Timothy G. Healy

Thank you, Brian, and good afternoon, everyone. We're excited about our positive start to 2014. Our results were highlighted by strong revenues, our key software platform upgrade and several strategic acquisitions, which further our international expansion strategy and diversify our broader Energy Intelligence Software platform. Our results position us well for continued growth in 2014 and beyond.

We reported revenue of $52.5 million for the first quarter of 2014, which represents growth of 60% over the first quarter of 2013. Our strong results throughout 2013 and here in the first quarter of 2014, have given us the confidence to make investments designed to expand our total addressable market over the balance of the decade. We've made investments that accelerate our entry into Europe, and we forged an important joint venture to open up the Japanese market. We've also invested in and acquired critically important tariff engine and utility bill management capabilities.

As reflected in the updated guidance we issued today, we expect these investments to accelerate our growth in 2014 with a very modest offset to adjusted EBITDA this year.

Five weeks ago, we hosted our largest and most successful customer event ever, EnergySMART 2014 in Philadelphia. One of the themes that we heard there from our customers and prospects was the desire to have one trusted partner to meet their growing Energy Intelligence Software needs. While many of our customers, including a number of Fortune 500 companies, see demand response as a killer application, they see it as only one aspect and yet an important funding aspect on their broader EIS strategy.

These customers are beginning to expand their investment beyond demand response into other strategic areas of EIS, like supply management, utility bill management, building optimization, capital project management and demand management. These applications are designed to deliver significant operational efficiencies by helping our customers buy energy better and use less of it through powerful data-driven analytics, recording functionality and integration with other software they already use. Every key function within an enterprise that requires management recording, decision making, business intelligence, data management and oversight is supported by multibillion dollar enterprise software categories, including PLM, CRM, HCM and ERP. We believe EIS will become the next major category of enterprise software.

There are a number of trends that are disrupting the status quo in driving demand for EIS solutions, including extreme weather events, increased energy price volatility and procurement options, a move towards distributed generation, including rooftop solar, electric-powered vehicles and the buildout of the industrial Internet or the Internet Of Things. This industrial Internet is an open global network that connects people, data and machines. We believe this will enable enterprises including more and more of the Global 2000 to harness the power of their global energy network providing unprecedented visibility and control over their energy spend.

So to leverage this market opportunity, we have developed and are executing against a 3-pronged growth and market diversification strategy which is based on driving adoption domestically of our demand response solutions beyond the mid-Atlantic region of the U.S., first and foremost; secondly, driving adoption of our demand response solutions internationally; and finally, driving adoption of our enterprise Energy Intelligence Software globally.

Our position as the leading demand response provider in the states is well documented. We are the market leader in demand response, not only in the mid-Atlantic, but in the United States. That said, we expect to see faster growth from international demand response than we do from domestic demand response.

While there may be a lot of excitement in the market in advance of the upcoming PJM auction for the 2017, 2018 delivery year, the reality is that PJM, an annual auction itself, are becoming a smaller component of our increasingly global business. Sitting here today, we anticipate maintaining our portfolio of roughly 4,000 megawatts in the upcoming auction for the 2017, 2018 delivery year, which is in line with our average position in prior delivery years. We're not planning to secure significant volume beyond prior year levels as increased participation in PJM would be inconsistent with our growth and market diversification strategy. We see more compelling, more strategic growth opportunities on which to focus our investments. You should expect to see us issue a press release on or about May 26, announcing our auction results, but going forward, we intend to deemphasize communication around our participation in the PJM market as our market diversification strategy gets further traction.

The international market opportunity for our solutions is vast. By our estimate, 3x the market domestically. We've been making strategic investments internationally as evidenced by our recent acquisitions of Entelios and Activation Energy, which accelerate our entry into Continental Europe and Ireland, respectively. We expect that international revenues, which represented less than 1% of our total revenues in 2010 and about 20% of our total revenues in 2013, these international revenues will represent over 30% of our revenues by 2016.

Key to our ability to drive adoption of our EIS and related solutions is making it easy for our customers to buy and deploy our software. We are making great progress on both of these fronts, and we'll have more to share with you on these topics soon. One important area that we needed to fill, either organically or through acquisition, was utility bill management or UBM. Our acquisition of EnTech 3 weeks ago rounds out this part of our EIS platform. EnTech is the leading provider of global utility bill management and we, along with more and more of our customers, believe that UBM is a foundational element of a complete EIS solution.

