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PowerSecure International, Inc. (NYSE:POWR)

Q4 2013 Earnings Conference Call

March 10, 2014 05:30 PM ET

Executives

John Bluth - VP, IR

Sidney Hinton - President and CEO

Chris Hutter - EVP and CFO

Analysts

Eric Stine - Craig Hallum

Rob Brown - Lake Street Capital Markets

William Bremer - Maxim Group

Tyler Frank - Robert W. Baird

Operator

Good day, ladies and gentlemen and welcome to the Q4 2013 PowerSecure International, Inc.’s Earnings Conference Call. My name is Whitney [ph] and I'll be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

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

John Bluth

Thanks very much Whitney [ph] and thank you all for joining us today for our fourth quarter and full year 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 that 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 to everybody for joining us today. Most of our audience is from the investment community but we do also have some utility partners and some customers on the call. So, before I adjust our investors, I’d like to take a moment and thank our utility partners and our customers for the opportunity to serve both of you.

We certainly had a lot of opportunity to serve both of you during the past few months with all the storms and with the extreme cold weather this winter. It's been our privilege to provide our utility partners with crews to help you restore service to your customers and it's been our privilege to provide load relief relative to peak shaving during the extreme cold weather and certainly it's been our privilege to provide you, our customers with backup power when the utilities failed during the recent ice storms.

With that, the rest of my comments will be directed at our investors. 2013 was a record year for PowerSecure. We saw significant revenue growth across all three key products and service areas, expanded gross margins -- expanded operating margins, I’m sorry, and delivered more than $22 million in adjusted EBITDA. We grew earnings per share about 73% and we significantly bolstered our balance sheet and as we reported today our backlog stands at all time record of $248 million, which puts us in a strong position moving forward.

For the fourth quarter, we reported revenues of $73.6 million, which represents year-over-year revenue growth of 57.4%. With these strong fourth quarter results, we generated full year 2013 revenues of $270 million, which represents almost 67% growth compared to full year 2012. Two thirds of that growth was organic, with the remainder coming from the ESCO, Solais and (indiscernible) acquisitions that we made during 2013.

For the year, our distributed generation revenues grew 46%, our utility infrastructure revenues grew approximately 84% and our energy efficiency revenues grew over 88%. Virtually, all of the distributed generation and utility infrastructure growth is organic and our energy efficiency growth is driven by our Solais and ESCO acquisitions.

Additionally, I’d like to point out that both our distributed generation and our utility infrastructure revenues surpassed $100 million during 2013. Both actually finished and write out $112 million revenue each, a major milestone for us as a Company. We’re very proud of our teams and their achievements of these impressive numbers.

It was transformative year in our energy efficiency business. Our ESCO and Solais acquisitions have significantly enhanced our energy efficiency platform. One thing I’d point out we talked about when we did the ESCO acquisition, we aspired, we’ve been aspiring to serve what are called the super ESCOs. Those are the really big companies that provide energy service solutions, paid performance contracting to Federal, Municipal and State Governments. We have never been successful in cracking that customer base. Well I’m excited to tell you as investors, two of our top 10 customers in 2013 are now in that super ESCO group and quite a transformation and a direct result of the acquisitions.

We made a move in 2014 to expand -- our goal is to be able to expand our opportunities over distribution generation and LED lighting solutions through that ESCO customer channel and we’re making good progress in transitioning our LED lighting manufacturing from our legacy approach to sourcing our lines directly from Asia and consolidating the operations activities into Solais. The leadership talent that we’ve acquired with both these acquisitions has been exceptional and has allowed us to integrate them quickly. We expect to see significant top and bottom line contributions from both Solais and ESCO in 2014.

Before Chris provides a more detailed financial review of the quarter and highlights the significant strength we’ve added to the balance sheet in 2013. I will provide some additional context on our key product and service areas and I’ll start with distributed generation. Our distributed generation offering is highly differentiated in the marketplace. With more than 10 years of data across our portfolio of systems that we have deployed, we have the most comprehensive dataset in the industry to assess reliability and performance. Third-parties have mined this data for us over the past two years and have found that our systems perform in a reliability rate of greater than 98%, and that is the highest in the industry.

This best in class reliability, along with the unique and compelling economic and environmental aspects of our offering are key drivers for all of our customers and especially our newest hospital and data center categories, two of the market segments we are focused on like a laser beam.

