Acorn Energy, Inc. (ACFN) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Acorn Energy Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kent Leacock. Please go ahead.

Good morning. Please take note that certain of the matters discussed in this presentation contain statements that are forward looking, such as 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 on or 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, we urge you to review Acorn Energy's filings with the Securities and Exchange Commission, in particular its most recently filed Form 10-K and Form 10-Q and the Safe Harbor statement in yesterday's earnings release. 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 events or otherwise. I will now turn the presentation over to John Moore, President and CEO of Acorn Energy. John?

Thank you, Kent. Welcome to the Third Quarter Acorn Energy Conference Call. Joe Musanti and I are pleased to bring you up to speed on our technical, market and financial developments for each of our 4 businesses. We're pioneers in the energy technology industry. We've had a lot of success in the past, challenging the status quo of the energy business. And I believe we're going to have a lot of success in the near future as we realize the results of our substantial past investments. The former CEO, one of our successful exits, reflecting on our business said, "The energy technology business is all about surviving until the world comes your way." When I think about each of our operating businesses, I like to reflect on the question, "Have we chosen an important problem to solve? And are we on the right track to bring the technology and customers to a threshold where we can greatly increase our shareholder value?" I believe today, we're close to answering these questions as we negotiate the sale of one of our assets and as we develop our close partnership for US Seismic. Following our recent private placement, we have approximately $7 million in cash. This gives us ample time to negotiate both transactions with multiple parties from a position of strength. We expect both of these transactions to be tapered by the beginning of the first quarter. Turning to DSIT. We believe the forces of evil are actively seeking to destabilize governments around the world by attacking vital energy infrastructures. DSIT is our business focused on anti-submarine warfare and protecting energy terminals from terrorist attack. Because of the conflict in Gaza, Israeli newspapers have carried stories about DSIT this quarter, which include speculating that our systems were battle tested during the recent activity in Gaza. DSIT has created and is now leading a new market in the security industry. Defense companies that are seeking to expand into the security industry are beginning to take notice. After we released our new Extended Range Diver Detection System in June, we received a series of orders from a Mediterranean navy and from 2 separate nuclear power facilities in Europe. In addition, we're completing the installation of our Diver Detection systems on the last of 5 offshore oil rigs in Asia. We believe this will lead to large follow-on orders from this customer in the future. Third quarter 2014 revenues of $3.3 million represent an increase of $500,000 or 17% versus 2013 Q3 revenues. 9-month revenue of $9 million was about $600,000 or 7% below 2013 level. In addition, gross revenues decreased 28% from 38% due to the mix of projects and weather-related delays on an important project that pushed out revenue recognition and increased the cost of the project. DSIT finished the quarter with $12 million in backlog. I'd now like to hand the call over to Joe Musanti, CEO of GridSense.

Thank you, John. Turning to GridSense, we believe that safety and reliability of the electric grid systems around the world are becoming a major concern. The problems, which include cybersecurity, aging assets, technical losses from inefficiencies and rising theft. The solution is to modernize and protect the distribution grid. GridSense is our distribution transformer and line health monitoring business and provides practical solutions to managing and protecting these assets. We recently received our first follow-on order from Florida Power & Light since they placed their initial order on this major project in 2011. We've also continued to invest aggressively in supporting the modernization of the grid in an emerging nation in Asia. East of these large installations have resulted in fundamental product improvements that make our solutions more reliable and more versatile in challenging environments. We have proven our technology in critical installations at large utilities. Our success has led to integration of our products into communication systems of turnkey suppliers, like Silver Springs, Landis & Gyr, OnRamp Wireless, Aclara and our newest relationship with Cyan. For example, our recent success was an install with Commonwealth Energy at Wrigley Field. The success of this installation led to the integration work by Silver Springs and has now supplied 20 Transformer IQs to their sales force. Likewise, John is actually in Cambridge, England, today with our application engineer, Tom Holcomb [ph], visiting the headquarters of the smart grid communications provider, Cyan. Cyan has developed systems specifically for developing countries. They have breakthrough technology in network communication at a cost of approximately 10% of Western suppliers. We believe this new relationship could be a substantial driver to our sales. Tom is doing -- teaching our products to Cyan sales and service teams. Tomorrow, Tom is off to India to introduce our products on a 2-week long sales trips to 8 utility customers of Cyan. With regard to the new products release and upgrade of our Grid Insite software that will support much larger volumes of data traffic to our system, we have 2 very large users of this system: one in the developing nation in Asia and one in New Zealand. Another product we are now ready to release is a unique underground transformer monitor. We believe this could be a good seller because it addresses a large unserved market for underground electrical systems. Our revenue was up 8% versus Q3 2013, but we were frustrated by previous management's lack of attention to our supply chain management. This change in management we are currently working through. This resulted in reduced margins from 42% last year to 28% in 2014. Having invested in important partnerships, we expect much better results in the future. We finished the quarter with $1.8 million in backlog. Turning to OmniMetrix. Another way Acorn is pioneering digital energy is M2M remote monitoring and control of critical access -- assets. It's very important to know we sell our instruments for a reasonable gross margin and we create a recurring revenue from continuing monitoring fees. For generators, our focus is on the dealer distribution channel. The dealers have historically serviced their customers' units through periodic physical inspection. Our instruments remotely monitor a generator 24/7. Our service enables the dealer to provide superior preventive maintenance and improves customer service and retention. This is a big and growing opportunity both in the U.S. and in the developing world. A big part of our success is management's focus on its market leader program where the dealers sign up for monthly minimum commitment of the monitors. For example, we have a dealer who has installed almost 1,000 of our monitors on his current base of 5,000 generators. He expects to cover his entire fleet, including the 500 new units he sells every year. We have seen an encouraging pattern of market leader dealers increase their monthly commitment as they see improved and profitability of their service department and improved customer satisfaction. OmniMetrix pioneered the generator marketing industry [ph], starting with the industry's first remote monitoring system over 50 years ago. There are over 2 million generators in the U.S. representing a current TAM of over $500 million per year. We are just beginning to market in the oil and gas industry where downtime is incredibly expensive, and remote monitoring has been a high-return investment. OmniMetrix recorded revenue of -- increase of 24% Q3 2014 versus 2013. Gross margins also increased to 59% from 50%. The increase in revenue is related to the increase in the number of generators being monitored. This growth was accomplished by cutting SG&A by 51% in Q3 and 46% for 9 months. We are currently monitoring almost 8,000 generators and 2,500 points on pipeline and growing by over -- almost 4,000 units per year. OmniMetrix is well positioned to participate in the emerging Smart Home and Internet of Things.

