Comverge, Inc. Q2 2008 Earnings Call Transcript

Comverge, Inc. (COMV)

Q2 2008 Earnings Call Transcript

August 12, 2008 10:00 am ET

Executives

Dan Pfeffer – Treasurer

Bob Chiste – Chairman, President and CEO

Mike Picchi – EVP and CFO

Analysts

Michael Horowitz – Stanford Group

Sanjay Shrestha – Lazard Capital Markets

Michael Molnar – Goldman Sachs

Michael Carboy – Signal Hill

Rob Stone – Cowen and Company

Jeff Osborn – Thomas Weisel Partners

Elaine Clay [ph] – Piper Jaffray

Colin Rusch – Broadpoint Capital

Richard Baxter – Ardour Capital

John Quealy – Canaccord Adams

Paul Clegg – Jefferies & Co.

Bryce Dille – JMP Securities

Hasan Doza – Luminus

Michael Horowitz – Stanford Group

Presentation

Operator

Good morning everyone, and welcome to Comverge's second quarter 2008 earnings call. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Dan Pfeffer, Treasurer. Please go ahead sir.

Dan Pfeffer

Thank you, Stacy, and welcome everybody. Joining me today on the call are Bob Chiste, Chairman, CEO and President; and Mike Picchi, Executive Vice-President and CFO. I'd like to begin today's call by reminding you that the remarks from this will contain forward-looking statements. This forward-looking statements include, among others things, statements regarding the business strategy, plans and objectives of Comverge. More specifically, those statements will include discussions about the amounts of future revenue we expect from long-term contracts, the amount of megawatts we expect to be generated by long-term contracts, the potential for AMI contracts, various regulatory changes and the amount of revenues, profits, and growth we expect to recognize for fiscal 2008 and beyond.

Although Comverge believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, estimates, and other risks and uncertainties that could cause our expectations to prove to be incorrect. The actual results for Comverge could differ materially from those anticipated in these forward-looking statements as the result of a variety of factors including market conditions, and other risks typically associated with our business, and the risks and uncertainties discussed in Comverge's quarterly report filed on Form 10-Q today and the annual report filed on Form 10-K on March 25^th with the Securities and Exchange Commission, both of which are available from the SEC and online EDGAR. You should not place undue reliance on these forward-looking statements which speak only as of the date of this conference call. Other than as required [indiscernible] under the Securities law, Comverge does not assume a duty to update these forward-looking statements as circumstances change or otherwise.

With that said, I'll turn the call over to our Chairman, President and CEO, Bob Chiste.

Bob Chiste

Thanks, Dan. And good morning, everyone and thank you for joining us on Comverge's second quarter 2008 earnings conference call. Our objective today is to help everyone on the call better understand Comverge's business model, strategy, and major growth opportunities and the demand response and energy efficiency industry. I'll begin our discussion today with some highlights on the second quarter, as well as recent events, and then Mike Picchi will provide more detailed information about the company's financial and operational results for the second quarter. We will open the call afterwards and we've ample time for questions from analysts and investors.

To begin, I'm very pleased that Comverge continues to grow dramatically. And that business prospects in all of our groups have never been stronger. Comverge now exceeds 2000 megawatts under management with more than $375 million in future contracted revenues. Macro drivers and trends for our industry are also improving as reserve margins are dwindling regionally, distribution congestion is intensifying, and the aging grid infrastructure becomes more and more outdated and fragile. An attractive cost effective solution to mitigate these issues is Comverge's state of the art software and hardware technologies.

Our technology base continues to expand and become more and more pervasive. Converge has multiple patent application in various stages covering its technology in addition to the 15 that we already own. Additionally, our call centers and network operating center, utilizing patented software, are world class and scaling well as our businesses grow. In a moment, I will dive deeper in these topics and highlight our business activities from the second quarter. But first, let me expand on the updated revenue outlook we provided in today's press release.

We continually evaluate our financial performance based on trends in our three operating group. As a result, we recently determined that a change in business conditions at PJM will likely have a more serious effect on our revenues than anticipated earlier. Therefore, we're lowering our revenue outlook for the full year in the range of $80 million to $90 million. This is up from $55 million in 2007 but below our previous full year outlook of $95 million to $105 million. While we're disappointed to be reducing our revenue outlook for the year, we believe it is prudent. Mike, will detail the reasons for our lowered revenue outlook shortly.

Now, for the business review. Comverge's focus, is always on creating a long-term shareholder value. The metrics used to measure our progress in creating a long-term value has been consistent. We measure it in three ways. First, megawatts owned under long-term contracts which generate very high gross margins and recurring revenues. We target an annual goal of 250 to 300 megawatts. Second, megawatts managed under open market programs and our commercial and industrial business. Here, our annual goal is 400 to 500 megawatts. And third, future revenues from long-term contracts. This goal is $150 to $175 million added annually. To that end, in the first half of 2008, we've greatly increased the number of megawatts under management which we expect to lead to significant future growth.

In the second quarter, Comverge entered several major agreements with utilities. One indication of our success is new customer program wins. We have been very successful by adding a dozen new customers including TXU, Dominion, and Amorin to name a few. Comverge also entered an agreement to expand one of its existing VPC contracts to provide additional megawatts in the next two years for the remainder of that contract. That contract continues until 2013. We estimate this expansion could be approximately 60 megawatts. At that expanded level, this would be largest VPC contract in terms of megawatts. It's important to note, this now represents our third existing VPC contract that has been upsized, demonstrating both our customers continued satisfaction with our execution under these contracts and the increasing need for capacity that utilities face. We're also awarded a 40 megawatt CNI VPC contract with Southern California Edison which is awaiting regulatory approval later this year.

For Enerwise, despite PJM market changes, the business still saw a good growth adding 94 megawatts of CNI load during the quarter to sell on the open demand response market programs. The result has been our total additions for the quarter are 194 megawatts, and for the first six months, 711 megawatts, an increase of 54% already this year compared to the year-end 2007. Comverge's megawatts under management continue to command a high value in the market place. This megawatts secured through bilateral contracts with utilities, or contracts with end-user CNI customers, are very valuable assets which we continually attempt to leverage for additional revenue streams.

Comverge now has 2,075 megawatts of demand side capacity resources under management. We believe we are the only independent private or publicly traded company in the nation to achieve this 2 gigawatt threshold. Understand that at the time we completed our initial public offering 16 months ago, Comverge's total accumulative megawatt under management was 362 megawatts. In other words, during that short period the number of megawatts that we managed has increased almost six fold.

In our products group. Our products capabilities have been strengthened to become advanced metering initiative or AMI ready. Several large AMI projects have been recently granted using advanced technology also deployed in our products. Comverge has been awarded several pilots deploying our Smart Thermostat for some of these awards. We anticipate these installations will eventually lead to significant demand response programs as part of these AMI Awards in the years ahead. We also announced that TXU Energy will be the first company we partner with to deploy a ZigBee-Enabled Demand Response Program with our Smart Thermostat. This is the largest ZigBee Demand Response deployment in the nation.

