Acorn Energy Inc (ACFN) 2011 Q4 法說會逐字稿

Hello and welcome to Acorn Energy's 2011 fourth-quarter and year-end conference call. We will be in listen-only mode during the presentation, but there will be an opportunity afterwards to ask questions. (Operator Instructions). This conference is being recorded.

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 certainties that could significantly affect anticipated results in the future and accordingly. Such results may differ materially from those expressed in any forward-looking statements and on behalf of Acorn Energy or its subsidiaries.

All statements other than the 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 of Acorn Energy's filings with the Securities and Exchange Commission, in particular its more recent file with 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 expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to the 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 statement whether as a result of new information, future events or otherwise. I'll now turn over the presentation to John Moore, CEO and Chairman of Acorn Energy.

Thank you and welcome fellow Acorn Energy shareholders to our fourth quarter and fiscal year-end conference call. 2011 was a record and an exciting period for everyone that's affiliated with Acorn Energy. We have the right people, the right businesses and the balance sheet to create shareholder value.

50 years ago the popular vision of our future was that in the year 2000 our lives would be made better by flying cars, rocket packs, robot assistants, and we would live on the moon or in underwater cities. Obviously none of this has has happened. And yet we can have a video conversation instantly and wirelessly with a person halfway around the world for almost nothing. The number of automated devices we deal with on a given day whether it's an ATM machine or an airline ticket kiosk is surprisingly large. And yet none of them resemble Robby the Robot. What did all those rosy predictions miss? They anticipated a revolution in energy, but what we got was a revolution in information.

James Kakalios, the author of The Amazing Story of Quantum Mechanics, says, "Implicit in the promise of jet packs and death rays is availability of lightweight power supplies capable of delivering large amounts of energy. But the ability of batteries to act as reservoirs of electrical energy is limited by the chemical and electrical properties of atoms. Openly we cannot change the nature of atoms. Information, however, requires only a medium to preserve ideas and intelligence to interpret them."

This is the heart of our unique strategy at Acorn Energy. Quantum mechanics, or the use of light to transmit and process data, created the miracle of fiber optics and microprocessors that have made a real quality impact on our lives. At Acorn we believe in creating shareholder value by harnessing these laws that are driving the information and telecom revolution to make energy cleaner, cheaper, safer and more reliable.

I would like to comments on six things. Our financial strength -- I'll need to talk about our four businesses -- and our strategy going forward.

First, I'd like to comment on our financial strength. We entered 2012 with a solid balance sheet -- $58.5 million in cash, including cash, deposits, escrowed funds and restricted deposits, and no corporate level debt. We grossed $61.9 million from the sale of CoaLogix, of which $6.3 million was initially held in reserve as an escrow for future indemnification in a possible working capital shortfall.

In the fourth quarter, we actually received $833,000, of which $347,000 was the working capital escrow, and we received an additional $486,000 of working capital adjustment. So thank you very much to our CoaLogix management team.

Today $6 million is still being held until the one-year anniversary of the sale to support our reps and warranties. It is our expectation that on August 31 that we will receive our complete escrow back, which will further enhance our cash balances.

Second, I want to discuss DSIT, our largest and most mature company. We think of the market opportunity as the 3500 water-based energy terminals around the world and the several billion dollar potential total addressable market that this represents. DSIT reported $10 million of revenue, and we spent most of the year aggressively pursuing three large deals. We lost one to a competitor, the third -- or the second remains solidly in our pipeline, and the third one we closed, but we closed it in December. So it didn't have much of an impact on our revenues.

As a result, revenues were down 8%, but we built a solid base for a profitable and high growth 2012. We closed this year with a small profit, which is attribute to Benny Sela and our DSIT team, and their efforts to develop the Company from a projects-based business to a company with multiple product lines. We doubled the sales staff from one Superman and globetrotting phenom, Dan Ben-Dov, to two, and we substantially increased our engineering staff under the leadership of Yitshak Peery.

DSIT hired our Company's first marketing professional, Brandy Ben-Yosef, several years ago, and she's made a big impact on making the Company seem larger than life. We performed a number of significant product demonstrations in 2011, mainly to energy companies, all of which were successful, and we expect those demonstrations will generate future orders. We are entering 2012 with $13.6 million in backlog.

We are encouraging DSIT and US Seismic to cooperate technically to expand our opportunity to include the enormous market for land-based perimeter security, so our future looks bright.

Our experience is that as bright as our growth prospects are and as hard-working as our people are, our revenues are not completely predictable. And this nonlinear nature of selling to large energy companies will be a common theme across all of our businesses. For this reason, we've learned to think about our business in two-year increments. Our goal is to grow our revenue to between 5 times to 10 times by the end of 2014. We encourage you to think about our progress, not quarter to quarter, but in these same two-year increments.

