Acorn Energy Inc (ACFN) 2024 Q2 法說會逐字稿

Good morning, and welcome to Acorn Energy's Second Quarter 2024 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. Now I'll hand the conference over to Tracy Clifford, CFO of Acorn Energy and COO of its OmniMetrix operating subsidiary. Ms. Clifford, please begin.

Good morning, everyone, and thank you all for joining us today. First, let me remind everyone that remarks that follow and answers to questions may be forward-looking. These statements are subject to various risks and uncertainties.

For example, the operating and financial performance of the company in 2024 and future periods is subject to risks associated with the pivot disruptions to business operations and customer demand, risks related to the company executing its operating plan, maintaining high customer renewal rates and growing its customer base as well as from changes in technology, the competitive landscape and the financial or economic environment.

Forward-looking statements are based on management's beliefs and the assumptions using currently available data and information pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

There's no assurances that the company will be able to achieve its goal. The company undertakes no obligation to revise or to disclose revisions to forward-looking statements to reflect future events or circumstances occurring after today.

A full discussion of risks and uncertainties that may affect the company is included under Risk Factors in our 10-K as filed with the SEC and is available on our website at acornenergy.com. Now I'll pass the call over to Jan Loeb, the CEO of Acorn and OmniMetrix. Jan?

Thanks, Tracy, and thank you all for joining today's call. Our Q2 and first half results reflect continuing trends experienced in recent quarters. We reported an increase in hardware revenue recognized and we continue to build our base of recurring high-margin monitoring revenue.

First half revenue recognized increased 18.4%, approaching our average annual revenue growth target of 20%. Importantly, in June, we secured a new approximately $5 million contract with the leading wireless telecom company to provide monitoring hardware and services for 5,000 to 10,000 cell tower backup generators over the next two years.

OmniMetrix was selected in a thorough and competitive process, which we believe confirms the value of our technology, monitoring solutions and strong customer service commitment. We have approximately $2 million of purchase orders in hand from this contract, and we commenced shipments yesterday.

Therefore, we expect to record initial revenues in late Q3 and early Q4 following customer acceptance of hardware installed. This contract represents the largest and OmniMetrix history and a major milestone in our effort to position OmniMetrix for major national, commercial, and industrial businesses.

Given our 2023 revenue of $8.1 million, this $5 million award should result in a substantial material contribution to our revenue and cash flow this year and next. It also confirms our belief that OmniMetrix monitoring solutions are the best in the business and should bolster the strength of our position in competing for other large opportunities that might arise with this and other large customers.

Given the increasingly critical nature of wireless communications, which drives continued demand for network infrastructure, the wireless industry could offer additional revenue opportunities for us going forward.

We also expect factors such as increases in severe weather events, growing electricity demand for electric vehicles, the expanded use of electricity to power artificial intelligence and decarbonization trends leading to more intermittent power sources like wind and solar to place further strain on the electric grid, all of which should support the demand for commercial and residential standby generators and remote monitoring solutions for these generators.

As you know, Texas is recovering from windstorms in May and the devastating impacts of a Hurricane Barrel that hit Houston in July impacting multiple Texas markets. More than 2.6 million households and businesses were left in the dark, some reportedly for up to two weeks. And tragically, of these, 23 people die from the storm and related power outages. Barrel was the earliest Category 5 hurricane record. And of course, another Gulf Storm Debbie made impact this week, further confirming the risk -- the growing risk of changing weather patterns and violent storms.

As you can imagine, significant and prolonged power outages drive awareness and new demand for backup power for homes and businesses seeking protection from future power outages. Over the past few years, we have grown our installed base significantly in Texas through dealer partners such as Power Solutions services in Houston. As a result of these storms, we expect increased demand for generators and monitoring services over the next several quarters and potentially longer given the severity of the storm's impact and duration.

For reference, market penetration of the addressable home generator market is less than 10% nationally. So there's significant opportunity for growth. Typically, a large outage will impact generator sales for 2 to 4 quarters and sometimes much longer as with Hurricane Sandy.

One key driver is the duration of the outage and in the case of Barrel, obviously, two weeks is a long time to go without power. Other than Texas, we have been focusing on growth in other areas such as Canada and California, both of which are experiencing significant and early wildfire activity this summer. Wildfires often cause power outages that boost generator and monitoring demand and also impact air quality.

As Tracy mentioned on our last call, our new user face OmniView two provides a range of new efficiency features, including air quality index or AQI data, which is used in certain jurisdictions to regulate the use of power generators on days that register bad air quality.

The OmniMetrix data provides our customers peace of mind regarding regulatory compliance and avoidance of fines, which we believe represents a competitive advantage for us and a value add for customers, particularly within the commercial and industrial segment. Overall, our team has made notable progress so far this year and for the reasons discussed, we expect our business momentum to build in the second half of 2024.