In our commercial and industrial group. Our channels to the commercial and industrial market have been expanded with five new strategic channel partners. These new strategic channel partners, along with our expanded direct sales force, will focus across the country in key markets such as New England, New York, and Texas, where our commercial and industrial customers can participate in open market demand response programs. We expect these partners to give us greater potential market penetration and opportunities to acquire new CNI customers. These channel partners, along with those previously announced, will provide or promote our full service energy management offerings.

In addition to our CNI open market growth, we are rapidly growing our residential and CNI DPC business and continue to expand our pipeline of DPC programs. All of our sales activities throughout the company are geared initially towards educating our utility customers on the purchase of our DPC programs. Comverge is accomplishing all this while we continue to implement internal programs to capture synergistic benefits and operational efficiencies.

On that note, we have continued to increase our direct sales force from 35 sales people at the beginning of the year to 59 today. While building this market presence, Comverge also has concentrated heavily on our cost structure where we've expended $3.7 million less than planned in the first half of 2008.

I'd like to turn briefly to those things that are accelerating the growth of the demand response industry. The fundamental macro drivers of our industry continue to strengthened, rapidly shrinking reserve margins of supplies of sources – resources in certain regions and distribution bottlenecks are two major drivers. Of course, environmental concerns as well as not-in-my-backyard outcries very much impede the construction of traditional supply alternatives. Even some relief which has been planned for regulatory initiatives for renewables, such as solar and wind, are being dampened by many utilities claiming it will be impossible to meet the renewable standards set by the regulators. We expect this situation to only accelerate the legislative and regulatory outcry for demand response and energy efficiency standards. Note that the Department of Energy and other sources have said that demand response could reduce peak load requirements by 5% to 8%, or about 60 gigawatts of peak electricity energy use. According to outside sources also, energy efficiency could reduce total electric base load consumption by as much as 24%, or about 200 gigawatts, over the next 20 years. Those are huge market opportunities and neither of these resources need governmental subsidies to be successful unlike other renewables.

Comverge has broad solutions for all customer classes and we are well positioned as these macro trends play out over the next decade.

Our story is not a complex one. Comverge helps utilities reduce costs and enhance reliability by providing demand management programs for all classes of the utility's customers. We do this through a variety of business models, tools, services, and products which comprise our total technology solution offerings. Comverge remains focused on successfully executing its business plan and vision, which is to increase our market penetration, expand the market for clean energy solutions, and pursues strategic opportunities that will build long term value for our shareholders. Comverge is a company that has it all in the demand response market, outsourcing with our virtual peaking capacity contracts, cutting edge advance hardware and software products for utilities that want to run their own programs, innovative commercial and industrial solution the designed for increased operational efficiencies, and tools and the expertise to improve energy efficiency. No other single company, public or private, can offer what we do. This comprehensive approach, both expands our addressable market and mitigates business risk.

The pipeline of our FTs throughout the country continues to be robust, representing future opportunities in each of Comverge's three operating groups. The industry in Comverge are poised for rapid growth. Federal and State legislative and regulatory movements to decrease demand on our nations existing energy infrastructure is widespread. Demand response in energy efficiency are generally viewed as the most expedient and cost-effective resource. Remember, the cleanest, most efficient and economic megawatt is still the megawatt never produced. We know we're on the right track in a new, large market that can be uneven at times on a quarter-to-quarter basis. But we believe that our knowledge, expertise, and leadership position, will enable us to continue to gain market share as we move toward a profitable future. Both Presidential candidates have made energy policy a cornerstone of their campaigns. We believe this means that comprehensive energy legislation will be one of our new President's early initiatives. Under either candidate, this means conservation and demand management will be two solid pillars of any new legislation, legislation that could greatly benefit Comverge and our industry.

In summary, Comverge operates a very focused business with only one customer objective; to improve the reliability and reduce the costs of our electric infrastructure. Comverge does this by offering comprehensive demand side solutions for all classes of utility customers. Our objective also remains to create significant and lasting long-term value for our investors. We believe we are succeeding on both of these objectives.

With that said, I'll turn the call over to Mike Picchi, our CFO, who will talk about Comverge's second quarter financial and operational highlights.

Mike Picchi

Thanks, Bob. As we stated in previous earnings calls, under our residential BPC contracts, we defer significant portion of our consolidated revenues, our most profitable revenues, until the fourth quarter of the year. We require to defer revenue to the fourth quarter when we threw [ph] up our estimates for megawatt capacity available to our customers during the peak cooling season in light of actual capacity that was made available over the summer.

Revenues for the second quarter 2008, were $9.5 million compared to $4.6 million in the second quarter of 2007, an increase of 106%. $5.1 million of our total revenues in the second quarter 2008 came from our smart group solutions group, compared to $4 million in the second quarter 2007. As previously noted, this group operates under a build-to-order business model. Thus, quarter-to-quarter revenues for this group can be somewhat uneven depending on the timing of orders. Smart Grid Solutions Group's future business opportunities look promising based on the large AMI implementation being planned in 2009 and beyond.

The alternative energy resources group recognized revenues of $1.8 million for the second quarter of 2008 compared to $700,000 for last year. An increased of a 168%. $800,000 of AER's second quarter '08 revenues were from PES which was acquired at the end of the third quarter 2007. This amount was lower than what we had expected because of a timing delay in getting our utility customer to accept and approve installations we had completed. There were $3.3 million of unbilled PES revenues as of June 30^th that cannot be recognize as revenue until the customer audits and approves the worked performed. This was up from $1.2 million of unbilled revenues at year-end 2007. We're working closely with the utility to get this work approved and we currently expect that these revenues will be recognize in the third quarter of 2008.

Deferred revenue on the balance sheet from the VPC contracts, which is not generally recognized until the fourth quarter, was $13.2 million as of June 30^th of 2008. This reflects an increase of $5.5 million in the second quarter. Bob mentioned the long-term value creation metrics we focused on. As of June 30^th, we had 701 megawatts of contracted capacity with regulatory approval up form 479 megawatts at the end of 2007, a 46% increase in the first half of the year. Of the 701 meg8awatts, 587 megawatts are in long-term VPC contracts and 114 megawatts are in long-term base load capacity contracts. These are the primary components of our future contractive revenues from long-term contracts, another long-term value creation metric which total $362 million during the next 10 years. This megawatts and the contracted future revenues do not include the 40 megawatts and $14 million from the Southern California Edison contract awaiting regulatory approval, which Bob mentioned.

Of the 701 megawatts under contract, approximately 254 megawatts are built out. During the second quarter of '08, we incrementally built out 27 megawatts of capacity under our long-term contracts. For the first six months of the year, we built out 61 megawatts. While we expect this built out megawatts and the additional 447 megawatts remaining to be built out will translate into high margin profitable business as we build them out over the next three years.

Revenues for the Enerwise operating group were $2.6 million in the second-quarter of '08, consisting of $1.4 million of Demand Response services, and $1.8 million of software and their Energy Engineering services which relate to the upgrade maintenance and monitoring of power systems. Important to know, we have not recognized any capacity revenues in the second quarter of 2008 from the new PJM capacity program that began June 1st of this year. While we acknowledged that the delivery period is four months, beginning on June 1st, for conservatism we have elected to defer the June revenues until the third quarter, when the fixed and determinable requirement of the SAB 104 will be satisfied. The amount of June payments related to the capacity program are approximately $3 million.