Fourth, GridSense is focused on the multibillion-dollar total addressable market for distribution optimization for the world's electric grids. GridSense makes systems with innovative sensors that help utilities reduce outages, improve reliability and reduce waste. GridSense recorded a substantial increase in revenue from $3.3 million in the full 2010 year, which includes the period prior to our acquisition, to $7.1 million or 115% increase. The year was marked by the introduction of TransformerIQ, a step change improvement in cost and performance for transformer monitoring. We think this is a very important technology for solving the seemingly intractable problem that the transformer fleet is the largest investment the distribution utilities make, and yet in the US the average age of a transformer is 37 years out of an expected 40-year life. The utility industry cannot afford to replace the entire fleet, but we can triage its replacement if it's properly monitored. Our product design was validated when we beat out several household name competitors for the world's largest transformer monitoring project and executed flawlessly on the delivery and installation of the products on over 2000 transformers without failure over a six-month installation period. Bravo Lindon Shiao, the CEO of GridSense; Kevin Anderson, the Product Developer; and Jeff Benach, our Head of Production. A lot was accomplished in 2011, and they set the stage for more growth in 2012 with the implementation of an SAP ERP system; the addition of key personnel, including [Leon Skateser], the Company's first Marketing Manager; and the launch of the CableIQ; and the updating of the PowerMonic and Line IQ. I'd also like to encourage everybody to check out GridSense's new website.

There's a lot to be excited about in 2012, and we anticipate announcing several major channel partnerships with the established utility communication providers, as well as opening up of new markets like Brazil, China and South Africa. To put in context the Company's growth prospects, last year at this time I would've told you that we had one major pilot program, and today we have more than a dozen, all larger and economic potential in the southeastern utility project we won in 2011. Once again, our progress will appear uneven, and although we expect to have an improved first quarter versus Q1 of 2011, we will still be investing to add new products and to support pilot projects. So we will certainly not be profitable for the first half of the year. But, again, if you think of our progress in terms of a two-year horizon, we expect to thrill you.

Fifth, US Seismic is all about step change in the $2 billion annual sales seismic tool industry. We intend to improve the oil and gas industry's ability to image oil reservoirs in the process of hydrofracking, which is being used to produce our nation's vast tight shale and oil reserves more efficiently and more safely. We believe that the dramatically improved performance of our patent-pending fiber optic sensors and the up to 90% reduction in cost over the legacy systems represents the enabling technology to create a step change reduction in risk for the oil and gas industry. In 2011 we conducted five field trials, and we landed five customers. While each field trial was imperfect, our customers saw our challenges as engineering tasks instead of fundamental science problems, so they gave us orders and are counting on us to provide perfect the commercial systems before we ship.

Jim Andersen has assembled the who's who of the fiber optic sensor business, and we and our customers are counting on them to deliver their first commercial systems before the end of the first half. We expect to get feedback from the first commercial systems by the end of the third quarter. We've invested $6 million to date in US Seismic, and they've attained approximately $3 million in revenue.

We also have conducted one major customer lab trial and another oil trial in the past week, and we hope to release results sometime soon. If we are successful in making a commercially viable product, we expect substantial orders. We have yet to even consider hiring a marketing person at US Seismic as the customers seem to find us, and we'd like to take care of our existing customers first.

We are implementing ISO 9000 in an SAP ERP system. We've also ordered automation production equipment in order to satisfy the expected ramp in production. [Marc Matejka], the former Head of Worldwide Quality Compliance at [Belkins] Fiber-optic Business, heads up our production efforts. I have every confidence in Jim and his team's ability to be able to both perfect our commercial products, as well as ramp-up for this increase in production.

We announced the purchase of OmniMetrix 30 days ago for $8.5 million, net of cash, receivables and payables. We paid approximately $7.5 million for a business that doubled its revenue year on year and earned approximately $800,000 pre-tax on approximately $3 million in revenue. We like the management team, and we like the business of remote monitoring of on-site power generators and pipelines. Stay tuned as we fund this business to build on its market-leading position as US electric reliability continues to suffer from storms, inadequate vegetation management and aging infrastructure.

Deena Redding and her team will be building a sales force, hopefully hiring five regional salespeople and our next marketing professional. OmniMetrix is not just a domestic US opportunity. It's an even bigger global opportunity, as on-site power generation is the primary source of power in many countries around the world. We believe that we can help fulfill our mission to make electric power more reliable by remotely monitoring generators. This is a great acquisition of a great company.

So my sixth and final topic is our strategy. Going forward we expect to invest Acorn's management time and our shareholders capital, consummating in sales and marketing for our operating companies. Coupled with these aggressive organic growth strategies, we and they will also always be on the lookout for perpetual acquisition opportunities to enhance both growth and our product platforms. With such an attractive portfolio of promising solutions, we think that investing in the organic growth and bolt-on acquisitions is the best use of our capital.

