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PowerSecure International Inc. (NYSE:POWR)

Q3 2008 Earnings Call

November 6, 2008 5:15 pm ET

Executives

Sidney Hinton - President and Chief Executive Officer

Chris Hutter - Chief Financial Officer

Analysts

Rob Brown - Craig-Hallum Capital

Eric Stine - Northland Securities

Alan Dillon - Morehead Capital

David Wright - Henry Investment Trust

Benjamin Burditt - Special Situations Fund

William Bremer - Maxim Group

Frosty Temple - Unidentified Company

Operator

Good day ladies and gentlemen and welcome to the PowerSecure International Inc. third quarter 2008 earnings conference call. My name is George and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today’s conference. (Operator Instructions)

All forward-looking statements in this discussion are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical facts, including but not limited to statements concerning future financial performance and outlook for the business.

Forward-looking statements are not guarantees of future performance or events and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, projected or implied in this discussion. Important risks, uncertainties and other factors include, but are not limited to those factors identified in the company’s annual report on Form 10-K for 2007 and subsequent filings with the Securities and Exchange Commission, including reports on Forms 10-K and 8-K.

Accordingly, there can be no assurance that the results expressed, projected or implied by any forward-looking statements will be achieved and listeners are cautioned not to place undue reliance on any forward-looking statement. The company assumes no duty or obligation to update or revise any forward-looking statements contained in this discussion.

I will now like to turn the presentation over to your host for today’s call, Mr. Chris Hutter, PowerSecure’s Chief Financial Officer; please proceed Mr. Hutter.

Chris Hutter

Thank you and welcome everyone to the PowerSecure International Inc. third quarter 2008 earnings conference call. Thank you for your time and interest in our company. With me today I have Sidney Hinton, our Chief Executive Officer.

Our agenda today will be that Sidney will provide an overview of our third quarter 2008 and lead us through a general and business strategic business discussion. I will then give a more detailed review of our financial results. We’ll open up the lines for Q&A and then Sidney will wrap up with a few closing remarks.

With that, I’ll turn it to Sidney to start the call.

Sidney Hinton

Good afternoon and thanks to everybody for joining us. We are very excited and pleased about another strong quarter and the results we were able to report today. The overall headline on the quarter is that we delivered positive performance on just about every financial measure, top and bottom line and posted very strong growth across every one of our strategic growth areas. That’s a point that we’re going to emphasize in this called today and I just want to lay the groundwork with you.

When we talk about strategic growth areas, we’re talking about our four areas of business; our Distributed Generation, our Utility Infrastructure, our Energy Conservation and Efficiency, and our Energy Services. You probably are going to get tired of hearing that on the call, but it’s important to get grounded in what we mean when to refer to that because this is a very positive report in every aspect on each of those business units and divisions.

Our third quarter results demonstrate that we are winning in a very difficult economic environment. The credit for winning goes to our people and their dedication to serving our customers. As many of you know, I can talk all day long about our superior technology, engineering, monitoring, technical know-how, on and on; however, it’s our people who make us unmatched in the marketplace.

Their drive and reputation for delivering products and services designed to solve our customers’ problems and exceed our customers’ expectations continues to pay off and this real marketplace success is what will drive our results in the future.

This quarter, like the last several quarters, we’ve been blessed to report results with big numbers. We are always happy when we can do that. On the call today we want to emphasize that beyond the big numbers, the real headline here is the quality of the results and the progress we have made in preparing our business for the future.

A couple of points here: The significant across-the-board revenue gains we’re delivering in each of the four business areas of focus; again, that is Distributed Generation, Utility Infrastructure, Energy Conservation and Efficiency, and Energy Services and I’ll give some specifics in a few minutes on those.

Additionally, results which continue to demonstrate the major progress we are making in the diversification of our revenue stream. As many of you know, we’ve been criticized in the past for our heavy reliance on the Publix business. This success in diversifying our revenue began about a year ago as we began to have the bandwidth to focus on our diversification efforts and we have established a very consistent and positive track record for expanding our business outside of what has historically been our largest customer, Publix.

We publicly thank Publix business for the business; we appreciate it and we appreciate the trust and confidence and they’ve helped make us a better company. So when we talk about the business outside of them, it’s not meant as disrespect to them. They are the foundation that we’ve been able to grow these competencies and we’ve been blessed now to start growing beyond them.

In the third quarter, Publix represented 27% of our revenues. This is the lowest level since the first quarter of 2006 and our non-Publix business reached a record of $24.6 million in the third quarter.

Let me run down some specific third quarter results, which are outstanding on virtually every measure. The revenue was $33.6 million, increasing 28% over last year’s third quarter. This was achieved despite the fact that our Publix revenues were down $4 million from the prior year and down $10 million sequentially versus our second quarter. The reduction in Publix revenue is consistent with what we’ve been discussing all year long.