Our Enerwise Group has 897 megawatts of commercial industrial load under contract, an increase of 94 megawatts in Q2. Enerwise also manages an additional 437 megawatts for a fee. As Bob already stated, based on our operating performance in the recent impact of the PJM rule change, we now expect the revenue for full year 2008 of 80 million to $90 million. As previously disclosed in our form 10-Q for the quarter ended March 31^st, 2008, PJM unilaterally affected a rule change during the first-quarter of '08. As a result, revenues from the economic, or voluntary, demand response open market programs and PJM have been negatively impacted during the later part of the quarter ended June 30^th, and will continue to be negatively impacted by the rule change.

This rule change did two things. First, it reduced the economic incentive payable to end-user commercial and industrial customers, or C&I customers. And second, it altered the operating procedures for those customers are requiring more involvement on behalf of those customers in the administration process. Both of which have resulted in reduced revenue. The effects of these rule change are now becoming more apparent through the decreased participation by C&I customers during the summer months of July through September. It is during the summer months when the temperature tends to spike and in turn the prices for demand response increase, creating an incentive for those C&I customers to participate in the program. To date, we've not had the extended leeway in the PJM service territory.

We previously didn't anticipated that those customers would participate in a greater during the third-quarter, and that the combination of greater program activity with higher prices would sufficiently offset any adverse impacts of the PJM rule change. Those customers are not participating at the same rate as expected. PJM is currently evaluating various proposals in regards to this rule change, however, we do not believe that there will be any 2008 revenue increase resulting from those proposals.

While Enerwise's total revenues were $2.6 million for the second quarter, Enerwise's revenues from the economic demand response programs were $100,000 compared to $2.8 million in the second quarter of 2007, which is a period prior to the time Enerwise was acquired by Comverge. For the first six months of 2008, revenues from these economic demand response programs was $200,000 compared to $5.3 million in the first half of 2007. Enerwise had economic demand response program revenues of $7.9 million for all of last year. So, after the TGM rule change impacting price and operating procedures, our growth in megawatts during 2008 would have had us on pace to record $14 million of economic demand response revenues for full year 2008 due in historical prices. As just explained, we're not seeing the projected level of participation by C&I customers in the economic program.

Turning now to margins, consolidated gross profit for the second quarter of 2008 was $3.8 million compared to $2.1 million for the second quarter of 2007. Consolidated gross margin for the second quarter of 2008 was 40%, down from 45% for last year's second quarter, primarily as a result of the inclusion of Enerwise whose business operates on lower gross margins. Let me add, we believe gross margin comparisons are only meaningful when looking at the entire year because the deferred revenue recognition of the BPC contracts until the fourth quarter. Importantly, that $13.2 million of BPC deferred revenue as of June 30^th has a profit margin of approximately 78%. In other words, there is an anticipated $10.3 million of deferred profit resting on the balance sheet at June 30^th that we currently expect to be recognized in the fourth quarter of 2008.

Total selling general administrative expenses were $13.3 million for the second quarter, compared to $7 million in the same period of '07, an increase of $6.3 million. Of that increase, $3.3 million relates to the operations of Enerwise and PES which we acquired last year. Of the remaining $3 million increase, $700,000 was for amortization of intangibles from our 2007 acquisition, $1.3 million was for non-cash stock compensation expense, and $1 million was for the additional staffing and marketing customer acquisition cost and G&A.

Notwithstanding to the deferral of $13.2 million in VPC contract revenue as of June 30^th, we expense customer acquisition cost as they are incurred each quarter. Keep in mind, the more successful Comverge is in winning new VPC contracts, the greater sales and marketing expense will increase in the near term as we incur customer acquisition cost to build out the programs during the initial few years of the typical 10-year contract term.

Capital expenditures for the second quarter 2008 were $2.7 million compared to $1 million in the same period last year. Capital expenditures for the first half of 2008 were $5.2 million compared to $2.1 million in the first half of last year. As we begin to build out under our recently awarded VPC contracts, capital expenditures are expected to continue to increase during the course of the year.

Turning to our balance sheet. Total unrestricted cash and cash investments as of June 30^th, were $54.7 million, with $55 million in cash and considering $20 million in acquisition related to every term maturing next year, with $35 million of net cash, between the solid cash position and the sizable credit facility in place, we expect to have the liquidity we need to grow the company organically, to fund R&D, and pursue strategic acquisitions over the next 12 months. We do not currently foresee the need to raise additional equity capital. As of today, shares outstanding for the purpose of calculating earnings per share, are $21.2 million. Total debt was $28.1 million as of June 30^th. This consists of $8.1 million under our GE capital credit facility and $20 million of subordinated debt, convertible debt related to our acquisitions of Enerwise and PES. That concludes our prepared comments. At this point, I'll turn the call back over to the operator to open it up for Q&A. Stacy, Bob and I are ready for questions from our listeners.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll take our first question from Michael Horowitz, from Stanford Group.

Michael Horowitz – Stanford Group

Hi, gentlemen. A couple of questions. I kind of understand or just to clarify. So, if we add the PES revenue that you are unable to recognize on top of the additional revenue that you did not recognize because you chose to view the SAB ruling to mean that you should recognize these revenues in the third quarter, that $6.3 million of revenues that didn't hit in Q2?

Mike Picchi

Yes. That's correct.

Bob Chiste

Yes. That's correct, Michael.

Michael Horowitz – Stanford Group

Now.

Bob Chiste

Michael, if I could just elaborate on the PES revenues. These will be booked in the third quarter and the reason for this we've accelerated that program so dramatically that our customer, ConEd, has to put on the resource to do the audits to follow-up on what we're installing. At the time during the second quarter, we out-paced them so they did not have enough resource. They've now staffed up, I believe, that's to seven people and their audit group that's going – following our installers to ensure that this load is in place. So this is not a permanent deferral. This will be caught up in the third quarter and then we won't have this constant deferral off into the quarter. So the $3 million will come in the third quarter approximately, and we will then be caught up with can net [ph] audit.

Michael Horowitz – Stanford Group

Now, the revenue for the PGM, that didn't get recognized in Q2, some of your other competitors that are public companies actually did recognized that revenue. So, can you just clarify why there maybe some differences there and how we should look at you recognizing revenue and the PJM going forward?

Mike Picchi

Yes, so, we agree that with all the competitors or companies that delivery period is June 1st through September 30^th, so the $3 million for June would equate to about $12 million for the full four month period. While we get paid in June, there's a chance that a portion of those revenues would have to be refunded if in the month of July, August, September and if that was called and we didn't respond with full load. So to be conservative, we said because there's this risk that there would be a refund of those June payments, let's wait until September 30^th when the program period has fully wrapped up to recognize those revenues.