In the hospital market we've seen a tremendous market response to our solution with 144% year-over-year growth in 2013 serving that segment and with exciting opportunities in the pipeline. The data center component of our distributed generation revenues grew by 86% in 2013 and also has exciting opportunities in the pipeline. As a side note, five of our top 20 accounts in 2013 came from those two categories, data centers and hospitals.

Moving on, we expect to see continued momentum in the hospital space and have started to see some larger cloud computing data center opportunities move into the pipeline. These larger opportunities typically have a 18 to 24 month sales cycle and we have an outstanding solution for this market segment. Just as we did initially with the retail and industrial customers, and more recently in the hospital market, we are working our way onto the radar screen to introduce large data center customers to PowerSecure and our highly reliable, green friendly best in-class solution.

As we succeed in beginning to penetrate this large data center opportunity, it could have a transformative impact on our distributed generation business. I emphasize this point. This is a big deal for you as investors and for the analysts. Penetration of the large data center opportunity could have a transformative impact on our distributed generation business.

A typical resale customer may require around a 500 KW generator for backup power. A hospital might require 3 to 5 megawatts of backup power which would be 3000 to 5000 of kilowatts, stick it with the same analogy we used before, and a large data center might require 20 to 30 megawatts of backup power or 20,000 to 30,000 kilowatts of backup power. So the data centers could easily accelerate the scale of our business.

I would also point out that this kind of growth we have seen and managed very effectively throughout the history of the company. I would also point out that the average size of our distributed generation project grew by 28% in 2013 versus 2012, which reflects the increasing contributions of the larger industrial hospital and small to mid-sized data centers.

Another growth geography for us are in our distributed generation centers around our company owned projects. We recognized $3.6 million of recurring revenues in the fourth quarter and for the full year we added $5.1 million in company owned distributed generation projects. With the enhancements we have made to the balance sheet, we’re actively working to accelerate the pace of our company owned distributed generation projects, with customers who would not otherwise be interested in distributed generation.

Key point there, we’re looking to grow our company owned fleet, accelerate the growth of it without cannibalizing our turnkey sales. This is an area that I’m personally focused on, as recurring revenue in our DG projects, distributed generation projects, represents the highest margin products that we have in any of our revenue areas and has the potential to be the most transformative on our income statement for you, our investors. Overall, our pipeline of potential distributed generation opportunities continues to reflect the highest quality of opportunities that we have ever had and we feel very well positioned to continue growing our distributed generation revenues.

Turning now to utility infrastructure, which grew right at 82% year-over-year in the fourth quarter, and right at 84% for the full-year, our growth continues to be driven by winning new business for new utility partners and expanding our business with existing partners with an additional contribution from the work we are doing for the energy companies.

We saw a very active storm cycle this winter. We enjoy storm works as it gives our best crews an opportunity to serve utilities. Many times we are serving utilities that we don’t have existing work with, and to serve the most when they need us the most. It is important to remember that PowerSecure, the greatest value that we get from storm work is not the near term revenues, since we are pulling our crews off existing jobs that they work. Instead it’s the marketing value of demonstrating our distinctive capabilities to utilities and our tremendous productivity, where the utilities that they got from there with our capabilities as we did storm work for them in past years is the large utility that we announce as a new long term relationship with last quarter.

You will recall that by holding on to our crews that we have made the decision to hold on our crews in anticipation of winning a large contract. We saw some dilution in our gross margins in the third quarter, and this improved in the fourth quarter as we expected it would, and as we described to you last quarter. We continue to expect that relationship will yield $25 million to $35 million of revenue annually. However, until we have greater visibility with the customer, we will keep the majority of this work out of our backlog, other than near term revenues that we expect to realize. But just to be clear, I want to give everyone a key data point to demonstrate that this relationship is very strong and very active. During the fourth quarter we recognized $7.5 million of T&D revenue from that customer.

With this developing relationship, with our backlog and with the high quality of sales in our pipeline, we have visibility into what we believe will be another very good year in 2014 for our utility infrastructure business. The profitability of this segment is a major corporate priority for us in 2014. We have an outstanding team of leaders there and they are plowing ground and doing a tremendous job of building our great business, not just in 2013 and back and not just for 2014; we’re looking out to 2015 and ’16, a great leadership team.

In our energy -- moving along to our last area, in our energy efficiency area, 2013 was a transformative year for us with our ESCO and Solais acquisitions. These acquisitions drove our fourth quarter and full year revenue growth in energy efficiency of right at 182% in the fourth quarter and right at 88%, slightly over 88% for the full year. Our energy efficiency revenues in 2013 were $47 million, significantly increasing the scale of our energy efficiency and product service platform.

