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PowerSecure International, Inc. (NYSE:POWR)

Q1 2013 Earnings Conference Call

May 8, 2013 5:30 p.m. ET

Executives

John Bluth – Senior Vice President, Investor Relations

Sidney Hinton – Chief Executive Officer

Chris Hutter – Chief Financial Officer

Analysts

Rob Brown - Lake Street Capital Markets

Eric Stine - Craig-Hallum

William Bremer - Maxim Group

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2013 PowerSecure conference call. My name is Shantley and I will be your facilitator for today’s call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. John Bluth, Senior Vice President of Investor Relations and Corporate Communications. Please proceed, sir.

John Bluth

Thank you very much Shantley and thank you all for joining us today for our first quarter 2013 earnings call. Joining me on the call from the PowerSecure management team are Sidney Hinton, our Chief Executive Officer and Chris Hutter, our Chief Financial Officer

Before we begin, I want to remind you that during the course of the discussion today we expect to make forward-looking statements under the Safe Harbor provisions of the federal securities laws. These are all statements other than historical facts, including statements concerning the future business, financial results and outlook of the company. Forward-looking statements are based on the current expectations and beliefs of management, but are not guarantees of future performance or events and they are subject to risks, uncertainties and other factors including those discussed in the company's SEC filings, as well as on the call today and in the earnings release, which could cause actual results to differ materially from those projected or implied. The company assumes no duty to update forward-looking statements.

Now I’d like to turn the call over to Sidney, who will provide a business overview, then Chris will walk you through our financial results and then we’ll open the call to Q&A.

Sidney Hinton

Thank you, John, and thanks to all of you for joining us today. We appreciate your interest in PowerSecure. The preponderance of our audience today is from the investment community but we do have some others on the call and before we get started addressing the investors, I would like to address our utility partners that we see on call as well as some of our key customers who are on the call. Let me just convey how much we appreciate the opportunity to serve each of you. We count it a great blessing and a great honor to serve you and we are striving to earn your deepest respect every day. And again, we appreciate very very much your support. With that let me turn back and the rest of the conversation is going to be directed to our investors.

2013 is off to an outstanding start for PowerSecure. We are excited to discuss the first quarter results with you. We continue to see strong performance and we want to highlight five key areas. First, the bottom line leverage that we began to deliver throughout 2012 has continued into the first quarter of 2013. We reported earnings per share of $0.04 this quarter as compared to a loss of $0.03 in the first quarter of 2012. Our operating profit increased 6.1 percentage points year-over-year and we are looking forward to a continuing bottom line strength going forward.

Second, top line growth in the quarter was very strong. More than 35% year-over-year to $45 million. Our exceptional 67% year-over-year increase in DG revenues and 51% year-over-year increase in utility services revenues were the key drivers for the growth. Third, as this growing revenue comes out of backlog, we are also quickly replenishing it and growing the backlog. Our record backlog -- our backlog now stands at a record of $206 million, that provides us with excellent visibility for the rest of the year and confidence going forward. And let me just say that we had a record quarter for revenues for our first quarter of $45 million. We are sitting here with a record backlog of $206 million. Particularly to our analysts, we anticipate that we will have a record second quarter in revenues and we anticipate that we will have a new record backlog when we do this same call in 90 days from now

Fourth, our record performance in 2012 and the momentum we had in 2013, we are checking ahead of the schedule that we put together for our strategic plan of reaching $300 million in sales by 2015, ahead of schedule. Sorry, I think I have butchered those dates but ahead of schedule there. And fifth, our acquisitions, the solar, ESCO and Solais. First, we are pleased we have it all done. Everyone of them -- Solais is new but they have hit the ground running. ESCO, we reported our first results here, there is one month of their results in these. We have been very impressed and I will talk about it more later and our solar is doing very well also. But the acquisitions, they give us catalyst for more growth and we are very pleased with their performance. And the people, most of the all I would say the people that came with those acquisitions, their skills and talents and their ability to create value for you our investors, as well as for you our customers that are on the phone.

In our fourth quarter conference call back in March, we told you we have never been positioned as strongly for a year as we were going into 2013. And our first quarter results reflect the execution that we expected to deliver. Once again, the quarter was driven exceptional growth in distributed generation and utility infrastructure businesses. Our energy efficiency business performed as we expected and had described to you, and we expect our recent acquisition of Solais will change the game for us relative to our potential lighting business going forward.