Michael Horowitz – Stanford Group

Alright. So the big question comes, in my mind then, with rules changing, whether it's for the economic program for various ways that your able to book revenue, I get their strategic question is how do you go about investing dollars so that these megawatts to actually give you some sort of return. I guess, you know, it becomes quite elusive for investors to understand investing dollars in demand response when rules can change so abruptly in some cases or revenue recognition appears to be difficult in other cases. And so, how do you look at that? Because I think that that's partly part of the reason why your stocks' getting crushed today, it's because people don't know how to value your investing in these megawatts.

Mike Picchi

Yes, Michael. I think that the – kind of the – I guess if there was to be a silver lining, is the approach that we've taken from the beginning, and we've talked about continually, is our diversity and the comprehensive approach that we take. So we do that for risk mitigation, as what we've always talked about. Now, let's just assume all of our eggs were in the one basket, we would really be crushed, and we obviously think that there's been a huge over reaction here. There is a couple of piece of the good news, besides the diversity and the comprehensiveness of our approach. First of all, we have these customers so we have this whole customer base in the PJM territory which is larger than last year, and we have more load in hand. The PJM has other programs, and now we're doing two things – we're working to put these same megawatts into other programs, to mitigate this risk further and to turn around this revenue situation, And two, we're working with various constituencies to change the rule or to solidify the rule. And answer to your question, where are we putting our bucks basically, we are not putting dollars into these programs because there is virtually no capital cost required, and we've already attained or already have in hand these customers, so where we're putting our dollars are in our R&D for our product, and our AMI programs, and in our VPC bilateral contracts where we have 10-year contracts. So this is surprisingly a relatively small part of our business and we do have ways of mitigating these rule changes from the standpoint of putting these programs into – putting these megawatts into other programs, but I think the real answer that we have is, this is proving out that our comprehensive approach and diversity of our offerings and where we're putting our real dollars for investment are in much more secure programs where we could see those returns going out further and further with the fixed pricing, particularly in our VPC programs.

Michael Horowitz -Stanford Group

This last stem [ph]. This may be a comment more than a question, but what whether your stock trading a little bit above $100 million in enterprise value, and given the acquisition price for NOI's and some other things that you've done with PES, and then of course your VPC business continues to grow, that would appear that either you're completely undervalued in the marketplace or some of your competitors would view you as susceptible for takeout, and I guess that's why I'm trying to understand how you value and how we can go about value in megawatts because clearly, the public investor base does not view this the same way as maybe some private companies had been viewing it.

Mike Picchi

Yeah. I agree, Michael and I think that we are way over sold and, of course, it's my personal opinion that the stock is extremely low, and the reason that I think that I could say that is it just various metrics that we use internally just to see basically where we think our floor is, and of course we're for sale on the NASDAQ Exchange everyday, and management does everything in its – possibly can to educate the street on what we are about. But just take the – I mean, a simple sum of the parts, and I don't want to give guidance to the analysts, this is my own personal view. But if you just take our cash, our net cash on the balance sheet which equates to about $2 a share, if you take the present value of the – of our EBITDA, or of our gross margins, basically on our $375 million backlog and discount it back, you know, you could come up with a number there, which I'm sure that you could all do. If you take our hardware business and, say, put a two time multiple on the value of that, which is in our opinion very low because of the AMI opportunities. PES has in hand now a very major contract with Con-Ed at high gross margin. So, I think that that was a very wise acquisition by us. And, I think that our Enerwise acquisition was very wise because we are now moving into other territories and we have the ability of selling a diverse line of products to our utility customers and classes. So, if you take all of those pieces, at least our internal work shows us that we are somewhere around $12, $13, $14, maybe $10, but, you could all do your own work, but it certainly significantly higher than we're trading at. And again, I'm not giving guidance on what I think our value is but, you could all do that work yourself, just a cash pieces, the easiest piece. And, that's – we think that there is huge upside in our VPC contracts also because of the terminal value which we don't include in any of those internal calculations that we do. So, that might have been a little bit rambling to your question, Michael.

Michael Horowitz – Stanford Group

That was very helpful, Bob, and I will hop back in the queue. Thank you.

Mike Picchi

Okay. You're welcome, Michael.

Operator

Thank you. And ladies and gentlemen, we do ask that you please limit yourself to one question and one follow-up. Moving on next is Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

Alright, thank you. Good morning guys. Thank you for that comment there, Bob. Quick question, when we think about your long-term business model which is building the VPC with the Alternative Energy Resources Group, which seems to be growing. Can you talk about the overall revenue opportunity that's changing under new contract that's being added to that? And the profit opportunity, is it directionally going down for the profit opportunity because there's more players coming into the market or are you seeing profit opportunity grow for you guys? Can you talk about that in some more detail a little bit and sort of – related to that question, you guys seemed to have done a great job of adding a lot of these for the first half of the year which almost is within the expectations of a full year. So, should we then expect that, maybe it's start tapering [ph] in the second half of the year or is it that you're going to do a lot more than your prior expectation in terms of adding the VPC capacity.

Bob Chiste

Sure, Sanjay. I think there's a couple of answers to the question. First of all, I think that you could expect to see more VPCs. So, we're very comfortable that they will get well beyond our – the numbers that we have set for internal goals; and secondly, we're seeing very little competition in the residential arena. We've always said on the C&I level, there's quite a bit more competition but we are seeing very little price pressure on the price side and the reason for that, we believe is they were competing with a natural gas-fired peaking plant and even though natural gas prices have come down, the cost of construction which is really our competitive – the nature – competitive nature of our business are going up and in some cases are going up dramatically because of citing the cost of steel, the not-in-my-backyard regulatory problems. So, we are seeing the cost of that alternative in many parts of the country for new construction being $800,000 to a million dollars a megawatt.

In addition to that, so we are not seeing much pressure on the price side at all. But in addition to that, we're seeing a great operational phenomena that we worked very hard on and that is reducing our cost. Now that we have this broad infrastructure in place with our call centers, our network operating centers, really understanding how to do our marketing and bringing the cost of our product down because we sell our product internally, we're seeing the cost of customer acquisition cost and the cost of installation because we're bringing much of that in-house going down fairly dramatically, and in some cases, a range of $7 for custom acquisition cost and installation cost each, both going down in the range of $50 to $55. So, this is dramatic in itself. So, we're seeing certainly our gross margins in our gross margins expand a little bit both because we're being able to hold price but secondly, because we're reducing our cost. And we're seeing our IR hours potentially raising considerably because of the leverage we're getting out of our GE credit facility.

Sanjay Shrestha – Lazard Capital Markets

Okay. Well obviously, you guys have all these, – Bob, one more question, you guys have limit just for two, but you guys ought to say have build this diversified modeling, you got the hardware business, you got the VPC business and the Enerwise business and I guess, this quarter or this year, the diversification, kind of, went against you on the economics market. But looking forward, with all these movement on the AMI side, how should we think about the growth in your Smart Grid or the product segment of the business specially starting on '09 and '10?