The infrastructure markets we are addressing are huge. Our brands and product value propositions are not yet well known, and the pace of adoption by energy companies is slow. The best investment we can make is accelerating with sales cycles of our operating businesses. We think the best way we can do this is by engaging in energy policy discussions that put us in conversations with the members of members of the C suite, the CEOs, CFOs, and the Chief Security Officers of the world's largest utilities and oil producers. This is critical because while our salespeople at the portfolio companies are having important conversations with the engineering departments and recommenders of technology, we at the Acorn parent level, can be raising the awareness of our solutions with the owners of the purchasing decisions. I think this will be a very effective way of accelerating our sales efforts. We are working to connect with the senior executives of some of the world's largest energy companies. Our efforts at investor relations also are having a big impact on increasing our network of luck, because often our investors speak directly to the CEOs and CFOs of our target customers. Our investors and potential investors had been very effective in helping us generate business opportunities. Thank you.

Another low-hanging fruit for us at Acorn is helping the portfolio companies collaborate. All four companies have technologies and relationships that are valuable to each other. While everybody is busy, there is an excellent spirit of cooperation between the business units. Areas that are most ripe for cooperation and collaboration are between US Seismic and DSIT on combining USSI's passive sonar system for harbor monitoring and DSIT's active sonar system and expanding DSIT's product line to include US Seismic's tunnel and perimeter detection.

We also see an opportunity to build a pipeline monitoring business combining OmniMetrix cathodic protection products and US Seismic's innovative fiber-optic leak detection systems.

As a contrarian buyer of energy technology assets, we're continuing to build our senior management team with our ability to source due diligence and close deals. I've asked Richard Rimer, an experienced entrepreneur and venture investor, to serve as our Vice Chairman to help me perfect our incentives and investment approach to our portfolio companies, as well as to help us expand our shareholder base in Europe. Heather Mallard joins as our new General Counsel. We've also added Kent Leacock as Senior Director of External Affairs to help us engage with regulators and policy thought leaders. We believe the most challenging aspect of our business is a long sales cycle and the slow rate of technology uptake.

This creates opportunities because we can buy great businesses like the OmniMetrix that have survived the grueling 10 years or more it takes to create a new market category at fair prices. However, we have a strong preferences for businesses that solve a pressing, even existential problem, for the energy industry. For example, we believe that every great new technology like unconventional gas and oil extraction, otherwise known as fracking, comes with a seed of problems like induced seismicity, creation of earthquakes, or water management or pipeline siting issues. We have a strong affinity for businesses that help solve these problems. This is an example where the normally very reluctant adopters of technology, like the oil industry, have had to throw out the old playbook and start fresh. This is a terrific area of opportunity for us and other small innovative, well-financed companies. There's a wall of capital and regulations coming at this business, and we've assembled an outstanding suite of products to help the industry solve these problems that affordably comply with regulations.

We have three solutions in the sector -- US Seismic's fracture mapping, GridSense for fracture water chain of custody management, and our pipeline monitoring solutions. We're on the lookout for more opportunities and great management teams.

We're making a big effort on raising the awareness of Acorn Energy. We believe they were going to be publishing great things over the next 12 months. We think it's also important to visit with people when we're not raising money. Our strategy is to take people through the process of awareness, to interest, to desire, to action, hopefully buying our stock. Our stock has performed well, up 55.7% in 2011 versus a negative 9.3% for the Russell Microcap Index, and we are up 139% year-to-date versus 2.8% for the Russell Microcap Index to date.

In addition, our volume of trading has grown from 36,000 shares per day to over 142,000 shares a day for the past 20 days. We implemented a dividend policy that paid our shareholders three quarterly dividends of $0.035 per share and one special dividend of $0.05. Our strategy of paying a dividend is to add an element of return, as well as to express our confidence in the capital-light nature of our businesses, and our belief that each business would achieve profitability in the medium term.

In conclusion, 2011 was an extremely successful year for us. The sale of CoaLogix validated our strategy of energy technology investing, provided us with capital to expand our mission, and 2012 should be even better. I believe we are in the first half of the first inning, and we have an outstanding roster of hitters to lead us to victory.

Thank you for investing in Acorn Energy. I'm now happy to take any questions.

Thank you. We'll now begin the question and answer session. (Operator Instructions). Jim McIlree, Dominick & Dominick.

Good morning, John. Thanks. Can you just update us on the trials that US Seismic has underway? And I'm assuming that you are pursuing more trials for this year. Is there a reasonable time period we can expect to hear about more trials for US Seismic?

I'll hand that one over to Jim Andersen.

Thank you, John. Yes, Jim, we've had just in the last, I am going to say few weeks, we've had two trials. One down in a test facility. It's the -- I guess it's the University of Texas downhole test facility, which is kind of like a facility where all the companies seem to go out and test their downhole products. And we had very, very good results.

What we have to do after we do the test, and the test was maybe eight, 10 days ago is we -- the final data takes a couple of weeks to process. But based on the initial results, we are downhole with a state-of-the-art competitive tool. Our data, from a quick look aspect, looked much better. We had lower noise floor, we had wider bandwidth, and higher sensitivity. So all-in-all it was a very, very positive test.