We have been focused on improving our operating margins towards our 2015 goal of mid-double digits. So we are very happy to be able to see and report a 6.1 percentage point increase year-over-year in our operating margins. The effect of, one, strong top line growth; two, a 1.8 percentage point increase in gross margins to 30.6; and third, a 4.3 percentage point reduction in operating expenses as a percentage of revenue which includes the benefits from our cost reduction, are all combining to drive higher operating margins. Two things, the first quarter, one, it delivered outstanding financial results, and two, we significantly increased our backlog through the strong order flow as well as the ESCO acquisition. Both positioning us and strengthening our confidence for 2013.

Before Chris expands on our financial results and backlog development, I would like to share some additional perspective on the three divisions, key areas. And we will started with distributed generation. In the first quarter our distributed generation revenues grew by more than 67% to $21 million. This growth was driven by continued success in the hospital market, industrial and manufacturing projects, municipal installations, and additional deployments with major grocery customers as well as some contribution from our solar projects.

In our most recent press release announcing the addition of $60 million to our revenue backlog, you saw that we added $36 million of new business on top of the $24 million that we moved into backlog from the ESCO acquisition. Of the $36 million in new business, over half of it came from distributed generation. I say this to highlight for you that our DG pipeline is extremely robust right now and the range of opportunities we are pursuing and winning is very diverse across our customer base. From grocery stores to hospitals, and we have talked about hospitals call after call. We continue to see that segment building force. We are very bullish on it. To our industrial customers, to the solar to micro-grid, we have blessed to get traction in our micro-grid efforts as well as in our data center opportunities.

We have an incredibly differentiated offering in the marketplace, best in class reliability performance, and we continue to deliver technology innovations and significant economic environmental value to our customers. Our modular PowerBlock generators and our complete solution including switchgear, peak shaving, and turnkey monitoring offers a compelling return on investment that enables our customers to obtain more than just using the system for backup. It allows them to obtain the economic benefit of peak shaving in working with the utilities.

We are excited about the opportunity to engage our ESCO customers relative to the opportunities they have to integrate peak shaving with their existing customers. It's a high value proposition and one that we are looking forward to bring in to bear in that market. This is a medium term type of opportunity. It's something we expect to see bear fruit late in this year or in 2014, just looking at the development cycle of the ESCOs and their proposals with their customers. Overall, the breadth and depth and continued potential of the DG business has never been stronger.

Now let's move on to utility infrastructure. In the first quarter our utility infrastructure revenues increased by 51% year-over-year. Let me just point out, Ronnie runs that business. Does an amazing job, him and his team. Huge kudos to them. They are almost -- they remind me of [Lu Garic] and the heating street. They just do it quarter after quarter after quarter, build and build and build, execute, execute and execute. Just phenomenal job by Ronnie and the team. The performance, the 51% year-over-year increase, that follows a 40% year-over-year growth in the fourth quarter of last year. We continue to see tremendous demand for transmission and distribution work with many of our largest, I will use investor owned utilities.

For our analysts, I will make a point right here and I want to call it out for you. I don’t want to just glance it and I will make sure you don’t miss it. The strength of those utility relationships, you will notice when you look at our backlog, our record $206 million. There is only $7 million, I believe of those $15 million last time we reported in long-term backlog. We are anticipating being blessed to win a very large contract that will greatly increase that number of 7. And it's with that investor-owned utility customer base (inaudible), a utility we are already serving and it's renewal time and that’s part of the region the decline in it is, you use it up as you go forward. But it's an opportunity we are bullish on. We can't say for sure we are getting it but it looks really good sitting here today. And I would put that in our category that we have used in the past of tipping our hand.

The new business we are winning in the utility infrastructure has a broad geographic footprint. It includes -- it has a broad scope of work as well. It includes new engineering work, new substations, new transmission and new distribution. The demand from the energy companies for new transmission capacity continues to be a key driver for us. We see the tremendous momentum that we have in the utility infrastructure business continuing all through 2013 and all through 2014. We are very bullish on it. Much as we said on the DG that has never been stronger, we definitely would say the same thing about the utility infrastructure. We are very very excited about where we sit.

All right. Moving to the third. While our distributed generation and utility infrastructure businesses grew by 67% and 51% year-over-year respectively, the area of business that looks a little different is our energy efficiency business, which as we expected was soft in Q1. Based on the buying patterns of our grocery customers over the past few quarters and the year-over-year decline in our energy efficiency LEDs, our decline in energy efficiency sales year-over-year was in line with our expectations as we had talked about in our last conference call, just relative to that market being soft.

That said, we do anticipate that this market will gain momentum in the second half of the year and that our anticipate is not just based on hope, it's based on the dialogue we are having with those customers who have historically proven to be pretty accurate as well flat out the backlog. That we have backlog associated with that work, so we have every reason to believe it will increase in the second half of the year. That being said, the real game changer for us or game changers for us in the energy efficiency space are our acquisitions of ESCO and Solais.

