Acorn Energy Inc (ACFN) 2012 Q1 法說會逐字稿

Good morning and welcome to the Acorn Energy first-quarter 2012 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 presentation over to Heather Mallard, General Counsel of Acorn Energy. Please go ahead.

Thank you very much and good morning. Please take note that certain of the matters discussed in this presentation contain statements that are forward-looking. Such 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 by or 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 Acorn Energy's filings with the Securities and Exchange Commission. In particular its most recently filed Form 10-K and Form 10-Q.

Acorn Energy's forward-looking statements are not guarantees of future performance. And the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected, and such differences could be material. Acorn Energy undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

I am now delighted to turn the presentation over to John Moore, CEO and Chairman of Acorn Energy.

Thank you and welcome friends and fellow Acorn Energy shareholders. I'm delighted to report that our revenues for the first quarter of 2012 were up 37%. And all of our companies showed increased revenues in Q1 2012 as compared to Q1 2011. We made some really important investments during the quarter. I often classify our investment criteria in terms of two-foot, four-foot and six-foot hurdles. Two-foot hurdles are investments to fund the organic growth of our existing businesses. We invested $5 million in US Seismic, bringing our total investment to $11.7 million. We increased our ownership to 92%, or 81% of the Company on a fully diluted basis to fund product development, and expand our manufacturing capacity.

Our four-foot hurdle was a bolt-on acquisition by US Seismic of a license of an important complementary technology from Northrop Grumman. Another two-foot hurdle is that we invested an additional $1.3 million in GridSense. The hardest thing for us to do is the six-foot hurdle, the acquisition of a new platform business. We acquired OmniMetrix on February 15 for $8.5 million. The combination of an outstanding management team, a powerful but unexploited dealer sales channel, and the company's proven solution to rising grid reliability challenges made this an investment we simply could not pass up.

The way we create shareholder value is finding and funding great companies, led by terrific management teams to solve a pain point that we believe could become a major new category in the digital energy business. We are seeking businesses that have a leadership position in the mind of their customer, or where the businesses require capital to cross from the early adopters to the early majority. OmniMetrix was a fat pitch down the center. Harold Jarrett, the founder of the business, created an on-site generator monitoring the industry. He created the industry. He established a reputation in the industry for integrity and fair dealings. He recruited Deena Redding to lead the company, and their collaboration resulted in 2011 financial results of $3 million in revenue and approximately $800,000 in pretax profit. The business was 13 years old when we bought it. And despite their leadership position, the company had only 2,400 connections out of a total addressable market of over 2 million generators in the USA. They needed to partner with us for our balance sheet, our risk appetite and our vision for the future of digital energy.

Two other incredibly appealing aspects of the business are potential OEM relationships and over 1,000 generator dealers with long-term service contracts with their customers. Deena has recruited Andy Briggs, one of the industry's highest visibility and most-respected sales executives to architect their sales and marketing strategy. We think OmniMetrix's compelling smart service approach promises to dramatically improve the profitability and customer satisfaction of this industry.

Overseas markets that we will target later are larger and even more appealing than the US market. One early success of our collaboration is OmniMetrix introduction this week at the cell phone industry tradeshow of the industry's first and only 4G monitoring solution. This is going to be an important driving force in our future product road map. We intend to aggressively invest in the business to expand the competitive advantage and ultimately our connections and recurring revenue. We've increased the personnel at OmniMetrix since the acquisition from 11 to 18 employees, and further expansion is planned on both the back office and the regional sales force. We're planning a fundamental change in the pricing policy to expand the number of connections, which will negatively impact the near-term financial results but ultimately improve our enterprise value. We believe the ultimate total adjustable market in the US alone is over $400 million annually.

Our investors need only look at Generac, GNRC on the NASDAQ, a leading generator OEM, operating results for the past quarter. Which resulted in a special $10 a share dividend to understand what incredible potential there is to exploit OmniMetrix leadership position in this burgeoning industry, which is solving the growing power reliability problems worldwide.

GridSense revenues increased 43% to $918,000 in Q1 of 2012, up from $641,000 in Q1 2011. An increase of almost $300,000. Increased revenue is attributed to sales of pilot projects and improved business environment in the utility industry. In late 2011 GridSense completed the fulfillment of what we believe to be the world's largest transformer monitoring project with a major southeastern US utility. GridSense pioneered a unique power-harvesting technology which resulted in follow-on orders based on the customer's initial successful deployment. The first quarter reflects significant increases in engineering, sales and marketing costs, which is expected to continue as GridSense continues to expand its sales and support capabilities. An engineering team has been expanded to 20 engineers to execute our new product roadmap, driven by specific customer demands that should result in substantial new near-term revenue opportunities.