Excluding the year-over-year Publix revenue decrease, the rest of our business was up a very strong 86% in the third quarter, demonstrating the strong growth our business is capable of generating. Our profit results were also very positive. Gross profit was 32.5% for the quarter, up a full 1.5 percentage points versus last year, as we continue to demonstrate the ability of our company to grow revenues and gross margins simultaneously.

This consistent track record of accomplishment is something we’re particularly proud of and let me assure you it isn’t something that just happens. It’s the result of a lot of blocking and tackling and a team that is focused on adding real value in the marketplace with the discipline to ensure that we are delivering customers’ value in the most efficient way possible.

This maximizes the value that we deliver to our customers, the value that our employees create for themselves, the value we deliver to our utilities, and the value that we deliver to you, our shareholders. Our diluted earnings per share from continuing operations was $0.17, up 21% over last year.

One of the things that I’ve emphasized and I want to hit it again and I’m going to give you specifics; about this quarter that makes it so exciting is the amazing growth we realized in every single one of the four strategic growth areas. This is a huge validation that we are investing our resources in the right opportunities and that our business unit teams are executing amazingly well in the spaces that we’ve elected to serve.

Let me highlight the year-over-year growth that we generated in each area. Again, the four areas: Distributed Generation; Utility Infrastructure; Energy Conservation and Efficiency; and Energy Services.

First, Distributed Generation: our absolute growth is 7% as reported to the prior year. That is driven by the change in Publix is why that is mitigated. If you pull out the Publix, i.e. the non-Publix distributed generation revenue, we have doubled in size. We are up 99%, proving our ability to expand our customer base and our capabilities in this core business.

Utility Infrastructure, which is focused on helping our utility partners with their growing infrastructure needs. This includes our Utility Services, our federal, our Utility Engineering and Power Service business units. We’ve more than doubled over the prior year, a 128% gain.

Particularly exciting and I’m going to come back to this again in a minute is our Energy Conservation and Efficiency, which is focused on helping our utilities, work with their customers to use energy more cost effectively. This includes our EnergyLite and EfficientLights business unit. It tripled in size, posting a 199% increase in revenues.

Energy Services, this is our Southern Flow and WaterSecure business where we serve the growing needs of the oil and gas industry. They also showed nice growth in the quarter. Southern Flow grew revenues a very strong 18% for the quarter. What’s impressive about this accomplishment is that they missed two weeks of service revenue due to the hurricanes that hit the Gulf during this past quarter.

The cost of having the Southern Flow team staffed we incurred, but they were able to generate revenues and offset it to the point that 18%. Being out cost them about five percentage points of growth on the revenue line and the cost of goods sold did include the expense of having our service technicians, who normally would have been out in the Gulf, on shore waiting to get back in the field to work. An incredible achievement and evidenced by the fact that their income was almost $600,000, which was just a hair below of what they did in the third quarter in 2007 when we had no hurricanes.

Lastly, in the energy services, our WaterSecure business continues to show nice results as we posted pretax income of $1 million from this business unit, up a very strong 29% over the prior year.

As I think about the quarter that just passed, I can’t help but be proud of the fact that not only on the areas we are investing and proving to be markets where there is real value that we can bring to serve a real customer need and I hope that you as investors recognize and gain appreciation for our ability to be intelligent and pick the right areas to invest, but also that our team is executing extraordinarily well every day in the marketplace. That is something that you as investors can be proud of is a team of leaders and incredible people that are doing this in this very difficult macroeconomic environment.

Let me turn to our backlog, which stands at $97 million. It’s ironic that one of the reasons it’s down is that our folks are banging out jobs at a record pace. Obviously, the flipside of this is also true that we didn’t win new jobs at the pace we needed to maintain our levels from the last quarter. Chris will discuss the backlog and the estimated timing of completion in a moment, but I wanted to make a few comments here.

First, we would have liked for our backlog to be higher, but being down is not something on its pace that alarms us. For us, contract wins are a result of a long sales cycle and new contracts do not come to us in a smooth, regular pace.

Second, we continue to be very encouraged by the quality of discussions we are having with our utility partners and their customers about how we can help them solve their energy problems with our solutions. Thus far we have not seen a drop off in the amount of engagement and receptivity we are getting from customers and utilities and we continue to be excited about the opportunities we see in the marketplace.

Third, we do not have a crystal ball and we must be cautious about the near term, given the current economic environment and capital markets. However, we absolutely believe we are in the right place at the right time and are very bullish about our long-term outlook and our capabilities. So we will stay the course and play the hand we’ve got because we like what we’re holding.

