Chris Hutter - CFO
Sidney Hinton - CEO
Rob Brown - Craig-Hallum
Eric Stine- Northland Capital
Amit Dayal - Rodman & Renshaw
William Bremer - Maxim Group
PowerSecure International, Inc. (POWR) Q2 2010 Earnings Call August 5, 2010 5:30 PM ET
Good day, ladies and gentlemen, and thank you standing by. Welcome to the Q2 2010 PowerSecure International Incorporated earnings conference call. (Operator Instructions) Before we begin, the company has asked me to read the following statement.
All forward-looking statements in this discussion are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact, including, but not limited to statements concerning future financial performance and the outlook for the Company.
Forward-looking statements are not guarantees of future performance or events and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, projected or implied in this discussion. Important risks, uncertainties and other factors include, but are not limited to, those factors identified in the Company's most recent Annual Report on Form 10-K as well as subsequent reports on Forms 10-Q and 8-K.
Accordingly, there can be no assurance that the results expressed, projected or implied by any forward-looking statements will be achieved and listeners are cautioned not to place any undue reliance on forward-looking statement.
The forward-looking statement in this discussion are only as of the date hereof and the Company assumes no duty or obligation to update or revise any forward-looking statements contained in this discussion.
I would now like to hand the presentation over to your host for today, Chris Hutter, Chief Financial Officer.
Thanks, Adam and welcome everyone to the PowerSecure International Inc. second quarter 2010 earnings conference call. Thanks for your time and interest in our company. With me here today, I have Sidney Hinton, our Chief Executive Officer. And our agenda will be very similar to in quarters past. Sidney will provide an overview of our first quarter performance and lead a strategic business discussion. Then I will provide more detail on our first quarter financial results, our balance sheet, and our backlog.
Overall though, given that our last few calls have been on the long side we tried really hard to prepare our prepared comments today with the goal of streamlining the call and get it done in under an hour. So we're going to work really hard against that goal. And then we'll open up the lines for Q&A of course as we always do toward the end of the discussion and Sidney will wrap up with a few closing remarks.
So with that, I'll turn it to Sidney.
Thanks, Chris. And thanks all of, you, for joining us this afternoon. And specifically, I'd like to recognize our customers who have dialed in, we appreciate your support, your confidence and your interest in it. And we appreciate our utilities who have dialed in again. We appreciate your support and confidence. And our investors who are on the line, we appreciate your support and confidence is us. Thanks all of, you, for this afternoon.
I am excited to be able share the results with you this afternoon, and I will be more excited to be able to be share when we go through these four major messages we're trying to communicate. And in messages three and four, I'm particularly excited about those, because we're going to do, what I would call tipping our hand. We're going to try to convey and help you as investors, you as analyst, you as customers, you as utility partners, see what has that's so excited about the future. So I can't wait until we get to the major points three and four. But let me back up right now and give you what the four major points are.
First, our second quarter financial results are very strong. Revenue is $34 million it was up 37%, earnings per share is $0.07 a share, which was up 75%. Our key message around that, and I'm going to come back and add color to this, is that our growth was across the board, on every one of our business segments, so that that's message one.
Message two, and again I'm going to add that to all of these messages. Message two is our operations and execution continues to be very positive. We like it a lot. It's reflected in our gross margin, which was 34.5%, that's 1.7 percentage points above last year.
This is our fifth consecutive quarter of year-over-year increase in our gross margin percentage. The headline here is that our team continues to deliver strong and outstanding products and services to our customers with the strong value proposition. Our engineering, our operations and our field teams did do a terrific job of executing on our behalf and on behalf of our customers.
Third message and the third important one is a couple that I'm really excited about. The third message, and this may be a little confusing, but if you'll bear with me, I think you'll enjoy this part. The message is that our new business development and new product development efforts are bearing fruit.
And that they provide us with excellent catalyst for growth. And when I think about the catalyst for growth, it's what are the things that we think are coming and that we anticipate and that we believe we'll propel our company forward. And later I will talk about, what are the things that have us positioned, actually I'll talk about in the fourth bullet here.
The things that help us get each of these business units up to $100 million each and we have three of those, and we believe have that potential and more. But a little more color into this third bullet before I move to the fourth and then dive into them.
We want you to understand why we're investing now, where's the growth we're investing for, why are we spending the money to-date. And you certainly see it for those who have not seen our financials. Our SG&A was up $3 million over the prior year, I'm sure some of you look and say, "Wow, it's a lot." And we want you to understand why we're doing that.
And the short message is, because we want to make sure we're positioned to get two pieces of cake, following up on our analogy from last quarters call. As we've talked about before and we will say it again, we've got some very promising opportunities in the pipeline. We're very excited about them.
One thing we would point out, when we talked on the call last time, we talked about that. We talked repeatedly about multiple pieces of cake, wanting the icing, why were we spending money and then we've said, we felt good things were coming. And I would just like to point out three things, it did come. These were the things we had in mind, and that we were blessed to land them all and be able to share them in press releases during the last quarter, since the last call.
One of those was the $30 million utility services contract with a top utility in the U.S. another one was our alliance with Schneider to reach the hospital segment. And in the third one was the recurring revenue contract with a major retail chain that we announced.
When we talk about this third category, we'll try to give you some more color into what we see out in the future. I will say this now; the stuff we'll be talking about is not predicting what will happen in the next quarter, as in the next 90 days. Some of it may very well happen during that time frame. But it is tough that we anticipate it's going to happen between the next 90 and 360 days.