Bob Chiste

Yes. This is – Sanjay, I think that's a fairly difficult question because you know utility buying patterns. What we can say is that we are now certainly seeing the awards on the metering piece of those AMI programs and you know that there's a – all of those programs out there that Itron has announced and Census [ph] has announced in Silver Springs, we happen to be compatible with all of those offerings and we now have five pilots in operation just in Q2 alone. So, we think that the buying pattern is going to, for demand response, will follow the metering pattern by probably a year to 18 months. The reason for that is the utilities are laying out huge dollars for their metering programs as you certainly well know, Sanjay. You probably have the best handle on that in the industry. The reason we think that it's going to be delayed for the DRPs is they want to make sure these utilities that their metering infrastructure is working because if that is not working than all of the ancillary products, obviously, will not work with them. So, we are seeing significant, significant activity in the DR pilots. You know that where many of these AMI programs are, so you can assume that many of our pilots are in those same places and that DRP's of these AMI programs is what generally makes the AMI program itself economically justified.

Sanjay Shrestha – Lazard Capital Markets

Got it. That's great. Thanks a lot guys.

Operator

Thank you. And will move on next to Michael Molnar with Goldman Sachs.

Michael Molnar – Goldman Sachs

Good morning everyone.

Mike Picchi

Hi, Michael.

Michael Molnar – Goldman Sachs

Couple of quick questions. The $80 million to $90 million in revenue guidance, can you give us a rough guide on how we should be thinking about that for the three different segments of Smart Grid, C&I, and AER?

Mike Picchi

Mike Picchi. I think people know that previously, Enerwise has a – well Enerwise does have a $36 million revenue bulk [ph] in terms of their earn-out from when we bought them, and so we're really thinking that the delta in the revenue outlet that we provided, well it's entirely relate to the PJM rule change. So that rule change will impact the revenue of Enerwise most. I think people are expecting the hardware business to do somewhere between $20 million – $23 million in revenue for the year, and I think people are expecting the VPC business to do somewhere between $38 million – $44 million in revenue for the year.

Michael Molnar – Goldman Sachs

Okay. And if I add up all the OPEX, all the different line items, it came to about $13.3 million for the quarter, which I believe was roughly similar to Q1. Will this trend stay in sort of this range of a $13 to $13.5 for 3Q and 4Q or do you expect that to continue to go up as you built out contracts. And just any color on where you see that number flowing for the remainder of the year, will be helpful?

Mike Picchi

The – one thing we've been conscious of, as Bob mentioned it in the script is, keeping our eye on the cost side, to be commensurate with what were seen on the revenue side. So, for the first half of the year, we controlled cost, to the tune about $3.7 million lower that what we expected to. I think for the second half of the year, while we might build out more megawatts under the VPC side of the business, we build out 61 megawatts during the first six months of the year, and on the VPC side, when you build up megawatts, you get that sales and marketing hits. I think we would expect to build up more megawatts in the second half of the year, so sales and marketing piece of that $13.3 million quarterly spend might increase in the second half of the year, but the G&A side, we're going to keep the reigns on because we're matching it with revenue.

Michael Molnar – Goldman Sachs

Okay, and just one last question. I apologize to be the annoying guy, taking too many questions but the 60 megawatts for Connecticut Power and Light, I know there were some debate last quarter, about may be getting that back in, etc. Just give us the status – that 60 is already built out, correct, and it's just a matter of placing it. Any color on that?

Mike Picchi

Michael, the 60 megawatts included about 18 to 20 megawatts which were C&I customers, and those contracts – we're still working with that C&I customer but there's 40 residential megawatts, and those 40 residential megawatts are now in the open market. So we're earning revenues on those 40 megawatts.

Michael Molnar – Goldman Sachs

Did you say open markets? So those are –

Mike Picchi

In the New England ISO open market – auction market.

Bob Chiste

Or capacity auction.

Michael Molnar – Goldman Sachs

Got it. Okay, thank you.

Operator

Thank you. Well, the next is Michael Carboy with Signal Hill.

Michael Carboy – Signal Hill

Good morning, ladies and gentlemen. A couple of questions for you Bob. First, I'd like you to elaborate a little bit on how you balanced the leverage you get from going to external sales or some other programs versus trying to manage sales and cost relationships internally. And then, Mike, I'd like you to elaborate a little bit on what likely impairment there would be to the intangibles on the balance sheet associated with the Enerwise acquisition? And then if you have any specific statistics you can share with us with regard to the number of demand response event that incurred during the second quarter. That would be helpful. Thank you.

Mike Picchi

Michael?

Michael Carboy – Signal Hill

Yes.

Mike Picchi

Could you please just ask that first question, again, balancing external sales with our internal cost?

Michael Carboy – Signal Hill

No. Would you –could you help us understand sort of how you think about the cost in terms of foregone incremental profit or increase – the need to share profit streams with a third party in the form of channel partners versus pursuing those customer relationships of the internal or inside sales force.

Bob Chiste

Okay. That kind of – I wasn't too sure of that's what you're asking. First of all, the way we use our channel partners, Michael, as we share at this point very little with most of our channel partners. Our channel partners see this as an opportunity to just bring a sort of another arrow in their quiver while they're selling commodity. And generally, with these channel partners, are worked – are used for are for sales leads. In other words, they don't do the selling for us. Our internal sales force will come in and bring in our professional engineering staff and our energy analyst when they open that door. So, we see the cost of having these channel partners very low and yet it's a great lead opportunity for us. So, really, they work in conjunction. The channel partner works in conjunction with our internal sales force and with our sales engineers and with our energy analysts. So, we don't look at that necessarily an either-or, we see that's part of the sales process where generally this channel partner is the lead generator and then we work shoulder-to-shoulder with that lead generator to actually close the sale.

Mike Picchi

And then with regard to the other two parts of your question, Mike, on the any possible impairment of Enerwise. One thing, when doing impairment testing is to look at the cash flows from the business. So, first of all, you do your impairment testing on the annual basis. Our annual test occurs at December 31^st of each year. Then secondly, to look at the cash flows. And so, while Enerwise, we would expect it's going to have lower revenues than what we projected. Based on their controlling of cost, they may still deliver the net same profit or approximately the same profit or cash flow. So, we'll have to wait to see how the year lays out in terms of what their cash flow are in. Secondly, just because the economic demand response market has not proved very fruitful to-date doesn't mean that we have – don't have other sources and uses for those megawatts. We own those megawatts. We've done the hard part. We've signed up that NCI customer to a contract, we have the option to put them into other programs PJM may have. So, we're looking to do that to still get other forms – other revenue streams for those megawatts. So, I think it's too early to make the call as of today if or whether there will be an impairment on Enerwise but we will do that as part of our year-end audit process.

And then, you're last part of your question was, the number of demand response events that we've had this year on our VPC contracts. I think we're over 50 cycling events this year and we're seeing our customer great benefit from our demand response networks that they've outsource to us. In fact, some of our customers use them in for economic purposes, meaning, they're shedding load on their grid to sell that excess, that freed up capacity into the open markets. So, a lot of value created by our VPC contracts for our customers and for Comverge.

Michael Carboy – Signal Hill

Okay. And Bob, this is just to wrap-up your – given the turmoil that PJM is creating here, what do you think the root cause of that turmoil is? Is this the IOUs, sort of, fighting back procedurally on the power pool front? There seems to be somewhat counter productive activity from PJM given the reserve margin issues.