As a result, our financial results for the second half of the year should significantly exceed the first half of the year, and our full year performance should exceed our 20% growth goal. Given this growth outlook and our margin profile, we also expect to deliver improved bottom line performance. From a cash flow perspective, we will have some working capital requirements to support the ramping of hardware shipments, but those are manageable.

We also want to mention again significance of our large NOLs that will shield net income from income tax liability. So given our current cash position and debt-free status, we feel confident we are in a good position to fund internal growth opportunities in our business. Let me now turn the call to Tracy Clifford for a financial review. Tracy?

Thank you, Jan. Let me start off by confirming that we filed our 10-K this morning, which should be accessible on our website and also on sec.gov. I'll now provide some performance highlights, and then we'll take investor questions. As I've mentioned in some prior calls, late last year, we launched updated versions of our hardware products with new functionality.

Prior to these modifications, our standard hardware products were not separable from our monitoring products, and the new functionality enables our hardware products to be distinct from our monitoring services as separate offerings, associated revenue, cost of goods and commissions on hardware sales have been recognized upon shipments since the date of the launch of these products or on acceptance as compared to our prior treatment, which was recording sales to deferred revenue and then amortizing the hardware revenue over the units useful life, which was estimated to be three years.

Our monitoring revenue was and continues to be amortized over the contract determined to service, which is typically 1 year. In terms of our GAAP financial results, Q2 '24 revenue rose 15% to $2,275,000, which included a 28% increase in hardware and a 4% increase in monitoring revenue.

Revenue increases were driven by revenue recognized from our TrueGuard product line in our Power Generation, or PG segment, which is our generator monitoring segment, offset somewhat by lower sales in Arcathodic protection, or CP, which is our pipeline segment.

Similarly, for the six months ended June '24 -- June 30, 2024, revenue grew 18% with the same revenue drivers as the quarter period. Gross profit was up for both 2Q and 6-month periods over the prior year period, while gross margin declined a few points. Gross profit grew 12% to $1.665 billion in Q2 '24, reflecting a 73.2% gross margin versus 75.5% in Q2 '23.

The decline in gross margin was attributable to the hardware category, which carries a lower gross margin than the monitoring category. Likewise, gross profit grew 16% in the first six months of 2024 and gross margin was 73.9% versus 75.4% in the first half of 2023, reflecting the impact of a higher proportion of hardware in the revenue mix.

Operating expenses were flat at $1.407 billion in Q2 '24 and Q2 '23 as lower SG&A offset higher R&D expenses. Lower SG&A primarily reflects a structural change in our sales organization in Q2 '24 and decreases in various other operating expense categories, including business taxes, depreciation expense and travel expenses.

For the first six month period, total operating expenses increased $102,000 or 4%, which included R&D increasing 62,000 or 15% and SG&A increasing 40,000 or 2%. Higher R&D relates to increases in the salaries of our engineering team and continued investment in new and existing product lines and product line extensions to continue to respond to customer needs and stay ahead of our competitors.

Net income attributable to stockholders improved to $271,000 or $0.11 per diluted share and Q2 '24 from $96,000 or $0.04 per diluted share in Q2 '23. This improvement was driven by the increases in revenue and gross profit, while total operating expenses remaining flat. As a reminder, per share amounts have been adjusted to reflect the 1 for 16 reverse stock split executed in September of 2023.

In terms of operating cash flow, Acorn generated $41,000 of cash from operating activities in the first half of '24 versus $155,000 in the year ago period, which reflects our results adjusted for changes in working capital and other operating assets and liabilities. Turning to our balance sheet.

Acorn had consolidated cash of $1.5 million at June 30, 2024, which is relatively level with the year-end and also with the current cash balance, which also rounds to $1.5 million. Excluding deferred revenue and deferred cost of goods sold, which have no impact on current or future cash, our net working capital was $2.6 million at June 30, 2024, which was also relatively level with the year-end.

The company was debt-free during both periods and continues to be debt free. In summary, with the addition of the new $5 million contract in the telecommunications industry, we're more excited than ever about our business strategy moving forward.

We've made great strides in 2024, building off of the cloud-based technology infrastructure that we've built for the last two years and the talent that we've added in various departments to cement our position as the industry leader in power generation monitoring for years to come.

The strength of our business model and financial position should facilitate the successful execution of our organic growth strategy for the remainder of 2024 and beyond. I look forward to updating you on our progress in November on our third quarter conference call. Now I'll turn the call over to the operator to take questions from investors. Operator?

We will now begin the question and answer session. (Operator Instructions)

Anthony Marchese, a private investor.

Congratulations. Great quarter, and it looks like you're going to have even better quarters. I'm interested in finding out if you can share with us the -- what kind of margins or impacts that you're going to -- does the $5 million contract have in '24 and '25? I'm not sure that if you've published that, I didn't see it, I'm just -- again, just interested in how that will affect your bottom line.

