Cliff Note #100

100% Upside; 50% recurring revenue combined with the largest contract in company history about to lead to break-out earnings growth

Themes:

GARP - New Large Contract - Recurring Revenue - Acquisition Target - Significant Earnings Call Information Arbitrage 

Acorn Energy (ACFN)

Data 

• Founded: 1984

• Website: https://acornenergy.com/

• Exchange: OTCMKTS: ACFN 

• Price: US$11.90

• Shares Outstanding: 2.48M

• Market Cap: US$ 29.5M 

• TTM Revenue: US$ 8.744M

• LT Debt: 0

• Current Portion of LT Debt: 0

• Cash: US$1.46M

• P/E  trailing 12 months: 62.6

• P/E 2024 est: 19.8

• EV/S trailing 12 months: 3.2

• EV/S on 2024 revenue est: 2.7

IMPORTANT CAVEAT: Stock is extremely illiquid, where the bid/ask spread can be wide at times.

What they do:

Remote monitoring (sensors) and monitors used to track, protect and control critical power assets and gas pipelines to reduce downtime and repair/maintenance expenses. Mainly Sells through distributors. Omnimetrix is the core product suite.

Product Sales Breakdown Industries/Customers served:

Divisions:

• Power Division: (making sure critical assets have power)

  • ~85% of revenue 

  • Products where sensors are placed: generators, industrial air compressors and our annunciator (alarm alerting) products. 

  • Served Markets: Residential (back-up generators), Commercial and Industrial. (cell towers, manufacturing plants, medical facilities, data centers, retail stores, public transportation systems, energy distribution and federal, state and municipal government facilities).

• Cathodic (technical word for corrosion) Protection

  •  ~15% of revenue

  • Gas Pipeline Corrosion Monitoring

  • Utilities and oil & gas companies 

  • To be clear, Service is only offered to gas  pipelines and not any other type of pipeline, like oil.

Type of revenue:

• Hardware (~50% of revenue)

  • Sensors (placed in  critical assets control panel

  • Monitors (dashboard that displays real time data received from sensors)

• Monitoring (~50% of revenue)

  • Monthly recurring revenue from monitoring assets, displaying information on dashboards and remotely controlling assets.

In the company’s words:

OmniMetrix is a Georgia limited liability company based in Buford, Georgia that develops and markets wireless remote monitoring and control systems and services for critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, fire pumps and other industrial equipment) and multiple markets in the IoT ecosystem, as well as cathodic protection solutions for the pipeline industry (gas utilities and pipeline companies). OmniMetrix started in 1998 by creating the first wireless monitor for on-site power generation,

Power Generation (“PG”) monitoring. OmniMetrix offers PG wireless monitoring and control IoT solutions encompassing wireless remote monitoring devices and applications for both residential and commercial/industrial power generation equipment. This suite includes our suite of TrueGuard products as well as our AIRGuard product, designed for remote monitoring and control of industrial air compressors, as well as a Smart Annunciator product. This Smart Annunciator product, tailored for commercial clients, provides a visual representation of a generator’s status through a touch-screen display, offering real-time updates on its current state.

Cathodic Protection (“CP”) monitoring. OmniMetrix specializes in CP monitoring, offering remote monitoring and control products specifically tailored for cathodic protection systems utilized in gas pipelines, serving gas utilities market and pipeline operators. Our CP product lineup, which features solutions for remote monitoring and control of rectifiers, test stations and bonds, is our Hero and Patriot lines of products. Additionally, we offer the RADTM (Remote AC Mitigation Disconnect), an industry-first innovation designed to mount onto existing Solid-state Decouplers in the field. This device enables remote disconnection/connection of AC mitigation tools, significantly reducing a customer's expenses while enhancing employee safety.

Some History: 

• The current CEO, Jan Loeb, has a private equity background 

• Loeb stepped into the CEO role in 2016 after being an investor in the company and eventually becoming dissatisfied with management’s lack of progress.

• Under Loeb, the company upgraded its technology and remote monitoring capabilities.

• Investors have been waiting for the business to inflect to meaningful profitability.

• An industry-wide required remote monitoring equipment upgrade cycle related to generators slowed down growth in 2022 and 2023. This opened the door for some competitors to poach ACFN customers. The company navigated this challenge well.   

• Management is most focused on growing its power division, due to large market expansion opportunities and high gross margins, and higher overall growth prospects (as mentioned in a Geoinvesting Skull Session live interview). The gas pipeline monitoring will be a slow growing, but stable and highly recurring. 

Reasons to add to Index: (Very easy story to understand).

1. Breakout Q2 2024 EPS performance, where the revenue grew 15% to $2.27 million and EPS increased 185% to $0.11, the company’s first significant profit since Jan took over as CEO.

