ACFN

Acorn Energy, Inc. (ACFN)

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Acorn Energy (ACFN)

Q1 2013 Earnings Call

May 10, 2013 11:00 am ET

Executives

Heather K. Mallard - Vice President, General Counsel and Secretary

John A. Moore - Chief Executive Officer, President and Director

James K. Andersen - Chief Executive Officer of US Sensor Systems Inc and President of US Sensor Systems Inc

Joseph Musanti - Chief Executive Officer and President

Deena Redding - Chief Executive Officer and President

Analysts

Harvey Poppel

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

William D. Bremer - Maxim Group LLC, Research Division

Ross Silver - Vista Partners LLC

David Duley

Charles Melcher Sloan - Mid-Continent Capital, LLC

Gavin Richey

Frank Barresi

Presentation

Operator

Good morning, everyone, and welcome to the Acorn Energy First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Heather Mallard, General Counsel. Ma'am, please go ahead.

Heather K. Mallard

Thank you, and good morning, everyone. 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 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, please 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 statements, whether as a result of new information, future events or otherwise.

I will now turn the presentation over to John Moore, President and CEO of Acorn Energy. John?

John A. Moore

Thank you, Heather, for that dramatic reading. Welcome to Acorn Energy's First Quarter Conference Call. I'm delighted to announce our business reported a 37% Q1 versus -- 2013 versus Q1 2012 growth in revenue. We also had growth in gross profits and margins. Over the balance of the year, we anticipate further ramping revenue with rising customer adoptions of our new products. We expect margins to increase in the second half of the year as US Seismic's new interrogator and automatic -- automated production line comes online.

GridSense continues to make strides in efficiencies, and OmniMetrix continues to grow its high-margin monitoring revenue stream. Overall, our businesses are poised to emerge from this major investment cycle in products and infrastructure, and we believe this will be reflected in our shareholder value and our plan to be profitable by the end of 2014.

Our balance sheet is strong with over $30 million of working capital and over $20 million in cash, of which $17.6 million is held at the corporate level. 3 of our 4 businesses, DSIT, GridSense and US Seismic, have working capital lines, and OmniMetrix is developing a banking relationship.

We've budgeted $7.6 million of equity investments in our operating businesses for the remainder of this year. Our board has decided to halt our quarterly dividend because they are so enthusiastic about the use of our capital to accelerate the growth of our businesses.

Our portfolio of companies can best be considered in terms of risk-reward ratio. We believe we own businesses that address large market opportunities, and we've invested in new products that help our customers solve problems they're having by doing things the old-fashioned way. Our risk is investing our capital not only in new products but also in sales and marketing infrastructure that's necessary to prove the market opportunity. We believe the model of investing in businesses with low fixed cost basis yet are very scalable and very capital-light offer huge upside leverage for our investors, especially since these businesses can expand margins as they scale. DSIT had another solid quarter, with sales up 9% and gross margins which improved to 39% from 34%. DSIT is investing heavily in the new generation of their AquaShield and smaller PointShield sonar systems. These investments are designed to improve the performance, margins and selling prices to keep ahead of the demands of this developing market for underwater security.

When management proposed our investment of $5 million to accelerate the growth of the business, they projected losses as they invested heavily in research and development, and yet they've managed to maintain their profitability. So hats off, Benny and team. Of the $5 million, there remains another $2.2 million to invest. We are especially excited about the pending collaboration with US Seismic on a new generation of tunnel and perimeter detection systems. Jim Andersen and his team have been making their oil and gas tool products commercialization the main event, but they are committed to licensing the security business to DSIT in the near future. We look forward to more solid execution by the DSIT team as they work to turn their multimillion-dollar pipeline into -- of near-term opportunities into sales and profits.

GridSense had impressive revenue growth of 68%, and gross margins improved to 43%, up from 37%. With an increased focus on products that have already shown traction in the marketplace based on our pilot projects, we believe that GridSense can become the second profitable company in our portfolio.

We are coming to the end of a big investment cycle in new products, and now is the time, as we launch these products, to focus on converting our huge pipeline of pilots into near-term revenue. The 3 big news items for the quarter at GridSense were the first large deployment of the pole-top transformer product, the release of the Grid InSite software solution and the appointment of Joe Musanti as CEO. The shipment of the 800 pole-top transformer monitors to a large California utility was largely responsible for the 68% first quarter revenue growth and margin improvement. As important as the revenue is the great referenced customer relationship and the business model opportunities that this installation represents. This shipment was quickly followed by one of the largest U.S. utilities ordering a pilot of 25 pole-top units in a high-profile demonstration that could result eventually in the deployment of as many as 50,000 units.

I want to take a moment to give you some detail on this customer. More than any other customer, they tell me that we're on the right track at GridSense with our pioneering efforts in the transformer monitoring business. This customer has the world's largest underground electric grid, and for several decades, they've been among the industry's first adopters in monitoring the 27,000 underground transformers. They now have a plan to use our product on their over-50,000 pole-top transformers. They have a robust business case and an operational culture that understands monitoring transformers. They like our product as is, no engineering changes. This is a $50 million project opportunity that they hope to deploy over a 3-year period. An OEM version of the pole-top transformer will be available at the end of May. And this could result in a large new market, but we don't know for certain because nobody's ever done this before, but it looks very promising. It also makes us very attractive to potential OEM acquirers of GridSense.

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