The energy services division, our business, the ESCO the purchase we make continues to be a big winner for us, delivering $2.3 million of profit in 2013 and keep in mind that’s a business where we paid $1.9 million in cash, assumed $3.6 million in negative working capital. We expect the ESCO business to grow in 2014 and we’ve begun educating our ESCO customers about our distributed generation and LED lighting solutions with a goal of beginning to pull those products through the ESCO channel in 2015.

We’re also making good progress in transitioning our lighting manufacturing to the Solais manufacturing systems in Asia. We expect this transition to progress throughout the first half of 2014, lowering our cost of sales and our overheads in our LED product lines and putting them on a path for a stronger and more profitable growth. That said, we do expect to incur some additional cost of sales, COGS, during our first and second quarters of 2014 due to the transition to Asian production, which will dampen our gross margins associated with our LED products in the first and second quarters and mainly that’s due around shipping -- keeping up with customer expectations but we expect that to turn around in the third quarter when we fully integrated the manufacturing and that we’ve worked out the supply chain. We’re very bullish on this transition.

When you look at our lighting business, we have basically three areas of light. We have our outdoor lights which that includes our utility area light we’ve talked, it includes our parking lot light and it includes the niche light that we’ve talked about but never disclosed what it is. Then we have a second category, which our grocery lighting which is our traditional customers and then we have our high end retail products which are the traditional Solais solutions.

For 2014 we expect to see strong growth from the outdoor product group and from the Solais product group and we expect our grocery store lighting to basically hold its own. Overall we are anticipating that our LED revenues will grow approximately 50% in 2014.

In summary, 2013 was a terrific year. Our strong revenue growth of 67%, our record backlog of $248 million and the conversations that I have every day with our customers, with our utility partners or with our employees have us very excited about the continued growth and success of PowerSecure. We are well positioned for another record year in 2014 and our pipeline of opportunities is the healthiest we’ve ever seen, which bodes well for 2015.

Now I'd like to turn the call over to Chris to walk through our record financial performance and our backlog in more detail.

Chris Hutter

Great. Thanks Sidney. I’m going to focus my comments in several areas. As I usually do I’ll talk about the highlights of the P&L, including trends in our revenue, the gross margin, our OpEx and our operating margins, 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 and so forth.

The headlines as we kind of work through 2013, I think it’s interesting, it’s the third consecutive year that PowerSecure has delivered year-over-year revenue growth in all fourth quarters of the year and I’d point out, not just modest growth, strong growth. And it’s interesting, if you go, if you look back one more year, we’ve actually grown our year-over-year quarterly revenues in 15 of the last 16 quarters. So just a little perspective on that to read.

For the fourth quarter of 2013, we again saw strong growth. It was driven organically as our organic growth rate was 41.5% and this combined with our acquisitions to deliver total year-over-year revenue growth for the quarter of 57.4%. As Sidney noted, this growth resulted in total revenue for the fourth quarter achieving record levels of $73.6 million, compared to $46.8 million in last year’s fourth quarter.

In terms of our revenue performance of our product and service area, we provide a revenue chart in our earnings release which breaks out and growth in each of those product and service areas for the fourth quarter. But headline is, we saw substantial growth across all three products and service areas with year-over-year DG growth of 16.4%, utility infrastructure growth of 81.7%, energy efficiency growth of 181.6%.

And for full year 2013, DG grew 46.1%, UI grew 83.8% and energy efficiency grew 88.5%. So all numbers we're really pleased with and it’s amazing efforts of the PowerSecure team to deliver those types of results. An important goal heading, now sort of moving down into the P&L -- our important goal heading into 2013 was to continue to translate our revenue growth into EBITDA growth and meaningful increases in EPS, primarily by decreasing our operating expense as a percent of revenue and expanding our operating margins and we have strong results to report against all of these measures and for those of you that have been following us for a while know, we've been very clear about those goals and that’s been the approach really for the last couple of years to drive that type of leverage.

Our revenue growth in 2013 significantly outpaced our operating expense growth and this resulted in very nice operating expense leverage. As a result, our adjusted EBITDA was $22.1 million, which was almost double 2012’s $11.2 million and our EPS was $0.22 on a GAAP basis and $0.38 on a non-GAAP basis. This was up 38% and 73% respectively. I want to amend here and just make sure everyone is really clear on our fourth quarter charges and our GAAP/non-GAAP measures. First, our non-GAAP financial measures for the fourth quarter of 2013 exclude a $4.9 million charge to restructure our LED lighting operations, which as Sidney touched upon and we've been talking about for a while, include sourcing our products directly from Asia. And this is a project we undertook to lower our cost of sales and overheads and position our LED product lines for enhanced future growth and profitability.

