Acorn Energy, Inc. (ACFN) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Acorn Energy First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael Barth. Please go ahead sir.

Thank you. Many of the statements made today in the presentation and our responses to your questions are forward-looking. These statements are subject to various risks and uncertainties. In particular, the performance of our operating companies in 2015 and future years is subject to various risks and uncertainties including, risks associated with meeting performance milestones; political risks associated with conducting business with government customers; and risks of possible costs overruns associated with fixed price projects. There is no assurance that Acorn or its operating companies will be able to achieve its goals for growth in 2015 and future years. Our ability to execute on our plans for 2015 and beyond is in large part dependent on DSIT generating the anticipated cash flow from operations of which there can be no assurance. A complete discussion of the risks and uncertainties which may affect Acorn Energy and the businesses of its operating subsidiaries is included in the risk factors and the company's Form 10-K filed by the company with the Securities and Exchange Commission. Please note this event is being recorded. Thank you.

Thank you, Michael. Welcome to the Acorn Energy first quarter earnings call. I'm joined on the call by our CFO, Michael Barth, who just read the Safe Harbor statement; our Chief Operating Officer, Joe Musanti; Walter Czarnecki, our newly appointed CEO of OmniMetrix; and Benny Sela, the CEO of DSIT. They will answer your questions at the end of my prepared remarks. The focus of Acorn is three operating units providing resiliency through protecting energy infrastructure. That energy infrastructure may be protecting critical oil terminals like we do at DSIT or the backup power systems for critical communication systems for major telecom customers of OmniMetrix or key transformers and distribution switches like we perform at GridSense at places like the Sony Tennis Center in Florida, Wrigley Field in Chicago. Let’s first talk specifically about each business’ operating performance and then how we are seeking to improve the value of each business by increasing sales, margins and operating profit. DSIT revenue increased 7% to $3 million versus the same period a year ago. This is due to an increase in our lower margin, non-navel real time and embedded hardware and software business. Our first quarter loss decreased slightly to $174,000 due to lower SG&A costs. DSIT is doing two things well. First, they continue to expand the number of navies purchasing systems and solutions from them. Second, based on successful project execution and support they are expanding the number of opportunities and projects with these navies. In late 2011, we received a $12.3 million order, which was the largest order in history at that time. We’ve completed this installation and are now discussing three projects; each multiple is larger than the 2011 project. In 2013, we then landed a $14 million from a Southeast Asian nation and we are discussing several new projects before we’ve completed the first. This year, we received another record order from another Southeast Asian nation for $15.4 million. This order was for four hull mounted sonars and a sonar training simulator. We think our hull sonar product line will be a growth market for us going forward. This order includes one year extension within options for additional six systems in the period of 2016 to 2017. DSIT started the year with $12 million in backlog. We now have more than $26 million in backlog. So, why do we lose money in the quarter, if we just lend to large and high margin order. We received the order late in the first quarter and we only recognized several hundred thousand dollars of revenue related to the project. We expect to recognize approximately $3 million in revenue from this contract in the next three quarters and we intend to ship the entire submarine trainer portion of the order towards year-end. The remaining $12 million is expected to be recognized over the following two years. We expect our margins to recover to the 35% to 40% level, as the mix of project is being worked on shifts to higher margin navy projects. In addition, we have the majority of our revenue target for 2015 in backlog for multiple existing orders and customers. This sets us up for a year where we should have great growth in revenue and be profitable for 2015. In addition, we have a very healthy pipeline of opportunities we expect to announce in the second half with both new naval customers and repeat existing customers. We are exhibiting at the Naval IMDEX Conference this week in Singapore. China is continuing to build artificial islands in the South China Sea in an attempt to gain status and to appropriate the natural resources of U.S. Allied Nations. This is a very big deal for allies in the Pacific like Japan, the Philippines, Malaysia and India. In a major policy shift, the Pentagon declared last Wednesday that the United States will directly defend U.S. National Security interest in the South China Sea against China’s expansive and illegal Maritime claims. There will continue to be conflict in this region and a robust and growing market for anti-submarine and diver detection systems worldwide, and we are growing our creditability as a supplier. Joe Musanti is Acorn Energy’s Chief Operating Officer and he has done a great job in decreasing costs at both OmniMetrix and GridSense. He has taken millions of dollars of cost out of these businesses. Joe also serves as the CEO of GridSense, Walter Czarnecki has served as President of OmniMetrix for the past year. He has been primarily focused on bringing consistent sales and marketing to the business. As a result of Walter’s focus, OmniMetrix has a robust pipeline of opportunities that we expect will start to impact the second half of the year. Walter was named CEO of OmniMetrix last week. Revenue at OmniMetrix increased 5%, and revenue at GridSense decreased by 6%. Gross margins at OmniMetrix increased 1% from 64% to 65%. Gross margins at GridSense increased 50% from 19% to 31%, while improving, these margins still have room to grow as we’ve been absorbing cost associated with shuttering our Australian operation and support cost for large overseas deployments. In addition, our selling, general and administrative cost was reduced at both OmniMetrix and GridSense by 18% and 40% respectively. OmniMetrix sees a rapidly growing need for backup power infrastructure to secure critical military and government assets against emergency events, including terrorist attacks, natural disasters, and cyber security threats. As a result, OmniMetrix is in discussions with several potential strategic partners to bring its unique product and service to that customer base. During the first quarter, OmniMetrix has made progress to these relationships and sees an ever growing market for protecting stand-by power assets at critical installations globally. We expect to reveal our first major order resulting from Walter’s effort sometime in the next quarter. This should have an important impact on improving the growth and operating results of OmniMetrix. Furthermore, OmniMetrix sees growth in the pipeline monitoring business and has added Steve Hurbanek, a 25-year veteran of the pipeline integrity industry. Steve is a member of several pipeline safety national committees. He serves on those committees with representatives of our largest target customers. He is teaching a course in pipeline integrity this week at Morgantown, West Virginia’s University Corrosion Short Course this week. At the event, the pipeline owners are voting on his election to another prestigious national pipeline safety committee. In a few short weeks he has been with us, he has managed to secure demonstrations of our products for some of the largest pipeline operators in North America. You will recall, we mentioned at our year-end call that we have quotes outstanding for over $9 million for our corrosion protection product line. These are just quotes for now but even if we just land a portion, it would have a significant impact on the growth trajectory of this exciting business. I would like to remind our shareholders that this product line as it is the case with all of OmniMetrix equipment sales has a nice high margin over 80% recurring revenue component. At GridSense, we expect that margins will continue to increase in 2015. Revenues budgeted to fall short of 2014 revenue due to an expected major customer reorder moving to the second half of 2015 and shipment not expected until Q1 of 2016. Joe has recruited new leadership to GridSense. Jon Rappaport is a veteran of the SmartGrid industry and has worked for both Census and co-founded 4Home which is sold to Motorola Mobility, now Google. He co-founded ZOME which is an MIT spinout focused on energy management for the SmartGrid. Jon is rebuilding our sales team with the skill set to support large scale utility deployments. 80% of our sales are derived from several large projects at any one time. There are lot of potential projects but we need sales people who can manage strategic sales. Jon, Joe, and I are working together to better understand how to position GridSense in the marketplace with strategic partners that will help us move more efficiently and grow our customer footprint. He is working to finalize our distribution agreements with major SmartGrid system suppliers like Silver Spring Networks and On-Ramp Wireless. These network suppliers have built out smart meters, their installations of smart meters and now they need to create revenue and add value by monitoring the utilities distribution assets, and that means helping us sell our products. This is a force multiplier as we get our partners sales forces to realize our products enable the high value software and services they are trying to sell. So Jon is focusing his turnaround efforts on taking the custom work we’ve done and the successful one-off deployments of our products and to create follow-on projects with other utilities. The first of our two successful big deployments are Line IQ 60, which is being used by PPL in Pennsylvania to automate motorized switches. This deployment on hundreds of distribution switches has cut outage times from four hours to four minutes on the customer network, this is very impactful on the utilities ability to get rate reimbursement. We are working with a major southern utility which wanted to do a similar deployment on thousands of those switches, but required a product modification to give even faster restoration time. This modification has been completed and will be evaluated by the customer in the coming weeks. The second area where we have unique product and valuable business case is the Transformer IQ which is being used by utilities to monitor vault transformers and underground fault detection at critical facilities like hospitals and airports. Jon will be seeking to expand the number of utilities adopting our existing products. Our ultimate goal is to lower operating expenses by sharing resources between GridSense and OmniMetrix while continuing our efforts to increase revenue. Acorn Energy’s parent costs at $1.33 million were largely similar to last year’s level of $1.43 million. However, the 2015 figure includes approximately $200,000 for expenses associated with exploring strategic events for subsidiaries and other one-time charges. Our cash expenses are running at approximately $200,000 per month. We are continuing to seek every opportunity to reduce parent company overhead. Our goal is to increase the level of business and the margins at each of our businesses, and to increase shareholder value. We believe that each of these goals is attainable in 2015 as is the plan for OmniMetrix and GridSense to achieve profitability in 2016. Thank you for your patience as we redouble our focus on sales, marketing and cost reduction. Thank you very much. We are now open to your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from George Deming, Deming Investments [ph]. Please go ahead sir.