Let me talk about Solais and then I will talk about ESCO. Those of you who have had a chance to visit with Solais at LIGHTFAIR in Philadelphia last month, got a firsthand look that we why we are so excited about the transaction. Solais has a proprietary portfolio of LED lamps and fixtures for commercial and industrial applications. Solais' innovative designs provide their products with superior light output, great energy efficiency, superior thermal management, optics and light quality, as well as strong aesthetics. We see strong revenue upside with the Solais product line. But as we said on the call when we announced the deal acquiring the company, make no mistake, we did the Solais deal to improve our margins on our existing product line by applying their sourcing and manufacturing expertise.

We have already moved immediately to implement their sourcing and manufacturing expertise with our products and we are optimistic that we will see the impact start to show up in the third quarter, when we report the third quarter financial results. Staying on Solais, as we discussed, we expect the transaction to be slightly accretive to revenues and earnings in 2013, and substantially accretive in subsequent years. As we said before, we are expecting 2014 for it to be at 10% or $0.10 EPS. Again, I was just repeating what we have already said on the prior.

Now moving to ESCO. The revenues from our ESCO business will also bolster and boost the energy efficiency results. We are excited -- no, we were excited to announce the $24 million addition to our backlog. And by the way I am sure you all know we said there is $27 million of contract when we bought it, we fully expect to get the rest of it. It's just paperwork and process time. But the really cool thing about the business is, is continue to -- it's a vibrant and growing and dynamic business. Great leadership came with it, great leadership. We couldn’t be more pleased with the leadership team there. And of the really exciting things that we have been blessed to see already is, a couple of million dollars of brand new sales. Sales that came out of the $75 million pipeline and in to the new business.

And the other thing is, we have been blessed to see the pipeline in itself grow. It has grown by more than 20% since the acquisition. As you all know, we are not having our reporting pipelines. They are just so easily manipulated. In this case though, it's exciting to see what they are adding, it's exciting to see how the customers have accepted. And it really it's exciting by being able to serve those customers with a balance sheet and bonding, there is a lot of opportunity out there. And we have a team in place that can do the work and can go chase it and win it. Great team that came over.

All right. Right before I turn it over, I'd just say, we said entering 2013 we were in the best position the company had been in heading into a year, and after our first quarter results as well as the strong backlog, we continue to be excited, very excited about this year. In fact, I will say we are even more excited than we were last time. It's just a higher confidence factor which was already high. But we are not only excited about 2013, we are excited about both the 2014 and the long-term trajectory of the business as well.

With that I will turn it over to Chris.

Chris Hutter

Great. Thanks, Sidney. I am going to go through my normal structure here. I am going to focus my comments on the highlights of the P&L, including trends in our revenue gross margins and operating expenses. I will break down our backlog as I usually do, so you can get a feel for how our revenues are likely to be realized in the upcoming quarters. I will talk about our balance sheet metrics including, our cash, our debt and our CapEx, and then wrap up.

I will start with an overview of our results for the quarter. Our first quarter financial performance got the year up to a great start and continues to built on the momentum we carried, really from 2011 into 2012 and now into 2013. It's been a really nice, consistent run, and as Sidney said, we continue to be focused obviously well beyond 2013 both in terms of the top line and the bottom line, in terms of the progress we have made. And as Sidney noted, a record backlog reflecting new business we continue to win, provides us with very high confidence moving forward.

Our total revenue for the first quarter was $45 million. That compares to $33.2 million in last year's first quarter and represents a 35.5% increase. In terms of our revenue performance by product and service area, I'd just direct you to the revenue chart in our earnings release which breaks our revenue and growth in each of those areas, with the highlights being that you have here DG growth of 68% and the utility services growth of 51%, drove our strong first quarter results and offset the anticipated softness in our energy efficiency area.

I also reiterate our first quarter trifecta. With our gross margin expanding 1.8 percentage points, our operating expenses lower as a percentage of revenue by 4.3 percentage points, and of course adding up to our operating margin expansion of an impressive 6.1 percentage point, highlighting the operating leverage or unlocking in our business as our revenues continue to grow. As we noted last quarter, we are also now reporting EBITDA to give you another metric to assess the business. In the first quarter, EBITDA was $2.8 million. That was a six fold increase from the first quarter of 2012. And we continue to expect our EBITDA to double in 2013 compared to 2012 and be in excess of $20 million. And you will note on the back of the earnings release, we lay out our calculation of EBITDA for the first time in those non-GAAP financial measures. So I direct you all to that to see the calculations. But again, very good numbers.