And then we did another test with a client where they brought out their standard downhole equipment and wanted to compare it on the benchtop. And we did that about four days ago and same thing. A side-by-side comparison with tool state-of-the-art digital downhole tool against our fiber-optic tool. And on the benchtop, same results. We saw wider bandwidth, better sensitivity, lower distortion. So I think all-in-all, I think every time we do a test with a client they are impressed.

We have several more scheduled with some of the leading oil service companies, the world's leading oil service companies. They'll be happening over the next 30 to 60 days. We project that they'll also be very successful.

And one of the things John pointed out, typically what we've done is our selling process has been -- we have clients that are interested. They are a little skeptical. So rather than just initially buying the system, they want us to go and drop it downhole against their existing tools. And every time we've done that with a client, it gets turned into an order.

So we know that when we go head-to-head against a competitive tool, that we will come out on top. So we feel pretty good about it. We just have to do more of it and do it faster to increase our market penetration.

Does that answer your question, Jim?

Yes, it does. John talked about production or commercial production I think in the second half of this year. Does that come from one of the customers that's already gone through the trial and the small order afterwards? Or is that --?

Yes, we -- oh sorry.

No, that's okay. I'm just wondering if you and John are attaching that commercial production to a specific customer, or if that's, you're just thinking it's a reasonable timeframe to expect commercial production based on all the things that you have done?

It's a little of both. Every one of these customers that we're building product for now has plans to buy significantly higher quantities once they get the first full-size system. Because the initial trials were a scaled down version with just a few sensors compared to their -- the competitors' sensors.

But then the next step was, they said we want to see if you can build a full-size system, and then we want to test that downhole, and then that will be the impetus to order more full-size systems. So that's kind of where we are. So we're delivering these things in second quarter and looking to ramp up second half of the year with the production orders.

That's great. Thank you. I'll get back in line so others can ask questions.

Thank you, Jim. And, by the way, Jim's come out with a great research report on the company. Jim's with Dominick & Dominick.

Thank you. Ross Silver, Vista Partners.

Hi, John. Yes, congratulations on the year, and just two quick questions for you. The first is regarding GridSense. What sort of needs to happen to have additional market penetration? I know you laid out the age of transformers, average life is 37 years. They are only intended to last 40 years, so it sounds like replacement is needed fairly soon here. What sort of catalyst occurs for that to take place?

And I think I mentioned you have 12 potential orders in your prior 12 opportunities in your pipeline.

The second question is, in terms of US Seismic is, the sort of ramp of orders, and I know you sort of touched on this with the last question, but how do you see the ramps taking place? Is it an aggressive ramp where you get past the proof of concept, you put the full system in, and then it's -- we want to put this in our all our projects, or is it sort of a gradual ramp? I guess whatever sort of granularity you can get there.

I guess we'll hand over the first question to Lindon Shiao, and I'm sure anybody that knows that Boston has recently suffered a crisis of failures of their transformers in the Back Bay, and so the Back Bay has been out of power for a couple of days. But Lindon, please go ahead and answer that question.

Okay. Thanks, John. So, as John mentioned, what happened in Boston was a catastrophic failure of transformers. And I think as the age, the average age of the entire fleet of transformers reaches its expected life, which is around 40 years, we're going to see more and more of these types of incidents occurring. And I think that will certainly catalyze the utilities into investing in the type of technologies that GridSense offers.

But I think, just in general, from our market experience, I think a lot of utilities are already in tune with the fact that there are alternative strategies than just replacing these old aging transformers. They can embed these assets with monitoring technologies, which combine sensing -- advanced sensing, remote communications, and software to optimize the operations of these assets to prolong their asset life and obviously to prevent failure.

And I think in addition to just protecting these assets, I think a lot of utilities are also realizing that there's a lot of value in embedding these sites with intelligence and remote communications, because it's going to enable a lot of smart grid capabilities. Like helping utilities improve their outage management, helping them monitor power quality, which is becoming an increasingly hot topic for utilities as distributed generation, new generation sources like solar, residential solar, disrupts the distribution network. And also an exciting new area that we are evaluating is using the transformer point for demand response, actually being able to localize the control of household loads. So all of these facets of the smart grid, which can be enabled with our technologies, really enhances the return on investment for utilities. So I think there's definitely a lot of awareness already in the industry, and we think that more and more utilities will be investing in the types of technologies that GridSense offers.

Thank you, Lindon. So, Jim, do you want to answer Ross's question about the ramp? And obviously you have to be careful about what kind of forward statements you can make.

Oh, sure. But, you know, Russ, I think you really hit the nail on the head. That's really our challenge. We're sitting here, we see that we're looking at a substantial ramp-up to meet -- just in terms of meet the demand. And it's sort of a balance. We're trying to figure out how far -- we just don't want to get too far ahead of ourselves to meet the demand. But, an example being, when you talked about how fast could the ramp-up be?

