Willdan Group Inc (WLDN) 2015 Q2 法說會逐字稿

Good day and welcome to the Willdan Group, Inc., second-quarter 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nii Tetteh. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the second quarter ended July 3, 2015. With us today from management are Chief Executive Officer Thomas Brisbin and Chief Financial Officer Stacy McLaughlin. Management will review prepared remarks and we will then open the call up to your questions.

Statements made in the course of today's conference call which are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve certain risks and uncertainties and it is important to note that the Company's future results could differ materially from those in any such forward-looking statements. Factors that could cause actual results to differ materially and other risk factors are listed from time to time in the Company's SEC reports, including, but not limited to, the annual report on Form 10-K filed for the year ended January 2, 2015.

The Company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group, Inc., disclaims any obligation and does not undertake to update or revise any forward-looking statements made today.

With that, I will now turn the call over Chief Financial Officer Stacy McLaughlin. Stacy?

Thanks, Nii. I'd like to add my welcome to those joining us on today's call.

In addition to GAAP financial results, Willdan also provides non-GAAP financial measures that we believe enhance investors' ability to analyze our business trends and performance. Our non-GAAP measures include revenue net of subcontractor costs and adjusted EBITDA.

We believe revenue net of subcontractor costs allows for an improved measure of the revenue derived from the work performed by our employees. Adjusted EBITDA is a supplemental measure of operating performance which removes the impact of certain nonrecurring income and expense items from our operating results. GAAP reconciliations for both of these non-GAAP measures are included at the end of the earnings release we issued today.

We had another strong quarter of year-over-year growth in revenue and EBITDA, driven by strong organic growth, as well as the contribution of Abacus and 360 Energy, the two acquisitions we completed in January. I will start with an overview of our income statement, then our balance sheet, and finally our guidance.

Total contract revenue for the second quarter of 2015 increased 36.3% to $36.8 million from $27 million for the second quarter of 2014. Abacus and 360 Energy contributed $7.7 million in contract revenue for the second quarter of 2015.

Willdan's organic growth rate was 13.3% for the second quarter of 2015. From an organic standpoint, the increase in total contract revenue reflects greater demand for Willdan's energy efficiency and engineering services. Willdan's acquisitive revenue growth rate was 23%.

By segment, revenue from energy efficiency services grew 57.2% to $21.5 million. Engineering services contract revenue increased 20.8% to $11.5 million. Revenue from public finance services increased 12.4% to $3 million and homeland security services revenue declined by approximately $300,000 to $700,000 in the quarter.

Revenue net of subcontractor costs increased 27.3% to $27 million compared with $21.2 million for the year-ago quarter. Direct costs of contract revenue were $22.9 million for the second quarter of 2015, an increase of 40.5% year over year. The increase was a result of incremental direct cost of revenue of $6.2 million attributable to our acquisitions, as well as higher direct costs driven by the growth in the engineering services segment and energy efficiency services segment. Both of these segments generally utilize a higher percentage of subconsultants than Willdan's other segments.

Gross margin was 37.8% for the second quarter of 2015, compared to 39.6% for the second quarter of 2014. The decrease in gross margin is due to an increase in pass-through subcontractor costs from the acquisitions.

With an increasing percentage of total revenue being derived from the energy efficiency and engineering segments, we expect our gross margin to be lower than its historical levels, although operating EBITDA and net profit margins will trend higher. As a result of the acquisitions and the growth in the energy efficiency segment, our model has changed somewhat, but the overall profitability of the Company will be higher.

General and administrative expenses for the first quarter were $11.1 million, compared to $11.7 million for the prior-year period. Approximately 54% of G&A expenses were attributable to increases in salaries and wages, payroll taxes, and employee benefits. The increase in employee-related costs primarily resulted from increased headcount within our energy efficiency and engineering services segments.

Most of the other line items increased over the prior year, consistent with the growth we have seen in the business. The one exception was a $177,000 decline in facility and facilities related expense, which was due to our increased efforts in cost savings.

In the second quarter, it was determined that the Company will become an accelerated filer beginning with the fiscal-year 2015 10-K. This means we will incur approximately $300,000 in increased public company related costs, some of which occurred in the second quarter.

With our increasing scale, we continue to see strong improvement in operating leverage, as our G&A expenses as a percentage of total contract revenue declined to 30.1% from 32.4% for the second quarter of 2014.

Operating income increased to $2.8 million for the second quarter of 2015, compared to operating income of $1.9 million for the second quarter of 2014.