Thank you, Joe. So we've been investing most of our capital in US Seismic, and we believe we brought this business to an important value threshold. ConocoPhillips invested $37.5 million in a seismic shootout to test the best acoustic sources and receivers for unconventional oil production. The acoustic source is used to create a sound wave and could be anything from dynamite to a borehole electric sparkler that creates a thunderbolt in the subsurface. The seismic receiver is either a conventional geophone; a fiber-optic DAS, a Distributed Acoustic Sensor; or our Optiphone HD, the first fundamentally new geophone in several decades. The value of the receiver is the fidelity which it can capture the signal from the acoustic source. From this signal, which is actually a reflection off the subsurface formation, a seismic image is created. ConocoPhillips measured the many different combination of sources in 5 different receivers, including our own. They believe the industry is at a disadvantage as it fracs largely without understanding the subsurface. It is commonly known in geology circles that it's more productive to frac areas that already have naturally occurring fractures than monolithic unfractured shale. ConocoPhillips' thesis was to determine if there existed a combination of acoustic source and a seismic receiver that was sensitive enough to image naturally occurring fractures in the subsurface. The results of the ConocoPhillips study, presented on October 29, 2014, at the Annual Meeting of the Society for Exploration Geology was that only the solojay [ph] acoustic source and the US Seismic receiver are capable of detecting naturally occurring fractures. We've achieved our goal of proving our sensor deployment technology. It's now time to partner with an integrated service company which can provide this breakthrough as part of a turnkey solution to delivering better-producing wells at lower capital cost. It's very important to us that we maintain our upside to this important investment that we've made, but also be able to leverage our partner's capital and access to the market. Since the big R&D spend is substantially complete, future quarters will show lower R&D spend as we focus on further testing our product and reaching this industry partnership both on land and on sea, thus shift the cost of completing the development away from Acorn shareholders. By January 2015, our monthly expenditures should be substantially below the past levels. We believe that we've taken the technology far enough to be attractive to industry partners. Additional evidence of our value can be found in the following successes: in August, the first production monitoring of a frac job was conducted using our tool. The tool was successfully deployed in a well at 6,000 feet. It operated continuously for 2 weeks and then was successfully withdrawn. The client received the data and paid us for our services. We received an order from one of the world's largest national oil companies for a permanent shallow application of our technology, and that's on one of the world's largest oil field. And finally, we've been notified by another large national oil company that we're part of their seismic shootout in 2015. Our customers see the value of our technology, but the [indiscernible] large deployments and they need to be supplied by large, experienced integrated service providers. We're taking the guidance of our board [indiscernible] to aggressively seek a commercial partnership. In summary, when our senior management team visualizes where we expect Acorn Energy to be in the coming quarters, it'll be a smaller, faster-growing, better capitalized, more focused and profitable company as a result of an asset sale and the partnership and the reduced burn of our US Seismic business. We're also committing -- committed to reducing overhead at corporate, which is down 43% in the third quarter and down 32% over the 9 months. We believe our mission of digital energy in the Internet of Things can be a great source of shape growing shareholder value. Thank you very much. We appreciate the continued confidence and patience of our shareholders, and we're confident that good things lie ahead for us. That concludes our prepared remarks, and we're ready for questions. We have Benny Sela of DSIT; Mark Bashforth is the CEO of US Seismic; Walter Czarnecki, the CEO, President of OmniMetrix; and Joe Musanti here to answer questions. Thank you very much.