UBM makes bill data, energy usage and expense information accessible to other key functions in the enterprise, including finance, operations and the C-suite, and it enables the accurate conversion of energy data typically represented in kilowatts and kilowatt hours to actual dollars and cents or to whatever the local currency is for each specific building on our platform. EnTech's software is currently deployed in over 100 countries and processes over $1 million utility bills per year for customers. The combination of real-time energy data, utility tariffs and monthly utility bill data on EnerNOC's EIS platform significantly advances real-time visibility and forecasting of energy costs and empowers better energy management across global enterprises.

EnTech has an impressive global reach. Its software is a global UBM solution for 8 Fortune 50 companies, including some of the largest companies in the world in telecommunications, consumer products, banking and auto manufacturing. EnTech's success to date is especially impressive considering that it has built its global presence primarily on its reputation and product differentiation without a direct salesforce or marketing support. We're excited to leverage the full strength of EnerNOC's sales and marketing engine to drive adoption of EnTech's UBM offering and our EIS offering around the world.

With that, I want to take this opportunity to give a warm welcome to our newest colleagues from EnTech who are sitting in offices all around the world today.

The benefit of having a more robust and comprehensive EIS solution is very tangible. First off, more customers are deploying our EIS solutions. Consider that 800 enterprise customers have purchased our software and related solutions as of March 31, 2014. 200 more than had as of December 31, 2013, representing an increase of 33% over the last quarter. So more customers are investing in our software, but more than that, the sales cycles of our demand response opportunities that include our software appear to be shortening and closing with higher gross margins. We attribute this to a stronger value proposition that is resonating quite well with our customers. This could be the start of an interesting trend and we're going to work hard to continue to drive that trend.

So I want to close by briefly touching on 2 appointments on the executive staff, which are designed to better support our long-term growth plans. First, we recently appointed Neil, Neil Moses, to the dual role of COO and CFO. Under this expanded role, Neil is going to assume additional responsibility for our global operations, including the management of EnTech. Since 2010, we've dramatically expanded our global footprint and now have offices in 11 countries with over 1,000 employees, 30% of whom are located outside of the U.S. David Brewster is going to continue to lead our domestic and international market development efforts in addition to overseeing our global regulatory affairs function, while Neil will assume responsibility for the day-to-day business operations in our established markets. We're thrilled that Neil has agreed to take on this additional responsibility.

We're also pleased that we added long-term software industry veteran, Phil Pergola, to our team as Vice President of Professional Services. In this new role, Phil will be responsible for driving customer success and adoption of our software. With more people than ever using our Energy Intelligence Software, the onboarding of clients to our platform is critically important to our strong track record of customer retention and satisfaction. Phil's experience delivering customer value across all aspects of the enterprise product and customer life cycle, combined with his SaaS experience, make him uniquely qualified to lead this function for us. So congratulations to Neil, and again, welcome aboard, Phil.

So that's a brief recap of the quarter. Our progress on our growth and market diversification strategy, as well as just a little commentary on our focus moving forward. And with that, let me turn the call over to David for his insights.

David B. Brewster

Thanks, Tim, and hello, everyone. I'm pleased to be with you this afternoon. I'll focus my remarks on our recent international expansion activity. We've been clear about our strategy to expand internationally. The international demand response market opportunity is significantly larger than the U.S. market and significantly less penetrated. To capitalize on this opportunity, we have, over the past 3 years, invested aggressively in markets like Australia, New Zealand and Canada. We've continued to focus on accelerating our international presence in 2014 as highlighted by our recent expansion into continental Europe, Ireland and Asia.

Our European expansion plans were accelerated by the acquisition of Entelios, which is the leading provider of demand response solutions in Germany, which is an 80-gigawatt market. Germany is one of Europe's largest potential markets for demand response with a peak demand roughly half the size of PJM's. Entelios has built a very strong technology platform that is prequalified by all 4 transmission system operators in Germany to deliver both positive and negative demand response in Germany's growing reserves markets to help manage system imbalances. The growing need for fast acting reserves in Germany is driven primarily by the large amount of renewable energy capacity that has been deployed in Germany to date. Entelios also has contracts with major European utilities with significant presence outside of Germany. Entelios has the team, the market expertise and an attractive customer base to help us establish an important foothold in continental Europe consistent with our geographic market diversification strategy.

