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PowerSecure International, Inc. (NYSE:POWR)

Q3 2013 Earnings Conference Call

November 6, 2013 08:30 AM ET

Executives

John Bluth - SVP, IR

Sidney Hinton - Chief Executive Officer

Chris Hutter - Chief Financial Officer

Analysts

Eric Stine - Craig-Hallum

Philip Shen - Roth Capital Partners

William Bremer - Maxim Group

Rob Brown - Lake Street Capital Markets

Tyler Frank - Robert W. Baird

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2013 PowerSecure International, Inc.’s Earnings Conference Call. My name is Tracy and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

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

John Bluth

Thanks very much Tracy, and thank you all for joining us today for our third quarter 2013 earnings call. Joining me on the call from 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 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 their 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 any forward-looking statements.

Now, I would 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 everyone for joining us today. Most of our audience is from the investment community but we do also have some utility partners and customers on the call. Before I adjust our investors let me just take a moment and thank each of you, our utility partners and our customers on the call for opportunity to serve you. We look forward to working diligently everyday to reward your trust and confidence in us.

Now let me continue with my remarks which would be directed at the investors. Our third quarter results continued our tremendous momentum in 2013 with another all time record for quarterly revenues and an additional 2.7 percentage points of operating margin expansion. Third quarter revenues of $81.5 million represent a 84% year-over-year growth. 55 of those percentage points come from organic growth. Despite the backlog consumption associated with our record quarter in the third quarter, our new order flow has been strong, our backlog today stands at a very healthy $240 million which does not include the substantial new utility infrastructure opportunity that we announced this morning in a separate press release.

The continued progression of our backlog positions us very strongly for continued growth and one of the things you will hear us talk about in this call is that we feel very well positioned to achieve over $300 million in sales in 2014 as we go in a full ahead of what or strategic plan was.

We’re seeing terrific organic growth in both our distributed generation business which grew 62% in the third quarter and our utility infrastructure products and services which grew 72% in the third quarter. The exceptional integration and performance of our ESCO and Solais acquisitions drove a 225% year-over-year increase in our energy efficiency products and services.

In addition to our organic stream, our acquisitions are performing very strongly the third quarter marks two fold quarters of contributions from our ESCO acquisitions, which exceeded our expectations by virtually every measure. In the third quarter, our ESCO business generated $9.5 million in revenues and in just two quarters, the business has already generated $2.3 million in profit for PowerSecure, already paying back the $1.8 million in cash, we paid for the business.

Even more impressive to us has been the strong leadership and strategic opportunity that we are seeing with the business. We move into 2014 with the opportunity to expand our DG and LED solutions through our new ESCO customer channel and under the team its exceptional leadership, the quality of our sales pipeline has been significantly enhanced in the ESCO, when we purchase that business, we got a backlog and we got a pipeline.

The great thing sitting here some months later is that the pipeline, the quality of the pipeline has been substantially improved, our team is doing a great job there.

Moving now, we are also seeing a rapid integration and significant contributions from our Solais acquisitions. Solais is exceptional product line for high-end retailers generated $3 million in revenue in the third quarter tracking nicely ahead of our acquisition, the business case we had for our acquisition estimates.

This product line provides PowerSecure with access to a new set of lighting customers, we are very excited about the progression of the core Solais business, but as we have described to you, our primary drivers for this acquisition with opportunities to substantially improve our manufacturing call structure and to enhance and consolidate the leadership of our LED lighting products.

Based on the excellent progress we are making with the manufacturing integration, we expect to enter 2014 with a product line that would generate gross margins that are 10 points higher than our current gross margins. And the leadership that we have gotten, which I would tell you, we thought this was a first round, first pay, top of the pay draft, well it's proven to be just that. But it's also proven to be a banner draft, this is a loaded team, it's been a great acquisition to us. We are starting to see the effects of their leadership and starting to see the efficiencies across the entire organization relative to our LEDs.

Moving on, in October, we announced acquisition of Encari, a leading provider of our cyber security and compliance consulting services to the utility industry. Encari helps large investor owned utilities, municipalities and cooperative utilities, assess, improve and maintain their compliance with NERC's reliability standards. The burden for utilities to comply with these standards is comparable to the burden public companies faced in complying with surveying Oxley requirements. And our Encari team has a who’s who list of utilities that they are serving to help them achieve and maintain compliance.

These NERC standards continue to evolve especially in area of cyber security for the group, which is an area of particular expertise for Encari. As a consulting business that carries excellent gross margins. The acquisition of Encari provides us with the opportunity to pull utility infrastructure margins higher and bring their service offerings to our existing utility relations as well as bringing the rest of our solutions to Encari’s rest of customer base.

Our recent acquisitions have added exceptional financial and strategic value to the company and enhanced our growth platform. And this is on top of our 55% organic growth this quarter. Our long term growth plans are built upon the consistent organic growth that we’ve demonstrated over the past several years in our three very attractive product areas and on a cost focused approach relative to operational excellence.

While we turned away, 99% of the opportunities we look at relative to acquisitions just because they don’t meet our criteria, we will continue to be opportunistic if we find additional attractively priced acquisition opportunities which can be accretive to our top-line and accretive to our bottom-line and provide strategic and/or operational benefits.