There's over 20,000 frack jobs planned in the US in 2012, and right now only 2% to 3% are being monitored. We talked to the leading -- multiple clients or to the leaders in this industry, and the people we are talking to probably represent more than 75% of the frack jobs that will be done in the US this year. And they've told us that we can actually build these systems and show the performance and meet the price points, they intend to monitor 100% of their frack jobs. And we see this a huge, huge opportunity of big ramp-up, and our challenge is to figure out how to address it.

We've done some things that have it. We started implementing -- we have an ERP system we're putting into manage our engineering, I mean manufacturing. We're getting ISO certification. We're buying automated stations. We have hired some leading operations folks to ramp up. So you know it's really a balancing act. As we get a little more clarity on exactly when these would happen in the quantities, which we are expecting to more about that over the next 30 to 60 days, we'll ramp up accordingly. But, you know, we actually see it as not a slow ramp-up, but a very, very fast ramp-up, and the quantity and the revenue will be based on our ability to meet the demand.

Okay.

Does that sort of answer you question, Ross?

Yes, definitely. And then one final question and I'll jump back in the queue is you mentioned there's 20,000 frack jobs in the US in 2012. Let's assume going forward there is a similar number in 2013, and you are past proof of concept. You have already begun to ship. What sort of competitors would you run into in 2013? Is there any reason to assume you wouldn't have significant penetration for those frack jobs? What's the thought there?

The interesting thing is that we've -- like I said, we're dealing with some multiple clients, the leaders in the industry, and really representing the majority of the frack jobs being done at the US. And they're telling us, based on our performance in our price point, we have basically the only technology that will answer their need in the short term.

While other people come up and from behind, we think they'll try. But hopefully we will be far enough ahead and have a presence that it will be very difficult for them to overcome us. But we have a lot of strong IP, so we actually feel very confident that versus our competitors that we'll fare very well.

Thank you very much, Ross. We appreciate all the great work that you and Vista has done to raise the awareness of Acorn.

Yes, thank you very much and yes, thank you.

David Duley, Steelhead.

Yes, a couple questions from me. I think you mentioned in the prepared remarks that you thought your revenue would grow by 5X or 10X, so looking at a two-year incremental period. Was that for the whole company or just for a segment?

That was for the entire segment. That was for the entire company. We don't have a lot of -- we think each one of our companies has very strong growth prospects, and we think that by the end of 2014 that our revenues could be 5X to 10X where they are right now. Obviously there's going to be challenges. It's all going to be primarily around the execution of the different operating companies. And the more companies you have -- some can stumble and others can outperform, but on the whole, we feel very confident in our growth plans.

Okay. And maybe just take a handicap now, which one would you think would show the most growth?

That's a great question. I think that the Company that's probably addressing the largest markets -- I mean, first of all, all of our companies have one big package, and that is that we're selling to really rich companies, and we're solving problems that they have.

I would say that the biggest thing to happen in the energy sector has been, and the most impressive investors, are the oil and gas industry, and that is primarily US Seismic's customers. So we're solving environmental problems for them and increasing their productivity, if we're successful with our trials. And so I think that that's the one that has the potentially largest growth.

Now Lindon has -- also solves a major problem, and that is the aging of these long-lived assets, but the utility grid has proven to be more reluctant investors than the US oil and gas industry has.

But there's been one big change, which has been that Pennsylvania has recently introduced distribution optimization incentives that basically says, distribution optimization, the area that Lindon and his team is introducing the step change to that they see it as so important and so high return and so important to the reliability of the grid, that they are saying, utilities you basically have a blank check. You can spend whatever you want on distribution optimization, and we will give you a 7.5% guaranteed rate of return on those investments.

You can then come back to us when you do file a rate case, and you can apply for an additional 3% rate of return on those assets. So we think -- we see signs that the grid is starting to be more aggressive about the type of investments that Lindon is offering them. As an investor, I'm always wrong about which one's going to be the best one. But I know that the thesis is right. So I'd say each one of the four companies. I mean DSIT, the only thing they ever do is surprise me, generally on the positive side. So they've got a lot of things in the pipeline. They are our largest company. So, Dave, I'd have to say that I know that we've got four strong bets, but it's hard for me to guess. I think US Seismic probably has the best customer base for large customers, for large orders.

Okay and just a couple more for me, and I will turn it alternate over to somebody else. To ramp up in the US Seismic business, you're kind of going from small arrays to bigger arrays. Now typically that might be a problem for companies as you scale a product line. But I mean you have experience doing that in some of your other businesses, don't you?

I think that question is directed to Jim Andersen?

Yes, and we have on the team that we have on board primarily came from another company that had taken this similar technology and geared it towards the defense market and ramped up and ended up winning a $450 million contract for sonar. And yes, they had to ramp up very quickly there, and we are successful at doing it. We learned a lot of lessons, and now that we're here, we're doing it a little smarter.

