Acorn Energy, Inc. (ACFN) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Acorn Energy First Quarter 2012 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the presentation over to Heather Mallard, General Counsel of Acorn Energy.

Thank you very much, and good morning. Please take note that certain of the matters discussed in this presentation contain statements that are forward looking, such statements relating to results of operations, financial condition, business development activities and market dynamics. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of Acorn Energy or its subsidiaries. All statements other than statements of historical fact in this presentation regarding Acorn Energy's or any of its subsidiaries' future performance, revenues, margins, market share and any future events or prospects are forward-looking statements. For more information regarding risks and uncertainties that could affect Acorn Energy's or any of its subsidiaries' results of operations or financial condition, review Acorn Energy's filings with the Securities and Exchange Commission, in particular, its most recently filed Form 10-K and Form 10-Q. Acorn Energy's forward-looking statements are not guarantees of future performance, and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected, and such differences could be material. Acorn Energy undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future event or otherwise. I am now delighted to turn the presentation over to John Moore, CEO and Chairman of Acorn Energy.

Thank you, and welcome friends and fellow Acorn Energy shareholders. I'm delighted to report that our revenues for the first quarter of 2012 were up 37%, and all of our companies showed increased revenues in Q1 2012 as compared to Q1 2011. We made some really important investments during the quarter. I often classify our investment criteria in terms of 2-foot, 4-foot and 6-foot hurdles. The 2-foot hurdles are investments to fund the organic growth of our existing businesses. We invested $5 million in US Seismic, bringing our total investment to $11.7 million. And we increased our ownership to 92% or 81% of the company on a fully diluted basis to fund product development and expand our manufacturing capacity. Our 4-foot hurdle was a bolt-on acquisition by US Seismic of a license of an important complementary technology from Northrop Grumman. Another 2-foot hurdle is that we invested an additional $1.3 million in GridSense. The hardest thing for us to do is the 6-foot hurdle, the acquisition of a new platform business. We acquired OmniMetrix on February 15 for $8.5 million. The combination of an outstanding management team, the powerful but unexploited dealer sales channel, and the company's proven solution to rising grid reliability challenges made this as an investment we simply could not pass up. The way we create shareholder value is finding and funding great companies led by terrific management teams to solve a pain point that we believe can become a major new category in the digital energy business. We are seeking businesses that have a leadership position in the mind of the customer or where the businesses require capital to cross from the early adopters to the early majority. OmniMetrix is a fat pitch down the center. Harold Jarrett, the founder of the business created an on-site generator monitoring industry. He created the industry. He established the repetition industry for integrity and fair dealings. He recruited Deena Redding to lead the company, and their collaboration resulted in 2011 financial results of $3 million in revenue and approximately $800,000 in pretax profit. The business was 13 years old when we bought it and despite their leadership position, the company had only 2,400 connections out of the total addressable market of over 2 million generators in the U.S.A. They needed to partner with us for our balance sheet, our risk appetite and our vision for the future of digital energy. Two other incredibly appealing aspects of the business: Our potential OEM relationships and over 1,000 generator dealers with long-term service contracts on our -- with our customers. Deena has recruited Andy Briggs, one of the industry's highest visibility and most respected sales executives to architect their sales and marketing strategy. We think OmniMetrix's compelling smart service approach promises to dramatically improve the profitability and customer satisfaction of this industry. Overseas markets that we will target later are larger and even more appealing than the U.S. market. One early success of our collaboration is OmniMetrix's introduction this week at the cell phone industry trade show of the industry's first and only 4G monitoring solution. This is going to be an important driving force in our future product roadmap. We intend to aggressively invest in the business to expand the competitive advantage and ultimately our connections of recurring revenue. We've increased the personnel at OmniMetrix since the acquisition from 11 to 18 employees, and further expansion is planned on both the back office and the regional sales force. We're planning a fundamental change in the pricing policy to expand the number of connections which will negatively impact the near-term financial results but ultimately improve our enterprise value. We believe the ultimate total addressable market in the U.S. alone is over $400 million annually. Our investors need only look at Generac, GNRC on the NASDAQ, a leading generator OEM, operating results for the past quarter, which resulted in a special $10 share dividend to understand what incredible potential there is to exploit OmniMetrix leadership position in this burgeoning industry, which is solving the growing power reliability problems worldwide. GridSense revenues increased 43% to $918,000 in Q1 of 2012, up from $641,000 in Q1 2011, an increase of almost $300,000. Increased revenues attributed to sales of pilot projects and improved business environment in the utility industry. In late 2011, GridSense completed the fulfillment of what we believe to be the world's largest transformer monitoring project with a major Southeastern U.S. electricity utility. GridSense pioneered a unique power harvesting technology, which resulted in follow-on orders based on the customers' initial successful deployment. The first quarter reflects increases in engineering, sales and marketing costs, which is expected to continue as GridSense continues to expand the sales and support capabilities. The engineering team has been expanded to 20 engineers to execute our new product roadmap, driven by specific customer demands that should result to this potential new near-term revenue opportunities. I stated publicly that last year, we had one major pilot project that resulted in this big deployment of our new product, the Transformer IQ. This year, we have more than 15 major pilot programs. Each one larger in scope than the first. We believe that GridSense is establishing a reputation as a pioneer in the emerging distribution optimization segment of this market industry. Lindon Shiao and Kevin Anderson have a unique and compelling vision offering important tools for improving the productivity and reliability of the distribution of electricity for utilities. This is important because the step-change solutions our devices provide