Before I turn it over to Chris for more detailed financial review of the quarter I'll provide some context for our three, our key products in service areas, let me start with our distributed generations. As I mentioned we had another very strong quarter in distributed generation products and services with 62% year-over-year growth as a record quarter for us in our DG area. Our revenues continue to expand and diversify in distributed generations, an example of this diversification which occurred in the third quarter is a prime power project we are completing for a major industrial customer in the Midwest. They wanted the ability to generate their own power independently from the grids given the low cost of natural gas. We were evolved for them a prime power solution that provides a highly reliable fully monitored generating system with exceptional economics. And then the economics in these prime power locations in this case the utility were supportive as well. And for prime power applications you have to do heat recovery in this location had a excellent source or excellent utilization of heat, so a great place to adopt the heat and receive economic benefit.

Since our last earnings call, sticking with DG, since our last earnings call we've also announced $10 million in company owned business awards which generate recurring revenues with very high margins. This is an area of strategic focus for us as we look for top tier customers who have a need for back-up power but do want to own the systems themselves.

Let me just step out and just point out some of the two. When you are trying to figure out what our priorities for investment are, this is number one, it’s acquisitions, we will be opportunistic and do acquisitions as they present themselves but the number one game changer for PowerSecure is changing the velocity with which we can invest in company owned assets, it’s a area we’re keenly focused on.

We recognized $4.4 million in recurring revenues in the third quarter and we’re on track to do a record $15 million for the full year of 2013. Continuing in DG, our hospital business continues to be a strong business driver for us in our DG and accounted for 15% of our sales in the third quarter and our hospital sales were up more than 200% year-over-year and we’re a seeing a diverse range of business reflected in both our revenues and backlog in addition to the hospitals relative to growth in our industrial manufacturing municipal installations, grocery store customers, MicroGrid customers and solar customers.

Speaking of MicroGrid. For PowerSecure MicroGrid represents an area where we made a focused investment and where there is significant upside potential. We are seeing more and more interest in our unique technology. For us MicroGrid doesn’t just sound interesting in electrode and on the blackboard, PowerSecure has engineered and sold and deployed MicroGrids that are delivering value for customers today. Our MicroGrid solution creates a customer engineered standalone power plant that integrates distributed generation renewables batteries and contains to our custom switch gear, our custom controls, our custom software and our custom monitoring and can be deployed in fixed or mobile configurations.

To-date our largest micro-grid customer has been the US military and we have new micro-grid projects underway for them. Solar is the part of the micro-grid solution and of course we also deploy our solar on standalone basis. Our solar products had an outstanding quarter in the third quarter contributing $7 million to our revenues.

Data centers remain area of key strategic focus for us as outside industry experts like Steven Fairfax of MIT and others have taken note of our best-in-class reliability. We have begun receiving more and more inbound interest from potential data center customers including some of the largest internet and technology companies in the world. The sales cycle for data center can be 18 to 24 months. And we believe we are in position to grow this area of our DG business in 2014.

Overall our pipeline of potential DG opportunities is of the highest quality we have ever had in the history of the company. And we are very well positioned to continue growing our distributed generation revenues.

Turning now to utility infrastructure which grew 72% year-over-year in the third quarter, our excellent utility infrastructure growth is being driven by a combination of winning business with new utility partners and expanding our business with existing partners. We are also having, we are also doing work and working directly for energy companies who are building out into shale platforms building out the utility infrastructure to serve those locations. And we are seeing more and more expansion of the customers robust to serve there.

This morning we announced a major new utility infrastructure win that has the potential this is significant I want to be very clear. This win has the potential to be the largest contract that PowerSecure has ever won. The contract is with one of the largest electric utilities in the country. And they’ve selected us as one of two new partners to provide transmission infrastructure service on their power grid.

We began serving this utility customer on a limited basis. In late 2012 and through our work this year and the strength we’ve recently added to our balance sheet, we’ve earned the opportunity to become a regular long-term service provider. Now that the utility has formally selected us for this role, specific volumes of ongoing work will be determined in the coming quarters.

Based on our discussions with utility, we currently estimate that in 2014 and ‘15, we could be asked to double our work volumes with them and as a result realize $25 million to $35 million of revenue annually from this expanded relationship.

I want to be clear though, we do not currently have the $25 million to $35 million of annual opportunity in our revenue backlog. The $240 million does not include that. We will add that to the backlog as we see specific volumes start to firm up very similar to when we acquired the ESCO there was $27 million of existing contracts, we didn’t put it straight in backlog, we waited and just took a conservative approach to it.

But the win of that business is highly significant to us. It’s a huge deal for us and something we’ve been strongly focused on this year. As we completed several projects this summer, we believed we were very well position to win this potential new business, so we maintained certain cruise and equipment that were located in those geographies close to that utility.

Let me be clear, we had a gap in the amount of what we had won and what we thought we would win, so we kept resources available to be able to win this work and ramp. It impacted our gross margins in the third quarter. [Candidly] we think it will impact our gross margins in the fourth quarter, while we ramp up and maybe bleed over a little bit into the first quarter.

