The U.S. demand response provider EnerNOC staked much of its future on expanding its energy efficiency and management software businesses. Now, the company has come to a financial impasse that could see it selling off those business units -- or the company as a whole. 

That’s the dire news from EnerNOC’s fourth-quarter and full-year 2016 earnings report on Tuesday. Although the Boston-based company beat Wall Street expectations on revenue and net income for 2016, it also offered poor guidance for 2017, with revenue expected to fall to between $310 million and $340 million, compared to $404 million last year. Losses are expected to grow from $1.74 per diluted share in 2016 to between $2.07 and $2.57 per share next year. 

This drop in business is partly driven by reduced revenue expected to come from its demand response business for mid-Atlantic grid operator PJM, which made up about 44 percent of the company's total revenues in 2016. 

But EnerNOC’s struggles are also driven by a software business that has “materialized much more slowly than we expected,” CEO and Chairman Tim Healy said in Tuesday’s statement. "As a result, we have taken significant steps to align the level of investment in our software business with the near-term market opportunity."

“To that end, we have concluded that it is in the interest of our customers, employees, and shareholders to explore potential alternatives to our current structure,” he said. “This may include the sale or separation of one or more of our business units, a sale of the company, or other alternatives."

“Conversely, the outcome of this process may be a decision not to transact at this time,” he added. The company has hired outside legal and financial advisers to assist, but will not be commenting on the ongoing process, he said. 

Back in 2015, EnerNOC declared that it would make a major push to diversify from its mainline demand response business through its Energy Intelligence Software (EIS) business -- the energy efficiency, power procurement, risk management, utility customer engagement and other software platforms it has built and acquired over the past few years.

The logic was that these diverse lines of business would end up being a much larger market than traditional demand response. Healy predicted in a February 2015 earnings call that “within the next few years, we expect revenue from our enterprise and utility business to exceed that from our grid operator business.”

But that prediction hasn’t come to pass. In 2016, software made up only $67 million of the company’s revenue, down from $82 million in 2015, according to Tuesday’s announcement. In 2017, it’s expected to account for only $50 million to $60 million, according to the company’s guidance. 

Healy declined to discuss what’s next for EnerNOC’s exploration of strategic alternatives in response to analyst questions on Tuesday’s conference call. As for why it’s considering it now, “We think we have an equity story, as I mentioned in my remarks, that makes it difficult for investors to [sift] through the complexity of some of the business,” he said. “The business continues to have some levels of complexity that are outside our control in some respects.” 

As for the timeline for this process, Healy said that it could come faster than the six to nine months suggested by one analyst, though he wouldn’t provide more details. 

Tuesday’s news of a potential sale doesn’t come as a complete surprise, given EnerNOC’s retrenchment in its software business over the course of last year. In May 2016, it sold the utility engagement software business it acquired from Pulse Energy in late 2014, laying off about 5 percent of its workforce. And in September 2016, it laid off another 15 percent amid a retrenchment of its energy-efficiency business to focus on more specific verticals. 

These moves drove a 20 percent reduction in EnerNOC’s software revenue over the year. But excluding the business lost as a result of these actions, EnerNOC’s software business grew 7 percent from the previous year, company president David Brewster noted in Tuesday’s conference call. 

The company’s annual recurring revenue from its software business remained largely flat in 2016, as improvements in “customer quality base” were eroded by churn and departure of customers from restructured business units, he said. 

Meanwhile, 2017 demand response revenue from grid operator markets is expected to fall by 20 percent to 30 percent, he said, “primarily due to our program mix in PJM,” he said.

EnerNOC has landed some big new contracts in Asia recently, including 200 megawatts for Taiwan Power Co. and 60 megawatts with Japan’s Kyushu Electric Power Co. The Japanese project is delivering revenue and the Taiwanese one is set to start in the second quarter. The company also won a sizable contract with Pennsylvania utility PECO. 

“We are excited about the growth prospects for our demand response business…and we remain committed to driving cost efficiencies across both businesses and limiting the EBITDA losses of our software business,” Brewster said. However, he also noted that “cash preservation and expansion is a key consideration, and will be foremost in all our efforts.”

Ben Kellison, grid research director for GTM Research, had this to say about EnerNOC's long-term strategy and prospects: "EnerNOC has long operated as the largest DR provider in the world, hoping that that scale could carry its business into the black as markets opened up outside of PJM and grew. However, DR spread slower than initially thought, non-PJM capacity markets remained less developed or less friendly to DR, and fuel costs that drive traditional generation costs fell."

"This cocktail of market conditions pushed EnerNOC to select software as the revenue supplement. With strong competition in non-utility markets and slow sales cycles, this market did not develop fast enough to meet EnerNOC's revenue needs and leaves it at a decision point in 2017 as cash reserves continue to be spent on operations. Pairing down the workforce will stretch funds out, but the company will be taking a serious look at making-up for lower capacity revenues in PJM or continue to reduce the cost of operations."