Next point. We are now well underway with the integration of our ESCO business. As you saw from the conversion of $24 million from our acquired contracts into our revenue backlog, and the announcement that we made I guess two weeks ago. And with our ESCO business off and running and our recent acquisition of Solais, I will discuss how we see the business flowing for the remainder of the year. For 2013, looking forward we expect to continue generating healthy gross margins and continued operating margin improvement. As we discussed on our ESCO acquisition call, gross margins from the ESCO business are lower than our company average and blending them into our P&L means that our new gross margin levels are likely to be in the upper 20% to touching 30% range. A number we expect to lift as we work in to 2014 and beyond, really by four major levers.

First, bringing our higher margin DG and LED solutions through the ESCO channel which we have talked about on both the ESCO acquisition call and then Sidney again today. Second, our manufacturing and sourcing efficiencies in our LED business that we expect to gain as a result of our Solais acquisition. Third, continuing to build our high margin DG recurring revenue business. And in addition to Sidney's comments there in terms of our overall DG pipeline, our recurring revenue pipeline is also looking very positive right now.

And last, continuing to realize increased in the percentage of our turnkey DG revenue mix and incorporate to our products such as PowerBlock DG systems. In addition, as we move through 2013 and beyond, we expect to see continued improvement in operating margins and EPS as revenues scale. We continue reducing operating expenses as a percentage of revenues and we began to capture the manufacturing efficiencies we expect to realize again from our Solais acquisition.

Next point. Our operating expenses in the first quarter were $12.7 million. This represents an absolute increase of $1.9 million. However, operating expenses as a percentage of revenue declined 4.3 percentage year-over-year, partially driven by the cost reduction program we successfully implemented at the end of last year. At the end of 2012. The $1.9 million increase consisted of $600,000 of incremental operating expenses related to our solar acquisition we made in June 2012. $500,000 of incremental operating expenses related to the ESCO business operations which we acquired in late February of this year. And $400,000 of incremental depreciation and amortization expense primarily driven by additional CapEx related to company owned DG projects as well as investments in utility and infrastructure equipment to support that growing business.

And the last element of that increase was $400,000 of increases in personal and other cost to support and deliver our strong first quarter 2013 revenue growth including investments in sales which we have been talking about for the last few quarters. Next point, we set our operating expenses to be in the low $14 million per quarter range throughout the year, plus or minus, which is up approximately $1.5, maybe a little more from first quarter levels, which is driven by the addition of our ESCO and Solais acquisitions.

In addition, we expect approximately $500,000 of transaction expenses related to the Solais acquisition, to be incurred in our second quarter. And we will obviously call this out in our numbers when we report our second quarter. But if I were you I would just go ahead and bake that in. It's a pretty good number. And finally, our EPS for the quarter was $0.04. That’s an increase of $0.07. $0.07 compared to a loss of $0.03 in the first quarter of 2012.

All right. Switching gears. I am looking at our revenue backlog. As of today, or backlog stands at a record $206 million. This compares to $183 million at the time of our last earnings release in March, and $151 million a year ago. So $55 million more than where we stood a year ago in terms of backlog. This visibility in our future revenues provides us with a strong foundation for 2013. You can see from our revenue performance in Q1, our revenues are very strong. But the strength of the new business coming in, especially DG and utility infrastructure, continues to replenish and grow our backlog.

As we described in the earnings press release, we breakdown our backlog in to three categories. Our near term backlog, our project based work including [those] for our DG, utility infrastructure and energy efficiency product and services, that we expect to recognize over the course of the next three quarters. Longer-term project based work that we anticipate will be recognize fairly evenly from the first quarter 2014 through 2015. And the third element is long-term recurrent revenues that we expect to recognize over the next 7 to 10 years.

If you look at our backlog number of $206 million, a $132 million of that is near term backlog, which is an all time record and tells you that we are expecting very good near term quarterly results. Specifically, we estimate that 37.5% of this near term backlog will be recognized in the second quarter. 37.5% will be recognized in the third quarter, and 25% will be recognized in the fourth quarter of 2013. Of course as we always say, projects can and do move in both directions. But these are our current estimates and this is the way we think that that revenue will be recognized into the P&L.

The next component, our longer-term backlog which includes longer-term project based work that we anticipate will be recognized fairly evenly from 2014 through 2015, currently stands at $7 million. Sidney talked about that, we feel positive about that we are in position to have a fairly large award here that will replenish that, related to an existing major utility that we are serving. And the last component is $67 million of long term recurring revenues. So again, $132 million of near-term project based backlog, $7 million of longer-term project based backlog, and $67 million of longer-term recurring revenue, totals the record $206 million backlog.