But let me be clear, our work load is doubling. We will be doubling our resources there. We couldn't afford to pull back and then try to ramp up. It was definitely a case where it was best to keep our foot on the accelerator. It cost us some money in the third quarter, cost us a little in the fourth quarter. We are a foot on the pedal. It's a big payout for us long-term. And we really do believe this contract has the potential to be the largest contract, we've ever won. And to put it in perspective, the largest we’ve ever won to-date as public over $200 million. Based on the high quality of our sales pipeline in utility infrastructure, we expect to finish 2013 very strong. And we expect 2014 to be a great year in that business as well.

Moving on to the energy efficiency area, which grew 225% year-over-year it is clear that ESCO and Solais acquisitions have been transformational for us especially as our grocery lighting business has tampered in recent quarters.

I’ve already described the value that we are gaining from these businesses which will put our energy efficiency revenues on a very strong trajectory for revenue growth and margin expansion in 2014. I will point out that our utility light sales have been gaining traction. We’re very bullish on those. Our niche [light] that we have not disclosed, we've been gaining sales in those. We’re very bullish on it. We like where we're at. While our grocery store, our core grocery store lighting remains soft, our new LED utility light, our security lights and are early niche both and our Solais offerings, they offer significant growth potential in 2014. Primarily because of our acquisitions, our energy efficiency is in a very healthy spot as we finish 2013 and as we roll into 2014.

In summary, before I move to Chris, in summary we've had an exceptional 2013 through three quarters. We're on pace to achieve record revenues with meaningful growth in all three of our product and service areas and excellent operating margin expansion. We're delivering robust organic growth and we've had outstanding year of finding and integrating strategic acquisitions at great cost, at great price points which have quickly added significant value to the business. Our sales pipeline has some of the highest quality opportunities we've ever seen. Our backlog development is keeping pace with our record revenue growth and is providing us with increasing confidence for our business in 2014, 2015 and beyond. We remain relentlessly focused on delivering value to our customers, value to shareholders and capitalizing on the significant opportunities that are in front of us to drive the growth of our business.

With that let me turn it over to Chris.

Chris Hutter

Thanks Sidney. I’m going to as I usually do I’m going to focus my comments on a few select areas. I’ll discuss the highlights of the P&L, including trends on our revenue, our gross margin and our operating expenses. I’ll breakdown 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. And I'll review our key balance sheet metrics, our cash, our debt, our CapEx et cetera.

I'll start with an overview of the results for the quarter. As you heard from Sidney, our strong organic revenue growth was enhanced by really terrific performance from our acquired businesses. And we continue to drive expansion in our operating margins. Additionally we've fortified our balance sheet which obviously was further solidified with the debt and equity transactions we completed this year. Even with our significant revenue growth and backlog burn in the third quarter as a result of the record revenues, our backlog stands in a very strong $240 million. And this puts us in a very good spot heading into 2014.

Once again our business delivered excellent top-line growth this quarter. Specifically our total revenue for the third quarter was a record $81.5 million compared to $43.7 million last year, a year-over-year growth of 84.3%.

In terms of our revenue performance by product and service area, we provide a revenue charge in our earnings release that breaks out revenue and growth in each of those areas. And we saw substantial growth across all three areas with DG growing 62%, energy efficiency growing 225% and utility infrastructure growing 72%.

More than half of our total revenue growth was from business lines that were in place a year ago, which basically our organic growth rate was 55% year-over-year. Our acquired ESCO and Solais businesses contributed $12.7 million of revenue during the third quarter.

Our revenue growth continues to significantly outpace our operating expense growth which resulted in substantial operating expense leverage specifically our operating expenses as a percentage of revenue decreased 7.8 percentage points year-over-year. And that metric excludes last year’s $1.5 million charge and this drove another 2.7 percentage point year-over-year expansion in operating margins to 7.3%.

In fact, this represents our ninth consecutive quarter of operating margin expansion. Our operating margin expansion continues to be very consistent with our goal of achieving 3 to 4 percentage points of expansion annually. As you map our progress against our strategic goal of delivering mid-double-digit operating margins in 2015, you can see that we are halfway through that five-year strategic plan and also right at the halfway point of achieving that goal. So we feel really good about where we sit, we feel really good about our progress in driving that bottom line operating margin leverage.

During the third quarter, our adjusted EBITDA was more than $8 million and more than double the adjusted EBITDA we generated in the third quarter 2012. Year-to-date we’ve generated $16.8 million of adjusted EBITDA and we remain on track to generate more than $20 million in adjusted EBITDA 2013. And everybody I am sure who has been following us will remember that was a goal we set out early in the year, it’s a goal we clearly communicated early in the year and again we feel really good about been just right on track there as well.

As Sidney described, our gross margin for the quarter came in at 26.3% as we blended in some of the lower margin ESCO and solar revenues, and as we held over some utility services crews in anticipation of winning the large utility services opportunity that we announced this morning.

As we move through the fourth quarter and into the first quarter of 2014, we expect that we’ll continue to be impacted by some operational inefficiencies in our utility infrastructure area and therefore have some [beneath] a little on the gross margins with lower than we typically have is our crews and equipment remain in place for the new assignments we announced today. We would expect to see gross margins in mid to upper 20s in Q4 and Q1 with gradual improvements as we move through 2014.