And it's stuff that really does have the potential to impact the company in a very, very significant way. So the third item, I talked too much on that one. That was just our new business and new products efforts are bearing fruit and it provides some great catalyst.
Our fourth one and it's a little bit related, but we're very pleased about the continued progress we're making in building a strong foundation looking out. The quantitative headline around this is that our revenue backlog continues to build, particularly the revenue items that are either recurring or longer-term in nature.
The qualitative is that we're executing, we're very pleased with our executing with some strategic initiative that will enhance our revenue and profitability in 2011 and beyond. And again, our eyes are focused on the goal of $100 million a year in the three business segments of Distributed Generation, Utility Infrastructure and Energy Efficiency.
You will see, Chris will talk later about the investments we're making in SG&A that are related to new market development, new product development and developing new technologies that help us serve our customers and create competitive advantage for our customers.
Let's move back up now. We are going to dive into topic one, which was the strong second quarter results. And again, echoing my earlier comments, these results were driven by strong revenue growth that was across the board.
Let's dive first into distributed generation. Our DG, Distributed Generation revenues grew 55%, and we couldn't be more pleased with that result. Quantitatively, this quarter's DG revenues were our highest level of quarterly DG revenues in our economy's history, excluding the public's work that we did in 2006 to 2008. We had roughly $15 million of revenue this quarter in our DG business.
Qualitatively, as a result of the success we've had in broadening and deepening the penetration of our DG business in key targeted customer categories, which includes manufacturing, data centers, hospitals and municipal applications is also the result of our success in expanding our utility relationships. You'll always hear us talking about the importance of our utility relationships to the business.
This revenue growth is a direct reflection of our success in expanding those relationships. It's also a reflection of our growing track record of demonstrating the value that our unique approach to distributed generation and managing those assets against the peaks of utilities and the value that creates.
Our NexGear, which is part of our distributed generation business unit, those revenues also showed strong growth, 44% during the quarter. And finally, our recurring revenues, part of our DG business was up 40% during this quarter to $1.8 million which is our highest amount of recurring revenue in the quarter. That's our Distributed Generation.
Moving on to Utility Infrastructure. This business segment grew 40% with the growth driven by the strong success of our utility services team and the work that they've done with several top U.S. utilities in transmission and distribution around construction and maintenance with the majority of that work being on the distribution systems.
Those of you who were on last quarter's earnings call, and even those that are on today's call, we've already mentioned it once, but I'll mention it again. You will recall that we mentioned the fact that we anticipated being a recipient of a significant new award. And in fact, that did occur; the $30 million business that we referred to is a great demonstration of our utility.
One thing we talked about in last quarter's call that we were ahead of ourselves spending money. We had spent some money in Q1 in anticipation of it. That was the reason why we're telling you about it. The great news is, that we did win it, and it's just validation of how well our utility services team is executing. They're able to go out and work with customers, get on their system, demonstrate the superior value they can provide and then earn a annual competitive market price for those services and then also make some profits out of those competitive market rates.
I will point out that we did this in the face of an environment in utilities for spending on infrastructure that has been described as tepid over the last year or so. But we do believe it's improving, based on what we've seen with the utilities we are working with.
Moving on to Energy Efficiency, our revenues in this business grew 21%. This was driven by an 11% increase in our EfficientLights revenue which totaled $5.1 million, combined with just a little under $1 million of revenue from our IES business and our EnergyLite business.
You will see when we talk about the category three, when we move to that, but I want to emphasize that here we continue to be very excited about the growth opportunities we see in the marketplace for LED lighting solutions. I know, several of our large investors have asked us from time to time, do we think LED on certain products is just ahead of itself, and it's not going to be able to achieve returns, and they ask that relative to some investments they have in other companies. And we feel really good about the space we're sitting in, the time we're sitting in, and the price points we're able to achieve.
We'll talk in a minute about the major opportunities we're targeting and the investments we're making in new product development to realize those opportunities. Just to step aside here for a second, I want to point out one thing that during the second quarter we hired another strong national accounts sales executive to boost our sales activities and capabilities in this area and with national accounts.
That said, we continue to see our EfficientLights, Case Light, the freezer case product, we just continue to see that as a major driver going forward, but we're also very excited about the new products that we'll be talking about in a few minutes.
Lastly, our Energy Services business unit. So we're going over the four segments, three of them are strategic, one of them we operate more as a cash cow type business; that's our Energy Services where we own two companies, Southern Flow and a minority interest in disposal wells.
Our Southern Flow business realized revenue growth of 2.6% over the prior year. Natural gas market conditions have improved over the last year, and our Southern Flow team is doing a very good job of executing on a growth strategy. They have added a sales team there, the first time they've had one in over 20 years, and we're excited to be supporting them on those efforts and their enthusiastic approach to trying to grow their business.
Southern Flow's operating income was $290,000, but that included $430,000 of a severance expense which was related to some realignment that we did in that business in the second quarter to help them get positioned for some higher growth. If you excluded the severance, the operating income would have been $720,000 and that would have been an 18% increase over the prior year.
For Southern Flow, it's the first quarterly year-over-year revenue and profit increase since the fourth quarter of 2008. We're optimistic that the second half of 2010 will continue to show improving trends in revenue and profits as well. Additionally, the minority investment we have, we refer to it as WaterSecure.
The income was $900,000, and that was up 90% due to the improving conditions in the oil and gas markets, as well as increases in natural gas production due to the introduction of some new technologies to extract natural gas from large shale deposits. That's our summary on our first one, talking about the strong second quarter that we had.