EBITDA was $3.3 million for the second quarter of 2015, an increase of 58.3% from $2.1 million for the second quarter of 2014. EBITDA margin was 8.9%, an increase from 7.6% in the same period in the prior year. The higher EBITDA margin is due to a higher proportion of energy work, which is higher margin, and improved business efficiencies as we were able to drive revenue growth in excess of the required investment in overhead expense.

As in the first quarter of 2015, we had a significant swing in our income tax expense relative to the prior-year period. Income tax expense was $1.1 million in the second quarter of 2015, as compared to $64,000 in the same period last year. The difference between income tax expense this year versus last year is primarily due to recognition of an income tax benefit for net operating loss carryforwards in the prior year that were fully utilized and are no longer available to offset taxable income this year.

Net income for the second quarter of 2015 was $1.6 million or $0.20 per diluted share, compared to net income of $1.9 million or $0.25 per diluted share for the second quarter of 2014. The year-over-year decline in earnings per share is entirely attributable to the difference in income tax expense between the two periods.

Turning to our balance sheet, we had cash and cash equivalents of $15.1 million at July 3, 2015, an increase of approximately $3 million from the end of the prior quarter. The increase was driven by strong cash flows from operations. We generated $5.7 million in cash flow from operations in the second quarter.

Our Accounts Receivable days outstanding was 75 days, compared to 75 days at the end of the prior quarter.

Turning to our guidance, we have made no changes from our previous outlook for 2015. We continue to expect revenue to range between $135 million and $145 million and our tax rate to be approximately 41%. In addition, as we have experienced over the first six months of 2015, we expect our rate of EBITDA growth to exceed our rate of revenue growth, due primarily to margin improvement.

All the information heard today is now included on an investor report located on our website in a downloadable Excel format. I would now like to turn the call over to Tom.

Thanks, Stacy, and good afternoon, everyone.

2015 is off to a good start and we continued to make excellent progress in the second quarter. On today's call, I will provide an update on each of our business segments.

Energy efficiency. Energy efficiency services continues to be a key contributor to our strong results, and as Stacy mentioned, our revenues were up 57% in the second quarter.

From time to time, we still get asked if the demand for energy efficiency is correlated to the price of oil. I will say it again. It is not. Over the past year, the price of crude has dropped by roughly 50%. Throughout the price decline, we are seeing a steady increase in the number of business development opportunities, resulting in the strong overall growth we are seeing in our energy efficiency segment. Legislation that will limit the use of coal will create a greater demand for energy efficiency over the next 15 years.

The most significant development this quarter was the award of another energy efficiency program from a southern California utility. This program, our second with this utility, will focus on reducing energy usage in small and medium nonresidential facilities. The program has an initial budget of $7.5 million through June 2016.

Our utility customers have on average 20 different programs focused on reducing energy usage across specific industries, ranging from multi-family housing to hospitals, hotels, data centers, and small businesses, to name a few.

We are focused on being a preferred partner to our large utility clients across all these business segments. To that point, our initial program with the southern California utility focused on reducing energy usage for their hotel customers. This program has been extremely successful, surpassing the targeted goals.

When the program for small and medium nonresidential facilities was competed, our track record of performance on the hotel program put us in an excellent position to win this new contract. We believe that the performance contracting capabilities we have added through our recent acquisitions were also a key factor in winning this latest program.

In terms of new contract awards, we continue to see a preference among utilities towards firms that can self perform -- we also call it direct install -- and provide performance contracting. They want to do business with firms that are a one-stop shop.

We now have an excellent complement to our proven consulting and analytical skills, and we are in a good position to win additional programs.

On the subject of recompetes, it has been announced that all programs, to our knowledge, at our utility customers have been extended through 2015. There won't be any recompetes until 2016 at the earliest. This provides us with good revenue visibility on our existing programs through next year. We will also be ready and well positioned for recompetes next year.

And in the meantime, we expect to win new contracts for programs that are terminated early for competitor nonperformance. We have a good track record of winning these types of opportunities, based on our strong relationships and reputation for performance. There are other new opportunities that Willdan has under negotiation and pursuing.

As you will recall, a major part of our programs with our large utility customers is to go to end users to analyze their energy consumption and make recommendations on how they can reduce their overall usage. In the past when an end user asked us to implement our recommendations, we were not qualified to do that. Now with the addition of the electrical and mechanical engineering and performance contracting capabilities we gained through our acquisitions, we are well qualified to implement energy efficiency projects.

I am pleased to report that since we have made these acquisitions just seven months ago, we have cross-sold our services. These performance contracts range in size from $100,000 to $5 million. We have approximately 10 new opportunities signed or in negotiation.