Now I’d like to touch on three specific qualitative areas. Those three areas are going to be cost discipline, hurricane performance, and back touching on our Energy Conservation and Efficiency business unit. First on cost discipline; Chris will talk about this in a minute, but I would be remiss if I didn’t point out the terrific job our organization is doing in managing for bottom line results.

Late in the first quarter of this year, recognizing the cloud that was forming in the overall economic environment, we began looking at ways to proactively reduce our costs and we talked about this on the second quarter earnings call and our team committed to each other to manage our business as efficiently as possible.

The cost reductions and the disciplines implemented during our second quarter were a direct outcome of this mindset and we continue to manage the business with a strong sense of responsibility about our spending, given the slowdown in the economy that is inevitable.

Having said that, please don’t confuse this focus on cost to mean that we are not making strategic investments to fuel our growth; we are. For example, we just hired a fantastic new sales and development business executive who has a deep understanding of utilities and their business needs to develop new relation for us in a geographic region that we think is a great opportunity for us.

Moving onto the next area to emphasize is our hurricane performance. This is something you as investors can be incredibly proud of, that the impact that our people have had and the effort put forth. It’s really hard to understand the depth of the dedication of our people have to our customers from the couple of press releases we sent out on the subject, but as shareholders, if you could have watched it from the ground level, you would have been very proud of the extraordinary efforts of our team during the string of hurricanes we experienced during this quarter.

The preparation and 24/7 efforts of our systems monitoring and service teams were outstanding, which of course translated into terrific performance of our systems and the protection they provided our customers. In fact, we had a case where a system operated for 33 consecutive hours.

I’ve already mentioned the terrific performance of our Southern Flow team in the Gulf during the hurricanes, but one additional item I’d like to share about the hurricane and Southern Flow’s performance is that Southern Flow proactively stopped parts that they believed our customers would need the most after the storms passed. By doing this, we were able to provide a very quick response right after the storms to get our customers’ measurement systems up and running as soon as possible; another great example of customer service.

Finally, I would like to highlight the efforts of our Utility Infrastructure team, who in some cases worked 24/7 to support our utility partners from the Southeastern Gulf region, all the way out through the Midwest, associated with storm restoration from the hurricanes. Almost our entire team of resources spent three weeks, roughly 21 days, out on the road working literally around the clock.

As we were bringing them home after three weeks on the road, 21 days of around-the-clock work, we received a phone call from one of our Utility Partners in the Southeast. Their largest customer had a facility in Texas. It was not the utility impacted, but their largest customer had a facility impacted in Texas. They called us to see if we could go out and get that customer back online. It was exciting.

Our folks had just driven through the night back into Georgia where they are based and literally were unloading from their trucks when the call came. They simply got back on the trucks, drove back across the country and got that customer back online. Needless to say, we’ll be reaping dividends from that type of customer service for years to come.

Energy Conservation and Efficiency is the third area I want to talk about. It’s continuing its expansion and the success we are having in penetrating blue chip, grocery and drug store chains with our breakthrough LED lighting from EfficientLights, which goes in their freezer and cases, is exciting. We’re seeing this success begin to translate into real results.

For the third quarter, our revenues from EfficientLights were almost $1 million. This is a significant uptick from our last two quarters as our run rate for sales has now more than doubled. We also continue to develop the market and seed the opportunities as the chains which we have installed lights in and test/pilot phase has also doubled from five to 10 grocery/drug/convenience store chains, which represents an opportunity approaching $200 million.

Our lights are also being adopted by several OEM refrigerated case manufacturers. What this means is our lights are being chosen to go in new stores, not just retrofits. We continue to receive positive feedback from across the industry that our lighting solution is the best in the marketplace. We have got the best quality of light that delivers the best return on investment.

In terms of go-to-market strategy for EfficientLights technology, it’s simple and very much consistent with the PowerSecure way. We install the lighting in real world conditions, we evaluate the real results and we prove our value proposition.

It was this exact formula which led Walgreens to recently award us the lighting for their new stores in 2009 and we are grateful to Walgreens for giving us the opportunity to demonstrate our technology and to serve them. We want to prove our value to Walgreens and look for even more opportunities to serve them in the future.

Finally, this is relative to the Energy Conservation. Given the success that we are having in our EfficientLights, we made the determination that we’re honing our bet on the EnergyLite. We are narrowing it down, trimming back some of our expenses and redirecting the majority of our resources; not all of them.

We have a couple of utility partners that we are committed to serving and we’ll continue serving and as opportunities arise, we will serve those as well, but we are moving our bet more and more toward the EfficientLights. We are very bullish on where it sits, and we are excited about the impact these additional resources can have by being invested there.

A general overall comment on the results; I’d like to point out that the results from our first three quarters, the numbers look very similar to what we achieved for all of 2007. It’s a great accomplishment by our organization across all of our functions and business units to be able to say that we’ve delivered the same output in three quarters of the time.