We anticipate that our recent acquisition of Dublin-based Activation Energy, which is the leading provider of demand response software and services in Ireland, will help us broaden our overall reach in Europe, and establishing operations in Ireland also gives us a foundation to start to centralize the management of some of our international operations. The integration efforts related to Entelios and Activation Energy are progressing very well. We've ramped up resourcing efforts in both sales and operations. We defined clearer go-to-market priorities in several European markets and created visibility and access to cross-sell opportunities across our expanding customer base. We're in the process of combining EnerNOC and Entelios capabilities to establish the ability to efficiently manage our energy solutions in Germany on a 24x7 basis, expanding from current daytime-only coverage. Although it is still early in the integration process, we are on track to meet our goals for both acquisitions.

We also continue to make progress in our lease and joint venture with Marubeni and our entry into the Japanese market, which is roughly the size of PJM in terms of peak demand. This JV brings together our expertise as the world's leading provider of demand response with Marubeni's deep experience and leadership position in both the electric power sector and the Japanese market. The strength of our combined team continued to be showcased at the Tokyo Electric Power Company, which is Japan's largest utility and which alone serves a peak demand for electricity that is equivalent to the size of Texas or the U.K. Our pilot program there continues to advance well as do our development efforts to establish much larger and longer-term commercial opportunities across Japan.

As Tim described, we're thrilled with our acquisition of EnTech. We share our customer's view that utility bill management is critical to understanding the true cost of energy and an important component of an end-to-end EIS platform. The acquisition brought us the leading global provider of UBM. It also brought us dozens of global customers with operations in over 100 countries around the world. I'm excited about us getting in front of those customers to describe the attractive demand response opportunities we are creating for them all over the world.

As we mentioned at our Analyst Day last November, M&A is a key component of this growth, and we're excited that our acquisitions of Entelios, Activation Energy and EnTech and the establishment of our JV with Marubeni are initial proof points of this strategy.

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 strong first quarter results. Before I get into the numbers, let me remind you of Brian's comments regarding our revenue reporting. Specifically, we've modified our presentation of revenues to be consistent with the way we now look at the business. Rather than presenting revenue along product lines as we used to do, we now present revenue by customer group, specifically grid operators, utilities and C&I enterprises. This is how we will present revenue going forward and we have updated prior periods to reflect this change in the presentation. We will also continue to provide traditional disclosure with regard to revenue mix by geography.

And with that, total revenue for the first quarter of 2014 was $53 million, up 60% compared to the $33 million in the first quarter of last year. Revenue from our grid operator customers was $36 million in the first quarter of 2014 compared to $15 million in the first quarter of last year. This increase of 137% was primarily due to energy payments generated in the mid-Atlantic region of the U.S., which were associated with the polar vortex that gripped much of the Eastern U.S. during the first quarter. Higher pricing and megawatt growth in New York, as well as increased participation in our Alberta, Canada programs also contributed to the growth in grid operator revenue in the first quarter.

Revenue from our utility customers was $10.3 million in the first quarter compared to $11.8 million in the first quarter of last year. This decrease of 12% primarily reflects the expiration of a short-term demand response program with a distribution utility in Eastern Australia in the second quarter of 2013. Our longer-term outlook for this part of the market remains positive, especially with the introduction of our demand manager product.

Revenue from our C&I enterprise customers was $6.4 million in the first quarter compared to $6 million in the first quarter of last year. This increase of 7% was primarily due to an increase in both the number of our C&I enterprise customers and overall service engagements for certain of those customers. A number of C&I customers with enterprise revenue grew from 500 to 800 year-over-year in the first quarter and reflects our SaaS revenue model and the lag between customer acquisition and site enablement.

Revenue from our international operations in the first quarter of 2014 grew by 14% compared to the first quarter of last year. Year-over-year international growth was also impacted by the decline in Eastern Australia utility revenue, I just described. Gross margin was 31% in the first quarter of 2014, compared to 32% in the first quarter of last year.