Now moving to our second major bullet point, and that is, our operations and execution continue to be very positive. You've heard us say it several times, those who have listened to these calls before; we look at gross margin as a key measure for evaluating ourselves. It's a reflection of the value we bring to our customers and it's a reflection of our own effectiveness and our team's effectiveness at executing and servicing.
We're very pleased and proud to say that our second quarter gross margin increased 1.7 percentage points to 34.5%. The PowerSecure team continues to do an extraordinary job of executing for those employees who are listening now and will listen later. Thanks for the great job you do.
One thing that we're very proud of, and I want to say it here is that we've consistently been able to grow gross margins since the early 2000s, while at the same time growing revenues; and looking at other businesses and from prior experiences, it's a rare combination. But I can't say enough about the track record of our team and their disciplined execution and constant innovations that delivered these results. And as we'll share in a moment, we have more innovations to continue driving those enhancements going forward.
Just to give everyone a sense of the kind of growth that our team is managing and how remarkable the gross margin performance really is, over the course of the last year, we've added over 100 people, which is over 50% in our field operations working on a wide range of new projects including our utility services team, and our utility services has more than tripled in size.
We definitely want to give huge credit to all the new people who have joined the team of PowerSecure for embracing the PowerSecure culture of executing extraordinarily well and of serving the customers with a strong sense of responsibility toward the bottom-line, and we also want to give huge credit to the leadership of our tender PowerSecure and their role to ensure that this culture has been perpetuated, and that these positive attributes are continued to be reflected in our work habits and in our culture.
On the top of execution, I would like to share a statistic. It is exciting to be able to share this, the statistic of our DG business. This is just one demonstration that the value that we bring to our utilities, and to our customers. The value that we are blessed to provide over and over again, through the course of the year.
As of June of this year, we've executed 6,239 peak savings and load management runs for our utility partners and our customers. That is up 56% over last year's year-to-date figures. In July, we ran another 1,500 times. Here again, we want to acknowledge everyone in our DG business for delivering such high quality, high value products and services, services that earn their keep 24/7. That's it; I do want to mention what executional challenge we are having. It involves a PowerSecure owned DG system that we installed in conjunction with our recurring revenue project.
It was built using a unique; it means it's the only one that has this combination of components. It is continued to perform inconsistently. After making a series of improvements to compensate for the performance issues, almost two years ago, we were satisfied that the systems was operating properly as it had for roughly 20 months to 21 months. However, very recently we experienced issues again. Our teams will work tirelessly to get it up and work into PowerSecure's normal excellent standards of reliability.
However, while we mention it now, you will note and Chris will talk about it in the discussion of the backlog, we reduced the long term portion of the recurring revenue portion of our backlog associated with this particular project just as a hedge realizing that we were having to forego some of our revenue, while we get that system tuned and up to speed. Chris will cover that in more detail.
Third, moving on to the third category, one that I'm just pretty excited to be able to sit here and share. And I do remember our goal of finishing within an hour. So I won't get carried away here. But our new business developments and our new product developments, they bearing fruit. And they do give us great catalyst, exciting catalyst for growth. We are very positive, and that's the headline we want you to hear.
We've achieved several milestones events new customers and with new products and developments. And we want to talk about some of those highlights, and we'll do this by business unit. Distributed generation, key thing, we are having success in marketing to major retailers on a recurring revenue model.
We have already announced some of that. We feel that we are positioned to have more success in the coming 90 days to 360 days. We really like forward position. On item four, I'll give a little color as to why we are having that success. But we feel very good about it. Those of you who as investors that have been with us, this is something you can see as earning a return for investments you made in prior quarters, when we diluted earnings by spending money ahead of time relative to have the capability to do these marketing and product developments.
The second thing in our DG, we are having success in expanding our major utility relationships. And basically, I'm referring to the large investor owned utilities and the large GNT systems around the country; we are succeeding there.
During this quarter we've just completed our first DG system for one of the largest investor owned utilities in the United States. This relationship has tremendous potential to expand. We also have expanded out into the western states. We have several projects, all first of their kind in those areas underway. And we have tractions with several other large existing IOUs. People we've been partnering with that had not yielded quite as much fruit as we would have hoped. And we're starting to see those crops take shape out in the field. We are excited about it.
And the last thing to talk about as catalyst for growth and the things that you as investors have supported our investment is micro grid. And we continue to be intrigued about the opportunity of the micro grid products that we've developed and what the opportunity represents. I want to stop here and just congratulate our micro grid team at NexGear. They have done an incredible job. For the incredible hours, developed some exiting technology. And have won the hearts, actually a couple of Fortune 500 accounts that we're developing these systems in conjunction with. Very, very impressive technology and it's exciting, the value that it can bring. We're on our third micro grid project and there appears to be a real international demand for it, particular in areas, with limited or no grid.
With that, I am not going to talk any more about the specifics on it for proprietary reasons. But it is an area that boasts potential and material potential.
Moving on to our energy efficiency business, and basically what I'm going to walk you through here are specific products. One in area light, it goes into production this week. You'll say, "Well, why are you telling us that?" Well as investors will start recognizing revenues from this product in the third quarter.
That's a wonderful mile stone, we are bullish on the product. It's been very well received from utilities we've shown it to, has a three to four year payback which is very aggressive in the streetlight market. I know some of few have invested in another companies with that and I think you'll be very pleased to hear those relatively fast paybacks, we see this as something that has a potential to be a real catalyst for growth.