Bob Chiste

Michael, as you know, first of all, I'll be diplomatic and political in my answer because some of those utilities are our customers for other programs that we run in products that we sell. As you know, and most people on the call know, the PJM is nothing more than a consortium of the utilities. So, the utilities manage PJM. It's not a – it's an entity which is managed and administered and run by the utilities. So, yes, this is – yes, you answered your own question. Basically, I'll agree with you, Michael, that its primarily utilities which are making it difficult to go through the PJM and these economic markets because the settlement process now has become a much more, let's say, cumbersome one where that end-user, that utility is part of that process and they could stall, they could do a variety of things which just makes it very difficult for the CI – for the C&I customer to be interested in spending their time or let's say wasting their time of these programs. On the other hand, the C&I customers have built a consortium. PJM is very interested in rectifying this problem, as is perk [ph]. So, we will see what comes up. But, I think that your proposition is quite accurate.

Michael Carboy – Signal Hill

Thank you.

Operator

Our next is Rob Stone with Cowen and Company.

Rob Stone – Cowen and Company

Hi guys. I wonder, Mike, if you just speak to your CapEx plans for the year?

Mike Picchi

I think we thought CapEx for 2008 would be in the range of about $10 to $12 million and so I think we were slightly over $5 million in the first six months. That number – full-year number still seems to be pretty good.

Rob Stone – Cowen and Company

With respect to the growth in demand response VPC programs, you had a nice build out, you got more megawatts under contract, but if my numbers are correct, your deferred revenue as of Q2 is actually down versus last year. Can you comment on how as we might foresee the influxes of VPC revenue for the balance of the year to get to the targeted growth?

Mike Picchi

Yeah. I think deferred revenue increase over $5 million in the second quarter, did the same in the first quarter this year. Last year's number was a bit higher because we had the ice and New England contract last year which had a much higher revenue rate per mega-watt. The fact that we're adding another $5 million a quarter, I think as we look at Q3 and into Q4, we would expect to kind of continue that pace in terms of – and actually had to grow up – go up as we build up out more megawatts, so –

Rob Stone – Cowen and Company

So, the deferred balance last year at this time was around $14 million, correct?

Mike Picchi

Yeah it was. But Nevada – so its a mix in contracts though in terms of last year, for instance, essentially what we had is deferred as of September 30^th would have been what got recognized as revenue in Q4 of '07, this year, we have VPC contracts of – allow for build out in Q4 of this year, and will recognize revenues from those VPC contracts in full year. So last year, the September 30 balance [ph] became the revenue number. This year, revenue built throughout the full year, and will result in higher level of VPC revenue this year compared to last year for the full year.

Rob Stone – Cowen and Company

So irrespective of the true up [ph] specifically happens at the end of the summer, you would still be adding revenues in the fourth quarter?

Mike Picchi

Correct. Correct.

Rob Stone – Cowen and Company

Great. Thank you.

Mike Picchi

Thanks Rob.

Operator

And we'll go next to Jeff Osborn with Thomas Weisel Partners.

Jeff Osborn – Thomas Weisel Partners

Great. Thanks. I just have two quick questions. Did you mention the Enerwise split of megawatts in PJM and non-PJM territory? If you could break that up, that would be helpful.

Bob Chiste

Well, one of the things in terms of diversifying our megawatt base, we've got about 10% of PJM of Enerwise's megawatt that are now outside of PJM.

Jeff Osborn – Thomas Weisel Partners

So 10% of Enerwise is non-PJM?

Bob Chiste

Correct.

Jeff Osborn – Thomas Weisel Partners

Okay. And then –

Mike Picchi

And Jeff, we've just entered those programs, so we will see much larger percentage moving outside of PJM. We now have sales force, sales representatives, and all of the other territories.

Jeff Osborn – Thomas Weisel Partners

Have you reallocated the resources within PJM towards those other territories that might be closer by?

Mike Picchi

No. We've expanded. So we haven't reallocated, we've just expanded.

Jeff Osborn – Thomas Weisel Partners

Got you. And then you mentioned shipping some of the PJM lost revenue opportunity into other programs within the PJM territory, can you just talk about some of the market-share trend that you're seeing within PJM, and the multiple different programs, and what's your strategy is to gain sure in some of the other programs?

Mike Picchi

Yes, Jeff. It's – I guess when we had dominated PJM, so as many more players come in and those programs get more – have expanded, then we're going to see our market share naturally decrease. We couldn't hold that large percentage of the marketplace for the independent providers like us. On the other hand, the same as happening in other areas of the country where others can't hold the same high percentage of market share, let's say, in New England. Now, on Texas we're all kind of starting out equal and Midwest, if that opens up, we'll start out equal. So, our market share will clearly come down or has come down in PJM for a couple of reasons just because of many more players and secondly, we're being very careful and we're trying to maintain our gross margins where we're not, let's just say, we're not giving as large a split with some of the commercial and industrial customers that they're demanding. So, we're very cautious and very cognizant of our gross margin.

As far as market share of new programs in PJM for example, we think that in some of those, they are complex programs where we have the ability of going after those markets where as other, some of the other smaller players, may not. So we think that we can get a larger share of some of these new programs as they come – as they are introduced by PJM.

Jeff Osborn – Thomas Weisel Partners

Got you. Thanks much.

Mike Picchi

Thank you Jeff.

Operator

Next Elaine Clay [ph] with Piper Jaffray.

Elaine Clay – Piper Jaffray

Hi. Thanks for taking my question. With the delay revenue from PES, was there any delay or dispute in the actual installation or was it just purely due to the audit issue?

Mike Picchi

Yes. Elaine, it was purely due to the audit issue. Now, when we do install, there's very small percentage as there has been in the past and I understand it's maybe 2% or 3%. Mike are you, where the audit will state that the megawatts are maybe 2% to 3% less than we had installed it and in some cases it goes the other way but pretty much we're confident and we've given a little bit of a haircut to that $3.3 million. We think that this is what will be agreed to. So, it's clearly the delay in the audit, Elaine.

Elaine Clay – Piper Jaffray

Okay, great. And then just on the 60 megawatt contract expansion. Could you talk a little bit about what portions of that are subject to regulatory approval?

Mike Picchi

None of it – none of the expansion is subject to regulatory approval. There's one piece of a contract which could help us fairly significantly in a way that the contract operates. And I wont go into details right now on that but it could add possibly 10 to 15 megawatts just on the way that the contract is interpreted, let's say. So, the utility has submitted that back to the regulator and we have not included the positive outcome from that possible interpretation in our 60 megawatt. So, the 60 megawatts that is approved.

Elaine Clay – Piper Jaffray

Okay, great. Thank you.

Mike Picchi

Welcome.

Operator

And next is Colin Rusch with Broadpoint Capital.

Colin Rusch – Broadpoint Capital

Good morning. Can you talk a little bit about your strategic thinking in growing sales staff and the evolution of your customer relationships relative to the importance of being the primary energy adviser to your customers?