And our total operating expenses were $47 million in the first quarter of 2014 compared to $41 million in the first quarter of last year. This increase primarily reflects growth in headcount across both R&D and sales and marketing to support our long-term growth plans. It also reflects the merger and integration-related expenses associated with the Entelios, Activation Energy and EnTech acquisitions and corresponding amortization of intangibles expense. We ended the quarter with 756 full-time employees, including 25 from our acquisitions of Entelios and Activation, and we expect to end the second quarter with closer to 1,000 employees as a result of additional hiring to support our growth plans and our acquisition of EnTech.

Speaking of EnTech, while the acquisition was announced only a couple of weeks ago, we've already made great progress in terms of rolling out the go-to-market strategy for our key customer targets, and we have completed product training for our sales leaders. Our focus this quarter will be the continued integration of over 200 new teammates in our organization.

GAAP net loss attributable to EnerNOC in the first quarter of 2014 was $30.4 million or $1.09 per diluted share, compared to a GAAP net loss attributable to EnerNOC at $30.5 million or $1.12 per diluted share in the first quarter of last year. And our non-GAAP net loss in the first quarter of 2014 was $24.3 million or $0.87 per diluted share, compared to a non-GAAP net loss of $24 million or $0.88 per diluted share in the first quarter of last year. Adjusted EBITDA was negative $18.4 million in the first quarter compared to negative $18.5 million in the first quarter of last year.

Okay, let's turn to the balance sheet. We ended the quarter with approximately $104 million in cash and cash equivalents compared to approximately $149 million at the end of last year. This decrease primarily reflects cash utilized in the acquisition of Entelios and Activation Energy and our investment in Genability, as well as cash used in operations of $12 million in the first quarter of 2014, compared to cash provided from operations of $7 million in the first quarter of last year. While our net loss was relatively consistent in the first quarter of 2014 as compared to the first quarter of last year, the change in cash used in operations primarily reflects an increase in accounts receivable due to timing of energy revenue payments earned from PJM dispatches in the first quarter of 2014.

PJM Energy revenues contributed $13 million to our total first quarter revenue; none of which was paid for prior to March 31.

Free cash flow was negative $18 million for the first quarter of 2014 compared to negative $2 million in the first quarter of last year. The primary reason for this change in free cash flow is, again, due to the increase in accounts receivable related to energy revenues earned from PJM dispatches in the first quarter of 2014. Of note, the vast majority of these receivables were subsequently collected in April.

As we continue to align all of our resources behind our 3-pronged growth and market diversification strategy, we have decided to divest an asset that no longer fits with our future growth plans. Specifically, we have recently entered into an agreement with a third-party to sell our Utility Solutions consulting services line, which was part of the Global Energy Partners acquisition in January 2011. While we see an important role for professional services to support our offerings, this specific service line does not lend itself particularly well to our software vision. The sale price is for approximately $5 million subject to certain conditions and representations. We expect the transaction to close in the second quarter of 2014. This asset contributed about $6 million to enterprise revenue in 2013.

Now I'd like to share with you a few updated thoughts on how we're thinking about 2014. We expect full year revenue to be about $450 million to be -- excuse me, to be between $450 million and $465 million, up from our previous guidance of $435 million to $460 million. This increase is due to our strong Q1 revenue performance, as well as the net impact of Q2-to-date acquisition and divestiture activity.

Further, we continue to expect full year gross margins to return to more traditional levels in the mid-40% range in the short term with opportunities for margin expansion longer term with the anticipated growth of our enterprise Energy Intelligence Software business.

We are reaffirming our expectation for GAAP net income in terms of being between $0.40 and $0.50 per diluted share, and we are raising our expectation for non-GAAP net income to be between $1.28 and $1.40 per diluted share compared to our earlier forecast of between $1.25 and $1.35. We expect adjusted EBITDA to be between $72 million and $76 million compared to our earlier forecast of between $74 million and $78 million. This primarily reflects some incremental investment related to the EnTech acquisition.

Okay, a word on taxes. We plan to fully utilize our net operating loss carryforwards in certain jurisdictions this year. As such, we expect our tax provision to increase over 2013 levels. We believe it's appropriate to model an effective full year tax rate in the range of 27% to 32% in 2014 compared to our previous estimate of 32% to 34%. This updated projection is based on revised earnings estimates for certain jurisdictions. We do not expect our acquisition activity to have a material impact on our total 2014 tax provision.

As in the past, we're going to continue to assess our need for a complete valuation allowance against our deferred tax assets as the year progresses. Our 2014 guidance does not include a potential reversal of any portion of our valuation allowance.

