Acorn Energy Reports Strong Revenue Growth - Analyst Blog

Written by Steven Ralston, CFA

Acorn Energy Inc (ACFN) reported third quarter results with strong revenue growth at four of Acorn's five companies. Results at DSIT and CoaLogix were particularly impressive, despite start-up costs at the new Steele Creek facility. Disappointing results at Coreworx motivated management to divest the major portion of that company to operating management.  John Moore is demonstrating financial discipline in the decision to curtail the funding of Coreworx.
 
Revenues increased 63.8% to $10.6 million from $6.46 million, driven by increased capacity at the new facility at Steele Creek Road in Charlotte, NC, which came on-line in August and DSIT's continued successful penetration into the security market of exposed waterfront commercial installations. Revenue growth was greater than expectations at four of the five companies (CoaLogix, DSIT, GridSense and US Sensor). Management decided to divest Acorn's problem child, Coreworx, through a management buyout. Revenues at Coreworx declined 21.2% and were below expectations. Total gross profit increased 27.7% to $3.65 million from $2.86 million in the comparable-period last year. The gross profit margin decreased 976 basis points (bps) to 34.5% from 44.3% in the comparable year-ago quarter, primarily due to start-up costs Steele Creek facility causing margin compression at CoaLogix (16.7% versus 24.7%). Acorn reported a loss of $4.57 million or $0.29 per diluted share.

 Management is demonstrating financial discipline by divesting much of its ownership of Coreworx and eliminating the cash drain of funding Coreworx further. The management buyout is expected to be effective on or before December 15, 2010 and result in non-cash impairment charge (write-off of goodwill and other intangible assets) of approximately $9.4 million in the fourth quarter. Acorn will continue to own a 10% equity interest in Coreworx, along with a 10% warrant interest, a $4 million secured note in Coreworx, and a 4% sales royalty until Acorn's investment is returned ($20 million).  Therefore, Acorn will retain a portion of Coreworx's ultimate success without any further financial commitment.

CoaLogix is pursuing significant opportunities in China. With approximately 80% of China's electrical energy being generated by coal-fired plants, China's pollution problems are immense. China's 12th Five-Year Plan for Energy (2010-2015), despite seeking additional nuclear and wind-power energy sources, will maintain China's coal-dominated electric consumption structure. CoaLogix has opened an office in China and is pursuing the catalyst regeneration market, though the required political and financial capital required most likely will require a collaborative partner.

During the fourth quarter, Acorn (ACFN) should fully benefit from the increased capacity from CoaLogix's Steele Creek facility without the impediments of start-up costs. Therefore, CoaLogix's gross margin is expected to recover to 38% in the fourth quarter. DSIT is expected to continue to grow both top-line revenue and net income due to new orders and a rising backlog.

Despite lowering our 2010 estimate, we are raising 2011 estimate from a loss of $0.50 to a loss of $0.45. We maintain Outperform rating and the $6 price target.

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