The energy efficiency audits we perform on behalf of our 18 large utility clients provide us access to more than 8,000 end users who, with our enhanced capabilities, are now potential customers. And when you think about escalating energy usage and cost, we believe a growing number of these customers will be interested in implementing energy efficiency programs.

Our ability to sell directly to these end users significantly expands our addressable market and capitalizing on this opportunity is a key part of our organic growth strategy going forward.

Other news in energy efficiency is that Willdan was recently awarded new contracts for eight community microgrid feasibility studies, which are part of a NY Prize microgrid competition. In July, Governor Cuomo announced awards to 83 communities as part of his Reforming the Energy Vision initiative to build a clean, affordable energy system for all New Yorkers. Microgrids, which offer resilient electric power generation that can disconnect from the traditional grid and operate autonomously to minimize or eliminate power outages, is a key component of his strategy.

I am very proud to say that our team submitted eight proposals and received eight awards.

As I commented last quarter, the microgrid business opens another avenue of long-term growth for Willdan and we are building our capabilities to participate in this emerging sector. One of the world's leading microgrid experts, Dr. Mohammad Shahidehpour, Director of the Galvin Center for Electricity of the Illinois Institute of Technology, joined our Board of Directors, as did Dr. Steven Cohen, Executive Director of Columbia University's Earth Institute. With their guidance, we established our microgrid center of excellence and our leading-edge reputation is a real benefit in recruiting microgrid specialists from across the country.

This is a very exciting new field for Willdan, and while revenue associated with the eight stage one awards is not material, being involved at the early stage of this influential program gives us valuable experience and visibility as other states consider microgrid projects. Near-term opportunities to be -- appear to be in Illinois, Maryland, and California, which are being aggressive in supporting the development of microgrids.

Beyond microgrids, the next major priority that we see emerging within the utility space is a move toward local capacity requirements, or LCR. Essentially, LCR relates to an increasing amount of local generation in order to enhance the overall reliability of the grid. We are seeing more utilities issuing requests for offers for LCR projects and we believe we are well positioned to capitalize on this emerging trend, which could develop into a significant revenue opportunity for us going forward.

Energy efficiency is viewed as generation for these opportunities.

In the engineering segment, we continue to have strong momentum in this area, with contract revenues in the second quarter were up 21% over the prior year and up 6% over the last quarter. We had a number of important new contract wins during the second quarter. We are excited about these wins, and based on the improving financial position of cities in California and the increase in construction activity, we expect to see a growing pipeline of opportunities in our engineering segment.

Homeland security. Some of the major projects they worked on in the second quarter, again, were the New York State MTA training program, the 2015 Yellow Command full-service exercise, the Amtrak station, and other local LA County Public Health and tabletop exercises.

Since the beginning of the third quarter, we have seen a pickup of RFP activity, with sizable projects being initiated by Amtrak and FEMA for preparedness training and exercise initiatives. With our strong track record and credentials, we believe we are in a good position to win this work.

And finally, in public finance services we secured $4.6 million in new contracts during the second quarter, which brought us to $8.2 million for the first six months of the year. During the second quarter, our largest piece of new business was a $2 million contract to provide staffing and administrative services over a multiyear period to the city of Grand Terrace, California, in San Bernardino County.

We continue to diversify our public service business outside the state of California. Two notable wins this quarter were programs to provide a cost service and utility rate study to the city of Manassas, Virginia, and a water rate analysis review to the city of Plano, Texas.

We continue to actively explore additional M&A opportunities. We have a good pipeline of candidates in various stages of evaluation, discussion, and due diligence that have the potential to add value to our franchise, similar to what we have seen with Abacus, 360, and [enecomis].com.

In summary, we have had a strong first half across our business segments. Our acquisitions are making meaningful contributions and leading to new business opportunities. All told, 2015 is shaping up to be another year of growth and profitability for Willdan.

With that, I would now like to turn the call back to the operator for questions.

(Operator Instructions). Andrew Gordon, Zeke LP.

Tom and Stacy, congrats on another solid quarter and thanks for taking my questions.

Thank you, Andrew. What is the question?

So the first thing I wanted to ask about is legislation, both on a local and a national level. I have heard from an industry contact that intensified legislation in New York has led to Con Ed experimenting with increasing some subsidies for direct install work above the 70% level that we had formerly been made aware of. So I'm just curious if there is any truth to that and what benefit you might be seeing or expect to see.

We have not heard that. We had our operating review two days ago. All our guys were in. Nobody brought it up, but if it is true, it will help. How is that, Andrew?

Okay, good enough. I hope it's true.

If it's true, what you are saying is the customer will have to pay less, right?

Yes.