2. 50% of the revenue is recurring which drops right to the bottom line: 

“In addition, given that our monitoring costs are largely fixed, revenue from incremental net endpoint additions largely drops to the operating income line.”

3. High consolidated gross margins of over 70% (hardware ~50%; software ~90%).

4. New $5 million contract with a  leading wireless telecom provider signed in June expands the company’s penetration into the wireless tower market. It’s the largest contract in the company’s history, is for 2 years and opens the door for more business with this customer (contract represents only a small portion of the potential with this customer). It also opens the door to target other telecom companies more aggressively. 

5. As we discussed in our PSIX Cliff Note #98, the increased occurrence of severe weather conditions is increasing the need to protect industrial assets and the needs for more back-up power assets (like generators) being deployed. The same goes for cyber security attacks and general protectionism attitudes in global markets these days.

6. The CEO has a private equity background and has made it quite clear that he is very open to selling the company. The recurring revenue piece of the business should ensure that the company receives a nice premium. 

7. A couple key competitive advantages seem to exist, aka a “moat”:

   1. Appears that sensors are brand agnostic, making deployment easy. 

   2. “This migration from failure reporting to failure prevention is fundamentally OmniMetrix’s focus and is the result of a strong data collection and analysis design point. We believe that this transition to prognostics sets OmniMetrix apart from its competitors, many of whom are still in the failure reporting phase of application development. OmniMetrix has also shifted its primary focus to the commercial and industrial segments from residential due, in part, to the ability to customize our products to the customers’ specifications. We have also increased our marketing efforts to end-users in an effort to increase demand for our services. These efforts have proven to be successful, and OmniMetrix continues to execute on that strategy.” 2023 10k 

   3. According to the company, no other comparable products exists for its gas corrosion monitoring offering.

8. Although management seems to not be attacking the data center market, we think it could be a potential area it could target since, as we know from Cliff Note #99 (PSIX), demand for generators in data centers is a large growth market. 

9. Cliff Note #99 (PSIX) also discussed growth tailwinds in the Demand Response market.
   
   “Demand response allows the Utility Company to turn your generator on and off for short periods of time during specific times of the day.” 
   
   Well, these generators have to be remotely monitored to control all this. It appears that a relationship that ACFN has established with a player (C-Power) in this industry could start to materialize towards the end of 2025. Obviously, ACFN would provide the remote monitoring and control functionality.

10. Information arbitrage in the companies 2024 second-quarter earnings called gave us clues to allow us to build a near term financial model. The basis for this model is only evident for those that referenced information the Q2 2024 earnings call and the 2023 annual meeting. This information was also confirmed in a recent Geoinvesting Skull Session interview with the CEO. Based on some back of the envelope modeling, we believe the company is poised to maintain an EPS run rate of at least $0.20 per quarter for the next several quarters. This should catch investors by surprise.

11. We are introducing the company to data center growth opportunities as well as a few other biz. dev. possibilities, which I believe can be substantial if management explores them.

12. The company has introduced new capabilities which allow its monitoring services to be able to be used with monitors, manufactured by other companies.

13. Net operating losses totaling over $70 million should shield future profits from tax liability for a good amount of time.

Valuation: 

Using our earnings per share assumption for the 12 months of around $0.80, the stock could easily trade at a P/E of at least 25x, or $20.00. Furthermore, these assumptions do not take into account any new contracts, which we think is a highly conservative assumption.

On a takeover assumption, we could see the company being acquired for at least 4x to 6x revenue, or $17.7 per share and $26.6 per share (possibly more) due to the company’s continued growth in recurring revenue from its Omnitrix business. 

This model suggests that the stock has a 100% near-term upside. (But has the potential to be a strong mid-term multi-bagger).

Caveats: 

1. The new wireless contract is front-loaded with hardware revenue, while recurring revenue will be recognized over time.  So, our model may not be able to assume that the near-term revenue/EPS contribution we are forecasting from this contract will continue at the same rate. Moving forward. However, New contracts in the wireless vertical could provide upside.

2. The new wireless contract only carries a two-year term.

3. We’d like the company to be more aggressive, targeting certain markets that management has stated that it does not see as a priority, such as data center markets. The company could be leaving some growth on the table, as well as a potential acquisition premium.

Research Tasks 

1. Understand which markets AFCN mainly serves and which ones they should increase emphasis on penetrating. Reference company filings (cell towers, manufacturing plants, medical facilities, data centers, retail stores, public transportation systems, energy distribution, and federal, state, and municipal government facilities).

2. Referencing a recent Geoinvesting Skull Session Interview with AFCN CEO, will the company change its stance about not wanting to enter the data center market?