Lastly, let me just summarize that as we look forward, we continue to be bullish on both the needs we see developing across the energy marketplace and our proven ability to deliver solutions which satisfy those needs. We are encouraged by our strong performance this quarter and our demonstrated success at diversifying our business profitably.

As we have stated for the last several quarters, we must remain prudently cautious about the near term, given the reality of the challenging economic and capital environment. However, we have every confidence that we are in the right place at the right time and we strongly believe in our prospects for sustained, long-term profitable growth.

Once again, credit for our wonderful performance and strong position in the marketplace goes to the amazing efforts of our people who bring a steadfast focus on delivering strong value to our customers and provide the company with a major differentiator in the market.

With that, I’ll turn it over to Chris.

Chris Hutter

Thanks, Sidney. As I usually do, I’ll start with revenue and I’ll work my way down the financial statements. Revenue for the quarter was $33.6 million, up $7.3 million or 28% over the prior year period. I’d like to point out that this represents our fourth consecutive quarter of revenue over $30 million and for the last four quarters our revenues have now totaled, trailing 12, $145 million.

For the quarter, our Publix revenues were $9 million, and our non-Publix revenues were $24.6 million; again, that was an all time record for us. Importantly, our non-Publix revenue continued to show strong gains and accelerate the positive results of the last several quarters and I’d point everyone to the chart we issued in our press release, which shows the non-Publix revenue trends.

The really nice thing is that this trend demonstrates that our diversification strategy is working and as Sidney shared with you, it’s being driven by across-the-board growth as a result of the investments we’ve made to develop each of our strategic growth areas. I would encourage you to look at that chart.

Sidney went through each of our business units in detail, so I won’t repeat that, but I would like to reiterate that the growth we saw was across our entire portfolio of businesses and it was really extraordinary, particularly given that in this environment.

As the group on this call knows, companies are reporting any growth at all, right now are few and far between, but on top of this we were able to expand our gross margins by a substantial 1.5 percentage points to 32.5%. To me this tells you how we are differentiated in the marketplace and that we are adding real value to our customers’ businesses.

Since I have the mic, I’m going to pile on a little bit more and just point out that this 1.5 percentage point gain was achieved on top of a 4.4 percentage point gain delivered in last year’s third quarter, for a two year total gross margin gain of 6.9 percentage points and if you remember, just last quarter we delivered a 7.9 percentage point gain in gross margins year-over-year then as well.

Remarkably, this quarter represents the fifth consecutive quarter of gross margin gain that the PowerSecure team has delivered and should be extremely proud of. In total our third quarter gross margin was $10.9 million, an increased $2.8 million or 34% over the prior year.

Our operating expenses were another bright spot. The thing that we are most proud of related to our operating expenses is sequentially these expenses were down by $1.1 million or 10%. This is a result of decreases in sales expense from lower sequential revenues; lower personnel costs as we addressed certain areas of our organization during the second quarter, recognizing that our business continues to evolve and also recognizing the overall economic environment we are all facing; as well as a companywide focus on costs that Sidney spoke about in his comments.

As expected, our operating expenses increased over the prior year, driven by investments in G&A, infrastructure to support higher levels of revenue and projects, as well as sales and business development expense to drive our future growth and broaden our revenue base in this and future quarters and I would just add there that I think the organization has proven that it knows how to invest smartly to go get those growth opportunities.

As those that have been following us are aware, the past investors were primarily made in late 2007 and in the first quarter of 2008 and so the year-over-year increase obviously makes sense and was what we expected.

In total, our operating expenses were up $2.3 million, and I always break this down. It’s broken down as follows: General and administrative expense was up $2 million. The overwhelming majority of that is for people related costs, 62%. 16% is for rent facilities and vehicle expense. 6% is for investments we are making and continue to make in our Southern Flow business and then 16% is just for other general increases.

Our selling expense was up about $140,000, which was entirely driven by our sales compensation expense and our depreciation was up approximately $150,000, driven by our investments in Distributed Generation equipment. The net result of the gross margin gains and the operating expense investments, delivered operating income of $2 million, which was up a strong 31% over the prior year.

The major item I want to point out below operating income is the income from WaterSecure, which holds our equity interest in our water processing business in Colorado. This business continues to perform well as Sidney pointed out, and delivered a total pretax income including our fees and our equity interest of about $1 million for the quarter, which was up 29% over the prior year.

As we’ve discussed before, this business is sensitive to changes in oil and gas prices, which is what drove as sequential decrease in its income from a record second quarter, but obviously it’s still performing at very high levels. Moving down to the bottom line, all of this adds up to deliver diluted EPS of $0.17, which was up 21.4% over last year’s EPS from continuing operations.