You may recall that we discussed this restructuring initiative last quarter and frankly we talked about it a quarter before. Right when it came on our radar screen we started talking about it and we are right in the middle of it as we speak. Just to remind everybody about the background, we're taking these actions to realize the manufacturing resource and synergies contemplated in our 2013 acquisition of Solais. These actions include eliminating certain deportated [ph] facilities, resourcing from new lower cost suppliers in Asia, reducing the number of product offerings in our portfolio and reducing personnel and overhead.

Okay, good, that’s the headline, really important from an accounting standpoint. Please not that $3.7 million of this charge relates to inventory and therefore was recorded in our fourth quarter ‘13 cost of sales and $1.2 million relates to severance, facilities and equipment and was recorded an a restructuring charge and operating expense, okay.

Again $4.9 million total charge, $3.7 million is in cost of sales, $1.2 million is in OpEx. From a timing standpoint, the majority of the overall actions to restructure these product lines were taken in the fourth quarter. That’s the $4.9 million. However, we do expect to report an additional charge in the first quarter of 2014 an amount of, we're only giving a range here, somewhere between $300,000 and a $1 million. This is consistent with the overall message that we have been delivering for last couple of quarters to expect to the charge in the range of $4 million to $6 million in total. So, there is the math, that’s how it lays out, hopefully that was clear.

In addition, our non-GAAP financial measures for the fourth quarter of 2013 exclude a one-time expense of a $0.5 million to upgrade an annuity with underpinned cities post retirement compensation. Basically we purchased an enhanced annuity from a different provider to fully guarantee the future payments on the semi after his retirement and that was the cost. So when you detect that charge and again, that’s in your G&A and Op expense as well.

So to summarize, our fourth quarter 2013 non-GAAP results exclude two charges; one, a $4.9 million charge that's split between COGS and OpEx and $0.5 million charge related to the new upgraded and annuity fund Sidney’s post retirement compensation.

Looking in the fourth quarter of 2012, as we look at that comparison, our non-GAAP financial measures again, we’re looking a year ago our non-GAAP financial measures exclude a 1.1 million pretax charge related to a restructuring cost reduction plan that we executed in 2012 which was part of our initiative to lower our operating expenses as a percentage of revenue and so we’re obviously realizing the benefit of that realized all year long. Look at earnings release, look at the carry filing and all those non-GAAP calculations in there, very good.

All right, moving down the P&L. our GAAP gross margin for the fourth quarter of 2013 was 22.4% compared to 33% in the fourth quarter ’12. On a non-GAAP basis, excluding the inventory related portions of the restructuring charge, gross margins as a percentage of revenue for the fourth quarter of ’13 was 27.4%. This number is right in line with what we communicated last quarter, that we expected to see sequential improvement from 3Q to 4Q. Year-over-year the decrease in gross margin was driven by the year-over-year growth of our utility infrastructure in ESCO revenues which -- as we’ve communicated many times are generally our lowest gross margin product in service categories as well as there are some differences in the mix of projects year-to-year.

We expect 2014 gross margins to continue to be in the mid to high 20s, 20% with on balance a little more risk than upside in the near term driven by some of the cautiousness and you heard Sidney talk about this with regard to our LED lighting realignment and potential cost of goods sold in efficiencies related to that transition and a little more upside than risk as we move past that and into the second half of 2014.

Our mid-range gross margin drivers continue to include several items to increase our gross margins and provide us some leverage including our Company manufactured PowerBlock, DG sales adding high margin company owned DG projects and as Sidney discussed pulling our higher margin lighting and DG solutions through the ESCO channel as well as the positive gross margin impact we expect to gain from moving our LED production to Asia once this transition period -- once we’re through this little transition period here.

Our operating expenses, moving on, our operating expenses in the fourth quarter of 2013 were 16.7 million which is excluding the restructuring and exact comps charges. Excluding the fourth quarter ’12 restructuring charge, this represents a year-over-year increase of 4.3 million. Again, if we do non-GAAP year-over-year excluding the charges in both years, its difference is 4.3 million that 4.3 million consists of 2.9 million of ongoing incremental operating cost related to the acquisitions of ESCO, Solais and in the fourth quarter Encari and 1.4 million of increases as OpEx related to our revenue growth.

