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New Issue Analysis: EnerNOC, Inc $160 Million Convertible Senior Notes 2.25% 2019-08-15

|Includes: EnerNOC, Inc. (ENOC)

EnerNOC, Inc. provides energy management software and solutions to utilities, businesses and other large energy users. Historically, EnerNOC has focused on the business of managing electricity demand response systems whereby the company sits in between utilities and large energy users to balance energy supply and demand. Under agreements with both utilities and energy consumers, EnerNOC will cut client electricity consumption during peak demand. The energy savings is beneficial to utilities because they can avoid the construction of peak demand plants. EnerNOC receives a fee from the utility to reduce electricity on-demand which it shares with its clients. EnerNOC has about 6,100 demand response clients.

More recently, EnerNOC has been developing an enterprise software as a service (SaaS) platform for more efficient energy purchase and usage. EnerNOC has signed up about 1,000 business clients such as Microsoft. EnerNOC's sales strategy is to lead with its demand response product and then up-sell its energy efficiency enterprise software to those existing clients.

EnerNOC released earnings last week, with a significantly lower loss than anticipated. Because demand response continues to be the company's major revenue stream, results are highly seasonal. Peak energy demand occurs during the summer months and that is when demand response systems are most likely to be utilized. EnerNOC recognizes the revenue for those periods in September. So like a retailer which may only be profitable in its fourth quarter because of the holiday gift-giving season, EnerNOC's third quarter is historically its only profitable quarter.

Earnings for the second quarter 2014 were as follows:

Revenue in $ millions









Act. V. Est.


Year Actual











Adjusted EPS






During the quarter, adjusted EBITDA improved to a loss of ($16 million) from a loss of ($22 million) in the second quarter last year. Free cash flow was a positive $11 million, up from a negative ($13 million) last year.

Highlights of the quarter including continued customer growth for both demand response and energy intelligent software. EnerNOC added over 200 companies to its energy SaaS client roster during the quarter.

EnerNOC is also pushing into international markets, recently concluding a joint venture in Japan with Marubeni for the demand response product. International revenue grew to $14 million in the second quarter, up 127% year-over-year.

Based on its continued customer growth, EnerNOC raised full-year 2014 guidance.


New Guidance

Previous Guidance


Reiterated Guidance

$450 - 465 million

GAPP Net Income

$0.47 - $0.55

$0.40 - $0.50

Non-GAPP Net Income

$1.36 - $1.45

$1.28 - $1.40

Adjusted EBITDA

Reiterated Guidance

$72.0 - $76.0 million


With no other long-term debt, the convertible security is a reasonable use of the company's balance sheet as it beefs its cash position to pursue its software and international initiatives. Continued success in enterprise software will lead to a stronger, more balanced company for the future.

EnerNOC stock is off its recent high of $24 in May in sympathy with small cap stocks. We believe the company will be successful with its strategy of up-selling its energy SaaS to its installed demand response customer base. While not cheap at 25x trailing earnings, EnerNOC's market growth opportunities and the ability to execute on an international scale should provide shareholders continued growth.

It may actually be a good thing that EnerNOC upsized its deal slightly, as the added liquidity in the $100-$200 million range probably will mean more investors will take the time to learn about the company. We'd have of course preferred a mid-30's premium, as the final pricing is on the full side, but we still are just comfortable enough with the deal's optics given the relative sizes. It's an interesting story that should find a home in a number of portfolios--and it seems likely, given the company's youth, that this will be the first of a string of EnerNOC convertibles.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.