Strategically as we look out we had several gross margin catalysts, including one bringing our higher margin DG and LED solutions through our new ESCO channel, two continuing to build our high margin DG recurring revenue business which should pick up again as we work into 2014 and we are currently budgeting $10 million for those expenditures next year, increasing the percentage of our turnkey DG revenue mix then incorporates our proprietary PowerBlock systems, and four beginning to capture the manufacturing efficiencies in our LED business that we expect to realize with our Solais acquisition as that catalyst.

Moving down to P&L, our operating expenses in the third quarter were $15.5 million right in line with the expectations we described to you on our conference call last quarter. This represents an absolute year-over-year increase of $3.7 million, again that number excludes the $1.5 million charge in last year’s numbers. The $3.7 million year-over-year increase in operating expenses consists primarily of $2.8 million of incremental operating expenses in 3Q 2013 related to our recent ESCO and Solais acquisitions. The remaining year-over-year increase is primarily due to an increase in selling expenses related to our significantly higher revenues and backlog.

Depreciation from our investments and company owned DG systems and utility infrastructure equipment and increases in personnel and equipments are driving support our growth. Because of our scaling revenues and assisted by the cost reduction program we implemented in the back half of last year, we expect to see continued reductions over time in operating expenses as a percentage of revenues, the key driver of our anticipated operating margin expansion and what has been the key driver of our operating margin expansion.

As we look forward, we expect our operating expenses to be similar to our recent run rates over the next couple of quarters.

Moving down, our recent acquisitions have provided additional opportunities to restructure and realign our operations to increase our operating margins in our energy efficiency product and service lines in particular, but also there are some other cost reduction opportunities that we see. This includes the manufacturing and sourcing synergies from Solais which we have described and a few other areas.

As we mentioned this last quarter, we have begun developing our plans to integrate and streamline the operations and product offerings within our LED product area primarily and we're actively working on those plans now. Our intention is to eliminate duplicative facilities, improve our strategic sourcing, rationalize our product line and reduce personnel.

We expect these actions to result in a total charge of between $4 million and $6 million, which will likely be incurred in the fourth quarter of 2013 and the first quarter of 2014. And just to point out here the last quarter we have timed this as our 3Q, 4Q event this year as a back half this year event and so we just adjusted our timing a bit, as we're working through the plan.

In addition, it's possible that these actions may result in additional charges related to goodwill or intangible impairment, but at this point we just have not done the work to determine if so or how much a penny, we just don't know at this point.

Earnings per share, moving down to P&L from continuing operations increased to $0.17 in the third quarter of 2013 and this compares to GAAP EPS of $0.03 in last year’s third quarter and non-GAAP EPS of $0.08 in last year’s third quarter. And again as I noted, our GAAP results from last quarter included the $1.5 million charge.

Now turning to our revenue backlog, as of today our backlog stands at a healthy $240 million, which we feel really good about considering the significant amount of backlog we consumed in achieving our record third quarter revenue results. This compares to $245 million at the time of our last earnings in August and $175 million a year ago. As we described in earnings release, we break down our backlog into three categories; near-term which includes order for across all of our business areas that we expect to realize over the course of the next three quarters; longer-term project based work that we anticipate will be recognized fairly evenly from the third quarter of 2014 through 2016, and longer-term recurring revenues that will be recognized over the next 7 to 10 years.

If you look at our backlog number of $240 million, a $116 million of this is near-term backlog and this is the number that the analysts use to drive their quarterly estimates. Specifically, we estimated 50% of this near-term backlog will be recognized in the fourth quarter, 30% in the first quarter of 2014 and 20% in the second quarter of 2014. Of course, we always said as projects can and do move in both directions, but of course these are our current best estimates.

The next component, our longer-term backlog, which includes longer-term project based work, again we expect that to be recognized fairly evenly from the third quarter of ‘14 through the year 2016 and that’s $48 million, and the last component is $76 million of long-term recurring revenues and those are recognized over the life of the contracts generally five to 15 years. A simple formality is our backlog is a basis to model our revenues over the next three quarters is take that near term project based backlog $116 million spread according to the estimated percentage I just described 15% in the fourth quarter, 30% in the first quarter, 20% in the second quarter, add approximately $6 million of revenue in each quarter to account for recurring in other regular revenues that we do not include in the backlog. And lastly layer in and we make assumptions about additional project sales you expect we will make incomplete between now and the period you are estimating to add to that quarterly revenue.

And obviously, common sense would say, the closer you are in terms of your quarter’s end, the less selling time to make an impact to further out the more selling time to make an impact that number is going to be bigger as you move out. When you run your estimates for the fourth quarter of 2013, you will notice that our fourth quarter revenues are still very strong and imply very strong year-over-year growth. But are not quite as high as what was indicated by our backlog last quarter.

That said overall, our backlog implies continued strong growth. As our near term backlog is up 50% over last year this time and our long term backlog is up 78% over last year this time. Again we are in great position as we look forward into 2014. And I just point out one initial note to point out, part of what we do expect in the fourth quarter is for our utility infrastructures revenues to bounce back, particularly as we start to ramp up into this new contract that we just announced today as well. So you will see that as part of the expectations set here as well.