Hi, good morning, John.

Good morning, Ged.

Very interesting analysis. I wonder if you could just go over the outlook for cash burn and the source of additional cash for the remainder of the year.

Thanks, Ged. So one of the things we talked about pretty extensively was relying on the loan agreement that we’ve entered into with DSIT to provide us with cash and we believe that DSIT is going to be generating a substantial amount of cash in the coming year and we believe that the cash that we have on the balance sheet plus that cash is going to allow us to run the businesses. And we are focused of course on a number of cost saving initiatives and things don’t always go as you planned, but we are working hard on increasing sales and that’s basically what we’ve said. We think that we’re going to be able to take about $5 million of cash, borrow up to $5 million in cash out of DSIT and we have – you can see from our balance sheet, we have about between all the different companies about $2 million in cash right now on the balance sheet.

Okay. Thank you. Any update on the NASDAQ listing issue?

As of May 08, we moved from the NASDAQ global market to the NASDAQ capital market, and we have until July 13 to meet the $1 per share listing requirement. At that time, we have the opportunity if we have the stocks not over $1, we have the option to present a plan of how we plan to get the stock over $1 per share and we can request an additional 100 days to 80 days to achieve that compliance. So, our understanding is that’s often granted across, so there can’t be any assurance that that’s going to happen, but we think we got a good plan and hopefully we can convince them to reinstate us.

Well, that would be great and I think the kind of momentum you might be able to derive [indiscernible] I think if people are really paying attention it should go over a $1 by then.

I hope so. I hope the complexion of the company, once we, I think all the managers of the business know that single digit growth for small companies like ours are not – is not acceptable and we got plans in place to exhibit greater growth and hopefully that will get people’s attention that we really have identified some important very exciting markets.

Absolutely. Well thanks very much. I appreciate it.

Thanks, Ged. I don’t think there are any more questions at this time.

We have no further questions. I’d like to turn the conference back over to John Moore for any closing remarks.

I just want to assure our shareholders that our minds, we’re not confused we know what we have to do. We have to increase our sales. We have to cut our costs. We have to increase our ability to be able to satisfy our customers; and we’re completely committed to doing that and we appreciate our shareholders patience in these challenging times. Thank you very much.

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