Bob Chiste

Sure, Colin. I think, that we've laid out our strategy several times. We'll do it again and I think that it's a very focused strategy. It's very simple to understand and we've looked at our presentations in the past and it's been viewed somewhat complex but when you think about it, that we're providing demand response and energy efficiency programs to different customer classes, it's fairly simple to understand. So, with our deep operational expertise. We now have all of the pieces of the puzzle in a place for the strategy, which our board has approved through say 2010- 2011, and that is leveraging off of our customer based, both the C&I customer base, the residential customer base, and the utility customer base to bring a variety of programs. One, is certainly VPCs; second, is our C&I customer strategy into open market and VPCs; third, is energy efficiency to expand our capacity offerings from peak capacity to peak and base load capacity; fourth, is our AMI strategy, where its really using the AMI infrastructure to bring demand response programs, and that could be a VPC program or a direct program; and the last piece of the strategy, which we think about, which we have a couple MOUs on, is how to leverage that residential and commercial customer base to bring renewables potentially, and that's probably through partnering agreements from a technology stand point and through a marketing stand point. Because if you think about our thousand of commercial customers, and you think about our hundreds of thousands of residential customers, these are all environmentally conscious, alternative energy conscious customers. So, that last piece of the puzzle in our current strategic – our current strategic plan could involve those types of leveraging off of our operational expertise and our customer base.

Colin Rusch – Broadpoint Capital

But, you're not really seeing any – seeing any subtle changes there in terms of your focus or where your efforts are going over the next 12 to 18 months or so?

Bob Chiste

No, I would say our focus, and I alluded to this a little bit in my opening remarks, all of our focus initially drives all of our sales people towards bilateral contracts, VPC programs. Not every utility want to outsource so then we drop back, and we'll either sell product or we'll sell commercial and industrial services. So our focus – you know I don't want to – there would be any mistaken about it. All of our operating groups focus our marketing and our sales on bilateral contracts initially4 because of the very high margins and the recurring revenue. So no, we don't see any change in focus in their next 12 to 18 months.

Colin Rusch – Broadpoint Capital

And just one quick last question. Have your expectations for being EBITDA break-even changed it all? With regards to the time of reaching those levels?

Michael Picchi

Well, we were EBITDA positive in 2007, we're trying to manage our cost to be – to make as much money as possible this year, and we think we've stock [ph] good prospects for revenue growth next year and controlling cost will hopefully allow us to deliver the most profit as possible.

Colin Rusch – Broadpoint Capital

Great. Thank you so much.

Operator

Thank you. And in the line next to Richard Baxter with Ardour Capital.

Richard Baxter – Ardour Capital

Thank you. I guess, could you talk a little about the VPC program opportunities in the co-op muni market and the IOU markets are those – as they have been, or are they changing or? Thank you.

Mike Picchi

Yeah. And you talked Richard about in the IOUs and the muni markets and in the co-ops. We were successful this year in getting our first contract with a co-op, that's SMECO in Southern Maryland. 75 megawatts – very, very, nice contract for us, and we're – first of all let me go to the IOUs. These are where we started, the large utilities, and we're seeing no slow down, we're still – our pipeline is growing and we're seeing great opportunities, in that IOU market, where we think that there is really continuing growing potential over the succeeding years is in that co-op market and muni market where there are much more capital constrain than the investor owned utilities. So to answer your question broadly, we're seeing no slowdown in the interest, and our pipeline is quite full.

Richard Baxter – Ardour Capital

Thank you.

Bob Chiste

You're welcome.

Operator

And we'll move next to John Quealy with Canaccord.

John Quealy – Canaccord Adams

Hi, Bob. Very quickly, on the thermostat business?

Bob Chiste

Yes.

John Quealy – Canaccord Adams

Can you talk about the opportunities there, and what you're seeing in terms of structure from utility? Some utilities just want the piece of equipment, some folks want Comverge there, and some in fact have gone with separate customer service operations to handle that piece. Can you talk about your relative attractiveness of the different models you're seeing from utilities?

Bob Chiste

Sure. What we're seeing John, initially on the large offerings – and those larger offerings we all know are – I guess, Southern California, that has now announced – southern companies announced, San Diego Gas & Electric has announced, Detroit has announced. We – they – these companies, they're all customers of ours already. What we're seeing on the thermostat from this initial push towards AMI is that most likely, these programs will be where the thermostat is sold directly to the utility. We're talking to several – potentially on laying of VPC contract on top of that to preserve chaos, to put into the metering part of their AMI initiative. But I think that the large initial deployments will be where the utility buys the thermostat directly or in fact instructs its residential customer base to go out and buy the thermostat. So I think it's going to be more of a sale initially, rather than a VPC type of infrastructure. I think as the AMI get pushed down to the – maybe to the smaller IOUs and to the co-ops, into the muni, we're going to see more potential for their via VPC laying on top of that communications infrastructure which the AMI provides.

John Quealy – Canaccord Adams

In terms of price points from the utility perspective. I know you've chatted a little in the past about potential price points. What are you seeing or ambitioning for price points revenues to Comverge per endpoint?

Bob Chiste

Well, what we're saying is utilities talked alike. I think utilities like to grab on nice round numbers and utilities are throwing out. They would love to see Smart Thermostat in a $100 range. And when we start talking about large volumes, millions of volumes, we think that that's potential for the smaller deployments. It's going to take awhile to get there but I think, you could think about that is sort of the very aggressive end of the pricing to get down into that $100 to a $120 range for Thermostat.

John Quealy – Canaccord Adams

And then, shifting gears on the street demand response side, can you qualitatively give us an update? How do you feel that Comverge is presented in the market place to the larger IOU's and the larger PUC that are looking at demand response.

Bob Chiste

I think that we still have a commanding position. We have competitors. We just did analysis for our board, as a matter of fact, on our strategic presentation, and we think that we have about 60% to 65% of the market. There are new entries in the market because it's being recognized now that demand response is very important to utilities. So, we are going to have new competitors and we continue to have the old competitors. The Canon Technologies are very good. Honeywell is very good. But we're holding our own. We've won some if they wish that they won and they've won some that we wish that we won. The beauty of what we have though is 500 customers and at least, say, 200 of those have bought something in the last 12 to 18 months. So, we have this continuing repeat business in our traditional demand response business where we already have 4.5 million devices installed. So, we have a nice repeat business just as that infrastructure is also getting older and older where we have kind of just take off the – our internal sales force or just make telephone calls and gets orders for 1,000, 2,000, 3,000 DCUs just about everyday. So, I think that our real strength is in our technology and this big customer base that we have.

John Quealy – Canaccord Adams

Alright, thanks, Bob.

Bob Chiste

You're welcome.

Operator

And we'll move next to Paul Clegg with Jefferies.

Paul Clegg – Jefferies & Co.

Hi, guys. I just have one more question. I want to try a bit to understand the sensitivity of your results to weather. Seems like it's a factor affected quarter. And, can you just talk about maybe how much your results can change relative to degree days or if there's some other metric we should keep in mind in looking at weather and how your numbers come out?