2014 I just want to make one additional technical note is that overall 2014 we expect the similar revenue pattern as 2013 meaning I would model similar year-over-year growth rates for each of our 2014 quarters year-over-year, 2014 over 2013, I keep your growth rates from quarter-over-quarter to be pretty similar as you roll through the year and I will get you a very similar pattern growth, but a similar pattern for 2014 to 2013. I think that’s a good starting point.

Okay, turning now to our balance sheet. Our cash balance at the end of the third quarter was $54.1 million. In the quarter we invested $900,000 of CapEx and $600,000 to deploy systems to support our company owned distributed generation recurring revenue projects and the remaining $300,000 primarily to first equipment for our growing utility infrastructure business. We expect total CapEx in the $8 million range and we are very consistent about that all year for the full year 2013. And for 2014 we are budgeting $10 million with a number of large company owned projects in the pipeline. And so we expect that to tweak up nicely as we move into 2014.

We’ve got zero drawn on our $20 million revolving credit facility at $26 million in term debt outstanding and in July we successfully entered in the interest rate swaps at lock out rate seven years for 3.73%, basically we’ve hedged about 80% of our outstanding debt. In addition to our low interest debt, our strong business performance and adjusted EBITDA growth, our fortified balance sheet provides us with flexibility to further investment in company owned DG projects acquisition opportunities, additional utility and infrastructure equipment and working capital continued to deliver bigger and bigger projects.

This quarter was another terrific quarter for PowerSecure. We have added to our strong organic growth within expenses accretive and strategic acquisitions and our healthy backlog and very high quality sales pipeline positioned the company to succeed in a set a very attractive in under penetrated markets across each of our product and service areas.

Now we will open it up to questions. And operator if you can start with the Q&A, we are ready to go.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Eric Stine of Craig-Hallum. Please go ahead.

Eric Stine - Craig-Hallum

Good morning, guys. Thanks for taking the questions.

Chris Hutter

Yes sir.

Sidney Hinton

Hey Eric. Thanks.

Eric Stine - Craig-Hallum

I wonder if we just start with the hospital segment. Given the growth you are seeing there, curious how you think of that in terms of penetration. I mean first, you think you are still early in that. And then secondly how do you expect to play out whether it’s geographically in your expansion there or size of projects? Any thoughts on those line will be helpful?

Chris Hutter

Well, definitely early in our penetration of the segment, obviously penetration of generation in hospitals is completely matured, all hospitals have generating systems, but our penetration’s in very early stages. But we are seeing a rare opportunities with the change, we are seeing great opportunities in the large locals. What we found is that certain key utility relations, once they embrace us they are able to get us in those geographies and then it definitely opens up geographically. But the size of those projects just much bigger than, our traditional project had been a grocery store type project, which is in the maybe $300,000, $400,000 range, $500,000 range versus each hospital projects there several million dollar. And the greater degree of complexity is an enormous advantage to us, the more complex our project becomes, the greater the competitive advantage we have, hence down. We win every time, if a customer isn’t brand loved, meaning their open owned brand and they have complexity, we're go blow them a light. We just have the best, the most competitive solution out there from a complexity standpoint.

Eric Stine - Craig-Hallum

Got it. And I mean your value proposition there just versus what's in place. So it's just, it's backup power , but it's an ROI and it's….?

Sidney Hinton

ROI. And then we go beyond the critical life safety systems, which is basically we're trying to picture what that is next time in the hospital look at the red plug-ins in your room, those are really ones that don’t have power, power goes out. We backup the whole campus, it's our typical approach or some large segment of the campus and we bring peak shavings to the table with that. The biggest value those we find out and increased the reliability of their system, even just from a standalone backup power system.

Eric Stine - Craig-Hallum

Got it.

Sidney Hinton

All the things, we have learned over the years in making systems reliable for peak-shavings have turned out to be great assets for improving the reliability of standby power systems too.

Eric Stine - Craig-Hallum

Okay, great. Maybe, just turning to utility infrastructure and I guess this is more, well, more important everyday and especially with the contract that you announced this morning. You have talked in the past about some constraints around equipment and probably most importantly people just updated thoughts on what you’re seeing now, how you’re managing that, how that plays out?

Sidney Hinton

Yeah. Thank you Eric. Definitely we see those same things there, although it does seem that the constraints on equipment have slight concern and candidly even people some, they’re sufficient that we sure had that released our people. We could have to manage our earnings better in Q3 and candidly better in Q4. I would pray that our investors will look at us and clap. We have the courage to lean-in and sale this opportunity we did not let those resources go, we view them as an asset, turned out we were right, we thought we would win the contract, we were right. It will cost us a little bit, it costs us some money, costs us a good bit of money in this third quarter and it will cost us as we ramp up. But it’s a huge opportunity, it’s just way too viable to take a short-term view on it. Candidly, if there weren’t acquisition nobody would think twice about us paying $15 million $20 million for an opportunity like that, nobody would, honestly you’d turn [cart wheels] if you want an opportunity like that. In this case it costs us few million dollars of lost earnings opportunity, but just a great opportunity overall. We love the market we're very excited about it. We feel very well position there.