As a last comment on the P&L, I just want to quickly run down our year-to-date revenue and profit achievements which are really strong. Revenues year-to-date of $109 million were up 47%; gross profit of $35 million was up $13.6 million or 64%, an expanded 30.4 percentage points; operating income of $6.7 million year-to-date more than tripled and EPS of $0.57 was almost double last year’s year-to-date results. Of course, all this is after removing a $14 million charge from last year’s numbers.

Now let me turn to our backlog, and as I usually do I’ll just break it down for everybody. We tried to simplify the presentation this time, so I want to make sure everybody understands it clearly. $97 million is our total backlog. That compares to the $112 million that we reported last quarter. $39 million of the $97 million is what our total backlog is for project-based work where we recognize revenue profits as those projects are completed over the course of the next three quarters in terms of what we expect to recognize.

At this point, a rough estimate of when this work will be completed is that we’ll recognize, again plus or minus, about 45% in this fourth quarter of ‘08, 30% in the first quarter of ‘09, and 25% of that $39 million in the second quarter of ‘09. $26 million of the total backlog is for longer-term project based work and in this we anticipate it will be recognized fairly evenly from the second half of 2009 through 2011.

$32 million of the total $97 million of backlog is for recurring revenue projects, which we will recognize over a 5 to 10 year period with a majority of these projects being recognized through about 2014. The $39 million, plus the $26 million, plus the $32 million is the $97 million total and again this figure compares to the $112 million we talked about last quarter, which as Sidney discussed earlier is a function of the fact that during our third quarter we completed projects at a pace that outstripped the amount of new business new contracts we signed up.

Completing our projects so well and so fast means that we did pull some revenue and we expected it to hit in our fourth quarter, back into this third quarter and this is consistent with our latest expectation on what will be completed and recognized out of our near term backlog in the fourth quarter. If you do the math you will see.

The other thing I would like to point out here is that our expectation of project timing means that we do have a nice start in terms of sales for the first two quarters of 2009 and right now we are expecting the recognition of those revenues, as you can tell to be fairly evenly spread. So we feel good about that.

Now, let me turn to our balance sheet and cash flow. The headline of the balance sheet and cash flow is that we continue to be in a very strong balance sheet and liquidity position. Our balance sheet was very steady compared to last quarter and honestly there is only a couple of major items I’m going to highlight here because it was so steady.

The first is, our cash balance at the end of the third quarter was $8.3 million. That was down slightly from the end of the second quarter which was about $10 million. That was really just driven by the timing of receipts and disbursements. I’d just add a data point there that since the end of the third quarter we’ve built our cash balance to about $12 million. So as you could tell, these fluctuations are really just normal working capital timing types of differences.

Our CapEx spend for the quarter was very modest, only $800,000, but you should expect it to pick up in the fourth quarter as we began construction on a few new recurring revenue projects. We are still expecting $20 million for the year plus or minus.

We finished the quarter with no outstanding on our $25 million revolver. However, I do want to mention that as a precaution, given the issues in the capital markets, during October, we did draw $5 million on our revolver. Again, we did this simply as a precaution and I would like to publicly say that Citibank was 100% supportive of this action. I could personally say I was incredibly impressed by their understanding of our desire to take that conservative step and we are very happy to have Citi as a great partner.

Finally, I said it last call and I’ll say it again, because I know we’ll get questions on it, but we are very much in the mode of keeping our powder dry for what we see as very significant potential recurring revenue projects in the future. We do look forward to utilizing our financial capacity to smartly grow this terrific business model and opportunity.

Net-net we remain in a very strong financial position and we are very pleased to be in a position to be able to act, as the balance sheet acts strategically, proactively and opportunistically with our capital base to grow our business.

With that, I’ll turn it back to the operator to start our Q-and-A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rob Brown - Craig-Hallum Capital.

Rob Brown - Craig-Hallum Capital

Could you comment on kind of sales trends over the recent weeks? Have they been similar to Q3? Have they gotten worse and sort of could you comment on how that gives you confidence on your backlog in ‘09?

Chris Hutter

We just had a couple of announcements two weeks ago. We were able to announce $15 million of new orders that broke out and $12 million of that was project-based, $3 million of that was recurring revenue projects. We like that mix, because it did allow us to obviously pull $12 million in that we’ll recognize near term.

Additionally, we were hugely pleased to be awarded the new contract from Walgreens to do all their stores for next year and yes, both of those events in really the last three or four weeks, yes, they have absolutely given us confidence. Now having said that, we have to add that, we are all living in an environment that we’ve never seen before.

So we are gratified we are able to get those wins. We feel like that all the discussions we are having with our utility partners and customers are strong and positive and we feel good about it.

Rob Brown - Craig-Hallum Capital

Just so I’m clear, is that backlog $15 million in total in your backlog number that you disclosed in your press release or would that be incremental?