A simple formula to use our backlog as a basis to model our revenues over the next three quarters, is take our near-term project based backlog, the $132 million, spread it according to the estimated percentages I just described. 37.5% in 2Q, 37.5% in 3Q, 25% in 4Q. Add approximately $6 million to $7 million of revenue in each quarter to account for recurring and other regular revenues that we do not include in that project based backlog bucket. And those of you who have been following us for a while will note that I just tweaked this up from what I usually say is about $5 million. And the truth is, the scale of our business just continues to grow.

And lastly, layer in and make assumptions about additional project sales you expect we will make and complete between now and the period you are estimating to add to that quarterly revenue number. Obviously, the window of selling time impact of coming quarters increases the further out you are projecting, and so you should have bigger numbers in there the further out you go in terms of the additional revenue. If you apply this approach, you will see one of the reasons why we are so confident in the remainder of 2013. And what Sidney talked about, the second quarter being both a record revenue number but also we expect another record backlog number as well.

Turning now to our balance sheet. Next subject which finished the quarter is almost a mirror image of our fourth quarter 2012. Our cash balance at the end of the first quarter was $18.2 million. In the quarter we invested $1.3 million in CapEx, about $0.5 million to deploy systems to support our long-term recurring revenue projects for DG. And the remaining $100,000 primarily to purchase equipment for our growing utility infrastructure business. As I mentioned earlier, looking out into 2013 we expect to generate more than $20 million EBITDA this year and we are expecting CapEx in the $8 million range for the year still. So to summarize, we are thrilled with our financial performance in the first quarter. We are very excited about how our backlog growth sets us up for success as we work through 2013. Our DG and utility services business continue to grow rapidly. And our recent Solais and ESCO acquisitions are strong additions.

We are on an excellent path towards our achieving our 2015 goals of $300 million in revenue with double-digit operating margins. And they were 2015 goals when we set them out in 2010, and the truth is, where we sit today, we are certainly on pace to accelerate that $300 million and achieve that earlier, and of course double-digit margins, I forgot to mention that key goal as well.

And now that really summarizes my comments. Operator, we can start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rob Brown. Please proceed.

Rob Brown - Lake Street Capital Markets

I just wanted to clarify your gross margin commentary. You said the business was sort of trending on that 30% range, so I guess just sort of near term and where does it sort of start out at and how does it kind of grow. Just give us a little sense there, please.

Chris Hutter

Yeah. We think we will be in the high upper 20s. Very well could tough 30 for the second quarter. But then stay in that, again, in the high 20s through the third and fourth quarter. And Rob, that really is the blending, right. The blending in of the ESCO business which is worth right about 1.5 in terms of the blend down on our base gross margins, which as we talked about before we are sort of in that 32% range, low 30 type range. So that’s where we think it settles out. We have got some drivers. As we have talked about, some strategic drivers to work that upward. But we want to be clear in terms of the blend in now that we have finished the quarter and we have had a chance to step back and make sure we assess how we think that’s going to flow as we work through the year.

Obviously, the flip side of that is, revenues are very strong and so the incremental revenues from not only these acquisitions but from the sheer pace of revenue, will obviously offset that as we work through the year. But it's just a little bit of a different fundamental structure.

Sidney Hinton

The other thing I would just point out on the margins would be the solar. Very little solar revenue in Q1, but as solar comes in, it's a 20%-25% gross margin business. It dilutes it down too, so to extent that the ESCO and the solar are heavy in a given quarter. The good news is, the rest of the business is doing great so the revenues will be wonderful but it will have a muting effect on the gross margins. They are not in lieu of other revenues, they are just in addition to other revenues. So it should offset any impact on earnings. But it will show up on the gross margin line.

Chris Hutter

And the other things is, we are obviously expecting our operating margin to continue to expand as well. So from an absolute perspective, we expect the same type of volume in terms of profit volume. So we are not expecting any impact on EPS which tells you we continue to expect to drive that operating leverage.

Rob Brown - Lake Street Capital Markets

Okay. That was good. And then on the ESCO business, how much your revenue growth is being held by the ESCO business? I would assume it's....?

Sidney Hinton

In the first quarter?

Rob Brown - Lake Street Capital Markets

No. Sort of for the next couple of quarters and maybe where you are at in that leverage of the ESCO business?

Chris Hutter

Yeah, right about $9 million a quarter is what we have assumed.

Sidney Hinton

Hardly anything in this first quarter.

Chris Hutter

It's about $900,000 in the first quarter and we are assuming about $9 million per quarter, Rob, for each of 2Q through 4Q. And that’s very consistent with what we suggested we would expect when we bought the business and had that call. So nothing has changed there. In fact....

Sidney Hinton

Confidence.

Chris Hutter

Yeah. The fact that we have obviously gotten all those contracts situated. We are confident enough now to put that in the backlog as you saw two weeks ago. We feel very good about that, about that revenue stream. And by the way, selling in behind it as well. So right now the assumption is $9 million a quarter. Could we do better than that? We could.