It is going the route of California. California got to the point that the customer paid nothing for some of the measures because the cost to sell and outreach was so much it didn't make sense (multiple speakers)

That's what I've heard. I have heard it is going to nothing for us or New York customers, but --

Well, I can tell you (multiple speakers)

You would know better than I would.

We have talked about it with Con Ed, NYSERDA, and New York for probably five years, but I have not heard they have made the decision.

Okay. The other question on legislation was I heard you mention that recent legislation around the clean energy plan sets up nicely for the longer term for your business. I am curious, though, if you foresee any sort of acceleration in demand response work over the more immediate term as utilities maybe try to position themselves early on.

I think so. We will be able to talk more by the end of the year of some programs where energy efficiency is really becoming very important to the utilities, very important. It was something that was forced on them before, but with the shutdown of coal, it is a necessity. Is that fair?

Sure.

Okay.

The next question I wanted to ask you was -- so congrats on that win in southern California. Can you give any guidance on how much of that revenue you expect to achieve in the back half of 2015?

We've started it at $7.5 million. I think that ends in June 2016. I would probably put a little bit of curve on it. We will see probably most of it in 2016, but I would say 20% of it in 2015. That's a guess.

Only 20%, okay.

Okay, 25%. We are just starting the (multiple speakers)

I am trying to -- what I'm trying to get at is if you -- I was expecting it would be -- I was thinking maybe if it were half, then it would be hard to see how you wouldn't surpass the high end of your guidance very easily, but if it's less than that, then it makes -- I guess I understand.

Although it still seems to me -- I guess a related follow-up question is I think I have heard you state in different occasions or on the past two earnings calls that January acquisitions were possibly at a run rate of $20 million or possibly at $25 million. So you got $7.7 million this quarter. I understand it's seasonal, but what's the current annual run rate, do you think, that is the most fair for where they currently are before you see that ramp-up in the order activity?

To be clear, I don't think I have ever said $25 million. I have stuck to $20 million. (multiple speakers)

Okay, maybe it was miswritten in the transcript.

Did I -- you got a transcript saying $25 million?

Not from you. I am saying it was a Seeking Alpha transcript that I thought I'd seen $25 million.

Oh, Mike has got an answer for you, though, on how things are looking with --

They are growing and you will see that in our 10-K. Or 10-Q.

Sure.

So, will we see more than $20 million is his question, Mike. Do you want to go there?

Not yet.

Not yet. Maybe by the third quarter, Andrew, we will have a better number for you for the rest of the year.

Okay.

The third quarter -- second lead into the third and the first couple of months of the fourth are generally the strongest.

Sure.

For these two businesses.

Yes.

We will have a better handle at the end of the third.

Okay. I also wanted to ask you, have you set up a share repurchase facility? And related to that, you have -- your net cash balance is almost nearly 20% of the market cap. Your business climate, I think, has gotten considerably better with that recent contract win and legislation, and the stock has been going down. I am just wondering, are you willing and able to get more opportunistic with repurchases?

I have stated before our order of priority is acquisition, second would be stock repurchase, third would be dividends. Our current agreement with the bank does not have the covenant to allow stock repurchase, but I can also tell you we are working on it with the bank to remove that covenant.

Okay.

So that ought to give you an indication of what we are thinking about with your question.

Sure. I think that's it for me. Thank you again and congrats on a great quarter.

Al Kaschalk, Wedbush Securities.

Just to clarify on this energy efficiency contract with the southern Cal utility, it was awarded for -- I guess in July or June, I forget the time frame. Why is it so back ended -- back half loaded in terms of their fiscal year?

Well, it's a startup of a new contract, and you got to get the sales force out. You got to make the sales. You got to do the energy audits. You got to get approvals and you're starting from ground zero. Any ramp-up of this type of contract is generally three months.

You could say Con Ed New York, which is the largest one in the country, the ramp-up is one year. So three months to ramp up, then we hit our stride hopefully fourth quarter, and that leaves [70]% of it for first part of 2016.

Right.

That's pretty typical of a startup of any contract.

That's the nature of my question. I didn't think it was that far off of your historical contracts and in particular this type of contract. So that's great.

On the recompete, when do those -- so you're good through the end of the calendar year or is it through June of 2016? When do you start to revisit these recompete opportunities and what kind of dollar level are we talking?

We don't anticipate any changes. We don't exactly know. We always think it's good news that they extend them, but how long they can extend, we are anticipating the end of 2016 for our major utilities. But if they came back next summer and said we're going to go another year, that's good for us.

Right.

I can't -- I don't have an answer. We don't know, beyond next -- second half of next year.

So second half of next year. The contract is not needed to be recompeted through the end of June 2016. Is that correct?