help utilities improve their profitability and reliability by getting more out of the grid without requiring people to change their behavior or increasing the electricity bills. The total domestic addressable market for GridSense products is currently $1 billion, and the company has an active development program which could substantially expand the market. DSIT's revenues increased 26% to over $3 million in Q1 2012, up from $2.4 million in Q1, 2011, an increase of over $600,000. This increase is due to the receipt of a major order for delivery of multiple diver detection systems in the fourth quarter of 2011. The order of $12.3 million is the largest ever received by DSIT or any of the existing Acorn companies. DSIT's net income increased from a breakeven in Q1 2011 to approximately $60,000 in the first quarter of 2012. Our backlog stands at $11.1 million. DSIT expects to increase its marketing activities in 2012, as well as to increases its development of new products. We currently extract 30% of the world's oil production from offshore sources. The infrastructure to extract, refine and distribute energy represents soft targets for terrorists to destabilize economies and nations. With over 3,500 water-based energy terminals, the total addressable market for DSIT is well over $1 billion, and management are aggressively building the category by marketing to the large national oil companies that control over 94% of the world's oil reserves. It would be impossible for me to do as good of a job as Jim Andersen did yesterday in explaining the multibillion dollar opportunity that we have to transform the market for seismic tools, the electronic and copper domain to that of fiber optics. If you're an investor in Acorn Energy and did not attend our Investor Day on Wednesday, I suggest that you check out the link that will be posted later today of Jim's presentation or his testimony in question-and-answer yesterday in front of the House Subcommittee on Energy and the Environment. There are 3 key points that I'd like our investors to take away from the US Seismic opportunity for fiber-optic geophones. We are offering a step function change and improvement over this old domain of these legacy products. The 3 benefits are: greater resolution, and this is accomplished through covering a wider range of frequency; greater sensitivity due to the order of magnitude of better signal-to-noise ratio, and this is important because it allows lower total system cost as it reduces the depth from which observation wells need to be drilled; and lastly, lower cost. By reducing the cost to less than 10% of the existing systems, we believe that we're going to substantially increase the total market size of this business. And the first market that the company's going after is the opportunity to both improve the productivity and reduce the environmental impact of the frac-ing industry. US Seismic fiber-optic geophones have now been tested in 6 real world field tests and each of the first 5 trials resulted in a customer order. So this is not just something which is theoretical, this is something which we're -- Jim and his team are making happen in the real world. And Jim discussed the recent results from our test in Devine, Texas, which was even more exciting than what we've experienced in the past. So we'll be shipping our first 3 commercial orders of oil and gas applications in the second quarter, and we expect to have full scale field results in the third quarter and hopefully, follow-on orders. Lastly, based on the customer feedback, we're looking to ramp up production. Acorn Energy, at the corporate level, has a terrific balance sheet. As of May 1, we had $15.5 million in cash, $18 million in deposits or cedars, an escrow deposit of $6 million due from the purchaser of our CoaLogix business, which we hope to receive in August for a total of $39.5 million. This represents nearly half of our March 31 total assets of $80.7 million. At the corporate level, our expenses increased from $900,000 in Q1 2011 to $1.5 million in Q1 of 2012. And the increase was due to the following factors: number one, transaction costs associated with the OmniMetrix deal, which is approximately $300,000. We also increased our investor relations activities. This week, we hosted this Investor Day at US Seismic. I thank the over 40 investors who traveled to California and the 90 investors who viewed the presentation online for the investment of time to better understand this important company. We'll be presenting next week at the Barrington Research Conference in Chicago and the Las Vegas MoneyShow. We believe that our business will be accomplishing great things over the next 18 to 24 months, and we feel that the effort and expense of increasing awareness is a high-impact use of our shareholder capital. Lastly, increased personnel costs following the expansion of our business development team. Richard Rimer, serving as our Vice Chairman, is helping us globalize our business and our shareholder base. He's operating out of Geneva, Switzerland. Kent Leacock has joined as our Head of External Affairs and has made a big impact in a few short months. Jim Andersen's testimony yesterday at the House Subcommittee on Energy and the Environment on US Seismic technology from improving the productivity to reducing the environmental impact of frac-ing is just one example of Kent's impact. Lastly, Heather Mallard, our new General Counsel, is helping to support all aspects of our company's growth, contracting and intellectual property development. These increased general administrative costs at corporate are expected to continue as we accelerate our business development and investor relations activities. We declared a $0.035 dividend payable on June 1 to shareholders of record on May 15. This is our third regular dividend payment, and we hope to be able to increase it over time if conditions warrant. In addition, there should -- should there be a sale of an existing portfolio company, Acorn Energy intends to maintain the policy of paying a special dividend to reward shareholders. Our parting thoughts are that digital businesses are fundamentally different from businesses built in the physical world. There's an exaggerated winner-take-all benefit to creating a category in investing overwhelming resources to service the smartest customers and to own the category. Economies of connection benefit from increasing returns. Our businesses and the physical economy eventually suffer from diminishing rates of return. The inability to come to grasp with this idea has resulted in many experienced investors thinking that Google was overvalued at its $65 IPO price, or passing on their available allocation of a private round to financing in Facebook at a $3 billion valuation. At Acorn, we're committed and determined to learn from these lessons and are committed to financing our winning digital energy pioneers and obeying the law of capture, which means when our management teams deliver and our technology is proven to offer step changes and benefits to eager customers, we need to get all we can get. We're extremely excited about our growth prospects and look forward to continuing acceleration of our revenue growth in the coming quarters. This concludes my remarks. And I and our CEOs and CFO are happy to answer any questions you may have.