Rob Brown - Lake Street Capital Markets

Okay. Yeah. Maybe I will ask a question there. Are you starting to see that sell-through happen in terms of the LED business and the DG business?

Sidney Hinton

No.

Rob Brown - Lake Street Capital Markets

Are you getting some pull-through in there yet or not?

Sidney Hinton

No, not in terms of actual revenues. They have this baked [book log] of $27 million in contracts that are pretty well cashed with suppliers. You know the suppliers work with them to develop and we are certainly supportive of that. We wouldn’t want to lose a piece of business to someone else. So it's really -- the time we will pull that, have our products go in, is after that $27 million in the new stuff. That’s when you will start to see it come in. Very little pull-through and certainly not in Q2 or Q3, possibly some showing up in Q4, but more likely than not showing up in Q1 of '14.

Operator

Your next question comes from the line of Eric Stine of Craig-Hallum. Please proceed.

Eric Stine - Craig-Hallum

Just hoping we could stick with the ESCO services business. And I am just curious, I mean it's long lead time stuff, in the commentary you just said as far as pull-through. But just curious, what type of feedback you are getting, I guess in particular on DG because that seems to be a pretty unique offering for that channel?

Sidney Hinton

I will say modest feedback in terms of quantity. Just because truthfully, they spend the 60 days since we have done the acquisition, literally consume (inaudible). If you imagine $27 million worth of work that would stop, I mean it was -- it's been queuing up. It's like a logjam in a river, nothing going through. And when that logjam finally broke, all those logs had to go through in it and they have been touching and working that. And so from a quantity of time, not that much time has been spent with to measure ESCO, but in terms of quality, when we [brushed] it with them, is favorably received. But I would tell you that we have got work to do to educate them on the opportunities. There are one or two opportunities that have already kicked up, that we were able to jump right home, for school districts. But it fits incredibly well with how they do business. So it's something we anticipate or have traction. And based on our initial feedback, we know they are interested in it but we have had the quantity of discussions that we want to have, that we would like to have over time. But right now we are just consumed with execution.

Eric Stine - Craig-Hallum

Okay. Understood. So the commentary about the increased size of the pipeline, that’s really based on their current (inaudible) statements in your....?

Sidney Hinton

Absolutely. Yeah, it very much is. And which is a huge testament to them to go from being -- imagine somebody that owns a railroad and you have to travel on and they can't get the darn thing clear of logs. And as they bust the dam and all these logs and people immediately [trust] them to throw more logs in up river. That really does speak volume of them, that they are already seeing that type of flow of opportunities. I would like to say it speaks volumes of us but we will be robbing them of their due praise. It's their reputation and their ability.

Eric Stine - Craig-Hallum

Okay. So you are additive to that but it maybe....

Sidney Hinton

Additive down the road....

Eric Stine - Craig-Hallum

Yeah, down the road.

Sidney Hinton

I think the first thing we will do is be able to put LED products in. But candidly, we have got -- use Solais' expertise to get our cost there and then to get all our certifications in place so that our solutions are acceptable. We know they are from a quality and performance standpoint but we have to get the documentation in place as well. I think it will be probably the fourth quarter time we see that show up in the ESCO business at all on that, and probably the first quarter before we see the DG stuff start showing up.

Eric Stine - Craig-Hallum

Okay. That helps. Maybe just turning to the order commentary. Obviously very bullish, sounds like it's broad-based and you talked about the one opportunity. But just curious, some of the large opportunities you have talked about those the last few quarters. That’s certainly different than maybe a year and a half, two year ago. So maybe where things stand in terms of those opportunities?

Sidney Hinton

Yeah. The wonderful things is, and I need to call in a term so I can describe those type of opportunities, but we don’t have any of those baked into our forecast. This one that we just discussed is baked to our forecast. We have already served them and we have served them well. We have got good report cards from them. We are anticipating, we are not expecting but we are anticipating, based on feedback we anticipate that we will be blessed to get an extension. That is baked in. But it's unbelievable, the big opportunities we are blessed to be chasing. Whether that be a micro-grid opportunity on a island, big stuff. You know stuff that's $20 million to $50 million of [pop]. And that where we definitely are the technology leaders and thought leaders, and it's just finding a way where in to get the margins we require to do business. And that I think we take a very healthy view of business.