Eric Stine - Craig-Hallum

And just to clarify on the contract. Do you think it’s $25 to $35 million potentially per year the next two, but clearly.

Sidney Hinton

We think it has the platform. There is nothing about the next twos that are unique with that utility. It’s a platform that candidly corresponds, it has a potential to double that on an annual basis. There is nothing that’s a back-end door of this that says -- our ambition is to win that relationship and serve that client for the next 20 years. That’s our ambition.

Eric Stine - Craig-Hallum

Right, okay. Got it. I will jump back in the line. Nice quarter. Thanks.

Sidney Hinton

Yes, sir.

John Bluth

Thanks Eric.

Operator

Your next question comes from the line of Philip Shen from Roth Capital Partners. Please go ahead.

Philip Shen - Roth Capital Partners

Hey guys. Congrats on the nice quarter.

Sidney Hinton

Thanks Phil.

Chris Hutter

Thanks Phil.

Philip Shen - Roth Capital Partners

I’d like to start with DG. in the quarter, can you talk just about the mix of revenues between hospitals, industrial, municipal, et cetera?

Chris Hutter

Yeah. I’ll take that. Phil, hospitals was right about 15% of our revenues, which was double year-over-year, so we thought obviously really good about the progress there. I would say the quarter was primarily large industrial, we had a number of big industrial projects that we worked on this quarter. In particular, one which is a prime power application in the Midwest, but much more heavy industrial, I would say in this quarter and that would extend into really next quarter as well. But we like the growth we’re see in hospitals. And I would also add, there was, we got a little bit of juice from datacenters as well. We completed some datacenter work on the quarter that should extend in the fourth quarter as well.

So we saw some nice work there. And then, there some sexy stuff too on the MicroGrid front, we've got, I guess a handful of projects right now gone for the military on our MicroGrid team. So we had some sexy stuff that we can put in the quarter as well.

Sidney Hinton

And on the MicroGrid we also have some MicroGrid stuff, we are doing directly for utilities.

Chris Hutter

Yeah. Good point.

Sidney Hinton

This made has very encouraging. And then Phil I would just point out on the prime power project that Chris referred to is our largest single site prime power project to-date.

Philip Shen - Roth Capital Markets

Great. And just to put some numbers, Chris you started off with 15% in hospital, you’ve given your [heavyweight] in industrial. Would that be like 65% and then 15% for data center or how does that mix?

Chris Hutter

Yeah. And believe me this is just got, we’re just, I’ve just gotten this out. You had about by the way there is price, there was about $7 million of solar on the quarter. So of that 40 which again was all time record for DG about $7 million was solar and the other 33 about 15% of that would have been your hospitals. Yeah, I’d say probably 65% was industrial. And then if you layer in call it 10% retail, your data center wouldn’t be more than 3% or 4% of that revenue at this point.

Philip Shen - Roth Capital Markets

Okay, great. That’s really helpful. So how do you guys think about this mix changing as we go through 2014?

Sidney Hinton

We definitely think that we will see the, well I guess ideally the ratios wouldn’t change because that would mean the numbers are going up. With the pipeline we have in the hospital our absolute value associated with hospitals should be increasing. It’s just a great pipeline there, as well as we would anticipate absolute value of the data centers going up. Ideally the percentages will stay the same because that mean the number again really be, but we definitely see a migration towards that.

We do see a lot of industrial work out there. It’s primarily in our pipeline, it’s driven by our utility stuff that we are developing and we just had some really promising stuff relative to [tariffs] that we’ve helped create for utilities and are rolling out. They just have really, really big potential for us. So I would think that percentage is again higher for hospitals and if they don’t, it will be because the rest of the base just keeps growing really fast as well because of the utility expansion.

Philip Shen - Roth Capital Markets

Great. Again that’s very helpful. So moving on to utility, obviously there is new contract and you guys talked about how it could be potentially the largest contract that you guys have won and that could continue growing nicely. What’s going on here? Is it the utility growing your business that aggressively, I’m guessing that’s not the case, but rather you are taking share from somebody else? And if so on what basis are you taking that share?

Sidney Hinton

Yeah. I would say, we are taking share and it’s on the basis of quality. The pace that we’re able to build systems at, the quality that we do the work at and the cost that we do that for the utility. And I’ll point that out that we make a better margin than our competitors, the public competitors on their reported gross margins, our gross margins are better. And I always point that out the same, we are not doing it cheap, we are not a buying market share that we don’t want to buy anything, we want to, I came from the utility industry, I know the utility industries won’t come and is there to serve them for the next 15, 20 years, they want people to stand by them in the storms, they want people that are in there. And it is imperative that we price in a competitive way, but it’s also imperative that we price in a healthy way. They need us to be healthy long-term. And we work incredibly hard to be more productive than our peers. That’s the bottom-line. Our price maybe equal to theirs, our price maybe 1%, but we are more productive.

We can get earnings out of that and we can get product, high quality of products out for the customer. That’s the magic formula for us.

Chris Hutter

Hey, I am just going to add to that bucket of items that strategically we set out earlier this year to fortify our balance sheet to put us in position to continue to do bigger and bigger projects for bigger and bigger utilities. So that's also a part of a mix here. They want partners like Sidney said, who are going to be there for 20 years. And we want to put ourselves in that position and that part of what we did on the balance sheet as well.