In terms of cash flow, we expect to generate about $50 million of free cash flow in 2014, and we are modeling year-end cash in the range of $150 million to $160 million in 2014. This reflects almost $40 million we have invested year-to-date on acquisition activity, but does not reflect any additional potential acquisition or stock repurchase activity.

Finally, with regard to the second quarter, we expect revenue to be between $40 million and $45 million. We expect our GAAP net loss to be between $1.25 and $1.30 per basic and diluted share, and our non-GAAP net loss to be between $1.01 and $1.07 per basic and diluted share. And we expect adjusted EBITDA for the second quarter to be between negative $22 million and negative $24 million.

With that, I'm going to turn the call back over to Brian, and I want to just one correction. The $6 million that I talked about for our divestiture was really a utility revenue in 2013 on the basis that we -- of how we've now reclassified revenue.

Okay, back to you, Brian.

Brian Norris

Terrific. Neil, thank you. Ryan, we're ready to open up the call for questions. I would ask folks to limit their questions to one question and one follow-up.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is going to come from the line of John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

So first question. Can we go back to, I guess, the software side of things, I know we had talked the past about million dollar-type of opportunities, but can you talk about expanding that beyond the million dollars? I'm talking about different product lines, different customers that want to pay something less than that. Certainly, we heard that sentiment from customers in Philly, just wanted to see if that's been productized or strategized yet?

Timothy G. Healy

Thanks, John. So this is Tim. So I think we mentioned that one of our goals in order to see traction would be to really try to leverage the sales to large enterprise customers. We felt that if we did that, we would have a trickle-down effect and we'd be selling, at the same time, a lot of software and solutions to the hundred thousand plus commercial and industrial accounts we see out there that don't qualify as the large big elephant accounts. And so it's always been a part of our strategy to get after both. We just think it's easier to articulate and start to track the metrics around those large accounts. So we have -- obviously with 6,000 customer accounts that are using demand response software with us, a lot of those accounts are the smaller commercial, industrial accounts and it's always been our strategy to upsell additional Energy Intelligence Software solutions to them. So our vision is that we'll continue to grow, that's why you see this customer count growing as I explained and Neil referenced as well, a lot of those accounts are smaller nonstrategic enterprise accounts and we'll be selling them the entire suite of solutions. We'll be introducing later this quarter and we'll talk about it on the next earnings call, product packaging that's targeted for that market as well. So that there's an onboarding of customers at a lower price point with a lower level of services to represent these smaller accounts with fewer sites and a lower energy budget and a different risk management profile. So we're going after both sets of customer accounts and I think we're seeing the traction in both classes of customers that we're going after.

John Quealy - Canaccord Genuity, Research Division

Okay. And my follow-up, in terms of M&A, $40 million done all-in. Your cash balance is expected to be $155 million at the midpoint. Can you talk about relative budgets for future M&A? Or are you guys going to digest for a while before you do some more deals?

Neil Moses

Thanks, John. Yes, I guess the only comment we'll make about M&A is that we've mentioned in the past that there is more to build out on the product side of the equation and we believe that we've had a good track record through our past acquisitions of integrating these acquisitions in, bringing them into the platform, leveraging their customer base to sell them our Energy Intelligence Software and solutions and so at this point in time, there's an attractive marketplace at the same time, for additional M&A targets, but there isn't anything in particular that we want to forecast at this point. We're just going to continue to be strategic and continue to be opportunistic as we fill out our product roadmap and continue to use M&A to expand geographically when the time is right, and we think that it can accelerate our growth into a certain market.

Operator

[Operator Instructions] Our next question comes from the line of Patrick Jobin with Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

Just looking here and certainly appreciate the additional disclosure here by segment. It seems to fit the business much more appropriately, so much more transparency. Just looking at enterprise line item, it seems like there's maybe a little bit of seasonality in it, which I -- somewhat surprises me, I guess, can you talk about that? And then just a follow-up, a clarification. The $6 million of revenue that you're divesting, that was on the grid operator line? Not the enterprise line? Just help me understand why it seems like services might -- may be falling under enterprise.