Chris Hutter

No, it is. It is in that number.

Rob Brown - Craig-Hallum Capital

And then maybe could you give a little more color on gross margin? You had a nice improvement there. You said it was kind of getting to where you want it. How sustainable is it and what really drove that? Was it commodity? Was it vendor price? I mean just give a little color on what the drove the gross margins out performance?

Sidney Hinton

Product mix; some of our product sales are better margin. Generally speaking, we do think it’s sustainable. There is the caveat that we have some charges that are relatively fixed that aren’t charged to individual products, so they just go straight in to cost of goods sold. Therefore if revenues are up, it’s accretive to the gross margin percentage, but if revenues are down, it has a diluted effect on that gross margin percentage. That’s the primary thing we see that moves it, other than the mix of the projects themselves.

Operator

Your next question comes from Eric Stine - Northland Securities.

Eric Stine - Northland Securities

Just touching on the margins first, just so I am clear, the Southern Flow margins, I saw this quarter that was down to a level that seems a typical 23.8%. That is not something we should think about going forward, that was more hurricane-related?

Chris Hutter

We think those will bounce back. The way that the great management team at Southern Flow works their business is even though we didn’t have revenues during that period where the Gulf shut down, we continued to pay our people and those people are in that gross margin line. So that is 100% due to the fact that it was hurricane related in terms of that compression of margins. We should see that bounce back to normal levels.

Eric Stine - Northland Securities

Okay, and then just touching in the EfficientLights segment, going from 5 to 10 that’s definitely a big deal. I was just curious if you could go into Walgreens a little more in depth and just talk about how that compares to maybe the other nine pilots as far as size or how you think about it price per store and that sort of thing.

Sidney Hinton

Generally speaking, your drugstores, they don’t have as many cases as any grocery store would have, so the dollar amounts are much larger on any of the pilots associated with grocery stores. As evidenced by when we talk about it being an approaching $200 million opportunity, it gives you some feel for the orders of magnitude of some of the other pilots.

Eric Stine - Northland Securities

And then lastly and then I’ll jump back into line, can you just talk about some of the strength you had seen specifically in the switchgear segment?

Sidney Hinton

Really, it’s all technical. Our folks just may continue to make gains in niches of the market that we are able to leverage our expertise to serve and find other OEMs that come to us for our expertise to make stuff for them that they actually sell under their brands. It’s very encouraging.

We have a very understated approach to marketing in the company. We rely very much on our word of mouth and on key relationships, the utilities in our core business and on our switchgear, we take the same approach. There is major manufacturers we partner with and major utilities and then major accounts and we see that building momentum and gaining steam.

Eric Stine - Northland Securities

Okay, and let me just ask one more question. Just in light of the current environment and it sounds like given that you are doing business with the utilities that you’re somewhat insulated. Have you noticed interest in the recurring revenue in that set up increasing with no upfront costs?

Sidney Hinton

We’ve not noticed it from a utility perspective. I could say I think just at the pace of questions you probably noticed it some on the customer side. The utilities, they are fairly insulated when it comes to capital. I mean that’s the core of their business model, is earning a return on their invested capital.

So far we’ve not seen them impacted by it on their preference, but we have seen some capital restrictions at other companies and lead to questions relative to pursuing the recurring, which we obviously we are very glad to serve our customers whichever way they would like it.

Operator

Your next question comes from [Alan Dillon - Morehead Capital].

Alan Dillon - Morehead Capital

I wanted to ask you about the recurring revenue. In the backlog you list $32 million in recurring revenue. Does that include the recurring revenue projects that are already in place?

Chris Hutter

Yes, it does.

Alan Dillon - Morehead Capital

Okay, does it also include some that are booked, but haven’t necessarily been installed yet?

Chris Hutter

Exactly, it does. That’s all in that number.

Alan Dillon - Morehead Capital

Okay. Do you have the number for how much of it is already installed and running?

Chris Hutter

We decided not to break out that just because we wanted to sort of simplify it for people. The last time the only reason we broke it out, was because we added to that statistic, the revenues from the projects that we already had in place, and so we wanted to really bridge people, but we’re not going to break out on the go forward, we are just going to keep it static and simple.

Alan Dillon - Morehead Capital

Okay and also in line with the recurring revenues, you guys just generally fund the CapEx for that just out of cash-on-hand and operating cash flows?

Chris Hutter

We have, but I’d quickly add that we’ve been working very hard to make sure that of course Citibank and even others understand our business model; understand that this is not an ‘if you build it, they will come’ type of model. We don’t build our generating systems until we actually have the contracts and we’re building them on behalf of those customers to then yield those revenues.

So that business model really does lend itself very nicely to a lending and a financing situation or even a leasing situation and so while we have done it out of cash-on-hand, frankly just because we had such a strong balance sheet and took a conservative approach with that. The fact of the matter is we absolutely believe the financing is there as well, if and when we want to use it.