[Operator Instructions] Our first question comes from William Bremer with Maxim Group.

Congratulations on the current developments. I look forward to reading them consummated. Let's first go to USSI. Can you give us a little sense on the underlying pricing? I think many of the questions I've been receiving is on the pricing of how this is going to work through with all the different arrays. And more importantly, as we get closer and closer to commercialization, what's your underlying capacity at the present time?

This is Mark. So I understand 2 questions, pricing strategy on the arrays and then capacity for production or ability to supply demand, I think, are your questions, correct?

That is correct.

So I think it's important to understand that in terms of the array design, there are 2 types of arrays. There's a low temperature and a high temperature. And while we're finalizing both of those products for commercial delivery, we recognize that each one of those products have got a different price point in the market. So certainly, the high-temperature one, where we've got little or no competition at all is going to command a premium price for deployment. And we're working with service providers now to ascertain exactly what level that will be, but it will be a substantial premium over what a customer would pay to use or purchase for a low-temperature array. It doesn't -- it requires a lot of R&D and development to get a tool that can survive in 200 C. I mean, the components are much more expensive and much more time-consuming to test. And so because of that and the construction of that particular tool, it will command a higher price. And of course, the market opportunity dictates that as well. So we expect to have a finalized price book by the end of the year, which will reflect the purchase. If you want to own the actual tool itself, and the price points will be based on low or high temp and then based on the number of arrays. And the configurations we're looking at right now will be either a 10 or 12-level array. There's an option for a 20-level array, and then 36 is the -- seems to be the sweet spot in terms of the high temp, which is what we get most often asked about. One of the nice things is, is as we go into next year, if a customer did buy 20-level array, we are providing the ability to be able to connect 2 arrays together. So potentially if it was a lease option, service provider could buy a 20-level and then buy a second 20-level and connect them together to get a 40-level array. So that's a little bit on the pricing strategy, and we'll have more details on that. And it will be priced by level, all right? So there'll be a linear relationship between the number of levels and the high- or low-temperature version of the tool. As far as capacity goes, for both leasing, we have an inventory of tools that will be available to deploy either through our service partner relationships or one of the larger service providers we're currently talking with. And we need them to make those tools available on an ad hoc basis, whether it was something that a service provider rented out for a fixed period of time or per job. And so we have a number of tools to meet that requirement and believe that the tools we have in place are substantial enough to generate the revenue targets we have for next year for US Seismic. And on the production capacity side, we're well positioned both in terms of facilities and manpower to produce new orders. We're currently working on an order for a national oil company that John mentioned for tool for a shallow-well deployment, and we've got some follow-up interest on related versions of that tool. So we've got plenty of manufacturing capacity. But as I've stated before on previous call, I don't see us being a full-fledged manufacturer of these tools. We would aim to scale our manufacturing capabilities by working with qualified oilfield tool manufacturers to help scale the production and delivery of our products.

That's great color, Mark, and I appreciate it. Let's just say one of these pilots on the shallow side does receive an order, and let's just say it's not volume. But let's just say it's a 10 to 12 array, hitting basically a single here. What's sort of like the lead time that you guys need to get it out the door and to actually realize it?

Right. So all things being equal, meaning if we had either the equipment in inventory or had a short turnaround from the suppliers, I think we could produce from start to finish something within a 3- to 4-month period depending if there was modifications required by the customer themselves. We're aiming to focus on a standardized delivery, and so we want to stay away from bespoke development whenever and wherever possible. I think that's some of the trouble we've gotten into in the past in terms of commercialization. So roughly, 3 to 4 months providing no delays from our suppliers.

And then, Mark, in the past, there's been some issues with some equipment that isn't proprietary, some of the cabling, the clamping. In your opinion, has all that been worked out at this point?

It has. And this is not a perfect science. There's always room for improvement. But my mission since I joined US Seismic is to prepare the tool for commercial readiness. That's been my absolute 100% focus over the last several months. In fact, as we speak right now, the team is in Devine, Texas, at a test site doing final testing of the clamp system. I was out there personally myself for part of that test. And I can tell you, I witnessed with my own eyes that the system is performing well beyond our expectations. We're getting good data from it. It's solid. It's holding. Deployment was phenomenal. And we've got the deployment down to a science now, and were very, very happy with the way things are coming. I think that future improvements might be how do we make maybe the cable design more robust because the oilfield is a very hostile environment. But our handling methods at the moment are more than adequate to handle the systems we have. But I think as we look forward, what we would see for enhancements, the current cable design might be one of those things. But from the core technology, the sensor technology and our capabilities on the clamp and the heat, we've got all that licked and we're doing the final testing to validate all of those claims.