Moving on to area light, moving into production and well received so far in the market. Second area, a full suite of LED lights and fixtures for our retailers. Many of you may know that we serve many retailers already, close relationships there. The Case Light is our core product today. We've already talked about expanding that into walk-in cooler lights and other shelf lighting in the stores. But we're also expanding that and will be expanding in the next I would say 90 to 360 days, into the parking lot light. And of particular note here are the main floor stain lights. That we will be bringing a product to market that is competitive and has attractive paybacks to do the main sales board.
It will be a big milestone for us and hopefully it'll be a big milestone in the market itself. So that's two areas in the energy efficiency business, the area light and then the full suite of products to our retailers. I've got two more to cover, well, let me just hit one on the Street Light's, we've talked about repeatedly, we are unveiling a new prototype next week. And we are unveiling it to the senior management team of one of the largest utilities in the United States, we are very excited about that.
The last are in this energy efficiency we want to talk about, and in some ways it turned out to be the biggest of the opportunities, as surprising as it is on a transaction level. Now the drivers, basically a power supply. Our IES team is in discussions with several very large lighting companies, where they would have us develop for them or provide for them our new line of LED power drivers. I want to make a statement here. I want to be clear when I say it, so I don't get tongue-tied. This is tens of millions of dollars to hundreds of millions of dollars per year opportunity.
This is a big, big opportunity, so very real market, IES we believe has us very well position to serve the large LED manufacturers with power drivers, and again this was one of the key reasons we made investment in IES. And just for those not familiar with LEDs, every LED light requires a power driver and is one of the key components in determining the light, and by that I'm referring to the fixture, in determining the efficiency, the quality, and the lifecycle of the product.
Our goal here is to, with all credit to Intel and their great marketing campaign, is to develop the equivalent of the Intel Inside as it relates to drivers and being inside the fixtures of not just our own products but all the lighting manufacturers or many of the large lighting manufactures.
The third area related to our key items is Utility Infrastructure; what are the catalysts for growth, winning additional utility relationships? Big deal here. We won the business we talked about last time, the $30 million. I'm sure many of you wondered, do you have more of those in the works. And the answer is, yes. Now, will it be that size? We don't know.
The terms and contracts vary, but we have a number of utilities that are as large or larger than the utilities we've already signed on with. And I'd say that this is a very exiting potential that's out there.
The other two more drivers to talk about in our utility infrastructure, one is our SmartStation, that's our smart grid substation proprietary product that we've designed. We're in discussions with some customers on this. We like it; we think we are going to have success with it. And then in 2011 we will be selling and implementing this product.
And the last thing is just flat out cross-selling; this Utility Infrastructure, our LED lights and our DG business, they go hand-in-glove for cross-selling. And we couldn't be more pleased with the cross-selling we've already seen in those relationships.
Before I close this, I just want to tie it all back to our discussion last time and point out that this is the cake that we're investing for, what I just described; this is why we're making the investments that we are.
Turning to the fourth item, and then we'll be wrapped up, we'll turn it over to Chris and that's it. We're very excited about the foundation we've laid for long term profitable growth. First thing there is the backlog, $127 million, it's up nicely, and we are having particular success in growing our longer term and our recurring.
We are excited about the alliances, and this is related to building a long term foundation. We've been blessed to establish some alliances with Fortune 500 accounts, to help us penetrate sale and penetrate key market segments. And we believe this will increase our effectiveness in growing the business and build strong alliances to protect us as a barrier to entry down the road.
We also like the foundation we're laying in international sales. Twelve months ago we weren't in it; now we are in it. It has been encouraging to see the foundation that's laid. There are several projects that may close here. It's very difficult for us to predict the closure rate on the International just from lack of experience.
We like the tone of the conversations and we're hopeful to win some. But even if we don't, in the near term, we're confident that the opportunities exist and that our solutions apply to the international market.
And then the last thing I'll talk about before I just summarize is our proprietary generators that we've been developing over the last two years and perfecting our own proprietary generator technology. And we're using that on a broad scale now to deliver improved performance, improved flexibility and improved ROIs for our customers and their DG system.
The feedbacks we've received from the customers on using these systems have been terrific, and we see this as one of our most strategic growth elements and growth catalyst, both on the top and bottom-line. We have partnered in developing this proprietary generator; we have partnered with a gold standard international engine manufacturer to supply the engines. And this manufacturer has committed significant resources to the relationship.
This goes back to the discussion on alliances, and they are developing for us proprietary fuel and emission advantages, advantages that we think will give us a big strategic advantage in 2011 and beyond.
Just summarizing the four big messages; second quarter was strong, we like the way we're operating; we like the cake relative to new business and new product developments. We like how we're positioned for that and we like how we're positioned for the long term.
With that I'll turn it over to Chris.
I'm going to break from the usual format today and I'm not going to run through the P&L. Sidney really covered the highlights in his section and was committed to streamlining the call today.
I'm going to focus my comments on four areas. First, on operating costs, to provide everyone with a deeper understanding of where we're investing and how it matches up to the strategic opportunities and growth catalysts Sidney just highlighted.
Second, I'm going to break down our backlog into the key components as I usually do so that everyone can get a feel for how our revenues are likely to be realized in the upcoming quarters. Third, I'll touch on our expectations regarding our gross margin and operating cost for the next few quarters, and then I'll talk about our balance sheet, cash, debt and capital expenditures.