As we look forward, we expect our OpEx to be in the 16 million, maybe a little higher but I think 16 million to low 16 million range over the next couple of quarters which is slightly lower than our recent run rates driven by the savings we expect to realize from our LED lighting realignment. Again, lot of overheads, we were able to rationalize in that as well.

I would also note that in the fourth quarter of 2013, our OpEx as a percent of revenue decreased 3.8 percentage points year-over-year and for the year our OpEx as percentage of revenue declined by 6.1 percentage points, these are both -- both of these I’m talking about are non-GAAP basis excluding the charges. So, good progress there, 3.8 percentage points on the quarter, 6.1 on the year favorable.

Moving down to P&L, our operating margin as a percentage of revenue was a negative 2.5% in the fourth quarter of ’13 on a GAAP basis and a positive 4.8% on a non-GAAP basis. This compares to a positive 4.3% in the fourth quarter of ’12 for GAAP and 6.7% on a non-GAAP basis in 4Q’12. The decrease in operating margins was driven by the decrease in gross margins which we talked about and frankly we’ve been talking about for the last I guess couple of quarters to expect that partially offset by a decrease in operating expenses as a percentage of revenue. So, that’s the math.

GAAP, let me move all the way down, GAAP earnings per share was a loss of $0.09 for the quarter compared to income of $0.08 a year ago excluding the charges GAAP was $0.13 per share, GAAP EPS for the fourth quarter essentially flat the prior year -- I’m sorry, non-GAAP was $0.13, John thank you very much, that was a good one. I also want to point out here that our tax rate for the fourth quarter of 2013 was lower than expected due to some year-end tax adjustments and you can normalize that rate to 40% which is what we expect our ongoing rate to be as we look forward, you’ll see that the tax adjustments benefited the fourth quarter right around $0.04 of the $0.13. So that’s the math on that, the tax rate for the fourth quarter was lower than we expected but I don’t want anybody use that on a go forward, use 40% that’s the right number, of course you always don’t get variation but that’s the strict down the middle number that we expected to be.

Ok, very good. Let me turn to our revenue backlog, as of today the revenue backlog is a record 248 million, this compares to 240 million at the time of our last earnings release and 183 million a year ago, so nice increases there. As we described -- as we always described in earnings release we break it down in three categories, we got our near-term backlog which is project based work, including orders for our DG our UI and our energy efficiency products, there we expect to recognize over the course of the next three quarters, which got our longer term project based work. And then we’ve got our recurring revenues that we measure every quarter.

As you look at the backlog number of 248 million, 118 million of that is what we call near-term backlogs and specifically we estimate that 40% -- I am going to take my time here because I know all the analysts want to know these numbers, so I just want to take my time. 118 million in near-term backlog, 40% we expect to be recognized in the first quarter, 42.5% we expect to be recognized in the second quarter and 17.5 will be recognized in the third quarter. And look, how we say this, I think everybody knows that it follows us, projects can do and do, and in both directions favorably and unfavorably from the timing perspective. But as of today, that’s our best look at how we expect that to be recognized.

Almost going to skip down these comments that’s the most important thing. All right, a simple formula, to use what I just said as a basis to model our revenues over the next three quarters is you can take that near-term backlog and spread it according to those estimates, those percentages, add approximately 6 million in revenue in each quarter to account for recurring and other regular revenues that we do not include in the project based backlog.

And then finally layer in and make assumptions about additional project sales, you expect we will make and complete between now and the period you are estimating the will add to that base of quarterly revenue that you get when you apply the percentage and then add 6 million bucks, then add what you think will sell in turn, obviously the window of selling time, the impact upcoming quarters increases the further out you're projecting. And so you should have bigger numbers in that row as you get further out in terms of that additional revenue.

Overall, our backlog implies continued growth as our near term backlog is up 18% over last year this time and our long term backlog has almost quadrupled. As always, the key will be the timing of order conversion from our pipelines to our backlogs, in other words our ability to sell and execute. We are in good position and we remain strongly focused on the work to be done to deliver another year of strong numbers in 2014 particularly given the tough year-over-year comparisons that we’re facing as we move through the year.