Alan Dillon - Morehead Capital

I just have one more question. You said that some OEMs are choosing your LED lighting systems to put into the cases from the get-go. Is that something you guys are going to get paid just directly on the sales or licensing fee for that?

Sidney Hinton

We actually sell only the fixture.

Alan Dillon - Morehead Capital

Okay, but you wouldn’t get any service fees for it like you do for retrofitting in the stores?

Sidney Hinton

Our revenue is really the same other than the installation part. On our EfficientLights, a lot of those sales, actually we just sell the fixture and a third party installs them.

Operator

Your next question comes from David Wright - Henry Investment Trust.

David Wright - Henry Investment Trust

I have a question about one of your risk factors; risk of changes in utility tariff structures. Is that risk primarily if the tariffs were to go down?

Sidney Hinton

I would characterize it as an opportunity if they go up.

David Wright - Henry Investment Trust

That’s what always trying to get to, the….

Sidney Hinton

That’s the risk we were identifying there, is that in regulated markets utilities can change their tariffs. There is an inherent reluctance to do that and that it impacts their business customers, which typically are their largest customers, but there is no statutory requirement that they can’t. So they may have to go through the public service commission, that’s why we identified that as a risk. It’s an opportunity that we don’t talk about.

David Wright - Henry Investment Trust

If they raise tariffs, it’s a potential opportunity?

Sidney Hinton

Yes, sir.

Operator

Your next question comes from Benjamin Burditt - Special Situations Fund.

Benjamin Burditt - Special Situations Fund

Just one quick question; was just did the $12 million cash balance a few weeks ago include the $5 million drawdown?

Chris Hutter

No, I’m sorry. That’s a great question Benji, appreciate it. No, the $12 million frankly was I believe was as of Friday. We actually paid down the $5 million today. So no, it was $17 million with a $5 million drawdown.

Operator

Your next question comes from William Bremer - Maxim Group.

William Bremer - Maxim Group

Yes Chris, you just pretty much referenced the question I just had regarding the $12 million and the $5 million. So as of right now, where is cash stand, it’s $12 million?

Chris Hutter

Correct and with no draw.

William Bremer - Maxim Group

And debt on hand is still $2.7 million?

Chris Hutter

Yes, which is really just a very small long term, term loan really just acting as a mortgage on when we bought our headquarters building.

William Bremer - Maxim Group

Okay and just a little housekeeping; stock based comp for the quarter?

Chris Hutter

Stock based comp for the quarter was $360,000.

William Bremer - Maxim Group

Okay and Sidney, I would assume on a geographic level, what is your take on Walgreens? Where do you think we are going to see the first implementation and installation of your fixture?

Sidney Hinton

I’m not sure geographically, because these are new locations, but in terms of timing, we’ve already done some pilot stores and they are leasing facilities to us pretty imminently.

Operator

Your next question comes from [Frosty Temple - Unidentified Company].

Frosty Temple - Unidentified Company

I wanted to just kind of review where we are and get your feelings on this. The stock is $3. You have net cash, no debt and significantly profitable and growing. The margins are expanding; high returns on capital; can you talk a little bit about the recurring revenue stream, how it’s growing and why you want to grow that?

Then maybe secondly, just kind of talk about Sidney, and this was kind of touched on, but maybe it should be reiterated because I don’t remember exactly the answer. In your discussions now with folks, they continue to seem to be excited about the opportunity, not excited about the opportunity, they still see the value added to it; what are you seeing in the last six weeks, two months, something like that?

Sidney Hinton

Let me answer the last part of the question, and I’ll let Chris answer the first part; let me jump on it first. Relative to the customer sentiment, I would say that we are cautious and aware. We are aware of the credit markets and aware of the economic environment and that instills in us a caution, to make sure we’re not hearing what we want to hear and trying to discern what are we really seeing. From our perspective it’s been very difficult to discern any change in pattern or behavior.

We’d like to think that that’s somewhat a reflection, as the earlier caller mentioned about us being somewhat insulated through our relationships with utilities, but we do realize that in our major accounts it’s true, but we think we already saw some of that slow down we talked about it in the last quarter. Specifically, we know we’ve seen it in the EfficientLights that we genuinely believe we would have had substantial orders except for the contraction in capital allocation at these retailers.

We’ve not seen any further retraction. We are optimistic, but cautious. Cautious not to wish our way into something, but optimistic based on what we are seeing and hearing.

Chris Hutter

Frosty, I’ll take the first part of your question, which I’ll try to do it. If I miss the mark, come back to me, but I think what you were asking was do you guys believe in your future? I think it’s basically an allocation and capital question. Did you feel any differently with the stock at $3, going after that recurring revenue model and that is a good use of capital and the answer is we feel exactly the same.