I've stated publicly that last year we had one major pilot project that resulted in this big deployment of our new product, the TransformerIQ. This year we have more than 15 major pilot programs, each one larger in scope than the first. We believe that GridSense is establishing a reputation as a pioneer in the emerging distribution optimization segment of this market industry. Lindon Shiao and Kevin Anderson have a unique and compelling vision, offering important rules for improving the productivity and reliability of the distribution of electricity for utilities. This is important because the step-change solutions our devices provide help utilities improve their profitability and reliability by getting more out of the grid, without requiring people to change their behavior or increasing their electricity bills. The total domestic addressable market for GridSense products is currently $1 billion. And the Company has an active development program which could substantially expand the market.

DSIT's revenues increased 26% to over $3 million in Q1 2012, up from $2.4 million in Q1 2011. An increase of over $600,000. This increase is due to the receipt of a major order for delivery of multiple diver detection systems in the fourth quarter of 2011. The order of $12.3 million is the largest ever received by DSIT or any of the existing Acorn companies. DSIT's net income increased from a breakeven in Q1 2011 to approximately $60,000 in the first quarter of 2012. Our backlog stands at $11.1 million. DSIT expects to increase its marketing activities in 2012, as well as to increase its development of new products.

We currently extract 30% of the world's oil production from offshore sources. The infrastructure to extract, refine, distribute energy represents soft targets for terrorists to destabilize economies of nations. With over 3,500 water-based energy terminals, the total addressable market for DSIT is well over $1 billion. And management are aggressively building the category by marketing to large national oil companies that control over 94% of the world's oil reserves. It would be impossible for me to do as good of a job as Jim Andersen did yesterday explaining the multi-billion dollar opportunity that we have to transform the market for seismic tools, the electronic and copper domain to that of fiber optics. If you're an investor in Acorn Energy and did not attend our Investor Day on Wednesday, I suggest that you check out the link that will be posted later today of Jim's presentation. Or his testimony in question-and-answer yesterday in front of the House Subcommittee on energy and the environment.

There are three key points I'd like our investors to take away from the US Seismic opportunity for fiber-optic geophones. We're offering a step function change in improvement over this old domain of these legacy products. The three benefits are greater resolution. And this is accomplished through covering a wider range of frequency. Greater sensitivity due to order of magnitude better signal-to-noise ratio. This is important because it allows lower total system costs as it reduces the depth in which observation wells need to be drilled. And lastly lower cost. By reducing the cost to less than 10% of the existing systems, we believe that we will substantially increase the total market size of this business. And the first market the Company is going after is the opportunity to both improve the productivity and reduce the environmental impact of the fracking industry. US Seismic fiber-optic geophones have now been tested in six real-world field tests. And each of the first five trials resulted in a customer order.

So this is not just something which is theoretical. This is something which Jim and his team are making happen in the real world. And Jim discussed the recent results from our test in Devine, Texas, which was even more exciting than what we've experienced in the past. We will be shipping our first three commercial orders for oil and gas applications in the second quarter. And we expect to have full-scale field results in the third quarter and hopefully follow-on orders. Lastly, based on the customer feedback we're looking to ramp up production.

Acorn Energy at the corporate level has a terrific balance sheet. As of May 1, we had $15.5 million in cash, $18 million in deposits or [seeders], an escrow deposit of $6 million due from the purchaser of our CoaLogix business, which we hope to receive in August. For a total of $39.5 million. This represents nearly half of our March 31 total assets of $80.7 million.

At the corporate level, our expenses increased from $900,000 in Q1 2011 to $1.5 million in Q1 of 2012. And the increase is due to the following factors. Number one, transaction costs associated with the OmniMetrix deal, which is approximately $300,000. We also increased our investor relations activities. This week we hosted this Investor Day at US Seismic. And I thank the over 40 investors who traveled to California, and the 90 investors who viewed the presentation online for the investments of time to better understand this important company. We will be presenting next week at the Barrington Research Conference in Chicago, and the Las Vegas Money Show. We believe that our business will be accomplishing great things over the next 18 to 24 months. And we feel that the effort and expense of increasing awareness is a high-impact use of our shareholder capital.

