EnerNOC plans to expand by focusing on software
Visit EnerNOC Inc. chief executive Tim Healy in his Seaport perch overlooking Boston Harbor and the conversation will inevitably turn to his company’s future in energy software.
EnerNOC built a big business around what is known as “demand response,” a system that rewards customers for reducing electricity consumption during peak demand times. This is how EnerNOC gets most of its revenue. But Healy wants to talk about something different now: becoming a provider of energy-efficiency tools.
It is a vision that has led Healy on a shopping spree in which EnerNOC has spent more than $125 million to acquire five companies since the start of 2014, increasing the company’s workforce by 60 percent to more than 1,200 people. To keep up, he will add a floor this summer to the three-level headquarters in the 18-story One Marina Park Drive. As many as 600 people could work there a year from now, he said, up from nearly 490 on Jan. 1.
This pivot can’t come soon enough. EnerNOC’s overreliance on electric grid-related revenue became painfully clear on Feb. 26, when it warned Wall Street that its business could drop during 2015 by as much as 13 percent.
This was an unexpected shock for investors, who sent the company’s shares down by more than a third in the following few days. EnerNOC’s stock closed at $11.92 a share on Friday, 35 percent below its price before the revenue warning.
But to analysts who follow the company closely, this baptism by fire could hasten a transformation that needed to happen: Growing software products into a steady, significant stream of revenue.
EnerNOC’s software allows clients to, for example, quickly analyze and respond to energy waste throughout a portfolio of buildings and to combine billing in one central platform.
The market for energy management tools is wide open, said John Quealy, an equity analyst at the investment bank Canaccord Genuity’s Boston office who follows EnerNOC. Many businesses, he said, recognize they need to gain more control over their energy bills, especially during a time of rising electric rates.
“Everybody used to write a check and forget about it,” Quealy said. “EnerNOC’s now changing the paradigm here, by trying to make those decisions smarter.”
EnerNOC is one of the most successful companies to emerge from the state’s fast-growing clean-tech sector, and its trajectory offers a path to young startups, a model for how to make the jump to an international stage.
“They’re the poster child for a bunch of our more successful companies that are looking at how to move from an early market leader to a more mature leader in a global industry,” said Peter Rothstein, president of the New England Clean Energy Council. “They’re one of the first that’s really made the transition.”
Healy said he has been preparing the shift to the software business since founding the company in 2001 with David Brewster, now EnerNOC’s president. The company has more than 1,000 paying software customers, Healy said, compared with about 30 two years ago.
“Today more than ever, customers are looking for an energy information platform to help them make sense of all the new choices they have,” Healy said. “They have more data around their energy than they ever did before.”
Demand response can be a volatile business. Most of the revenue comes in during the summer, when grids are overtaxed by all the air conditioners running at the same time. The business is highly regulated, and those rules can change over time and vary between regional grids. And the revenue is linked to energy markets: Low prices in Western Australia, for example, can wipe millions off of EnerNOC’s top line.
But software is another story. Sign a client up and you could have steady business for years.
Healy has hunted for smaller companies that could add software to his platform, and he is hiring developers at a brisk pace to design new programs in-house. He has pushed sales representatives to focus on the software end of the business.
“It’s now about how many buildings the customer has, as opposed to how many megawatts of reduction we can get from them at peak times,” Healy said. “Our plan all along was to try to get [a customer] to realize it was leaving a lot of money on the table by not managing energy with the kind of business intelligence software it should have.”
The demand-response customers represent a captive sales audience: They are already using what is essentially free EnerNOC software to know when they should power down.
“Demand response is a great customer acquisition tool for them,” Quealy said. “EnerNOC has the luxury of having customers that really like them already.”
Analysts said Healy and his team need to calm investors by smartly integrating the companies acquired in the past year — a list that includes the $77 million purchase of Worcester’s World Energy Solutions Inc. in January — and showing more progress in the shift toward software revenue.
Ben Kallo, an analyst at investment bank Robert W. Baird & Co., said the disappointing revenue outlook represents one of the biggest shocks he has seen EnerNOC face since its debut as a public company in 2007.
“It’s going to take some time for investors to get confidence restored,” Kallo said. “It’s time to put your head down and integrate the businesses that you bought. I wouldn’t rule out [more] acquisitions. But at this point, the best thing from an outsider’s position is to make sure they have a hold of what they’ve acquired over the last 18 months.”