First, headlines on our operating costs and where we're investing for growth, including costs in each of the three major operating expense lines of G&A, selling, marketing and service, and depreciation and amortization. The primary focus of the discussion is going to be around year-over-year increases, and the reason that we kind of chose to do it that way is just that last year's second quarter really is a pretty good baseline from a cost perspective, due to the fact that at that point, we were still very much in a defensive mode and doing very limited hiring and investing.
So first I'm going to start with depreciation and amortization. That was up about $180,000 year-over-year, quarter-over-quarter, and that was almost entirely driven by depreciation related to the PowerSecure-owned distributed generation systems that we're installing as part of our growing recurring revenue business.
Next, selling, marketing and service expense. That line item was up $418,000. The biggest area of increase here was for investments in our sales team and sales executives, including one new international sales executive, two domestic U.S. DG utility-oriented sales executives, one new salesperson in our NexGear switchgear unit, and one, our new EfficientLights sales executive.
Additionally, our commission expense was higher due to higher revenues. And our sale promotion and travel expenses were up year-over-year, as our sales team has been very active in the marketplace as I'm sure you can tell by now in terms of Sidney's comments on creating the opportunities that Sidney talked about.
And the last section of our year-over-year expense discussion is our general and administrative line, which was up $2.9 million. And I just want to really emphasize this. That's kind of a generic line of course that it goes into, but the fact of the matter is, that is anything but general and administrative in nature in terms of those increases.
And I'm going to walk you through and break those down for you. The investments here are kind of bucketed by business unit really, and opportunity. About $750,000 of that $2.9 million year-over-year increase in general and administrative expense is related to our Distributed Generation business. A $150,000 of that $750,000, so $150,000 related to supporting the expansion of our NexGear business, including in our engineering and product development, as well as our switchgear service areas.
And this is really the area of the company where we are developing our micro-grid and our SmartStation products. And so that just sort of ties that investment back to that important strategic growth area, of course.
$100,000 was invested in our DG area related to the acquisition we made last year. So it's the year-over-year increase in our PowerPackages medium speed engine technology. That was a strategic investment we made to enable our DG units to provide continuous power on about 90% natural gas and also to open up international opportunities.
And then about $500,000 was invested in our core Distributed Generation business for engineers, field project managers and service technicians, as well as investments in manufacturing capabilities as we increase the production of our proprietary generator packages that Sidney talked about just a minute ago.
So that's DG. Those are the investments we're making in that business unit to prepare us for the future.
Utility Services. We invested year-over year about $700,000 in the G&A of our Utility Services group. And that really relates to the significant ramp-up in personnel and equipment to support the huge growth we realized in this business.
And the costs in our G&A are really of two types. One is the vehicle expenses related to the investments in trucks and equipment that we've brought on board to perform the work for the big contracts that we won. As well as the employee benefit cost would be the second bucket related to adding about 18 people year-over-year into that group.
So those are really the two buckets. The personnel cost related to the folks that are performing all that work, that's in our cost of sales, but the benefits are in our G&A.
We got to move down now for the next investment area, and that is our LED lighting business where we invested $400,000 in G&A. The overwhelming majority of that is the increase in expense related to bringing on board our IES Lighting team and then complemented by a modest amount of new investment in our EfficientLights business, all of which is being made in our efforts to bring new LED lighting products that Sidney talked about to market to capitalize on what we see as a huge opportunity in that marketplace.
There was a little over $400,000 of severance in the G&A lines, as Sidney mentioned, related to our Southern Flow business. And the remaining about $500,000 really relates to sort of general increases related to our business leaders' travel, facility expense, consulting, insurance and legal expense to support our growth.
Now I'm going to turn to our backlog, and I'll break down everyone in the same method that I usually do. $127 million is our total revenue backlog. As usual, this represents the revenue commitments we have as of today, including the new business we announced this week on Monday. And this total backlog number is up $10 million since our last earnings release on May 6.
$40 million of this backlog is near-term backlog for project-based work, including work in our DG or Utility Infrastructure and our Energy Efficiency groups that we expect to recognize over the course of the next three quarters. This number is lower than last quarter's $52 million, primarily because the $40 million of orders we've been awarded in the last 90 days have been more longer term and recurring in nature.
Also, we had a strong quarter, as you all can tell, from the standpoint of project completion and execution, which accelerated the burn-off on that near-term backlog we reported last quarter.
Our estimate of the spread of the revenue recognition is for this $40 million to be spread, approximately 45% to be recognized in the third quarter, up 30% in the fourth quarter and 25% in the first quarter of 2011. So $40 million, 45% of that in the third quarter, 30% of that will be recognized in the fourth quarter and 25% will be recognized in the first quarter of 2011. Those are our best estimates as to how that will flow through the P&L.
I'll remind everyone it's proven to be a pretty good simple three-step process. The estimate where our total revenue is for the next three quarters is take that near-term project based backlog of $40 million, spread it according to those percentages I just laid out, and that's $79 million of revenue to account for sales that are made and completed within a given quarter, as well as recurring and other revenue, like our Southern Flow revenue, for example, that we do not include in the project-based backlog. And then, of course, make assumptions about additional project sales, which we will make and complete between now and the period you're estimating that will add to those revenues.
Obviously, the quarter we're in is obviously smaller window of time to impact and then the out quarter is obviously much larger time compared to the impact to those quarters as well.
The next component of our backlog is $36 million of longer-term project-based work that we anticipate will be recognized fairly evenly from the second quarter of 2011 over the course of the next two years through the second quarter of 2013.