If I give you a ten-year warranty but I am not around to do business for three years, my ten-year warranty is really a three-year warranty. And we are committed. When we write ten-year warranty, we are committed to be in there for ten-years. We will go price our work in a way that reflects that and it may mean we don’t win some of those opportunities but we are taking a long-team healthy view of creating them. And definitely people are seeing our value there but we are seeing huge opportunities just on a scale that we have never seen over in utility infrastructure. We are seeing it in the DG business, we had he micro-grid, we have solar. Candidly, behind specific utilities. Just big opportunities that as we have grown in scale and track record, it gives people confidence to project that on a broader platform. It's just very exciting. And we actually see some big scale opportunities in the LED business. Not as big as the others, mainly because the unit prices are so much smaller. The volume of units you would have to sell to get it to be a $20 million, $50 million, $60 million single customer opportunity would be significant. But we are very excited about it. Hopefully that helps, Eric.

Eric Stine - Craig-Hallum

It does. And then, I mean, really, if you went back two years, you were not shaping those type of opportunities.

Sidney Hinton

No way. No way. I mean we just didn’t. No. It's wonderful. We chased those. We know we have the competency to deliver, we have the competency to price, we have the competency to assess the risk. We have the competency to be able to convey to the customer. I am confident we have won their hearts on these solutions. I can't say we will win the business. You know they may end up particularly on some of the stuff around the micro-gird; they may take some of our ideas and try to build with somebody else to save money. But in the long haul, they will end back at our door. Whom you want doing the work? The person who invented it or somebody who is copying it. I am confident over the next three to five years they will be at our door. Perhaps we will win these right out off the shoe. If we do, they are completely accretive to our business. So it's nothing that we have baked in.

Eric Stine - Craig-Hallum

Okay. Maybe just -- let me sneak in one more. Just on utility infrastructure. Really strong quarter, strong outlook. I mean do you anticipate at any point, just on the equipment side that ability to get equipment could limit that business, or is that something you think you have a handle on.

Sidney Hinton

No, I am thinking you are very insightful, Eric. You must follow this business besides us. And in terms of that segment, we could get all the distribution equipment we want. We could get all the underground equipment we want. We could build by the cranes all the way we want to build substations. I can tell you what's hard to get, and that’s the transmission equipment. That stuff is hard to find and we work every angle to get all we can. Thus far, we have been able to get in -- could it meet our growth? I would tell you truthfully, it kind of already does meet our growth. Candidly, with unrestrained access to equipment and people, I'd bet we could grow that stuff over 100% this year. That’s how good our people are. It's how good they are at serving the customers, it's how good they are communicating, it's how good they are delivering. But the reality of finite amount of equipment out there does mute it down, and that’s really more of a reflection on what we are anticipating this year. It's just our ability not to win it but our ability to get the resources to fulfill it. Does that helpful?

Eric Stine - Craig-Hallum

Yeah, it is. That’s great. Thanks a lot.

Sidney Hinton

And we are always looking for creative ways to find more equipment. Because if we can get the equipment, we can boost the growth rate even more. People running that business are asking for us.

Operator

Your next question comes from the line of William Bremer of Maxim Group. Please proceed.

William Bremer - Maxim Group

Let's first start out with utility infrastructure. Was there any type of hurricane sandy impact that came into this first quarter?

Sidney Hinton

No.

Chris Hutter

No.

William Bremer - Maxim Group

Then a special call out to Ronnie, nicely done.

Sidney Hinton

Awesome done.

William Bremer - Maxim Group

Very nice. Okay. In the past you have provided a growth rate per segment. Should we be utilizing what has been historically provided, given the strong growth rates that you are articulating for each one of these segments?

Chris Hutter

Actually, I think we have tried not to -- we have tried to give color, but not specific numbers. I think kind of the way to think about it is, that our energy efficiency grew. Of course it will be down here for the first half. For the second half, we think it will return to growth. Our utility infrastructure grew, we think we will continue to plow forward and deliver very nice growth. And the same with our DG. Each of those areas, we feel like will do well, particularly as we work through the second half.

Sidney Hinton

What they are, Bill, is just distinguish between organic growth and acquired growth. From an absolute standpoint, our energy efficiency more than doubled this year. Just taken our sales rate last year with our ESCO acquisition. I just want to be sure, we will [post] that out.

William Bremer - Maxim Group

Okay. And also in the past, just so you give us a little color on gross margin per segment and where that stacks up? And I appreciate the EBITDA numbers. Anyway we could get a little more granular here this evening and provide some gross margins per segment.

Chris Hutter

Well, we could....

William Bremer - Maxim Group

Even if it is actual for the first quarter.

Chris Hutter

No, we are not ready to do that yet, Bill, but we do give ranges in the Q. That would kind of give you a sense that our DG business is our highest gross margin business. Our energy efficiency business is sort of right in the middle. And our utility infrastructure business is kind of in that -- is the third. But other than that, we really don’t want to get specific at this point.