Timothy G. Healy

Okay. I'll take the first question and then maybe we might ask you to repeat the second one. I don't actually think there's a whole lot of seasonality in the enterprise business. I mean, I think, if you look at what happened in 2013, it ranged between basically between $6 million and $9 million per quarter. So I think it's relatively consistent. I think where you're going to see activity increasing or decreasing in a quarter, is really with the -- based on the size of the customer that we're able to recruit and our ability to retain those customers. So that's really the issue there. I did mention on my comments earlier, Patrick, that there is a lag between the acquisition of a customer and also the recognition of revenue. That lag is true for 2 reasons: one is that we -- first of all, we aren't recognizing the revenue until we actually enable the site, and that means physically placing a meter at the location and then getting our software working at the location. And then secondly, in some cases, the customer is using demand response payments, if you will, to support the payment of their Energy Intelligence Software. And in the case of, let's say, a customer inside the PJM region, those demand response payments may typically take place in the summer months. And so where a customer -- we've acquired a customer and we've enabled a site but those demand response payments are taking place during a certain portion of the year that may be later on, but referring the recognition of revenue until such time. So that can also create some level of lumpiness, if you will, in our Energy Intelligence Software and solutions revenue. Does that make sense?

Patrick Jobin - Crédit Suisse AG, Research Division

I think so. Let me just make sure I understand, the sequential decline from Q4 of '13 on the enterprise line to Q1 is due to timing of customer recognition and also partially due to tying revenue to PJM capacity payments, so that's the cause for some of this seasonality?

Timothy G. Healy

That's correct.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay. And then, sorry, my second question was just a clarification. The $6 million of revenue that you're divesting for professional services for energy efficiency, why would that not be under enterprise?

Timothy G. Healy

Well, the way we classified revenue last year, it would've been under the EE portion of our business, the energy efficiency portion of our business, okay? The way we classify revenue now, it's under the utility portion of our business because it's consulting that we're doing directly with utilities, okay? So I guess it depends upon which revenue classification you want to look at. If it was in our prior classification of revenue, it would've fallen under energy efficiency. Given our current clarification of revenue, it falls under the utility category.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay, that makes sense. And just one quick question. When you think about the recurring nature of the different revenue lines, how much of the enterprise revenue would you consider to be recurring in nature versus kind of initial set up services or anything of that regard?

Timothy G. Healy

Yes, we've classified both the majority of our utility and the majority of our enterprise revenue as recurring revenue.

Operator

And our next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

On your European acquisitions, you mentioned the integration process. Any better sense now of what the timetable might be for actually scaling up revenue from Germany, Austria, Ireland?

David B. Brewster

Yes. I mean, Pavel, we are scaling as we speak. I mean as I mentioned in my remarks, we are focusing a lot of efforts right now for the sales and operations, hiring to grow those teams. We seem -- the markets are ready for the taking now. I mean, the market will also allow us to provide reserves in Germany and allow us to provide capacity in Ireland. So it is -- the ramp is progressing.

Timothy G. Healy

Pavel, we're going to see some revenue this year, right, for both Activation and Entelios and probably a more significant increase next year, is that fair?

David B. Brewster

Yes.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then, same question but with regard to Japan. Been about 6 months since you partnered up with Marubeni. Any added visibility on that opportunity at this point?

David B. Brewster

So that -- the revenue from that, Pavel, is in a pilot with TEPCO, Tokyo Electric Power Company. That pilot will likely run through March of 2015. So this is -- as we -- I think I've talked about in the past, Japan is in a period of time of figuring out how to integrate demand response into the markets, the best way to do measurement verification and payment levels. And so this is a year of building the foundation and we would expect that to start ramping in the middle of next year.

Operator

Next question comes from the line of Andrew Weisel with Macquarie Capital.

Andrew M. Weisel - Macquarie Research

My first question is at the Analyst Day last year, you gave some good forecast for the 3-year outlook by a bunch of the different segments at the time. My question is, with the new the reporting segments, can you give any either numbers or drivers of what the 3-year growth outlook looks like?