Philip Shen - Roth Capital Markets

Great. One quick housekeeping and I'll jump back in queue. This question is on the restructuring. I think you guys talked about $4 million to $6 million in Q4 and Q1. Can you just give us a sense for how this will be distributed between two quarters?

Sidney Hinton

I think it will mostly be Q4, but I had to say that the fact -- to put material together. I really had mostly, in my language. But I just, I think there is a lot of very clear hard and fast rules from a GAAP perspective on when you can book those elements. And so you have to be basically completely done, it can't be that just have a plan and you are executing as the plan. So I’m just not sure that some of it may not roll over into Q1 and that's why we said broadly, we gave ourselves to wide swap. But I think you'll see most of it in Q4.

Chris Hutter

And the focus there Phil is that we want to make sure we don't, I mean there is great, the changes we're making will bring greater economic efficiency to the business and to the investors. We want to make sure we don't have a rush to get it done in the fourth quarter. We don't want to decrease the probability of it being seamless and successful.

Philip Shen - Roth Capital Markets

Great. Make sense. Thank you to you both and congrats again on the nice quarter.

Chris Hutter

Yes sir, thank you.

Operator

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

William Bremer - Maxim Group

Good morning, gentlemen. Nice quarter.

Sidney Hinton

Thank you, Bill.

Chris Hutter

Thanks Bill.

William Bremer - Maxim Group

Alright. You just sort of conveyed about potentially doing the whole restructuring in the fourth quarter, maybe a little bit spills into the first, okay we got that. I guess my first question goes into gross margins. You voiced a potential 10 basis point improvement year-over-year for efficient lights. Can we just get a sense of where the margins are currently per segment? What are the margins running at right now in that segment? And can we talk about DG and utility as well?

Chris Hutter

Yeah. We're not going to do by segment, but I will just because we're own record, I’ll just stick with what we said. We've been historically around 30% in the LED space. And I would tell you that this year that slip down into the upper 20s, but we think we anticipate that in ten-fold points to that. But we don’t give the margins by the other segments.

William Bremer - Maxim Group

Okay. The utility infrastructure segment that’s most the time operating the low 20s, how much of the hit did you guys take this quarter in terms of carrying that capacity for this potential project?

Chris Hutter

It was in the 7 figures, but we're not going to disclose that number. The truth is that it’s not a non-GAAP one-off item, we're not going to disclose it. As we've said we have a little and we think that will be impacted here in the fourth as well to a certain extent and maybe a little in the first. And we just handle that with our overall gross margin expectations that we said will be in the mid to upper 20%.

William Bremer - Maxim Group

Mid to upper 20% and that’s for just ongoing as you get passed this two quarters?

Chris Hutter

No, for the next two quarters mid to upper 20s and then grow from there, expand in that.

William Bremer - Maxim Group

I am sorry, you’re talking consolidated now are talking segment?

Sidney Hinton

That’s correct.

Chris Hutter

No we're not going to talk segment.

William Bremer - Maxim Group

Okay. I got you. All right. Let’s go into the backlog here $240 million can we talk on the pricing of that backlog, the bookings that you received this quarter say versus, sequentially versus the second quarter, how is the pricing then?

Sidney Hinton

We have never altered our approach to pricing, never. We price every day to deliver great value to our customer and great value to our investors. We owe it to our customers to be a healthy company and we price that way. We only for our customers to give them a great value every day and we price that way. We don’t alter based on market conditions, we price the same boom, boom, boom. I guess if the market moved away from us it might show up in our backlog or something we were awaiting, but if it goes in our backlog, we priced it to be happy with it and we price it to be competitive to our customer.

William Bremer - Maxim Group

Nicely done. The current project with the major utility, this is one that you’ve been working with. Can you just give us a sense of what type of work you’ve done in the past? Okay up to what level are we talking about here, are we talking about the 245 sort of scenario?

Chris Hutter

I would say 245 and below, we may have done some stuff a little above that, but….

William Bremer - Maxim Group

And Sidney, does this project include [MSA] work? And if so, what’s the span of time on that?

Sidney Hinton

Honestly, I don’t know exactly what the scope of work or opportunities include with that customer. I am not familiar with the details on individual projects.

William Bremer - Maxim Group

Okay. Have you done any substation work there?

Sidney Hinton

We've done substation work on their system, I couldn’t say for sure that it was through them. I mean it’s a big investor on utility. I know we've been on their grid with some substation work, but that may have been for one of the GNTs to step into them. In fact I am thinking it is for one of the GNTs. We've done a couple of substations out there.

William Bremer - Maxim Group

(inaudible) housekeeping on the tax rate going forward keeps status quo with this level that we are seeing right now?

Sidney Hinton

Correct.

William Bremer - Maxim Group

Okay, great gentlemen. Thank you.

Operator

Your next question comes from the line of Rob Brown from Lake Street Capital Markets. Please go ahead.

Rob Brown - Lake Street Capital Markets

Just to talk a little bit more about the utility contract, could you give us a sense of, is this a long-term deal or is it like a 10-year deal and it’s sort of $20 million to $30 million over 10 years or?