Lastly, increased personnel costs following the expansion of our business development team. Richard Rimer, serving as our Vice Chairman, is helping us globalize our business and our shareholder base. He's operating out of Geneva, Switzerland. Kent Leacock has joined as our Head of External Affairs and has made a big impact in a few short months. Jim Andersen's testimony yesterday at the House Subcommittee for the environment on US Seismic's technology for improving the productivity and reducing the environment impact of fracking is just one example of Kent's impact. Lastly, Heather Mallard, our new General Counsel, is helping to support all aspects of our Company's growth, contracting and intellectual property development. These increased general and administrative costs at corporate are expected to continue as we accelerate our business development and investor relations activities.

We declared a $0.035 divided payable on June 1 to shareholders of record on May 15. This is our third regular dividend payment, and we hope to be able to increase it over time if conditions warrant. In addition, should there be a sale of an existing portfolio company, Acorn Energy intends to maintain the policy of paying a special dividend to reward shareholders.

My parting thoughts are that digital businesses are fundamentally different from businesses built in the physical world. There's an exaggerated winner-take-all benefit to creating a category and investing overwhelming resources to service the smartest customers and to own the category. Economies of connection benefit from increasing returns. Where businesses in the physical economy eventually suffer from diminishing rates of return. The inability to come to grasp with this idea has resulted in many experienced investors thinking that Google was over-valued at its $65 IPO price, or passing on their available allocation of a private round of financing in Facebook at a $3 billion valuation.

At Acorn, we are committed and determined to learn from these lessons. And are committed to financing our winning digital energy pioneers in obeying the law of capture. Which means when our management teams deliver, and our technology is proven to offer step changes and benefits to eager customers, we need to get all we can get. We're extremely excited about our growth prospects and look forward to continuing acceleration of our revenue growth in the coming quarters.

This concludes my remarks and I and our CEOs and CFO are happy to answer any questions you may have.

(Operator Instructions) Jim McIlree of Dominick & Dominick.

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

I am, John.

Great. Would you like to answer Jim's question?

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

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

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

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

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

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

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

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

Okay. Fantastic. Thank you and good luck.

(Operator Instructions). Michael Osterer of UE Systems.

Good morning, Michael. Thanks for making the trip to California and being on the call this morning.

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

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

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

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

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

Great. Thanks Michael.

(Operator Instructions) Les Schultz, Schultz Capital management.

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

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

Thank you.

(Operator Instructions) [Joel Sclar], a private investor.

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

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

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

I would just like to back up what Linden said. These pilots, they're actually at deployments in Brazil, South Africa, Canada, the United States of course, China. Really, it's a global phenomenon, both for the LineTracker and for the TransformerIQ. And they're developing lots of new end uses for the TransformerIQ. It's really Linden's vision and Kevin and Andersen's vision here. It's just incredibly compelling. We're providing solutions at 10% of the cost of the competition. So it's really a blue ocean strategy.

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

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

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

That's great. Thank you so much.

William Bremer of Maxim Group.

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

I'm sorry, I missed the second part of that question.

What is your goal for margins at GridSense.

Okay. I will take the second part first. I think traditionally we have targeted gross margins above 50%. And I think that those are sustainable and that will continue to be our target going forward. Over time we may experience some pricing pressures. Other competitors see the traction that we are gaining and the niches that we are playing. But I think that we will be able to maintain those margins through improved efficiencies in our production. And we are constantly making incremental improvements on how we build, assemble and test our products. So I think above 50% margins are very achievable going forward.

And then the first part of the question, could you repeat that again please?

What is your capacity in terms of kilovolts that your products can be utilized on?

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

I understand on the distribution side. I'm just trying to get a sense on, is your technology capable of being deployed on a 500 kilovolt line or 765?

Yes, it can be. The TransformerIQ can be. With our line monitoring products, the Line IQ, there is a limitation. That range of products can be deployed up to 130 KV. Some utilities define that as transmission level or sub transmission level. But the product is suitable for lines up to that level, that KV level.

Okay great. Thank you.

Bill Calvert of UBS.

Good morning, John. Thanks again for putting together the event on Wednesday.

Thanks for attending, Bill.

A question for you on your cash and your use of cash this year. You said you've got liquidity of round $39.5 million currently. Had $1.5 million run rate corporate-wide for the quarter. What are the four companies going to demand for cash this year, do you envision?

We haven't made any projections yet about the capital needs. We tend to be very opportunistic. But I'll just say substantially less than the cash that we have on the balance sheet. I think that our cash right now conceivably could last us three years. At which time we expect our companies to be very profitable. I think maybe the direction of your question is, are we in good shape on cash, and the answer is absolutely yes.

Okay, thank you.

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

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

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