Timothy G. Healy

Right, Pavel, -- I'm sorry, Andrew, this is consistent with what we laid out at our recent Investor Day. I think, we talked very much about growing the enterprise revenue part of the business, the revenue from our C&I customers, selling them our software and related services. And if that -- we projected that to grow to over $110 million of revenue in 2016. And then the grid operator revenue and utility revenue that's our domestic DR and international DR. We get revenue from 2 different types of customers in international markets, as well as domestic markets. And we said that domestically, we expected our revenue domestically to grow very modestly from our demand response business. And internationally, we expect it to basically double the amount of revenue not quite but basically double the amount of revenue, and we feel very comfortable that the early returns over the last 6 months suggest that our projections for 2016 -- we're feeling good about that. So that's really the way we're looking at this. I think as we continue to disclose our results over the next several quarters, we'll put more color into what we see as the global trends of grid operators and our penetration having just made a couple of acquisitions where we get some new grid operator customers as part of that -- part of those acquisitions. So you see that in the grid operator customer count that we released on our -- one of our schedules today. You see that go up from having 8 grid operator customers at the end of last year to -- we're now serving 13 grid operator customers throughout the world. Our utility customer count went up. It had been pretty flat throughout 2013. We're serving right around 35 utility customers throughout most of last year and it grew to 43 utility customers in the fourth -- in the first quarter. So again, some domestic and -- or some organic, as well as inorganic growth there in terms of the number of customers we're serving, and we expect revenue to continue to grow in both of those categories.

Andrew M. Weisel - Macquarie Research

Okay, that's great. My follow-up is about the PJM capacity auction. Maybe it's a going to be a multipart follow-up question. But you mentioned that you're going to be expecting lower volumes as you deemphasize it. Do you think that the overall demand response participation in the auction as an industry will be down? And if so, do you see that as a function of pricing? And then maybe can you talk about where you see more upside to pricing East versus West?

Timothy G. Healy

So I'm not sure that we're going to go into that level of granularity. I think in part because of what we've described -- what we've tried to describe throughout the bulk of last year and what we've reiterated in the entirety of the first quarter of this year, PJM is becoming less and less an area of growth for us in terms of grid operator revenue growth. We are serving the amount of customers in PJM that we think is the right amount of customers to serve there relative to the other attractive opportunities worldwide to lead with demand response and then bring in our suite of Energy Intelligence Software solutions. We think we've got the most envious portfolio of customers in the PJM marketplace right now that have an increasing appetite for a full Energy Intelligence Software suite, something that integrates with their enterprise resource planning, applications, something that really helps them manage the energy cost and energy supply risks that they're facing. We think the polar vortex in the first quarter was something that contributed to an increased interest in customers wanting to do more risk management, more understanding, get more visibility around their total energy spend. And demand response is just one part of the equation for them. They're there, they're doing it and now they want more. And we think we need to turn our resources in the PJM marketplace to delivering that value to them. You see that in our customer count. Our customer count of customers, they're bringing us enterprise revenues continues to grow. You also see that when you look at the number of customers participating in the demand response. We've been able to grow our revenue significantly and yet the number of customers participating in demand response is staying relatively flat, that's because we're getting more value from serving the best customers in these marketplaces. And with that, our game plan, as we mention, is to manage the portfolio of roughly 4,000 megawatts. It's the same plan we went into last year with. So as for what the rest of the demand response industry will do, my only comment there is, we don't know what the goals and objectives are of everyone else that we're competing with in the demand response market. We know that we come at it with a technology solution that we think is better equipped to handle the complexities that PJM has been introducing into their market than any other provider. And whether that complexity leads to higher prices or not, in the short term, we don't know, I think most markets would suggest that increased complexity generally leads long-term to increases in prices. But we're nowhere near long term yet in terms of the introduction of these complexities into the marketplace.

Operator

[Operator Instructions] The next question we have on queue comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So maybe a follow-up to the last one, if you will. I'm kind of curious, I mean, is this more of a scaling back in PJM as a function of just your own tactical shift towards higher value products? Or to what extent are these latest rule revisions and specifically in limitations on buyback and collateral requirements shaping your view? And perhaps to put a finer needle on it, if you will, how much of a reduction in aggregate are we talking about? Is this comparable to the kinds of scale of reduction we saw last year? Or less or more, if you will?

Timothy G. Healy

Maybe I'm struggling to make it as clear as I'm trying to, but there's not a reduction in what we're doing. We are doing what we did last year, which is trying to manage the same size portfolio as we managed -- as we bid in last year. So it's not a reduction for us, it's a status quo -- keep our portfolio the same so that we can go do exactly what you describe, which is go sell solutions, software to customers that are asking us to sell it to them.