Thank you, Anthony, for your question. We've not published the margins for that contract. But what I can tell you is that in general, they are not dissimilar from our normal corporate margins but take that with a drop of -- a little grain of salt just because of the natural size, so you would expect that by nature of who they are and their size that they would get a little bit of a break relative to some of our other customers.

But it's not dramatic and it's not -- and just because of the size, we think it will be similar to -- for our corporate wide.

Got it. Okay. Well, listen, great color. And can you discuss the -- I don't want to see the possibility, but are you bidding on other or seeing other opportunities of equal size? Or is this sort of a once every 5-year kind of contract?

The answer is no. We don't see this as once every five years. Number one is this particular customer has more cell towers that were not in this RFP. And we just see in general, data and power are two very important trends and they're coming together with us, meaning we provide data about power and more and more large industrial and commercial customers want that and need that and don't want to be caught without it.

So we are certainly seeing other customers or the large customers talking to us. And then I also want to stress that this is an ongoing business. So it's not just -- yes, it's two years for, so to speak, the hardware, but the monitoring goes on for a much longer significant period of time. So therefore, our ARR just will continue to grow.

Mike Andrews, a private investor.

Congratulations on the progress this past quarter. The one question that I have is in regards to hardware capacity, are there -- as this one large or a good size order to come in and you're actively looking for more? Is there -- are there capacity constraints, supply chain constraints, assembly restraints, anything like that, that would sort of put a ceiling on top line hardware sales?

The simple answer is no, and I'll explain why. I mean, firstly, in terms of supply chain, 2 years ago, there were certainly supply chain issues that we've dealt with. And if you follow us on our call, we had built our inventory levels up because of that and now they've come down because the supply chain is much easier to deal with.

So at least right now, without any external trouble in the supply chain, we're fine on supply chain. In terms of our own capacity, we've hired some more people to help us with this large order. And we can expand and contract fairly easily, and we can do more stuff in-house. We can do more boards outside with contractors. So we have, I think, fairly good flexibility in terms of our ability to grow the business even beyond where we are today.

Manny (technical difficulty) MS Capital.

I had a question in regards to how aggressive have you been in the possible penetration of data centers because do you see that in your description. Can you comment on that?

Yes. So we have a few data centers as customers. But I would say that by and large, that is not a focus of our business. And here's why. Because data centers are so essential, almost all of the big data centers have 24/7 manned control rooms looking at all their equipment, all their servers and all the other equipment that they have.

So if you have 24/7 manned operations, you really don't need our remote monitoring capability. So some data centers have us because we have very good equipment and they monitor it themselves, so to speak, behind their fire -- behind the firewall they monitor and they use our equipment because it's the best. But we don't have really the remote monitoring ARR from those clients because they are 24/7 manned.

I look forward to the second half performance.

Bill Jones, Akorn's Investor Relations.

Jan, we have a question that was e-mailed from a longtime shareholders unable to join the call from -- due to vacation. I'm going to paraphrase, I think you've touched on some of this, but -- the question relates to the $5 million -- approximate $5 million telecom contract.

And you've said that there's $2 million in POs, purchase orders related to that contract. And in the past, you've mentioned an approximate 50% EBITDA contribution from incremental revenue. Is it correct to then think of that as if you take 50% of the $2 million divided by 2.5 million shares, approximately $0.40, you've already done $0.13 through the first 6 months.

So he asks if that puts you over $0.60 for the year just back of the envelope. In terms of EBITDA or earnings per share or cash flow, how does that relate?

So let's just talk about earnings per share. I mean we do not give guidance, never given guidance, but the back of the envelope map is I can't argue with that. I've certainly said in the past that we have a high-margin business both from our hardware side and the monitoring side and that incremental revenue drops -- should drop to the OmniMetrix EBITDA line at 50%.

So that is definitely correct. And if we have, let's say, $2 million of incremental revenue, which I think, by the way, is just the first half, that's just POs that we have in hand today, yes, presumably, we could drop $1 million to the OmniMetrix EBITDA line, and the math is the math. So I can't argue with that.

And so you have to take into consideration the Acorn Energy expenses, so we might have some changes in Acorn Energy expenses, which he's not taking into consideration. But by and large, is math is correct, and I can definitely see how he gets to that -- we could be earning $0.60 or so this year in terms of EPS.

Now showing no further questions. This concludes the Q&A session. At this time, I'll turn it back to Jan Loeb for closing remarks.

Again, thank you for your interest in Acorn Energy. We appreciate your support, and we're always happy to speak with investors. You can arrange a call with us or ask any questions through our IR team, whose information is in today's press release. We look forward to updating you again on our next call. Thank you again for spending time with us today. Take care.

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