So that’s all that, the P&Ls, the backlog charges and so forth, I will turn to the balance sheet at this point. Our cash balance at the end of the fourth quarter was 50.9 million, the headline for the years that are strong revenue growth and related working capital requirements resulted in the usage of cash from operations were about $2.2 million and frankly we’re happy with this result given the growth that we’re executing against, we feel really good about that, feel good about how we managed the balance sheet.

In the quarter we invested $4.4 million of CapEx with 3.5 million invested to deploy systems to support our company owned long-term recurring revenue projects and remaining 900,000 primarily to purchase equipment for our growing utility infrastructure business. We continue -- as we look forward, we continue to anticipate total CapEx in the 10 million range for full year 2014 and I will just quickly add to that, of course we are focused on looking at ways to dramatically increase that 10 million is really -- that’s our base line plan, that’s without really ginning up that effort.

We’ve got $27 million in low cost term debt, that’s a 3.73% in capital leases and nothing drawn on a $20 million revolver. So we’ve got plenty of dry powder and that gives us with plenty of flexibility for future investments whether it’s company owned DG, acquisition opportunities, additional equipment and the working capital, importantly the working capital to continue to deliver bigger and bigger projects. So in summary, just quick summary, we're pleased with our results relate, we like where we sit and we’re in a strong position as we look forward.

And with that operator, we'll turn it over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Eric Stine with Craig Hallum. Please proceed.

Eric Stine - Craig Hallum

I was wondering if you could just start with the data centers, this is an area that a number of years ago invested along with hospitals. Hospitals clearly have kind of led the growth but just wondering some lessons learned there and maybe how that shapes your view of data centers? How that might develop overtime?

Sidney Hinton

Yes, two things here Eric. First we would acknowledge that we’ve said it before but we’ve stumbled at again the data centers relative to our -- when we went out, we hired -- we tried to hire industry experts. We’ve got a great one in the hospital market. Candidly, we were after a really top tier person, he ended up as Senior Head of Sales for a publically traded company, just to give you a feel for the caliber of person we were after. We didn’t get that person -- we ended -- we just stumbled on the higher. It got us off to a slow start at the data center but what we learned in the hospital market was -- there is nothing second tier, there is nothing -- you’ve got to go after the very best people, the people with the proven track record, the people that bring, they’re already selling their products and solutions and that's what we’ve done.

We’ve gone and acquired a really high end sales talent and candidly we won’t hesitate to acquire more in that data center and hospital market, it’s just incredibly beneficial. And the interesting thing is we have to sell [they aren't] joining us. They already have the customer and that’s the very validating thing is when they see the value proposition that we can bring to their customer base, that’s what drives them to leave the company there with, we're already making hundreds of thousands of dollars, it's not seven figures at their existing compensation packages that’s what job and leave that and come to us because they know there is that much more value that we can bring to their customers and thus that they can deliver to their customers. I hope that’s helpful Eric.

Eric Stine - Craig Hallum

No, that is helpful the fact that those individuals are tied in with that customer, does that help at all in the sales cycle I mean it still sounds like they’re…

Sidney Hinton

No, it definitely helps. I would tell you we’ve cut the sales cycle down probably six to 12 months in many cases because of their familiarity with the customers, the customers' trust in them and us just having to win the trust of the sales executive himself or herself.

Eric Stine - Craig Hallum

Yes, that 2014 data center is likely going to be a big theme?

Sidney Hinton

[They operate is]. We’ve definitely got a great pipeline. If we’re blessed to convert that pipeline in to sales, everybody on this call will be excited.

Eric Stine - Craig Hallum

Okay that’s great. Maybe just turn in quick to hospitals, just characterize the growth there’s been pretty significant but just maybe how far you think you’re in the opportunity or whether it’s you’re in a couple of states or it’s in small projects, you can get into larger projects, just how we should think about that?

Sidney Hinton

Yes, I would say we’re in -- if this were nine inning baseline game, we’re in the -- maybe the bottom of the second inning and top of the second inning, I mean, we’re the only played the inning. We’ve at least gone to top chart of the order. It looks good. We really like where we’re at, but the whole focus is penetrating the bigger change, the bigger opportunities and doing stuff on a wide scale, we've very much have validated our belief that we have a significant value proposition to bring to the hospital market and are very-very bullish on that.

Eric Stine - Craig Hallum

Okay and some of your awards here that have even uncertainly in first quarter I think one of them in particular was a sizable hospital order I mean is that any comment whether that would be progressed towards getting into a chain or maybe that’s too much color that you might provide?

Sidney Hinton

I’d probably dodge that question if you don't mind or just not answer it.