[Operator Instructions] And it looks like our first question is from Jack -- I'm sorry, Jim McIlree of Dominick and Dominick.

John, can you talk a little bit about OmniMetrix results? And they did $3 million in 2011 and just a little over $100,000 this quarter, when does that ramp? And secondly, is that mostly products? That's got to be mostly product sales right now. So given the change that you're pursuing in that business, do you have a couple of quarters of continued modest revenues and then it ramps as the monitoring business kicks in?

I'd like to ask if Deena is on the call.

I am. I am, John.

Great. Well, would you like to answer Jim's call -- Jim's question?

Sure. Sure, Jim. Yes, the assumption that you had is correct that we will experience a few quarters of soft revenues. Our focus is going to change and be more on the connection space. We're going to really focus on the recurring revenue portion of the business and last on the hardware revenue of the business. So when we're in this growth mode, we will certainly see right now a pattern of some soft quarters in the revenue until we ramp up the connection, which will be the focus of the future of OmniMetrix.

But I think it's important -- that's well said, Deena. I think it's important to comps to say that changing the business model to more of a recurring revenue stream has been -- I'd say the response has been incredibly positive from the dealer distribution channel. And what Deena's mostly focused on right now -- we don't have any question that the demand is going to be there and that this is the right thing for the business. What Deena's focused on is making certain that we have the back office to support the -- what we think is going to be dramatically increased amount of volume of business.

Absolutely. We have -- just to add to that, we have a focus right now on the generator dealers. And we've just approached our first one to ask him to adopt the monitoring into all of his maintenance contracts. So we had our first meeting last week with him, and his response was really overwhelming at their willingness and their belief, and moving this into the major portion of their business to be able to put it on their units that they have their maintenance contracts on. So we anticipate our new pricing module and our focus on connections to really have a great impact as far as volume connections. And as John said, we have -- after a lot of responses at the show even this week at CTIA, we have great confidence that moving to this focus of connections will have a huge impact on where our business is going.

And I guess we're asking our shareholders to be as patient with us as Deena makes certain that she executes flawlessly on that transition because when the phone starts dialing a lot, it starts -- we don't want to roll it out too more quickly than we can actually handle the business. So we're very, very encouraged by that -- by our -- the early results of this effort.

And so is it reasonable to expect that by the end of the year, you would still have a relatively modest number of connections? And then as you go into 2013, those ramp as the product becomes more well regarded and the channel gets some momentum?

Yes, that's correct. The first 6 months of it will be a slow progression. And again, we're trying to do growth control to be able to manage that. But certainly, as we go into 2013, we anticipate the acceleration of that growth to really start to ramp up.

And just my last one, Deena. When I think of modest number of connections, I'm thinking sub-1,000 is that too modest or is that too aggressive?