William Bremer - Maxim Group

Okay. I noticed that there was no shares repurchased in the quarter. Can you give us an update on where the stock buyback is? What's the...?

Chris Hutter

Yeah. So still very much -- right at 5 million, might be just a little under 5 million, authorized and available. Truth is, as you could tell, we have been very very active deploying our cash in accretive, strategic and accretive to EPS type ways, in terms of the acquisitions we have done. You know as we came, rounded to the first of the year versus 2013, we saw those opportunities in front of us. Of course we have been working very hard on those, and decided that that was the first use of cash over the last few months.

William Bremer - Maxim Group

Okay. So it's still out there but yet it's not active at this time?

Chris Hutter

We didn’t buy any back this quarter because we were focused on our acquisitions.

William Bremer - Maxim Group

Okay. Let's take another step back and take a look at this Solais acquisition here. Has it been able to, at this point, you feel as though that you will be getting some incremental type of margins and that’s going to be begin in the third quarter, if I understand you correctly. Should we start seeing that in the third quarter or we are going to start seeing that a little bit more coming through into the fourth and then definitely into the 2014.

Chris Hutter

Well, we expect to realize it beginning in the third. But really what that does, is that offsets the incremental cost base that we have got in. So it won't sort of come to an incremental EPS in the third. It's the fourth quarter when we expect to see that tweak through in incremental EPS. And nothing's changed on that front. That’s exactly what we communicated three weeks ago and of course the acquisition is very fresh. But 2014, yes, that’s the $0.10 we talked about in terms of accretion. I believe everybody has baked that in at this point obviously. But 2014 is when we expect to see the full impact of that.

Sidney Hinton

But we are underway, I mean aggressively underway relative to implementing their manufacturing and sourcing.

William Bremer - Maxim Group

And then my final question right now, just the tax rate for this year. You have always voiced about 37%, this one came in a good amount below that. Should we be using the current rate or 37%?

Chris Hutter

Q2 is 37%. 37%-37.5%, right about there.

Operator

(Operator Instructions) Your next question comes from the line of [Matthew Paul] Please proceed.

Unidentified Analyst

In reference to the DG business in the hospital end market being the lead growth driver there. Can you paint us a little picture on how much of that market you penetrated and maybe the opportunity that still lies ahead?

Sidney Hinton

Oh, gosh, way less than 5% of the market is penetrated. I mean we are scratching the surface. It's a big, big market and big market opportunity. It's our job to convert them from a model of just pure back which is the traditional solution, to a market that combines peak shaving and backup. So you can justify more investment and get a better return. Put more capacity and more backup power and get a higher rate of return because you use that generation for peak shaving. But huge opportunity, just scratching the surface.

Chris Hutter

And, Matt, you have seen really in last six to nine months, is where you have seen our announcements. If you kind of go back and look through those you will see a significant increase in the pace of order flow from hospitals. Really a result of the fantastic team that we have got leading that business, we talked about that. I think we talked about that about a year, year and a half ago. And they are just now starting to get traction. But you are seeing it flow and you have seen it flow for about six to nine months already.

Unidentified Analyst

Sure. Second question I want to ask, if you could comment on the effect that the increase to the recurring revenue has had on your gross margin expansion in the quarter.

Chris Hutter

Well, yeah. Recurring revenue was -- it was a good number. I would say, though, it wasn’t incrementally, it wasn’t of the magnitude that it would have big impact on gross margin. I would say that the impact on gross margin would be negligible year-over-year. It was really -- what drove the gross margin increase was the culmination of overall our DG turnkey being a greater proportion of our revenue this year compared to last year. As well as some efficiency gains in our utility infrastructure area as that team just continues to execute at a terrific pace and extremely well for our customers.

Operator

At this time there are no additional questions in the queue and I would like to turn the call back over to Mr. Hinton for closing remarks.

Sidney Hinton

Well, thank you all. Thanks everybody for joining us this evening. Before I summarize, let me thank again our customers and our utility partners who have dialed in. Again, we very much appreciate the opportunity to serve you. We don’t take it for granted. Every day we are focused on earning your respect and trust. With that back to focusing on our investor community. Summary key points will be a record backlog of $206 million, we anticipate when we do this call in 90 days we will announce a new record backlog. Operating bottom line leverage continues to grow, 6.1 percentage increase in operating margin versus Q1 of last year. We are tracking ahead of our 2015 goals of $300 million in revenue and mid-double digit operating margins. Our solar, ESCO and Solais integrations are all going very smoothly. We are very bullish on the teams that came over. We had great expectations when we made each acquisition and I can say that each of them have surpassed our expectations relative to get rolling. We are looking forward to a great 2013, a great 2014. We appreciate all of your support and confidence and investment in us. We look forward to talking to you all again. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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