Eric Stine - Craig Hallum

No its fair, that’s fair. Just last one for me. You didn’t talk a whole lot about solar in your prepared remarks but I was just curious, if you could give an update, I think it was early December and I don’t think you announced this but Dominion put out an announcement that you’re the EPS firm for I think it was 2 megawatt project. I know Dominion's got a 30 megawatt plant and just thoughts on progress well first for that 2 megawatt that initial project but then the additional megawatts with that utility and I guess with other utilities as well?

Sidney Hinton

Yes, let me avoid being specific on an individual customer but as for more broadly, we love our play in the solar business. We pay $4 million for it. We did 16 million in sales during the 2013.

Chris Hutter

Which was double, that’s double what we did in 2012.

Sidney Hinton

And candidly, we’ve got odd zone chance to double it again this year. It’s got probably the greatest variability of anything and hell we could be able to call, say we did $20 million too, but I'd say we probably got about the odds of doing 20 million is probably about the same as the odds of doing 35 million to 40 million that is just big projects. And that we have a good value proposition and disciplined delivery process that lets us price competitively, yet maintain our margins. We really like where we're at and we found that the customers very much, the utilities in particular, they like the fact that we can do monitoring, they love the fact that we can do the interconnect with the utility. They love our detailed knowledge of the systems and the fact that we can bring our own inverter technology to the market. We’re just different than any of the other EPC contractors that are out there.

Operator

Your next question comes from the line of Rob Brown, Lake Street Capital Markets, please proceed.

Rob Brown - Lake Street Capital Markets

Good afternoon, congratulations on a good quarter. I think you mentioned, I think you said 50% growth in the LED business, was that the LED business or the overall energy efficiency?

Sidney Hinton

That’s the LED portion of the energy efficiency growth.

Rob Brown - Lake Street Capital Markets

And you gave some sense on where that comes from, but could you give us a little more sense of sort of how that rolls out throughout the year and sort of what new products come to market, are you expecting additional customer wins or how does sort of build up?

Sidney Hinton

Yes, candidly the demands, they’re to date, I mean it’s, part of our biggest hiccup right now is moving this manufacturing out of the States and into Asia, it's costing us some margin now, it's also costing us some customer patience. We’ve pretty much got the orders there to do it, it’s just getting the manufacturing moved, obviously we’d rather ship more once we’d move the manufacturing. We don’t want to disappoint a customer, we have to choose between making money or disappointing a customer, we will not disappoint a customer. Because serving a customer always comes first, we have taken a long term view of that. But I mean if the margin enhancement is just so significant that we’d much rather ship more of that in the second half when the margins are high.

Chris Hutter

Yes, and I’ll just add to that Rob, there is -- also with the lighting, particularly on the retail side, is I know you know, there tends to be some seasonality there, the first quarter tends to be a little slow to ramp and the last quarter tends to taper down because the retailers don’t like, don’t want to do all those retrofits during those periods, so kind of second, third quarter I’d say will be our highest quarters of the year but we ease into it, the third quarter will probably be higher than the second and again the first quarter probably will be lowest, and the fourth quarter will probably be somewhere in the middle, if that makes sense.

Sidney Hinton

With the potential offset of being the utility lights and so forth, they’re not very seasonal so to extent that grows, it may offset some of the traditional…

Chris Hutter

Yes, we make it more of a sequential off of that, that’s a good point. Makes sense, Rob?

Rob Brown - Lake Street Capital Markets

That was perfect, thank you. And then on the margin expansion and utility infrastructure business I think you talked about that being a focus area, what -- is it just getting utilization on those underutilized resources as this new contract comes in or are there things you’re doing there?

Sidney Hinton

No candidly so the leaders in that business unit, it’s their initiative, they’ve made a conscious recommendation to the company which we accepted which was to prioritize profitability over growth and be very disciplined on the pricing process, they look back from what’s been learned over the past 24 months and they feel like they know how to avoid some pricing issues that cause some margin erosion on the turnkey pricing as well as a disciplined approach with customers that we don’t make a lot of money on, either managing those customers to turn them profitable or stop growing with those customers. It’s a -- just an overall comprehensive approach, lessons learned, and manage our growth with customers who really value the quality and not just another contractor. Literally if somebody’s going to rip up an envelope and just take the lowest price, he's probably not a good customer for us to serve longer term and we do want those customers who value, the fact that we’ll move heaven and earth to serve them in a moment of need as well as the quality and the timeliness of the construction we do for them, hopefully that’s helpful.