So essentially you shouldn't have a problem scaling from the trials to a production system?

There will be problems, I'll tell you, but I think we could address them. But it's not going to be easy, I'll just say that.

Okay, one final one from me, and I'm sorry I have some feedback on this line. If we grow the revenue, whatever your revenue targets are, what should gross margin number look like if we hit the revenue targets?

We plan all our quotes and all that with at least a 50% gross margin. So that's our intention, and we think as quantities go up, we could do better than that.

Okay. Thanks.

[Michael Wasser], [UE Systems].

Good morning, John, Jim and everyone there. First, I want to say you've done an excellent job. As a shareholder, I thank you.

I think my question may have been answered, but, John, when you say not to be -- my words, not yours -- myopic, but to look at the progress over a two-year period towards 2014, and given the size of all the individual markets, which I too have looked into, which are enormous. Certainly with US Seismic, if they were to get 5% of the market that exists, it's a number, needless to say. When you say 5 to 10 times, do you have a number in mind? I mean would $200 million in sales plus, two years from now, surprise you?

I want to be careful because the markets that we are going after are so big, and we are bringing step change to the industry. In the case of Lindon, he's offering a monitoring at 10% of the cost of the competitors. Jim, similarly, is bringing in his products at a 90% savings versus the legacy systems. And we do have -- we operate with -- this is the electronic manufacturing and assembly. So the idea is that the scaleup is not like a chemical scaleup where you're trying to make batteries on a very large scale or something like that.

So the scaleup is, while it's not easy, it's not -- we're not trying to change the laws of physics in order to get it to work. It's really hard to project. We've made projections in the past, and man makes plans while God laughs. So we put out the 5X to 10X growth number to express our confidence that we're going to be substantially growing the business, but we don't want to pin ourselves down to a number in specific.

Thank you, Michael, so much for your patience. I think you're one of our longest and largest shareholders. I appreciate you confidence in us.

Well, fair enough, and I'm very grateful for the job you're doing and the markets you've entered. Thank you.

Steven Ralston, Zacks.

Good morning and congratulations on a truly impressive year.

Thank you, Steven.

Could you talk about your acquisition strategy, both in terms of the potential that you are looking for and the price you're willing to pay? In other words, better defined hat fair price that you mentioned in your talk. And also approximately about how much time do you really spend on looking at acquisitions, of your own personal time?

Of my own personal time? Well, I have the great pleasure that I've got four incredibly competent, much more competent than me, CEOs of actually running businesses. So I don't actually have to run any of the businesses. That's all done by our CEOs.

So I divide my time about 50-50 between telling our story, being out on the road, and the other 50% looking at acquisitions with Richard and Heather. We're looking for companies that benefit from economies of connection. We get shown a lot of businesses that require success with economies of scale. We pass on those out of hand. But we do believe like Peter Lynch said, that he who turns over the most rocks wins. And we're looking for companies that will be synergistic with our other businesses.

So the type of things we're typically looking for, I'd say OmniMetrix is like my ideal fat pitch down the center. It was a company that had -- where the founder had guts it out for 10 years. He had formed a partnership with a CEO who -- Deena Redding, who had figured out how to make the business profitable after 10 years. When we looked at their budget and we had said that they have $10,000 of total travel and entertainment expenses over the year, we were wondering in the due diligence whether we were looking at the right number or not.

But we like CEOs that have a little bit of -- they're a little bit Scottish in their approach to expenses, and they've been able to survive for that reason. But they also have extremely high margins that we could scale where maybe they haven't -- they succeeded despite not spending much money on sales and marketing, and where we can come in and invest $4 million, $5 million, $10 million in accelerating the sales and marketing approach.

I think the other thing that was really extraordinary about the OmniMetrix acquisition was -- a lot of times when we buy these businesses that have a step change function in benefit, that a lot of times there's not a distribution system that's lined up perfectly to bring those products to market. In the case of OmniMetrix, there's 1000 Generac dealers. There's hundreds of Cummins and Caterpillar and Kohler dealers that we can line up with.

Well, we've got a great product. We've got a mature product. It's acknowledged it's a leader in the industry, but we have 2400 connections in the US versus the total installed base of 2 million systems.

So we think that by adding sales and marketing teams, that we can dramatically increase our shareholders value. And so those are the type of deals we're looking for. Some we are looking for economies of connection that play on energy intelligence and solve a major pain point in the industry.

The pain point to me was obvious when our former CEO, Bill McMahon, who is the most belts and suspenders guy you'd ever want to meet, he bought a generator. There was a failure, there was a hurricane, the power went out, and his generator didn't come on because the battery was dead. And I said, you know, if people like Bill McMahon have problems like this, then a lot of people have this problem. So that's the type of things we look for. So Steve I hope I answered your question.

Could I just mention about the -- what kind of price you're willing to pay?