That's probably too modest. I mean, we're hoping for a little more than that, but our belief right now based on what we've just currently seen is that it will be a little better than that.

[Operator Instructions] And we do have a question from Michael Osterer of U E Systems.

It was enlightening. I see obviously, as I believe many others do, that the potential for US Seismic is enormous. And Jim Andersen I believe also is doing a terrific job. First, I want to acknowledge you because you are the one who have to evaluate which companies and which to deploy the ACF and capital in, and I think you've done a terrific job. So as a shareholder, I thank you.

It's great, Michael. Thank you so much. And I just -- for the people that weren't at the Investor Day, I just -- I guess, I wish I could communicate just what a great response we had and terrific questions and back and forth with Jim Andersen. And I guess between this conference call, Jim's presentation and all the presentations we've been doing, the word is starting to get out but it's just early days, and thank you all for your patience. The primary thing about the energy technology business is about the transfer of wealth from the inpatient to the patient. And you, as well as a lot of our other investments -- investors have been extremely patient with us. I think it's going to pay big results.

Well, again as a shareholder, I'm grateful. As demonstrated also in the increase in the price of the stock, which is really very much a part of why someone gets behind the company. It's the management team and the anticipation for increased value, and you've demonstrated that.

I've also been warned by some of my trusted advisers and shareholders to not get too excited about the price of the stock. It's nice that it trades at a fair value, but the hard work still has to be done by our CEOs and their teams to build the businesses, to continue that growth in the stock price.

Well, with those, I want you to have a great day. Keep up the good work. And I'm looking forward to -- I'm with you. It starts -- the companies have to stand on their own, be successful and the market price will take care of itself.

Great. Thanks. Thanks, Michael.

At this time there are no other questions. [Operator Instructions]

Great. I think we're now -- are over 70 shareholders that are on this call. I don't think we have any more questions, so...

Actually, sir, we do have one question that just joined the queue, if you'd like to take it?

I'd like to take it. I'd like to take it.

Okay. It is from Les Schultz [ph] of Schultz Capital Management. [ph]

I just wanted to ask if you have any takeaways on the comments that Jim Andersen made in his testimony yesterday?

I would say that it's -- I guess, really what I'd like to say is first of all, I apologize I haven't had a chance to listen to him because I was on -- I just got on a red-eye from Los Angeles. I wish I would've had a chance to listen to him. But I would like to say that it's unusual for a small company like ours to be investing in government relations, but whenever you've got something which is so fundamental to the geopolitical future of not only the United States but other countries in developing cheap, plentiful safe energy, it's critical for us to make an investment in helping Congress understand that. It's natural that there'd be concerns about the revolution and what are the environmental consequences. But from what I heard, the feedback that I heard was that the Chair of the Committee basically was astonished to learn that not only could US Seismic technology reduce the environmental impact of frac-ing but that it could also improve the productivity and pay for itself in a very short period of time. So I just think that being a border-crosser and talking to regulators, talking to legislators, particularly about something as dynamic in the headlines as frac-ing is -- we think is going to further catapult the US Seismic in front of its customers. So thanks, Jim Andersen and thanks, Les Schultz [ph].

[Operator Instructions] At this time, we do have a question from Joel Sklar [ph], a private investor.

John, quick question on GridSense. Can you provide a little bit more color around -- you had mentioned the something like 15 pilot set or similar or larger to the one done last year? I wasn't quite sure whether you're on the proposal stage or whether these are done deals or where they stand. And then also, I think a lot of this is around Transformer IQ. Can you or Lindon talk a little bit about maybe LineTracker, which seems like a very exciting product for the digital part around distribution intelligence?

Yes, I like to hand the call over to Lindon, but we had a board meeting at GridSense yesterday, and I was astonished actually at the increase just from the last time I visited GridSense and the professionalism of the manufacturing operation and the effort and marketing. The team has been at the IEEE this week. So Lindon, please answer Joel's [ph] question?

Okay, great. Joe, just regarding the number of pilots that we have, pilots are very important to the company because they position us for large scale rollout similar to the one that we did last year with Florida -- in Florida. And I'd like to just report that this year, the number of pilots that we're currently supporting is significantly larger than we had this time last year. So we're pleased with the number of pilots, and they involve not only Transformer IQ but also with our Line IQ technology. So I think, going forward, it's imperative that we support these pilots. And in terms of timing, working with utilities is very difficult because there are long sales cycle and very thorough, intensive evaluation and testing, but we expect that a lot of these pilots that we're currently supporting will materialize and the commercial roll outs in the future.

