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The following segment was excerpted from this fund letter.
In what we consider one of the most important portfolio developments this quarter Acorn Energy announced a partnership with CPower Energy Management in June 2022. As a reminder, Acorn Energy owns 99% of its subsidiary OmniMetrix, which provides hardware and monitoring services for standby electric generators. This has been a nice business, growing roughly 20% per year for the last few years, with $8mm+ in annual cash revenues split between hardware and monitoring revenues.
The monitoring revenues are very sticky, with a 95%+ renewal rate, highly diversified at over 30,000 customers – and are a relatively small absolute dollar customer expenditure with a monthly subscription cost of approximately $10 with the annual Average Revenue Per Customer (ARPU) being in the low $100 range. More recently this $22mm market cap company has reached an operating leverage inflection point where it has begun to generate ~$1mm in annual growing cash flow – which we always expected to substantially increase.
To take a birds-eye view of the business model, OmniMetrix has the ability to monitor and control tens of thousands of standby electric generators, a true Internet of Things (IOT) business. To take this even further, one can view the generators as standby energy producers on the grid. The innovation of the last decade has allowed for millions of people to begin utilizing their assets to generate revenue: from personal cars becoming taxis or rentals, to spare guest rooms becoming hotel rooms.
This is why the agreement with CPower is such an important milestone for OmniMetrix, as it now allows a substantial number of the existing and virtually all new customers to participate in the demand response program which involves annual payments from utilities and ISOs (Independent System Operators) to generator owners (and, of course, dealers and service providers).
Demand response rewards energy users who conserve energy or switch to standby generators to help grid operators or utilities meet periodic increases in electrical power demand. Across the US, CPower manages more than 5.3 GW of capacity for nearly 2,000 customers at more than 12,000 sites to help the grid when and where it is needed most through its demand response solutions.
CPower’s demand response solutions, enabled by OmniMetrix’s wireless remote generator monitoring and control, will automatically shift the power load to enrolled customers’ standby generators during peak demand hours, when the grid is stressed and energy prices are high, without any action on the part of the generator owner.
The generator owner not only has peace of mind of knowing that their generator is monitored and therefore, will work when needed for reliable power during extreme weather events, but additionally they will now be compensated for allowing their generators to be on call to potentially avoid power outages for their community through demand response.
How does this translate into an economic benefit for ACFN? While this is somewhat unprecedented some economic numbers are starting to become available. For example, an ISO may pay between $1,500 to $2,500 on an annual basis just to have access to a generator. This amount will be split between the generator owner, the dealer, and OmniMetrix. In other words, the company with a ~$100 customer ARPU may see ARPUs rise by $100s of dollars in the near future, while dealers will now be substantially incentivized to sell generators that have the hardware and software to participate in the program.
In July 2022, the OmniMetrix CPower partnership announced their first deal with the Electric Reliability Council of Texas (ERCOT) that connects Briggs and Stratton generators with OmniMetrix hardware/monitoring software. This is still the early days but we believe this is a substantial economic event that will significantly improve the long-term revenue growth and profitability of this company.
While we initially anticipated a ~$2mm Free Cash Flow number by 2023, growing to ~$3mm in 2024, we believe this program will begin to contribute $1-2mm in high-margin revenue within a year, with potentially a $4-$5mm Free Cash Flow by 2024. This increases our near-term price target from $1.20 to over $2.00, with a longer-term $5.00 per share valuation going from possible to probable.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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