OmniMetrix really stretched our -- sort of looking at that business, it really --in general, we would like to buy things as cheaply as possible. But we're not willing to -- in the case of OmniMetrix, it was -- the company had doubled revenues and they had very high margins, and we saw the size of the market. So we paid net of cash and receivables, about $7.5 million, which is about 2.5 times trailing revenue. So that's sort of the upper end of what we're willing to do, but that probably answers your question. We want to be careful with our shareholders capital, but we're also not willing to cheat ourselves out of a great partnership with a great management team.

Thank you.

Charlie Sloan, Mid-Continent Capital.

I wanted to make an observation about Jim's business first. With seismic, I would expect that if you don't have problems with your production and commercial commercialization, then you're not a real business. Because all real businesses in startup mode have problems with that. So I look forward to hearing about the problems as well as the successes.

It also strikes me that your 5 to 10 times number is kind of arbitrary and capricious, John. Because it could be 20 times, and that wouldn't surprise me as much as it is if it's 3 times.

Charlie, I think that's an accurate observation, and it's just -- if I'm being an artist, I'm trying to express to our investors that I think we can aggressively grow these businesses. We're not willing to actually put a number that we are willing to commit to, but I think you're right. As an experienced gross stock investor like yourself, you know that. It's very difficult to predict these things.

Right. And on the Seismic business, wouldn't you welcome more competition?

I would say that, yes, sometimes the best thing that can happen to a restaurant is another restaurant moves next door. And there are people that have been trying to do fiber optics for a long time. What I think is special about US Seismic is that they have this deep craft that's been formed in -- at Lindon, which is kind of like the Fairchild Camera and Instruments of the fiber optics business. So, do we welcome it? I mean there's certainly plenty for everybody. That's clear. But we're not seeing it and that seems --

Right.

And the other thing in this industry is that Jim's business has been picking up customers from other companies that have tried to do fiber optics, and I think that's maybe the most sincere form of flattery.

Right. And then on the capital side, it sounds like that even with the investments that you're making at the holding company level, you certainly aren't going to require capital for the next year or two to actually execute on your growth strategies.

So I just want make certain, could you ask that question one more time, Charlie?

Sure, sure. At the holding company level, at your level, you don't think even with the investments are making in the broad people that are really required to really engage Acorn Energy as a company bigger and get more exposure, that you're going to require more capital from shareholders.

I mean I think we are hopefully sending a loud signal by paying a dividend --

Right.

-- that we see ourselves in the business of cautiously returning capital back to investors. But we got one eye on returning that capital to investors and the other eye on giving our existing investors -- our existing operating businesses the capital to have organic growth.

Right. Well, it seems like I've never been more excited as I hear the story and just watching it and how it's unfolding. And you have a great -- it seems to me that everyone of your businesses has a wonderful competitive position and, quite frankly, a wonderful management team. I mean DSIT is remarkable in the way that they run their business. And so anyway, in good sense -- I mean the utility industry is so tough to sell to. They're so slow, and selling on a cost incentive basis is hard, but God love you.

It means so much to us to hear that kind of encouragement from our shareholders, and I definitely see Lindon's business as being more as a business where, even though we're bringing in the step change, he actually has sales and marketing people because you have to sell these products as opposed to Jim's business where the step change is so evident to the customers that they seem to be finding Jim. No offense to Jim, but his job is executing on actually making the promise right with these guys.

No, his sales skills have yet to be tested.

Probably thankfully for Jim, too.

Anyway, listen you guys have a great day, and keep fighting the good fight.

(Operator Instructions). [Ricky Solomon], [Varisian].

Could you possibly size the market opportunity for OmniMetrix? I mean it sounds like it's a very big opportunity, and you've highlighted that you've got new opportunities that you're pursuing right now. But I never heard like a true size of what that market could be.

Deena, are you on the line? Dean was not able to join us --

Yes.

So she is.

Yes, I am, I'm here. The opportunity for OmniMetrix, as John stated before, there's a 2 million installed base currently of generators. So we feel that there is less than 1% of all those installed base that's currently being monitored.

So their cell towers and the great big vertical national markets that are out there, we feel like the opportunity is wide open. We are in the infancy of this market as far as monitoring base. So the opportunity is huge, and as John said, partnering with the manufacturers and those distributors is our sales strategy.

Okay.

So I think I could quantify by saying it's bloody big.

Bloody.

We look at this thing and say, okay, we have 2400 connections on generators. If we can get to 50,000 connections at $420 a year of recurring revenue, that's somewhere in the area of $20 million of recurring revenue with extremely high margins.

Right, okay.

As we look internationally, we look at the fact that most people's power generation in places like Africa is a diesel generator, as opposed to the central grid. And, as they become more prosperous, they are going to need more reliable sources of power.

So we just think that this is a very large -- it's a huge opportunity, and we sort of look at this business as like, not to compare ourselves to Warren Buffett, but it is sort of like Warren Buffett talks about Geico. He says, well, I hope the CEO will figure out a way to spend more money on advertising because we think this is a business which is really ripe for sales and marketing. And OmniMetrix has one salesperson right now. So we're going to be investing in -- they have been growing dramatically without any -- with just one salesperson. So what can we do if we added five more, and we started actually advertising the product.

