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Executives

Kamyar Mofid - Chief Executive Officer and Director

Anthony M. DiPaolo - Chief Financial Officer and Principal Accounting Officer

Analysts

Matt Koranda - Roth Capital Partners, LLC, Research Division

Michael O'Rourke

Philip Lee

Real Goods Solar (RSOL) Q2 2013 Earnings Call August 13, 2013 4:30 PM ET

Operator

Good afternoon. Thank you for joining us today to discuss Real Goods Solar's Second Quarter Results Ended June 30, 2013. With us today are Kam Mofid, the company's Chief Executive Officer; and Anthony DiPaolo, its Chief Financial Officer. Following their remarks, we'll open up for a call for questions, and before the conclusion of today's call, I'll provide the necessary precautions regarding forward-looking statements made by management during this call.

We would like to remind everyone that this call is available for replay through August 20, 2013. Starting later this evening, a webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at realgoodssolar.com.

Now, I'd now like to turn the call over to Chief Executive Officer of Real Goods Solar, Mr. Kam Mofid. Please go ahead, sir.

Kamyar Mofid

Thank you, Crescent. Good afternoon, everyone, and thank you for joining us today. Today, we are going to talk about the operational progress we made during the second quarter, which included setting the stage for strong performance improvement in 2013 and getting ready for an exciting 2014. We will also talk about 2 complementary acquisitions we recently announced, intended to further advance our position as a leading provider of solar power systems in one of the nation's fastest-growing industries.

But before I go into this further, I'd like to ask Tony to walk us through the financial results, after which, I will provide some additional color and we will be glad to then take Q&A. Tony, please proceed.

Anthony M. DiPaolo

Thank you, Kam, and the thank you, everyone, for joining our call today.

Our net revenue for the second quarter of 2013 was $20.7 million compared to $21.4 million in the same quarter last year. The revenue decline reflects lower prices paid by customers as a result of competitive pricing pressures within the solar installation market. The decrease in the average selling price of solar energy systems more than offset the increase in our deployed solar energy systems compared to the same year ago quarter. We deployed 5.6 megawatts of solar energy systems in the second quarter of 2013 compared to 4.7 megawatts in last year's second quarter.

Gross profit was $4.8 million or 23.1% of net revenue in the second quarter of 2013, compared to $5.3 million or 24.8% of net revenue in the same quarter last year. The gross margin decrease reflects the aforementioned competitive pricing pressures.

Our total expenses were $7.9 million for the second quarter of 2013 compared to $9.3 million for the same quarter last year. The decrease in operating expenses is primarily attributable to successful implementation of productivity improvements and other cost reduction and cost avoidance initiatives. This substantial decline in operating expenses led to a significant 20% improvement in our loss from operations.

Loss from operations was $3.2 million in the second quarter of 2013 versus $4 million in the same year ago quarter.

Our net loss for the second quarter of 2013 was $2.9 million, which is $0.11 per share and compared to a net loss of $2.5 million or $0.09 per share in the same quarter last year. The increase in the net loss reflects the impact of an income tax benefit of $1.6 million recorded last year, but there's no corresponding tax benefit recorded in this year's second quarter.

Now turning to the balance sheet. We ended the second quarter of 2013 with $6.9 million on hand. During the second quarter, we successfully completed a private placement of equity securities, raising net proceeds of $8.4 million. The proceeds were used in part to fully pay down borrowings under our revolving line of credit with Silicon Valley Bank. At June 30, we had $5.2 million of unused borrowing capacity under that revolving credit line.

We are presently discussing the terms of an extension of our credit line with Silicon Valley Bank. We believe a renewal will occur prior to the September 30 maturity of the Silicon Valley Bank line of credit.

This completes my summary report and our results for the second quarter of 2013. For a more detailed and complete analysis of results, please review our reports on Form 10-Q, which we filed with the Securities and Exchange Commission today and is available at www.sec.gov, as well as at our website. I will also be happy to answer any questions during the Q&A session.

Now I'd like to turn the call back over to Kam.

Kamyar Mofid

Thank you very much, Tony. With 2013 expected to be another record year for the industry according to Greentech Media Research and the Solar Energy Industries Association, the solar industry is the fastest-growing energy source in the U.S., powering homes, businesses and utility grids across the nation. As a major downstream solar solutions provider with substantial reach, we address all these growing segments of the market nationwide. Now it is indeed, and will likely continue to be, an exciting period to be in solar.