This component of our backlog has tripled since our last earnings release, and we're really pleased to be able to report just a continued build on these longer-term more regular revenue streams into our backlog. And the last component is $51 million of long-term recurring revenues that we expect will be recognized over a seven to 10-year sweet spot, with some extending even beyond that period.
As Sidney mentioned earlier in his comments, although we did sign an additional $5 million of new recurring revenue actually just this week, our recurring revenue backlog is down slightly due to the fact that we reduced our expected revenues from one of our recurring revenue projects due to the inconsistency we're experiencing in the performance of that DG system that Sidney mentioned.
So summarizing, $40 million of near-term project-based backlog was $36 million of long-term project based backlog, plus $51 of long-term recurring backlog is $127 million of total backlog.
As we look forward, I'm going to switch now to margins and costs, we expect our gross margins as a percentage of revenue to be very similar to these second quarter levels in our third and fourth quarters.
Also, looking at operating cost, we do expect those to decrease modestly as we look into the third and fourth quarters. You'll just remember that this $400,000, there's severance also in this quarter that will come out and as we look forward. So again, a modest decrease in the third and fourth quarter from where we sit in our second quarter.
Turning to our balance sheet, we continue to be very pleased with the strengthened position of our balance sheet. Some key stats are, cash at the quarter end was just a hair under $4 million. As we anticipated and discussed last call, this number was lower than our first quarter due to the LED company acquisition, and working capital requirements to support higher inventory to fulfill EfficientLights product orders.
And we've also used some working capital at the outset of the new large utility services contract we're just starting to work on, with people, equipment, supplies and receivables. Additionally, as we anticipated and communicated last quarter, we continue to use cash to support these growth areas in July. And in early July, we did draw $10 million on a revolving credit line.
Again, this is not a surprise; we talked about that possibility last quarter. And really the last few weeks, we've been hovering right around that. We have $10 million of cash on the balance sheet, $10 million drawn on the revolver type level. And I expect this to kind of stay at this basic level until the back part of this quarter when our working capital should begin to flow to the positive.
Our model shows us that we should generate somewhere between $2.5 million and $7.5 million of cash from positive working capital outflows over the course of the next 90 days. And so, I expect by the time we're on the call 90 days from now that our revolver draw has been reduced by quite a bit.
Our CapEx for the quarter was $1.4 million, of which $700,000 was for recurring revenues, project capital, and this brings our total CapEx spend to $2.6 million year-to-date. We're holding $10 million in our forecast for CapEx for 2010. That number's probably high, but that's what we're holding today, and it all depends of course on the mix of our recurring and project-based revenues.
And my summary comment on the balance sheet is just we continue to be in a great position.
And with that I'll turn it to the operator to do Q&A.
(Operator Instructions) Your first question today comes from the line of Rob Brown of Craig-Hallum.
Rob Brown - Craig-Hallum
Just wanted to get a little more color on the contract you announced earlier this week or last week, I guess. With this national retailer, there was a recurring revenue contract. Could you just give us a sense of what that involved in terms of the scope, number of stores and if there is a scope to increase that with that national retailer? It sounds like there may be is, but just give us a sense what that could be?
As much as I would be delighted to share the details, I'm going to have to resist just for, one, we don't have permission to disclose the account, and so I want to be careful not to inadvertently do that.
We are quoting, I guess to use an old-fashioned word, are marketing, and we perceive it as being successful marketing due to several of the very larger retailers in the U.S.
And what we announced was the initial success with one of them. We're very bullish about the potential, not just with that retailer but with the large retailers that we're marketing to, very bullish about the potential for some nice reasonably large-scale rollouts of PowerSecure-owned assets to serve them.
I'm sorry, that's too evasive. I hope that's enough of a response. I just can't give any more detail.
Rob Brown - Craig-Hallum
Okay, no problem, I understand. And also, I'll flip to the LED lighting business quickly. When you bought IES, you said you were going to make some changes, try to improve that. And I just wanted to get a sense of that with the power driver business kind of monetizing that. Is that part of making that more of a product? And I mean, if you just can provide color on how that's coming along in terms of the IES acquisition?
Really, the main change we made for them was giving them access to capital. And these guys are amazing; they have an amazing team of inventors, and innovators and technologists. And as entrepreneurs they did a great job of building their company over eight years and not bringing in outside capital. But it left them constrained to actually pursue the opportunities.
And we helped them rationalize, choose the ones, and we gave them permission to fire some customers; you don't need to chase them, there's no money there. And it's a different situation for us versus them where they're operating on cash flow quarter-to-quarter. We're willing to take a little bit longer term view.
And let's choose the highest potential products to focus our channel. They've done an excellent job. They're doing that, and this driver is definitely one of the products that was immediately moved to the top of the list and time spent on it. It's a really, really big potential.
Rob Brown - Craig-Hallum
And then, lastly on the streetlight products you talked about. I think you said you're moving to production shortly. I guess you've got one order there, but how should we expect the streetlight business to sort of develop in the rest of year and then into next year?
It's a great question. Candidly, we're curious to see that ourselves. We have very promising feedback. One customer we have has already given us one order. Very candidly, we completely expect more orders on that. We don't have a feel yet for the volume and the timing of it, particularly in this year.
We think we have a feel for what it would like next year, just on that one client. But that same exact product is used very widespread among utilities. And our existing utility partners that we have shown it to, has been very favorably received.
My guess is, at the risk of getting hit over the head by Chris, I would guess sales that we would recognize would be less than a couple of million dollars on that product. But we would be well positioned next year on just that one product.