Right. So are you looking at hiring a Gekko or something like that? (laughter) Do you mind answering the same kind of question for GridSense, like qualify that market opportunity? Because that sounds very large, too. And you have a few -- you said you had a few more pilots going on now that are larger than the ones that you had with, I think, it was Florida Power. So is there any chance you can talk about how large that market opportunity is?

Lindon, that's you.

Yes, sure. I will comment on that question. I think in terms of market size, we need to break down by the part of the grid that we're addressing. We've got a range of products that cover all the critical parts of that tower delivery system, from overhead lines to underground cable and transformers. I'll just comment on one of the segments, mainly the transformer market. Based on our estimates, we think that the total addressable market is approximately 30 million or more transformers with a very small percentage of those transformers currently being monitored.

One of the reasons why penetration has been so low until now is because there really hasn't been a cost-effective system that is cost-effective relative to the replacement costs of those assets. So a lot of these transformers remained unmonitored, and I think what GridSense has done is really break that price barrier for adoption by creating a platform that is a fraction of the replacement costs of a small transformer, even of the size that it is found at the distribution level, which are referred to as pole top transformers.

So 30 million transformers, right? And if you've got 10% of the market one day, let's say, what's your ASP? I'm just trying to throw -- trying to get some kind of an idea of what the size could be, right.

Right. So if you're looking at 30 million -- I mean just taking a very low, applying a very low unit price, which we expect to achieve with greater volumes and be able to capture strong healthy margins, we think the total addressable market is over $10 billion.

$10 billion over no specific time period, just $10 billion.

Just total addressable market.

That's total addressable market.

Right.

Now we are also finding new applications for our TransformerIQ. We've discovered that the product that we've developed for the utility industry can easily be adapted to other industries as well, including the oil and gas industry, specifically addressing environmental factors and the monitoring of water that's used in these water fracturing drill sites.

And with that market, we estimate that the annual market value is closely tied to the number of frac sites that are being developed per year. So I think the number that Jim Anderson talked about earlier was about 20,000 sites. And for each of these sites, there can potentially be about 10 monitoring points using our TransformerIQ platform. So that market opportunity, which is separate from our utility sector, we estimate to be over several hundred million dollars per year, per annum.

Yes. Okay. That sounds great.

And then, of course, you might think with overhead transmission, distribution line monitoring and underground cable, we have solutions that address that market -- those markets as well, and those are very sizable as well.

It's very exciting. Okay. Great. Thank you.

Ricky, thank you so much. Varisian is our second largest shareholder, so thank you for much for your time and attention and faith in our mission.

Les Schultz, Schultz Capital Management.

One of the comments that just came up was the recurring revenue with OmniMetrix. Another company that I'm familiar with had done a study several years ago on project revenue versus recurring revenue and had six investment bankers come in and wanted an evaluation on the different multiples that would be applied to the two various categories, project or reoccurring revenue. And the reoccurring revenue, the low estimate was 16 times and the high estimate was 30 times what you would pay for if you were buying a company that had reoccurring revenue or what the market should pay for. So it was 16 and 30, and the average was 22 times. So the reoccurring revenue has got so much potential for recognition by investors.

Well, Les, thank you for pointing that out, and we will definitely be thinking about that as our other companies continue to develop their business plans.

Great. And --

Sometimes it's just hard like in the case of GridSense where the utilities aren't getting compensated based on rate base, so they want to put it into their capital costs. But --

Right. And one of the other things that got me very interested in ACFN was the success that Jim has had previously -- and this has been brought up a couple of times with Litton -- but he's already ramped up, he's already solved the problems. And although it's not exactly the same, he was very successful at that, and I think that bodes well for what's going to happen in the seismic area.

Les, thank you for introducing us to a key member of the management team that's helping Jim to commercialize our products.

Good. Thanks a lot. Keep up the good work.

Thank you.

And there are no more questions at the present time. So I would like to turn the call back over to management for any closing remarks.

Great. Well, just in case anybody from my compensation committee was listening, I spend 50% of my time talking to shareholders, 50% of my time looking at acquisitions, and 50% of my time talking to the CEOs of our companies encouraging synergy and cross-pollination between the companies. So we have an excellent cooperation and spirit of entrepreneurship between all of our CEOs.

But I'm extremely excited about the future, we have the balance sheet, we have the entrepreneurial, the creative genius to -- and I think we have, I think, the right investment thesis. And we also have the right shareholders. I mean our shareholders are -- we're just very grateful to have everybody's time and attention and all the people on the call today. We think that our shareholders help give us credibility in the marketplace. So thank you very much, and we're looking forward to reporting even better results in the futures.

Thank you. That concludes today's teleconference. You may now disconnect your phone lines. Thank you all for participating, and have a nice day.