It was almost exactly a year ago when I joined the company. I think it would be an understatement to say we had simultaneous challenges facing us on a number of fronts this time last year. I feel it is important to briefly reflect on what we said we would do to turn the company around and what we have in fact done.

You may recall, shortly after joining the company, I established 3 overarching objectives for the company to focus on: one, improving cash management, liquidity and working capital in general; two, increasing productivity and reducing operating expenses; and three, getting back on a growth trajectory and doing what we historically had done so well in terms of winning business both in residential and commercial.

Regarding cash and working capital performance, we achieved major improvements on a number of fronts. Not only did we address significant accounts receivable past due issues, but also established major discipline in cash management and treasury functions. We went through a challenging liquidity period in the second half of last year without ever missing a single commitment to anyone. We ended the year in a much stronger cash position than end of Q3, for instance.

We continued our disciplined approach towards working capital management in the first half of this year, reduced residential back-office lead times by 50%, dramatically reducing the timing of project milestone payments and also raised additional capital to strengthen the balance sheet and enable pursuing strategic growth initiatives, and finally ended Q2 with 0 borrowing against our line of credit.

In terms of productivity and reducing operating expenses, I think the data is particularly self-evident. We made number of business process improvements to increase productivity, especially in our residential division. We improved controls over and management of discretionary spending, and we improved organizational structure and alignment, which resulted in significant payroll reductions. In total, operating expenses have been reduced by approximately 15% in Q2 alone compared to Q2 of prior year.

Lastly, and very importantly, we got the company back on a growth trajectory. Ideally, I would've liked to see even greater growth year-to-date, but growth must be achieved against a backdrop of right business processes, right organizational structure and capabilities and the right foundation. Therefore, in the first half of the year, management bandwidth focused not only on driving growth, but also by the necessary block and tackle to improve in these related areas. Nonetheless, as highlighted in our press release, residential is nicely back on a growth trajectory. Specifically, other than 1 single month throughout Q1 and Q2, residential sales grew every month compared to the prior month.

I'm also pleased about the progress we made in commercial in the first half of this year compared to the last 6 months of 2012. The dollar value of contracts awarded to us increased by 91%, which naturally is a significant step in the right direction in putting the company back on an appropriate growth path.

In terms of accelerating growth, it is important to note that the downstream solar market remains very fragmented. We believe we are in a unique position to leverage the platform we have created, coupled with investments we have made in management capabilities, management horsepower and business know-how to pursue appropriate acquisitions; acquisitions that bring critical talent, capabilities, competitive differentiators and enhanced market reach to the company.

As part of this strategy, we recently announced a definitive agreement to acquire Mercury Solar Systems, a premier solar solutions provider with head office in Port Chester, New York. Completion of this transaction requires shareholder approval and that we file a registration statement with the SEC. During this process, we are limited in what forward-looking statements we can provide until the transaction is closed.

The Mercury acquisition significantly expands our presence as a major solar solutions provider in key solar markets across the East Coast. Mercury has installed more than 50 megawatts of solar projects that have cumulatively generated over $250 million in revenues, including $35 million in 2012. As an added benefit upon closing, it also strengthens our balance sheet with approximately $10 million of cash and no debt. Mercury will bring more than 15 employees to Real Goods Solar, including 3 seasoned executives, further enhancing our leadership team.

While Mercury will primarily strengthen our commercial business, yesterday, we announced completing the acquisition of Syndicated Solar, an innovative and rapidly growing residential solar company. Syndicated is a plug-and-play opportunity that avoids large incremental investments in residential by us in the core business, by leveraging Syndicated's highly-efficient and more scalable sales and customer acquisition processes. These 2 acquisitions are intended to expand our nationwide presence, as well as strengthen our sales capabilities and backlog into next year. However, on an organic basis, before Syndicated and Mercury, we feel we were already on-track to achieve significant year-over-year growth.

The next few months will be both challenging and very exciting as we continue to drive our core business improvements and growth strategies, while leveraging the Syndicated acquisition for accelerated growth in residential and going through the due process to close Mercury. We are looking forward to writing the next chapter in our journey and in continuing to position the company as a premier solar solution provider in the country.

