ENOC: Positioned to Break Out in '09

THESIS ENOC is a margin story. Since going public in May 2007, the company has pursued a very aggressive (and unprofitable) growth strategy, investing heavily to acquire customers, enter new markets, and buy several smaller competitors. Revenue growth has been strong (up 5x over 2006), but investors punished the stock in '08 due to the company's lack of profitability. I see ~33% upside in the next 12 months, catalyzed by the company turning cash flow positive in 2H '09. The street recognizes the potential in the business, as evidenced by consensus 55% growth forecast over the next two years, but I believe the market is under appreciating how the company's strong competitive position and evolving product mix will provide improved operating leverage in the future. TECHNOLOGY PLATFORM CREATING A "MOAT" 1. Focus on automation: ENOC's installs hardware at each C&I site, which allows it automate the DR process. This approach generates higher upfront costs vs. smaller rivals ? who compete on price using manual (i.e., telephone notification) systems ? and positions ENOC as the industry leader in reliability. This has contributed to ENOC's recent wins at SRP and Xcel. 2. Creating regional economies of scale: Automation gives ENOC economies of scale in operations and also lets it avoid performance penalties for failing to curtail load. 3. Distinctive strategy: Closest public competitor Comverge (COMV) has only 400MW contracted DR capacity and serves residential DR segment with proprietary hardware. Private competitor CPower has 800MW and relies on manual systems. Constellation NewEnergy is aggressively selling manual systems, but passes on penalties to customers. SHIFTING MIX TO HIGHER-MARGIN PRODUCTS AND SERVICES 1. Exclusive DR contracts: Utilities value ENOC's reliability and fast response time, and have selected the company as an exclusive DR provider (e.g., TVA, SRP, Tampa Electric). 2. Growth of high-margin services: Energy management services offer ~80% gross margins (vs. 36% in DR). Currently account for 6% of sales and 12% of profits and growing ~50% faster ? I see 10% of sales in 2010 3. Focus on existing geographies: In 2009, ENOC plans to focus on increasing MW under management (MWUM) by adding C&I customers in existing, more profitable current markets (currently only has 6% of 2007 footprint. MARKET MISPRICING RISK DUE TO POST-IPO VOLATILITY 1. Excess post-IPO volatility: May '07 IPO at $30, went to $50 in Jan '08, and as low as $4.80 in Nov. Major drop was Q4'07 miss due to unexpected sales force expansion. The stock first fell below $10 in Oct. '08. 2. Confident insiders: Since August, six insiders bought shares between $7-$14. James Rogers, the President of Duke Power joined board in October 3. Long-term contracts provide earnings visibility: On track for $105M revenues in 2008. Latest management guidance is that ENOC will reach cash flow positive in 2H09 and full year profitability in 2010. Company has beat estimates last three quarters. Street expects 56% revenue growth to $258M in 2010. 4. Increasingly clear path to profitability: Company currently burning ~$35M cash annually. Revenue visibility and strong balance sheet ($58M cash, $4M debt) reduce downside risks. 5. Growth assumptions imply $12 target: assume $10M FCF in 2010 w/ 30% growth for 5 yrs KEY RISKS 1. Reliance on a few key ISOs (e.g., ISONE, PJM) / changes to the regulatory environment 2. Lengthening of the C&I sales cycle due to economic uncertainty