I'd just like to sort of back up what Lindon said with these pilots or actually -- there are actually deployments in Brazil, South Africa, Canada, the United States, of course, China. Really, it's a global phenomenon both for the LineTracker and for the Transformer IQ, and they're developing lots of new end-uses for the Transformer IQ. It's really Lindon's vision and Kevin Anderson's vision here is just incredibly compelling and it's -- we're providing solutions at 10% of the cost of the competition. So it's really a blue ocean strategy.

And -- sorry. Just to add also, I think we're finding that a lot of the applications that we're discovering with our utility customers are very much transferable throughout the industry. We're discovering that -- we're discovering very robust niches where we're providing a lot of value because of the price points and the functionality that we can deliver with our main platforms, the Transformer IQ and the Line IQ. And what's also very exciting is that these technologies are also transferable across different geographies. So the problems that a utility in California is experiencing is very much the same issues -- operational issues a utility in South Africa or in Australia is experiencing.

And Lindon, just a quick follow-up then. Would it be too much of an extrapolation then to assume that you can pretty much use your off-the-shelf products for those different locales, or is there a bit of customization that's needed?

I definitely think that our platform products can be easily adaptable to different applications, and we're also developing new applications, which will help us get into new areas. Traditionally, our company has focused on monitoring. We're using the same platform to also develop some control capabilities. So later this year, we'll be announcing the commercial launch of some new products, which are derivative products from our core platforms. So it's a pretty exciting time for our business.

The next question is from William Bremer of Maxim Group.

John, my first question deals with GridSense. I really want to get a sense on what type of kilovolts can their underlying technology go up to. I know that predominantly, you guys are going at the distribution work, but I do want to get a sense on the capacity that you're able to deploy there. And then what is the, I guess, the goal of margins on GridSense initially?

I'm sorry, I missed the second part of that question. Would you repeat, please?

What's your goal for margins at GridSense?

The goal for large...

Margins, for margins.

Oh, margins. Okay. I'll take the second part first. I think traditionally, we have targeted gross margins above 50%. And I think that those are sustainable and that will continue to be our target going forward. Over time, we may experience some pricing pressures. Other competitors see the traction that we're gaining and the niche that we're playing, but I think that we'll be able to maintain those margins through improved efficiencies in our production, and we are constantly making incremental improvements in how we build, assemble and test our products. So I think above 50% margins are very achievable going forward. And then the first part of the question, could you repeat that again please?

What's your capacity on terms of kilovolts that your products can be utilized on?

Okay. So in terms of the voltage rating, we need to look at by product. So with our Transformer IQ, this is a platform that -- platform for monitoring transformers of all sizes and of all classes. So we're talking about transformers as large as your generation step-up transformers all the way down to the residential pull-top level. And what's unique is that we have different versions of the Transformer IQ, and they're all based on the same processing boards and electronics. And the advantage of that is it allows us to very cost effectively manufacture at such a low price point that utilities can even justify putting it on the smallest distribution assets.

No, I understand on the distribution side. I'm just trying to get a sense on -- is your technology capable of being deployed on a 500-kilovolt line or 765?

Yes, it can be. The Transformer IQ can be. With our line monitoring product, the Line IQ. There is a limitation. That range of products can be deployed up 133 kv. And some utilities define that as transmission level or sub-transmission level, but the product is suitable for lines up to that level, that kv level.

The next question is from Bill Colbert of UBS.

John, question for you on your cash and your use of cash this year. You said you've got liquidity a little around $39.5 million currently at $1.5 million run rate corporate-wide per quarter. What are the 4 companies going to demand for cash this year do you envision?

Well, we would like to -- we think -- we haven't made any projections yet about the capital needs, and we tend to be very opportunistic. But I'll just say substantially less than the cash that we have in the balance sheet. And I think that our cash right now conceivably can last us 3 years, at which time we expect our companies to be very profitable. So it's -- we feel like we're -- I think maybe the direction of your question is, are we in good shape on cash? And the answer is absolutely yes.

At this time, I show no other questions. I would like to turn the call over to Mr. Moore for any closing remarks.

Great. I just like to acknowledge our shareholders for helping us. In the case of Les Schultz [ph], he helped us recruit Noam Lotan to the Board of US Seismic. He's going to be tremendous and valuable. A lot of you met him at the US Seismic Investor Day. Noam helped build the MRV Communications, over $500 million of revenue and fiber optica communications. And so across-the-board, our shareholders have been helpful and supportive in increasing the size of our family and the people that are intend to care about -- inclined to care about Acorn Energy, and we're grateful for your advice on how we tell our story and for increasing the size of the shareholder base. So I'd just like to knowledge our shareholders and thank everybody very much.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.