We are now ready for the question-and-answer portion of the call. Tony and I will be pleased to answer the questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Philip Shen with Roth Capital Partners.

Matt Koranda - Roth Capital Partners, LLC, Research Division

This is Matt on for Phil. Just wanted to start with your acquisition strategy. You guys have made a couple of acquisitions over the past couple of days here. Just kind of wanted to discuss the strategy at a higher level. Maybe you could mention some of the specific things that you look for in a potential acquisition, maybe in terms of pipeline, sales force, geographic location or any other important elements that you care to mention.

Kamyar Mofid

Thank you. In terms of an acquisition strategy, obviously, we worked hard over the past little while to bring to fruition a couple of key acquisitions. Mercury, that still needs shareholder approval, but we signed the definitive agreement, and Syndicated, which has been acquired. Our intention is not to pursue, for instance, a pure roll-off strategy for the sake of roll-off. As you know, the solar downstream market is very fragmented and there are many players out there. We believe, as the industry matures and as the dust settles, a small number of very significant, very powerful players will emerge, and we absolutely intend to be one of those. So our acquisition strategy, as I said, is not a roll-off for the sake of roll-off, but in a very selective fashion to evaluate potential fits of companies that bring some aspects of differentiation and value, both to the company and to our shareholders. So in terms of some of the key things we will look for, just as we did with these 2 recent announcements, are things that provide therefore greater market reach through complementary geography. Mercury is a very good example of that, where it brings historical strength and current capabilities in markets that are very complementary to our RGS Energy, our commercial and utility division. In addition to geographical complementarity, we look for talent. We want potential acquisitions to also give us access to a great, dedicated talent who want to be part of our journey as we move the business forward. And also, acquisitions that, in one form or another, improve our overall cost performance and cost positioning. This could be in the area of conversion, meaning the actual implementation of these projects or equally important, in the area of reducing the customer cost of acquisition, meaning the benefits that would show below the line in the SG&A. And Syndicated is actually, I think, a very appropriate example of that, where the acquisition was really justified, not just based on talent, but equally important, based on processes that we are confident that will help us reduce our total cost of acquisition.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Great. That's helpful, Kam. And just one more here, if I may. You guys mentioned lead times in your release and you talked about sort of your lead times converting sales into installs. Could you talk about what they are currently? And then how do you see those lead times decreasing over the next year or so? And also, do you see your lead times in line with the industry, in general?

Kamyar Mofid

Sure. I think we look at the lead time in a broader context. I look at lead time in the context of cash-to-cash conversion, cash-to-cash cycle times. And personally, I come from a background that lead time reduction was paramount, the speed of execution was paramount. And I think solar, by being somewhat of a, relatively speaking, younger industry and still long way to go in terms of overall maturity and all of that, I think we can learn from some other industries where they have focused a great deal on lead time reduction. A classic example of that is the automotive industry, for instance, where there has been tremendous focus on process improvements and things like that. So we are leveraging lessons learned in terms of what our management bring from different backgrounds, experiences, to really take an end-to-end view on cycle time reduction. This not just installation, but in fact, more so processing sales lead times, their back-office processing. Typically right now, and I will say -- I would guess, we are somewhat typical in the industry. There is probably -- from the time, as an example, a residential contract is signed, there is probably 90 to, let's say, 100, 110 days on average before that project is actually commissioned. Some of that lead time is due to soft actions, like business process issues, some of it is capacity, there's a bunch of drivers. But I will say that would be fairly typical, what I have seen in the industry. Our goal in general is to drive significant cycle time reduction, and it's difficult to give you an exact number for next year, but what I can definitively tell you is we are focusing on conversion time reduction from the time a contract is signed until the system is commissioned. And what we announced in our news release, and I briefly mentioned, is a very real example of that where, at the highest level of the company, we put focus on cycle time reductions from an end-to-end process standpoint and we achieved actually very good results, which are not only related to improving customer satisfaction, but equally important related to improving working capital performance.

Operator

[Operator Instructions] And our next question comes from the line of Michael O'Rourke with Oppenheimer.