Mark, that's great to hear. Excellent. I got a couple for Joe if he doesn't mind.

Sure.

Joe, you mentioned the introduction of a underground transformer monitoring. Can we get a little more granular there, please?

Yes. In a lot of places, there are, as opposed to pole-top transformers, there's underground transformers, whether it's in New York City or in Chicago and a lot of the big cities, and there's some engineering that we needed to ensure that the radio signal got out of the -- out of the underground. And also that from a power supply point of view, the unit was able to get power because the power delivery is slightly different. So it's really just an extension of the normal application into another section of a transformer monitoring.

So I guess, let's take this a step further. Have you sold any? Or are you ready to commercialize this product?

No, we have a minimum amount of pilots that are out there, and we have large utilities that are interested. So at this point in time, we have not sold any.

Okay. All right. And then I have one on the OmniMetrix side. You mentioned 24 points on pipeline. Can we just get a little more granular there as well?

Sure. That's on the -- this is Walter speaking. It's on the cathodic protection side of the business. And it's really to help the pipeline owners detect corrosion and monitor the condition of the pipelines.

So basically integrity?

Correct.

If this both on oil and gas? And at what -- what's the diameter specifications that this can be performed on?

That product is applicable across any type of pipeline. So it could be in the oil and gas field as well as water pipes. Really any type of pipe is relevant for this product.

And has this been -- are you going to be licensing this technology? Or how are we going to market on it?

We've been going to market directly as well as through a distribution network.

Okay. Great. Can you discuss how it's priced?

It is priced similar to the structure of our power generation side of the business, where there is a fee for the hardware and then there is an annual monitoring fee.

Thank you so much, Bill. And by the way, I just want to say that we misspoke when we gave the numbers. We actually have about 2,500 cathodic protection monitoring points. And that, plus our power generation, equals about 8,000. We're just about 8,000 connections recurring revenue spots this year. Thank you.

Our next question comes from George Deming [ph] of Deming Investments.

Some of my questions were already answered. But just a quick question in regards to the aggregate value of all the backlog at this -- throughout your company today. How much do you think you'll be able to augment that a year from now? What are we looking at in terms of total backlog?

Thank you, Jed [ph]. I'm going to ask Michael Barth to answer that question. And we don't give -- we don't make projections. But, Michael, perhaps, you could answer the question about how much backlog we have right now.

Well, I mean the backlog that we have is in our queue, each company. It's $12 million at DSIT, $1.8 million for GridSense, $1.7 million for OmniMetrix and $1.9 million for USSI, a total of $17.4 million. As John said, we generally -- we don't make projections. It's not an easy thing to do to project, particularly with some of the companies on how we're going to -- timing of getting projects and the growth. We do see growth, but we can't project a number.

Okay. But I guess -- I assume you feel a lot more comfortable about the outlook today versus a year ago.

Yes. Yes, absolutely.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to John Moore for closing remarks.

Yes, thank you. I just want to comment that Tom Holcomb [ph] and I are over in London visiting with Cyan Technologies. And I can just say that there is a huge demand for reliable electric power, the Rest of the World, India, Africa, all looking to the U.S. to the lessons learned about building out the smart grid. And they all see reliable electric power delivery as essential to their economic and social development. And I think the future is incredibly bright for companies that are -- like Cyan and GridSense and OmniMetrix that are delivering that reliable power, something that we sort of take for granted in the U.S. And I think that our near-term partnership opportunities are extremely bright for US Seismic. And I want to really compliment Mark Bashforth for -- we hired what we thought was a great sales guy with domain expertise in seismic. And what we got was a terrific project manager who really focused the organization on getting the development of the 1.0 version across the finish line. And that has -- speaks volumes to our partners and the people that we're talking to. And one of our partners told us we have the right technology at the right time, and so the investment of over $30 million that we made in this technology is going to be, I believe, the next major technological step for the shale industry. It's just going to require a partnership between US Seismic and a major player to be able to make it a reality and make it an everyday way that people are doing business. So thank you so much for your patience. There's a lot of hard work on the part of the employees of Acorn Energy and the leadership and a lot of patience required by the part of our shareholders. We're working very hard. We're conscious of the need to be careful of our capital. We want to get back into a situation of where the company is flush with cash, where we can focus on getting these -- getting back on attractive growth. Thank you very much, appreciate your time. Thanks for tuning in to Acorn Energy.

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