The other, streetlights, I don't think we would have, other than some possible international sales, any material sales of streetlights in 2011. There is one international project that we have selected a shortlist and they are going through a testing phase. And then we'll find out if there is any money. They say there is, but we'll find out.
Let me just interject some here, when Sidney used the term streetlight, it's probably a different product than the area light. So the area light is the first part of your question and then the streetlight is really something we're going to bring out in the fall and begin the market more widely as well, but just separating those two products in your head.
Your next question today comes from the line of Eric Stine of Northland Capital.
Eric Stine- Northland Capital
I guess first thing, I would like to touch on Schneider Electric that agreement seems to be a pretty meaningful development given their dominance of the hospital market. Can you just appreciate your thoughts on what kind of exposure you think that it gives you? And also given their presence in other end-markets, I think data centers, landfills, oil and gas, is there the opportunity to expand to those applications?
The hospital market was selected as a test of our two companies to create value for each other. It's not meant as a limitation, but as an entry point. If we can't add value, either them to us or us to them, then we won't continue this. But very much as an entry point, because as a market we already serve and then the customers we serve it with, we've been very successful
But we don't really have any natural reach to the hospital, so it seemed like a perfect marriage. They have a very large sales force, very well recognized with their security products in the hospitals. And we have a proven solution that has been used in quite a number of hospitals with 100% success. So we're bullish on it. We agree with you, we're bullish on the potential of it.
Eric Stine - Northland Capital
And the ability to possibly expand that certainly is the plan, it sounds like?
Possibilities for expansion are both geographic as well as in international, as well as in segment. There is no natural barrier in either direction. The only barrier is the ability to add value to each other.
Eric Stine - Northland Capital
And just turning to EfficientLights, can you just update us? In the past I think the revenues there have been pretty concentrated with one or two customers, is that still the case? And what's your outlook in kind of broadening the reach there?
Yes. Now you are correct, Eric, there is definitely customer concentration there. In terms of the large portion of the revenues, I would say that is still very true. But at the same time, we are definitely getting a more robust number of additional customers that are just buying smaller lots. So yes, we fell from a total revenue perspective, there is definitely still customer concentration. And I would say that, the incoming phone calls, the smaller lot types of buy, people are testing, installing, working the products to their own valuations. That continues to be very robust.
Eric Stine - Northland Capital
And I guess that's where the large orders started, just buying small orders, so that's a good sign?
Eric Stine - Northland Capital
Okay. And maybe last thing and just a little more clarity on the, you've talked about the DG product, the specific one that was having some issues, just want to confirm, that's separate of the product you've been developing right? The PowerSecure branded generator?
It is definitely separate. That particular configuration is of one of a kind that was a reflection of some market conditions that limited availability of generators at the time. And I want to be careful not to say anything that's inadvertently disparaging to the people who know they have components in that system. It is frustrating, but we'll get it fixed, but we didn't want to go ahead and be conservative and adjust our backlog.
Eric Stine - Northland Capital
But it sounds like this is not something that you see being an issue going forward beyond this?
Not systemic, it may be a hell of a problem out there. In terms of fixing that crap, but it's just one thing. It's a wart, it may be ugly one but it's not cancer inside the body.
The next question to day comes from the line of Amit Dayal of Rodman & Renshaw
Amit Dayal - Rodman & Renshaw
The top line and gross margin execution has been great, especially in a very volatile economic environment. And we also know there are multiple strategic efforts under way right now. My question is when will we see this execution translating to operating leverage and boost the net margins?
I'll answer and then let Chris follow up too. My view of that just comes from as an entrepreneur looking at it. Right now, we're making fairly significant investments. There are no questions dilutive today. They show up in the G&A in our different business units and in the sales. And as those investments start paying off, there should be a rapid accretion to the net operating margin.
Traditionally, we've done a good job of pulling it from the top-line to the bottom-line. We've just been bullish, particularly for the last 12 months. We've been very bullish heading into this, seeing the opportunities we have. We may have got ahead of ourselves, but then we went ahead and made the investments, and we're grateful that we did from the results we've seen. We've got these investments out there.
The accretion will come to the net operating margin as those specific dilutive investments pay off. Our core business will produce the basic margins that it has before all the way through and start to have leverage. We've just broadened the platform of businesses that's made a broader investment.
I'll also maybe add to that a couple of things. I think when we think about making investments, we want investments that can pay off fairly quickly. By that, I mean that they can start to pay for themselves in a 12 to 24-month type timeframe, maybe even tighter, 12 to 18-month type timeframe. We're not kind of a company who is going to try to put money down, hey, 10 years from now you're going to get a return. That's just not the way we operate.
So I would think about a lot of the things that we're investing in today. By the time we get to this point next year, you can rest assured we're going to be looking for a return. We're going to be looking to understand that those investments are paying off.
But related to that, I do want you to understand that we are not complacent with our investments. We're always looking at is that return coming, is that return paying off, how do we view the marketplace today, has the marketplace changed, how we are executing, do we have the technology we think we have. Quite frankly, I'm not going to tell you exactly what they are, but they're definitely things that are on our list today, a real watch point for us where if we don't start to get a return sooner than later, we will pull back the spending on. So I guess that's the only thing I'd add to what Sidney said.
We're constantly looking over the cards in our hands. And if we decide we don't like a card in our hand, we will put it down. We're not wedded to them. We're wedded very much to the market and we are wedded to our confidence and our ability to read the market. But if the market changes and we're constantly looking at it, and we have a couple of areas and they definitely were highlighted today.