Neil Moses

And I think that status quo, if I can just add, has very little to do with changes in PJM rulemaking and just about everything to do with our strategy of market growth and diversification, specifically along the lines of international demand response and Energy Intelligence Software sales to C&I customers.

Timothy G. Healy

And one more Julien, I wouldn't expect that you follow along with every webcast that we do or every conference that we went or that we go to, but we did just attend a conference earlier this week. We webcast our comments at that conference and somewhere after about the 20th minute, if you go online, minute 25 or thereabouts, we talk about our PJM strategy and I mention that the market would absorb -- or EnerNOC would be -- it would be fine for us to bid another 1,000 megawatts into the market in the future. We just don't think that's the right thing for us to do strategically in terms of where the more attractive global demand response opportunities are and where our customer base wants us to open up more demand response opportunities for them. We've been invited in the door of the Global 2000 customer base that we serve. Several hundred of those customers have a full plate of demand response being served to them in PJM and they want us to continue to bring them into new demand response markets worldwide. And it's a lot easier when you're already invited in the door to go and upsell these customers more demand response in other markets of the world that they have sites and that they do business and it's a lot easier to sell them an attractive Energy Intelligence Software suite, and we think it's just more cost effective for us and a better strategic option.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Perhaps just a follow-up on that, if you will. I appreciate it and frankly, I'm almost -- I'm impressed given all the changes that PJM that you're keeping -- you're holding steady. How do you think about relative to peers and your ability to kind of gain market share even if you just hold, kind of, hold steady, if you will? Do you get what I'm saying?

Timothy G. Healy

I do.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

To what extent are the rule changes are going to be instrumental?

Timothy G. Healy

I understand that the utilities and that the IPPs, that pay attention to getting strategies of all the different participants, probably are very curious to hear what the rest of the demand response industry is going to do. I -- we're just the wrong company to comment on it. We've built our portfolio. We've got technology to support that portfolio. We've got incredibly strong customer retention and a very confident approach to being able to serve these companies under PJM's construct. Whether that construct is the same as it was this year or it continues to change in the years to follow. We've built scalable robust modular flexible technology that we've been able to continue to adapt as demand response markets continue to evolve and become, in some cases, become more complex, in other cases, simplified. And at the end of the day, it's just -- we're unable to predict what the rest of our industry will do. We know that we've got the technology and the customer base to support our strategy moving forward.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then perhaps just a quick follow-up there. New England looks like it's set to really improve in terms of market fundamentals. Is there any thought to getting back into that market at all? Or is this really, again, a de-emphasis of the Northeast?

Timothy G. Healy

I don't think it's a de-emphasis of the Northeast. I think we've mentioned it on prior disclosures that when you look at the customers that we're serving with our Energy Intelligence Software and related solutions, the largest concentration of those customers, not surprisingly, is in New England. Why is that? That's because these customers started with us early on and they became very attracted to us helping them manage the entirety of their energy bill not just their demand response participation. So we still have a large customer base in New England that we support and if the New England demand response market comes back and is an attractive opportunity and can be a part of these customers' energy management strategy, I think we stand ready to bring them into those market opportunities. But right now, we're helping these customers manage their demand charges on their bill, buy supplies for a lower cost than what they can do by just going with their default utility, and we're helping them optimize the building and do everything else from paying their utility bill to just make sure that they have a smart risk management strategy as energy becomes a more complex thing than just paying the rent every month.

David B. Brewster

Julien, I'm going to have to leave it there. So before I turn the call over to Tim, for his closing remarks, I just want to remind our listeners that we have an active investor relations calendar this quarter. We're going to be out on the conference circuit. We'll be in the Mid-Atlantic, we'll be in the Boston area, New York, we'll be in Europe. So we look forward to seeing some folks.

Timothy G. Healy

So Brian, thank you. And again thank you, everyone. Thanks for the questions today. We look forward to talking to you all, seeing you all very soon and updating you on our continuing progress on our next conference call. Thanks, everyone.

Operator

Ladies and gentlemen, that does conclude today's conference. As I mentioned earlier, today's call has been recorded and it is available for replay. That replay will start today at 7 and will run for 3 weeks until May 22. You may access the AT&T replay system by dialing 1 (800) 475-6701 and entering the access code 324498. I want to thank you for your participation. You may now disconnect.

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