Sidney Hinton

No, it’s a two-year deal and it’s $25 million to $35 million per year is what we see the opportunity. It’s our ambition to the way this customer contracts their legacy, I mean they like to have stability in their contractors, it’s our ambition to turn this into a 10, 20 year relationship, we are eagerly serve them and that’s down -- and I am sorry I guess I should say dam right, but you are doing right, we kept those resources available. We don’t serve that utility. I hope they are on this call, I want them to hear loud and clear we don’t serve you, we are excited to serve you, delighted to serve you, we want to serve you for the next 10 to 20 years.

Rob Brown - Lake Street Capital Markets

Okay, and under that scenario, how it gets to that 200 million plus kind of piece of business for you?

Sidney Hinton

Exactly. Yes, we believe it can be a $500 million future business over the life of it, we ought to go out and serve, and our people have done a great job of doing just that to get us this opportunity.

Rob Brown - Lake Street Capital Markets

Okay. You are closing in on your 300 million in revenue kind of goal, any sense on kind of where you go from here, do you have I don’t know if new goal yet, but how did the growth kind of continue from here?

Sidney Hinton

Yeah, we anticipate continuing the growth rates that we’ve seen in that. Our long-term view is we’ve tried to build the business and focus on the business that would sustain at least 25% organic growth year over year over year over year and we don’t want to enter markets that don’t have that type of headroom for us and that’s what we look at.

Rob Brown - Lake Street Capital Markets

Okay, great. I turn it over. Thank you.

Operator

Your final question comes from Ben Kallo from Robert Baird. Please go ahead.

Tyler Frank - Robert W. Baird

This is actually Tyler Frank on for Ben Kallo. Thanks for taking my question and congratulations on a great quarter. I did want to ask you guys, you mentioned that you had roughly $10 million in new business rewards for company owned assets in the DG segment?

Chris Hutter

Yes, sir.

Tyler Frank - Robert W. Baird

Hoping to get some highlights on, how you see that growing going forward, I know that was a big push for you guys here, more company owned assets under your belt?

Chris Hutter

Yeah, it’s a huge area of focus for us. Candidly as a balancing act, we don’t want to cannibalize. If somebody wants to buy system, we want to sell them the system. We are trying not cannibalize our current period of sales, we are trying to accretive to them, which is take those marginal customers, who really don’t want to own the system and thus we would make a decision. They might not decide not to do it, they just would decide to move forward and use us owning as the catalyst to bring them forward. That’s the balancing act.

And we’ve had certain customers that every deal they do was, they don’t want to own them, so we’re going to own them, and they are great, great, great credit customers, I mean they are pristine credit customers, it’s just increasing the number of those that we have those relationship with is our goal and it is being very selective. We do not want to do deals, I mean you guys are in the business and managing funds, you know how bad it is, you pull the stinker out, it’s really hard to average backup. We work really hard to avoid doing deals that turn into good [sides]. So it’s a balancing act, we are very disciplined not putting bad deals into the pipeline, but we do want to grow the velocity with which we're deploying this capital. We believe that's a game changer for us and for investors that we increase this velocity as the earnings were so strong I felt them, that we will be rewarded, the customers rewarded and that our investors will be rewarded handsomely for.

Tyler Frank - Robert W. Baird

Could you give us a sense in numbers what you expect sort of in Q4 and in 2014?

Sidney Hinton

Yeah. I'll sort of scope strategically for you, this year we'll probably put about $4 million worth of projects in the ground, that's our class, that's our CapEx to do those projects. We're expecting it to double, our base budget has a doubling to 8, but that really, that sort of the known pipeline, that doesn't include a real push from us to continue to accelerate that. So 4 to 8 is our base case.

Tyler Frank - Robert W. Baird

Okay, great. And I believe you mentioned that you are going to bring new product line of lighting products to market. What customers are you going to be primarily focused on for those?

Sidney Hinton

Yeah. The high end retailers are the product line with Solais relative to our niche product that we bring in the market, we never disclose the niche, it's just such a tight niche and we're in a such a great competitive position, we don't want to took the competitors that might not realize just how close that market is to tipping over and going all LED.

Tyler Frank - Robert W. Baird

Okay. Understood. Great guys, congratulations.

Operator

I would now like to turn the call over to Mr. Sidney Hinton for closing remarks.

Sidney Hinton

Thank you, and thanks to all of you for joining us this morning. We had an exceptional third quarter with strong organic revenue growth and fantastic performance out of our acquired businesses. Our $240 million backlog, which does not include the large utility infrastructure opportunity we announced today and a very high quality of the pipeline of opportunities gives us huge confidence heading into 2014 and we're focused on executing on those opportunities to deliver for our customers and for our shareholders. We're well positioned to see our 2015 top-line goal of $300 million a year ahead of schedule in 2014.

Thanks again all of you for joining us. We’ll be in New York next Tuesday presenting at the Stephens Conference and hopefully we’ll get chance to speak some of you there. Again we appreciate your confidence and support.

Operator

Thank you for your participation in today’s conference call, which concludes the presentation. You may now disconnect. Good day.

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