World Energy CEO Talks Growth and Profitability Amid Cleantech Downturn

10/1/12Follow @gthuang

It’s not every day I make it out to Worcester. Especially not the nicest office space in Worcester. Well, at least I haven’t seen a better one.

I made the trek out there to visit World Energy Solutions (NASDAQ: XWES), an energy management company that occupies the 20th floor of 100 Front Street in downtown, with sweeping views of the city and rolling hills. World Energy moved into the space this summer and recently passed 100 employees, about half of them local. The firm has been making some noise in a sector that’s very tough to crack.

World Energy isn’t the easiest company to grasp, for an outsider. It started in 2001 and operates in specialized areas such as green-energy auctions and renewable energy certificates (RECs); online reverse auctions, in which electricity customers in deregulated states invite suppliers to make bids in real time; and the demand response market (where utilities pay businesses and municipalities to curtail energy use during peak demand). One of its chief competitors, EnerNOC (NASDAQ: ENOC), is based right in Boston.

But World Energy CEO Phil Adams (pictured above), who took over the job from Richard Domaleski in June, boils the whole backdrop down to a simple idea. “Fifteen years ago, the energy manager in this building got an electric bill and paid it. It wasn’t that hard,” he says. “All of a sudden, energy has exploded.”

He means that now energy considerations are a bigger part of a facility manager’s job. With every move or renovation, the manager has to consider things like energy efficiency, incentives from utilities, retrofitting, getting green-building certification, and other factors that could impact his or her bottom line. “Customers are saying, ‘We realize there’s a lot to energy management,’” says Adams, the company’s former president and chief operating officer.

And World Energy wants to take care of it all. The firm will sit down with a customer—a health club owner, say, or a big company—and figure out how the company is thinking about energy, and what its options are in terms of utilities, contracts, and so forth. “We create a plan for you, a batting order of tactics,” says Adams.

Adams and World Energy lived through the post-dot-com era, in which a lot of Web companies were trying to become the “eBay or Amazon for energy.” As Adams puts it, “Money poured into the space in 2000. Then a lot of VC-backed, technology-based companies went for B rounds and there was no money. They saw a technology approach.” Meanwhile, he says, “We were running around in offices of energy managers in basements, and they didn’t have e-mail on their business card.”

In short, World Energy figured out that its business is about services, not just technology. But still it has been a grind. The company grew steadily and went public on the Toronto Stock Exchange in 2006 before hitting the Nasdaq in 2009. Last year it hit a crossroads in terms of growth and decided to raise $5.5 million from institutional investors in a stock sale. “Our thought was, if we didn’t do anything a year ago April, we’d get to $50 million [annual revenue] in six or seven years on 15-20 percent organic growth. That’s a long slog to not even get as far as you need to go,” Adams says. “We said, ‘Let’s dilute a little, make accretive acquisitions that will turbo-charge the growth, and get us to $50 million in two to three years instead.’”

Which brings us to the firm’s recent acquisitions and growth. It has become profitable in the past two years, and is on pace to do more than $32 million in revenue this year. Last fall, World Energy made three acquisitions: Co-eXprise’s energy procurement business (enterprise software), Northeast Energy (efficiency) for $4.75 million, and GSE Consulting (energy management) for $8.6 million. Adams says the acquisitions are a mix of high-profit and high-growth businesses, so it sounds like the plan is to grow faster—but not too fast. “Steadily up and to the right,” he says. “That will hopefully get Wall Street’s attention.” (World Energy’s stock price has been climbing as of late, but it’s still just under $4.50.)

Here are some deeper highlights from my chat with Adams:

On the demise of cleantech businesses: “You’ve got big public failures like Solyndra and Evergreen Solar that have cast a pall on green energy,” he says. “Certainly the recession has curbed output of greenhouse gas. I don’t believe it’s less urgent, but the urgency has come down. We’re not spewing as much stuff, we’re fuel-switching from coal to natural gas for generation, so ‘there’s a lot of stuff that’s mitigating this thing and it’s sort of getting fixed on its own, so I don’t have to worry about it.’ There’s that sentiment.”

“To me that feels like macro cleantech, almost like macro economics—big, bold statements of policies and conditions. Like micro economics, we’re micro cleantech. We’re on the ground, doing it for each customer. We’ll broker solar credits in New Jersey. We run the auctions for the Massachusetts Solar REC program. What we’re trying to [say] is, let’s talk to you about how green you want to be. What’s available in your territory? Let’s put all of that in the mix and create an energy solution for you. We’re an energy management company, we’re not a cleantech company. But Wall Street needs a term it can hang its hat on, and you need a ‘tech’ attached to it, to create some kind of new interest and bubble or whatever. I think it was a big mistake.”

On the challenges of energy vs. Web businesses: “It’s not like you can get 800 million users [like on Facebook] in eight years. The contagion isn’t there. Everything with cleantech is attached to a building, or a pipeline, or a grid, or something physical. The adoption on that is necessarily slower because you need somebody to do something. It’s not like, oh, just log in, everybody just does it because everybody else is doing it. It’s been a real challenge,” Adams says. “But we have a pretty interesting way of looking at [energy management], and guess what, if you do it in the right order, there’s a multiplier effect. People go, ‘Wow, that makes a ton of sense, please do that for us.’”

On what World Energy has in common with Microsoft: “We’re at a ‘Microsoft Office’ moment in this industry,” says Adams. In the ‘80s, everyone used different kinds of spreadsheets. Then all of a sudden people switched to Windows in the early ‘90s, and Lotus 1-2-3 was replaced by Excel and Office. “There was one software company, with the same [user interface], that won the day,” he says. “Our thesis, what we’re building our future on, is gone are the days when an energy manager wants one company to do procurement, one to do efficiency, one to do demand response… We can be the Microsoft Office and claim all three beachheads. The market is huge.”

On Worcester vs. Boston: Adams talks about World Energy going from building to building, doing energy tests, and talking to customers. It’s not flashy, it takes time, but the company continues to grow. “Maybe it’s more of a Worcester business than a Boston business,” he says. “We’re grinders. We grind it out quarter after quarter. Eight quarters ago, two years ago, we weren’t profitable. Now we’re profitable. It’s about making money.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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