3. Try to tighten up our financial model. The challenge is that new contracts are frontloaded with large amounts of equipment revenue. So, assuming the new contract flow might be lumpy, it would be a good idea to try to figure out what the much higher recurring revenue could contribute to EPS. Our assumption is that it will probably be around 50% or more. 

4. Understand the future risk of industry upgrade equipment cycles and when this could occur again (in both divisions).

5. What will the next evolution of the company’s technology or service offering be?

6. We would like to understand if this relationship has materialized into expectations:

“In support of our growth outlook today, we disclosed the completion of a nonexclusive resale agreement with one of the nation's largest commercial generator dealers with multiregional operations. We believe this agreement could ramp over the next 12 months to between 2,500 and 3,000 new monitoring connections per year.

We believe this relationship could contribute annual hardware sales, activation fees and initial monitoring revenue of $1 million to $2 million when fully operational along with adding to our base of recurring monitoring revenue in subsequent years. We expect this partnership to begin to contribute to our results starting in the first quarter of 2024.”

PR/CC/Filings/Presentations Commentary

Q2 2024 release / environmental hazards bode well for company: 

“Importantly, demand for backup generators and 24/7 monitoring and control continues to increase as a result of various tragic weather events and wildfires that have disrupted the electric grid. After hurricane Beryl hit Houston on July 8th, 2.6 million Texas households and businesses were left in the dark, some reportedly for up to 2 weeks. Significant, prolonged events such as this boost demand for backup generators, and we are already experiencing increased demand in Texas for OmniMetrix solutions as a result of the storm.

“We also expect increased demand for generators and monitoring in the wake of wildfires in the U.S. as well as Canada, where we are working to expand our sales and marketing reach. In addition to causing power outages, wildfires also negatively impact air quality. Our new user interface, OmniView 2, provides a range of new features, including Air Quality Index (AQI) data to support customer compliance with air quality regulations that vary by location and regulator. Under these regulations, businesses can be fined for operating generators on bad air quality days; OmniMetrix solutions provide customers with the data they need to assure regulatory compliance.

Big Wireless telecom contract: 

“This is the largest contract in OmniMetrix’s history and a major milestone for our Company as it confirms the strength and value of our monitoring technology, monitoring services and our customer service commitment. OmniMetrix was selected through a rigorous competitive process. Importantly, this relationship has the potential to position us for other large-scale deployments for this customer and others.

“The engagement also puts us well on our way to achieving our 20% annual revenue growth target in both 2024 and 2025, building on 2023 revenue of $8.1M. Additionally, monitoring endpoints added through this contract should make a material contribution to annually recurring monitoring revenues in 2024 and 2025, and likely in future periods given the potential for annual monitoring service renewals.”

2023 10K detailing the company’s transition to create better remote monitoring technology: 

In the early stages of OmniMetrix’s PG product and market development, relatively unsophisticated generator controls and early generation cellular and satellite communication processes limited the applications to alarm delivery. Customers were notified that some event had taken place after the fact. There was no diagnostic data opportunity, but service organizations could, at best, practice a reactive service approach.

With the advent of second-generation cellular systems and newer, computerized engine controls, OmniMetrix migrated to a design point of collecting large amounts of performance data from remote machinery, which allows service organizations to perform diagnostics on equipment before dispatching service. These enhanced control panels allowed the service organization to put the right person in the right truck with the right parts to affect a one-trip or even a zero-trip solution. At this phase, service organizations could be efficient, proactive, and provide a higher level of customer satisfaction. They could also manage more customers by using remote monitoring. Customers have provided OmniMetrix feedback regarding how customer service teams are able to work “smarter” and more efficiently by going directly to problem sites with the appropriate people, parts and solutions, thus increasing the value of their businesses.

Links

Q2 2024 release / environmental hazards bode well for company: https://www.globenewswire.com/en/news-release/2024/08/08/2926848/0/en/Acorn-s-Q2-24-EPS-Improves-to-0-11-vs-0-04-on-Revenue-Increase-in-Remote-Monitoring-and-Control-Solutions-for-Backup-Power-Generators.html

Wireless telecom contract: https://www.globenewswire.com/en/news-release/2024/06/05/2893775/0/en/Acorn-Secures-5M-Contract-with-Leading-Wireless-Provider-for-Remote-Monitoring-and-Control-of-Cell-Tower-Backup-Generators.html

Go to page 4 of 2023 10K,  detailing the company’s transition to create better remote monitoring technology:  https://www.sec.gov/ix?doc=/Archives/edgar/data/0000880984/000149315224009150/form10-k.htm

Information videos on Omnimetrix: https://www.youtube.com/@omnimetrixllc3299