We have a couple of areas that we're still making some investments in. And we're still confident, but instead of being 95% confident, our confidence is maybe pulled back to maybe 75%. And we're watching it very carefully to say, do we want to continue this investment for how long. We'll just monitor it.
And hopefully as investors, that gives you some degree of comfort that we're not out to prove ourselves right. We don't have any interest in it. We've got too many good things going to allow ourselves to get distracted by something we thought would work and it just didn't turn out to work.
And your final question today comes from the line of William Bremer of Maxim Group.
William Bremer - Maxim Group
First off, I would say I really respect the entrepreneurialship of your company in this environment that we are in. I mean you guys are constantly looking for products that are ahead of the trend and really and truly are trying to ramp business, and I truly respect that. Chris, can you provide for us, like you did last quarter, the breakdown of revenue per segment, DG, Energy Efficiency, Utility Infrastructure?
Total DG, I'm going to give you round numbers. $18 million total: Utility Infrastructure, $6 million; $6 million for Energy Efficiency; and Southern Flow Energy Services was $4.5 million. That's right in the report.
William Bremer - Maxim Group
The recurring revenue of $1.8 million, that is within DG, correct?
Yes, $1.8 million is within that DG, $18 million.
William Bremer - Maxim Group
Going back to one question that was raised this evening on the street lights, you already have an order, but yet this product is due out in the fall. Did I hear that correctly?
No, sir, my mistake, I made it confusing on that. Our product that we have orders for is area light. It's actually in production starting this week. We took orders for that design. We sold the initial batch. And they're actually in production starting this week.
We're unveiling a new prototype street light for a 400-watt replacement next week to a major utility. The product we're coming out within the fall is a new street light, a new design. The area light is more of a security type light that utilities use at residential type applications that we're already in the market with. And then the international opportunity is actually just a separate light that was developed for an international application.
While we're using the driver technology and some other similar technology out of the components, the light, internationally is just very different than what's here in the States. So it's not a lot of cross-over on that particular.
William Bremer - Maxim Group
The area light, that came out of EfficientLights or did that come out of IES?
That came out of IES. They had that in the queue when we made the purchase. And I will say that they are working. IES has a streetlight that they developed on their own that was pretty much developed or conceived, and then we paid for the development since the acquisition.
But they are working collaboratively, the EfficientLights and IES, on a new streetlight that EfficientLights will bring to the market later in the year. IES has knowledge of drivers, and EfficientLights, knowledge of photometrics.
William Bremer - Maxim Group
So you are still going forward with dual streetlights targeted at different types of villages and municipalities?
Yes, we are at this point. You could easily say, well that's marked from a G&A standpoint, and I wouldn't argue with it. But from a culture standpoint is, we do really respect large entrepreneurs. We don't mind at all having two parties running fully knowledgeable to each other, not competing against each other, but competing against the market.
And we think both of them will work, and then the issue will be, we'll let the market decide. And maybe the market is buying both of them, just different end use solutions. But, yes, we are doing the dual track on streetlights.
William Bremer - Maxim Group
And my last few are really housekeeping questions for Chris. Hey Chris, stock expense for the quarter, do you have that handy?
Yes. Give me one second.
William Bremer - Maxim Group
And while you look for that, you made references back that in the next couple of quarters expect operating costs to come down modestly. Can you give us a little more color on that?
We're ahead of our $1 million. I think we'll probably come in under 11 in the next couple of quarters. I'm not promising that I'm not guaranteeing that and I'm not giving you guidance. But I'm just saying, I think from a trend standpoint, I think we'll probably come in slightly under that on the next couple of quarters.
And stock options, that is 123. For the current quarter 2010, it was $492,000.
Ladies and gentlemen, there are no further questions at this time. I would like to turn the presentation back over to Chris Hutter for closing remarks.
I am just going to turn it to Sidney.
Well, again that's one heck of what we've said throughout the call, and I do have a couple of prepared comments. But I want to make the statement, we're very excited about the hand that we have. We really like the position we're in. We are knowledgeable, and we're not ignorant of the fact that we're definitely a little ahead on our investment; when you're up $3 million on your G&A, it definitely diluted our earnings for the Q.
I hope as investors you look at that as a good thing, seeing that we do have a check record of being pretty good or making good investments and paying off, that we delivered earnings, but we also invested for the future. It may get us ahead of ourselves here on a near term, but we're really excited about how it's got us positioned. We like it a lot.
In summary, we couldn't be more pleased with the second quarter. We love the across the board growth. We're blessed to have an awesome team of people. We're hugely proud of their efforts and the strong strategic and financial position that they put us in.
We're very bullish on opportunities we see to serve our customers, to serve our utility partners, to serve our alliance partners and to serve you as investors. To use our analogy that we used on our last quarter's call, we wanted to get two pieces of cake. And we're excited about the growth catalyst we shared earlier.
That said, please rest assured that as we move forward, we're going to stay alert for any patterns in our business that are not desirable, just related to the uncertain economy. We will be vigilant, and we do realize that we've got some big expenses out there that we're making these bets on these opportunities with.
We want to thank our utility partners, our customers, our vendors, our banks, our board of directors for their support, their belief in us, and we want to thank you, our investors for your support and your financial commitment as well. We don't take it lightly, and we don't take your support lightly either.
We're strongly focused every single day on serving our customers with excellent products and excellent service, which ultimately drives value for you, our shareholders.
Thanks to all of you, and we appreciate your time and your interest. And we'll keep working on speeding up our call. Thanks.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.
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