Bob Chiste

Paul, we've often said in the past that weather is not terribly determinant. What we're usually talking about is in our VPC programs, where our M&V programs are all weather adjusted. In other words, the utility wants to have that availability of that resource. But obviously, I wouldn't say today that we're not weather sensitive just by a virtue of this economic program. This is a voluntary program and it's based on prices and prices gets driven when there's heat. So, we have not had the heat storms that we've had in the past. And, we could wait on days [ph], I mean, in theory, it's very possible that we could pick up these economic programs if there were continuing heat waves. What we need is basically 3 or 4 or 5 days of continuous heat, where that really drives the peak. So, if you get one hot day of 95 degrees in the Middle Atlantic states and then it cools down or there's a storm that comes through, we don't see that real pop in the pricing and therefore the revenues. So, from our fixed-priced long-term contracts, it's not weather-related but obviously in these short-term voluntary programs that we've gotten hit on in this second and third quarter, we certainly see that potential for being weather-related. On the other hand, the PJM capacity program is not dependent on the weather. So, it's that one program, and you know the fact that it's cooler summer is were we've – have been weather affected.

Paul Clegg – Jefferies & Co

Okay, thanks very much.

Mike Picchi

You're welcome.

Operator

And we'll move next to Bryce Dille with JMP Securities.

Bryce Dille – JMP Securities

Good morning, guys.

Mike Picchi

Hi, Bryce.

Bryce Dille – JMP Securities

I was wondering if you could talk about the 61 megawatts of capacity build-out for VPC year-to-date and what you're looking for a potential full year number for a build-out?

Mike Picchi

Thanks, Bryce. We were trying to build out approximately 150 megawatts for the full year. So 61 megawatts for the first half is the – a little below that page but we do see an increase in build in the second half of the year because both of our – on the SEMECO [ph] contract that we just got awarded late first quarter, build-out will start to take off there. And also, continuing build-out in our Pacific Gas and Electric CNIDPC [ph] contract in California.

Bryce Dille – JMP Securities

Okay. So then, just expanding on that a little bit further. If I tie that back into deferred revenue, an expanded build-out on the second half of the year would imply potentially expanded revenues associated with that, is that correct?

Mike Picchi

Correct.

Bryce Dille – JMP Securities

Okay. Thanks a lot, guys.

Mike Picchi

Bryce.

Operator

And we'll go next to Hasan Doza with Luminus.

Hasan Doza – Luminus

Good morning, guys.

Bob Chiste

Hi, Sam.

Mike Picchi

Good morning.

Hasan Doza – Luminus

Bob, I have a question for Mike. I'm sorry, I missed this previously, Mike, cant you explain to me why, so far this year, why it is still [ph] you guys are in cash flow negative? And the reason why I'm asking is that, if you compare it to December 31^th, and compared to June 30^th, you had about $12 million in increase in deferred revenue. So, as you have the increased in deferred revenue, you would have had also in associated increase in cash flow. So, I was wondering if you can kind of help us understand as to why it's still cash flow negative and is there something we should be thinking about?

Mike Picchi

Okay. Well, a couple of items. Really we've used cash flow – some cash flow in terms of working capital, so for instance, restricted cash has increased $2.5 million at June, compared to December, in terms of posting letters to credit, cash letters to credit for programs, but also two things that used cash in first six months

One we had, an increase about $3 million in receivable, we collected those $3 million increase of receivable in July, so when you get to September numbers, you'll see – we expect you to see a favorable and permanent receivables balance net, secondly, accounts payable is down a little over $3 million year-to-date and at June 30^th, we did a general ledger system conversion and as part of that we purse our accounts receivable balance, so the temporary use of cash at June 30^th, will rebuild that 80 balance in the third quarter, and neutralize the cash use.

The cash use is really been primarily for working capital, because as you indicated under the VPC contracts, we get paid cash, sent you its each quarter, and while the reported EBITDA losses would be negative, the true cash, because we're getting paid this quarter, isn't that significant – isn't as significant our biggest cash drain as we move to the period, but so is a working capital.

Hasan Doza – Luminus

Mike, that's my question and you hit on it. And as I look at it, as you have, I mean – the second point of that question would be that when you look at your SG&A, I understand the bigger portion of the EBITDA loss was kind of the G&A. How much of that is kind of a one-time as we look through the, I guess, the end of the year, second half, how do you kind of see the G&A mapping out through the year?

Mike Picchi

Well, of the $13.3million in the G&A for the second quarter. First of all it's important to kind of pull out the non-cash pieces of that. So, the stock comp was about a $1.9 million. The amortization and the acquisition of intangibles about another $6 million, $600,000, excuse me. So, it's a little over $2.5 million of our G&A is uneven really cash expense. So, if you think that our cash, G&A cost is somewhere between $10 to $11 million in a quarter, I could see it thicken up slightly for some sales and marketing activity but I don't see it moving significantly as we report Q3 and Q4 this year.

Hasan Doza – Luminus

Okay. But cash flow wise –when – because in the second half of the year, your deferred revenue balance is going to decrease right? Because you want to recognize those revenues?

Mike Picchi

Yes. December 31^st. It will. Correct.

Hasan Doza – Luminus

If the deferred revenue reverses, then your cash flow also reverses. Meaning, you should have – the second half of the year, you should have less cash flow than the first half. Correct?

Mike Picchi

Well, here's the thing. When the deferred revenue reverses, the EBITDA increases significantly. So, your net loss shrinks dramatically. So, that's the direct offset. All of that is in the operating activities section of the cash flow statements. So, they directly relate and offset each other.

Hasan Doza – Luminus

Okay. Very good. Thank you.

Mike Picchi

Thanks, Hasan.

Operator

And will take our final question from Michael Horowitz with Stanford Group.

Michael Horowitz – Stanford Group

Just one follow-up, guys. In terms of current and half churn and how you might view turn and the PJM whether it's you or what you're seeing in the competitive marketplace based on role changes or customers maybe not believing in the programs because maybe the things have change you first tried to sign them up before. You've seen that from other competitors as well.

Bob Chiste

At this point, we just not have – have not, Michael, first of all churn, meaning customers just say no. They just want out of these programs, take my name of the list. We have not seen that. We're working with them in other programs. And as far as churn where we're taking others customers or others are talking our customers, I think that the markets are too new and we have not seen that phenomena happen yet? So, from a customer's standpoint, it's a very stable market. From the revenue generation obviously, with the role changes, it's not very stable.

Michael Horowitz – Stanford Group

Thanks, Bob.

Bob Chiste

Okay.

Bob Chiste

Alright, well, we again left it open to get everyone's questions in and I hope that's appreciated and so, thank you very much for the great questions and hopefully our answers were to the point and helpful. So, let me just say that while we expect quarter to quarter results to vary, I believe the long term investor value proposition for Comverge remains solidly intact reflected by the growth in our megawatts under management and future contracted revenues. The acceptance of our demand response solutions across all customer classes and the powerful market drivers that continue to create more opportunities for our company. This concludes our call for today. Thanks very much for joining us.

Operator

Thank you. And once again, ladies and gentlemen, that will conclude today's conference. We do thank you for participation and you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. U.S.ERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!