Michael O'Rourke

Just wanted to check, as you look forward, at what point do you see the company breaking even and at what point do you see cash flow positive?

Kamyar Mofid

Michael, thank you for the question. Obviously, an important and a relevant question. As I mentioned during my narrative a few minutes ago, by virtue of the transaction that we are in the middle of, we are limited to -- in terms of providing guidance and outlook. Having said that, I think if you look at our results and the progress we have made in the past 12 months, I think you can see significant improvements have been made in our cost structure as shown in the operating expenses. And we have focused on, and we are sensitive to ensuring we do move the needle very much in the right direction regarding the items you just referred to. So I'm sorry, I cannot be more specific. I hope you sort of understand a little bit of the dilemma. I would actually very much like to talk more about this.

Michael O'Rourke

I'll call you offline when you get the deals done. But just pretend that we didn't do the deals. Let's just say that both of these transactions didn't take place. And you look at what I'm looking at right now, which is $20.6 million in net revenues and it works down to a net loss of $2.9 million. If you were to look forward, forgetting both transactions, knowing the efforts you've made on both the operating expense, cutting that back, reducing the cycle times and so forth, pushing out further, if it was just this to looking a year from now, what might that look like just based on what -- how you see your business and knowing the improvements that you want to make?

Kamyar Mofid

Again, very much appreciate the question, but obviously, we cannot undo the clock and say, "Okay, if we weren't doing this or weren't doing that." What I do feel comfortable to tell all of our investors is if we look back at the last 12 months and if we look at what management said management would do, I believe we have fundamentally delivered in terms of what we said we were going to do in those 3 overarching areas, which is related to your questions. So I cannot provide -- I'm sorry, I cannot provide sort of more specific answer other than we are pleased and we are happy with the progress we have made, and I feel confident to say that we believe our turn around strategies and action plans are very much on target.

Operator

And our next question comes from the line of the Philip Lee with Mangrove Partners.

Philip Lee

Just had a question about the 2 acquisitions. Maybe I missed it. Are Mercury Solar or Syndicated Solar, are they both profitable?

Anthony M. DiPaolo

This is Tony. The acquisition of Syndicated was an asset acquisition. We bought assets there, so it wouldn't be appropriate to measure that as a profitable operation. I think we've given some indication of their growth trajectory compared to where they've been so far this year. When it comes to Mercury, again, because of the status of that transaction, the filing with the SEC of a registration statement, and the limitation that, that creates before the document is declared effective, I'm very much limited in what I can say about Mercury.

Philip Lee

You can't say if it was profitable in 2012?

Anthony M. DiPaolo

No. As a private company, I'm limited in what I can say and what I can provide before we file the registration statement.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the conference over to Mr. Mofid. Please proceed.

Kamyar Mofid

Thank you, Crescent. I want to thank each one of you for joining us today and I especially want to thank you for your insightful questions and comments. Hopefully, as you heard in the past hour or so, we have come a long way. A great deal has been accomplished and we are very excited in terms of where the business is and where the industry is.

Thank you, again, for your interest in the company. Our sights are set on driving profitable growth and establishing ourselves as one of the leading downstream solar solution providers in the country. We do appreciate your interest in Real Goods Solar, and look forward to continue to provide renewable solar energy solutions to our customers and building value for you, our shareholders.

Operator

Before we end today's presentation, I would like to take a moment to read the company's safe harbor statement that provides important cautions regarding forward-looking statements.

The following constitutes the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Except for historical information, the matters discussed in this call are forward-looking statements that involve risks and uncertainties. A number of important factors could cause the company's actual results or performance to differ materially from those indicated by such forward-looking statements, including, but not limited to, general business conditions, integration and acquisitions, the timely development of new businesses, the impact of competition and other factors detailed under Risk Factors and elsewhere in the company's 10-Ks, 10-Qs and other filings the company makes with the SEC from time to time.

Company -- copies of the company's SEC filings are available on its website at realgoodssolar.com. The company does not undertake any obligation to update forward-looking statements.

I would like to remind everyone that this call will be available for replay through August 20, 2013, starting in about 2 hours. Please refer to today's press release for dial-in replay instructions. A webcast replay will also be available via the company's website at realgoodssolar.com.

Thank you for joining us for today's presentation. This concludes today's call. You may now disconnect.

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