Operator

Your next question comes from the line of William Bremer with Maxim Group, please proceed.

William Bremer - Maxim Group

Let’s stay with the margins a little bit, can you sort of give us an idea of what the MSA contribution was for the utility infrastructure segment this quarter?

Sidney Hinton

As you know Bill, we don’t break out the margins per segment like that, per business unit, but it is lower, I mean it’s going be lower than the DG. DG’s always going to be the highest, of course the recurring revenue on the DG is at the top of the list, then DG turnkey and then the lighting and then the UI will be the lowest, so whenever you get that, the growth, the kind of growth that we’ve been seeing you're going to get some pressure on margins and again that’s, it’s really the blending. The good news there is that we came off of a 26.3 overall blended gross margin in the third quarter, we talked about, really related to inefficiencies in the UI customer base, we’ve recovered nicely there, we’re able to add a point sequentially on the gross margin lines but it’s the lowest, that’s for sure.

William Bremer - Maxim Group

You added a point on UI sequentially or you’re talking consolidated?

Sidney Hinton

Overall.

William Bremer - Maxim Group

Okay.

Sidney Hinton

We went 26.3% blended to 27.4% excluding the charge.

William Bremer - Maxim Group

Okay. Master Service agreements in UI, can you just sort of give us an idea of how that’s developing?

Sidney Hinton

That’s how we operate. I mean those agreements are sort of fundamental to the business. We engage in relationships, we work off of master service agreements and then we work to expand our service underneath those master service agreements over a period of quarters and years. And so it’s always been fundamental and that’s sort of what we do. We try out with utilities to be able to put ourselves in position to be contracted long term under IMSA tech agreements.

William Bremer - Maxim Group

Okay. And going to DG can you sort of give us an idea there, especially during the last, in the fourth quarter and sub-sequentially into the first, clients definitely are asking, how you guys participate in the economics of peak shaving maybe just go through on the call please?

Sidney Hinton

Sure, it is, I mean, if the customer owns a system then we participate and the fees that they pay us for monitoring and dispatching, we get fixed fees on a monthly basis and that’s it, they are -- if we own the system, then our revenues are generated almost 100% as a result of the benefits associated with peak shaving and our cut ranges anywhere from 50% to over 100% in some cases when we get all the peak shaving and they pay us for backup power as well just depending upon what the benefit stream is.

Operator

Your next question comes from the line of Tyler Frank with Robert W. Baird. Please proceed.

Tyler Frank - Robert W. Baird

Thanks for taking the question. I was wondering as we look forward for your operating margin targets and long term goals, could you give us a sense on when you may give us an update on sort of your three year, five year goals going out and whether that might be revenue targets or more of an operating margin goal?

Sidney Hinton

Yes, it’s going to be all the above and we’re going to have that conversation with our Board in our meeting in early June. So we’ve set that up, that’ll be our -- that's our next strategic thing to do is to bring that strategic plan to the Board. We haven’t really made a decision as to how ultimately what the metrics will be that we come up to the street. I would think, I definitely would think it would be revenue, it would be some type operating margin, maybe some ranges on each of those, so if you understand what the top line is and then what the profitability metrics are that we’re going to be shooting for and we think we can deliver, so that’s the plan so it will be out this summer with a revised plan on that. Thanks for the question, that’s great question. Thanks for asking it.

Tyler Frank - Robert W. Baird

Great, and then just another brief one when we look at the pipeline I guess the opportunities that are currently outside of your backlog, but in the larger pipeline. Can you tell us how things look from that sense and where you might be seeing traction but also any areas where you might be seeing some weakness right now?

Sidney Hinton

Yes, I would say across the board we don’t see any weaknesses, it’s a very, very, very healthy pipeline across the board best we’ve ever had, definitely utility in infrastructure, definitely in DG, definitely in the ESCO portion, definitely on the LED lighting. I mean it’s really it’s great and we’re very, very bullish on the pipeline, very bullish.

Operator

There are no further questions in the queue at this time. I will now turn the call over to Mr. Hinton for closing remarks.

Sidney Hinton

Thank you. And thanks everybody for joining us this evening. 2013 was a record year for PowerSecure and we’re incredibly encouraged about our opportunities in 2014 and beyond. Thanks again to all of you joining us today. We’re presenting tomorrow at the Roth Conference in California and I hope we’ll have a chance to see some of you there. Good evening.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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