We think that being able to provide that option to customers is very important in the marketplace, but also we think that using our balance sheet to line some current revenue into our P&L makes a whole lot of sense. We think that ultimately the market will reward us for that, particularly because from a P&L standpoint those recurring revenues do come in at much higher margins than the project based business.

So there really is no change in terms of how we think about uses of capital and basic strategy around that opportunity.

Frosty Temple - Unidentified Company

No, no, no; look as a shareholder I want you to print as much recurring business as you can. I was more gearing it towards, can you tell me what the growth has been year-over-year and sequentially and what we are seeing visibility wise in recurring revenue?

Then secondly and my question about the demand level is, is the current economic crisis something -- and I don’t know how it’s going to play out, but it would seem to me that the returns and the ROIC on these projects is so high that a CFO goes to an executive committee and says look this is what I want to do and I don’t have to have any out-of-pocket expense by the way guys; they will do it for us. Obviously, I want you guys to print as much as you can of it, but does any of that make sense?

(1) Can you tell me how it’s growing and (2) should the tougher economic times maybe push people in little more towards it?

Sidney Hinton

I’ll let Chris do the growth and I’ll address what we’re seeing in the marketplace. As I have said earlier; the utilities, we’re not seeing any indication that it’s pushing them one way or the other. They will have a bias, an existing bias. They will either favor a purchase power agreement or they will favor an investment in assets and it really is utility specific, but we have seen some, at least we perceive. It might be us seeing what we want to see. We perceive a higher interest in it from the customer side, the end use customer side having a recurring payment to us versus a capital expenditure on the front side.

Chris Hutter

And absolutely from a growth standpoint there is no question it’s growing; it’s growing nicely. All the recurring revenue projects we’ve announced this year, that’s growth. Those are projects that of course it is on a small base. It continues to be a small base, but even just the announcements we made two weeks ago, all that’s incremental and all that’s growth and without that option, you can question whether we would have received those revenues. So yes, it’s growing nicely; still on a small base, but we are very happy with it.

Sidney Hinton

I think it’s a good point, just to echo Chris’s statement. One thing, we do not believe at this point that the recurring has cannibalized the projects sale. We believe it’s enabled a sale that would not have taken place, which is encouraging.

There is a risk that you just cannibalized your current sales and spread it, which is fine. I mean we’ve conditioned the market today, and we’ve conditioned ourselves for it, but thus far, it appears to us to have got deals to close that would not have closed otherwise.

Operator

Ladies and gentlemen, this will conclude the Q-and-A session for today. I would now like to turn the call over to a PowerSecure’s Chief Financial Officer, Mr. Chris Hutter; please proceed.

Chris Hutter

Great and Sidney’s got some closing remarks.

Sidney Hinton

We’re pleased to be able to report another strong quarter and we pray that we are blessed to be able to continue reporting great quarters like these. Importantly, I emphasize our growth across all four of our strategic growth areas: Distributed Generation, Utility Infrastructure, Energy Conservation and Efficiency and Energy Services.

I emphasize that we have continued to build a strong business outside of Publix. Again very, very grateful for the business we have with Publix, very grateful for the relationship we have with them, and very excited to be able to demonstrate the record results of non-Publix revenues.

We are pleased that we’re blessed to have such an amazing team of people. People that know how to go out and grow the top line, while simultaneously expanding the gross margin level, and delivering bottom-line results.

Looking forward, we continue to be bullish on both the needs we see developing across the energy marketplace and our proven ability to deliver solutions which satisfy those needs. We do reiterate that we must remain prudently cautious about the near term, given the reality of the challenging in economic and capital environments, but we strongly believe in our prospects for sustained long term profitable growth and that we are in the right place at the right time.

Again, credit for our wonderful performance and our strong position in the marketplace goes to the amazing efforts of our amazing people, both who bring us steadfast focus on delivering strong value to our customers and makes us a force in the marketplace and differentiates us from people out there.

We also thank the vendors that support us, the customers across the board that have believed in us and afford us the opportunity. We thank our Board for believing in us to giving this opportunity and we thank you our investors for believing in us and giving us the opportunity.

With that, one more thing I’d like to do; I’d like to give a special thank you to Mickey Briggs, our long term Board member and sage who recently retired for health reasons. Mickey, I want you to know we are praying for you and we cannot thank you enough for the contributions you’ve made to this company. There is no bigger supporter, there is no bigger fan of PowerSecure than Mickey Briggs and we will miss you.

Thank you for your time and your interest. Good-bye.

Operator

Ladies and gentlemen, this will conclude the presentation for today. You may now all disconnect. Good day.

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Source: PowerSecure International Inc Q3 2008 Earnings Call Transcript

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