(multiple speakers) start a calendar. They may go -- in the contract term, they may extend. We don't think we will see any recompetes until next summer.

Okay.

That's all I know right now, Al.

Great.

We have no definitive answer on any of them.

Okay. Now let's go back and revisit, I guess, say the gross margin, but it obviously provides us the data point to think through this passthrough, the activity that has increased. How much of revenue are we talking here and what is this a result of, because I thought we had anniversaried a lot of this passthrough?

Hi, Al. Over the quarter, our subcontractor revenue increased and it has a lower margin than the work performed by our internal employees and therefore decreased our gross margin.

Right, no, I understand that. What I was trying to get at is how much revenue now is more on the subcontract -- is subject to being subcontracted now and therefore has this passthrough versus 100% of it not being -- just self perform?

I would say it's about the same as our revenue net of subcontractor costs, so for Q2, that was around $26.9 million, and for the year to date, it was $51.9 million or $52 million.

Okay, but for (multiple speakers)

We have that detail on the end of the earnings release as well.

Yes, okay. I will follow up off-line, but I was just trying to understand how much -- is it work that came on from 360 and Abacus that's caused this to increase or is there new work that you won that in terms of going forward, it may be consistent with the first one or two quarters of this year? But I'm just trying to appreciate how we should think about the gross margin line.

The increase is related to the acquisitions of Abacus and 360. They do use a higher percentage of subcontractors than the rest of the energy group does. As well, they have -- they are very busy in the summer months because of schools being out. They do a lot of -- a lot more jobs, so we would expect the increase during these quarters.

Got it. Thank you very much.

J.D. Padgett, ALMAK Capital.

Just a couple quick ones. One, Stacy, I thought you said the acquisition revenue was (technical difficulty)

J.D.? Moderator?

Mr. Padgett, I guess he got off the line. We will go ahead and go now to Wyatt Carr, Monarch Bay Securities.

He is back in the queue. Let's see if we can get him back on.

A couple of quick ones for me. Stacy, I thought you said the acquisition revenue was $7.7 million. Is that right?

Correct.

Okay, and then, did you say excluding that, revenues grew something like 13% year over year? My math was just coming up with something a little different and I just wanted to double check I wasn't doing something wrong.

Year over year, consolidated was 36.3% and 23% was related to acquisitive growth.

Okay. So the $7.7 million on the base last year of $27 million would be, what, like 28 or 29 points of growth? Am I looking at that right?

What's your question? State your question again. You want to know how much was acquisitive and how much was organic?

Yes, I was getting excluding acquisitions growth was more like 8% or something like that, I think.

I think we had 13%.

Yes (multiple speakers)

So what number do you want to work from?

Either way, I just wanted to figure out what the right one was to look at.

We start -- yes, we started the acquisition growth after the first quarter. You started after -- it depends on when you started. So we had about $1.2 million, $1.3 million of organic growth from the acquisitions above what we modeled them at. That may help you get to the 13%.

Okay. So, yes, you're including a little organic on what you did with that combined business. Okay.

Right.

Makes sense. And then, the confidence about some of the utility programs, is that -- when we look at Con Ed in the context of that comment, is that something we should expect Con Ed to be similar revenue run rate in 2015 to what they did in 2014, which I think was about $27 million, or is that winding down a little bit as that contract, current contract, matures or what is your expectation around that?

We think it will be flat from where we are right now.

Okay.

We have no indication of less; we have no indication of more, with regards to that contract. We do know they're coming out -- that's why I commented with other programs that they are closing out early and that we will be chasing that will impact and could potentially grow 2016.

Okay, but for this year and what you have seen through the first half, it is tracking on pace with the $27 million from Con Ed that you did last year.

Yes.

And hopefully there is some opportunities to do better than that?

Yes.

Okay. And the other question from me had to do with the optimism about some of the new programs and some of the stuff in the pipeline. Why have you not taken the opportunity to maybe raise the revenue guidance for this year? It seems like if you just flatline from where you are at now, you are in the middle of the range, and hopefully there is some seasonality that is helping you in September and some new programs that are layering on, like the southern Cal program. I'm just trying to understand. Are there some other things that you are trying to build in some hedge around or how you are thinking about that?

I would say we are hedging around. We have got -- I think that as of this week in the review of the rest of the year, the top side of that is still looking where we are. If some good things happen, we could exceed it, but we are not willing to put that in print.

Right. Okay. Hopefully at some point, people begin to realize the value in this stock because you guys are sure executing well and I can't understand the nonconfirmation by the stock. So, keep up the good work.

I think that's our only choice.

Absolutely.

And that's what we intend to do, so thanks, J.D. We lost Wyatt in whatever happened with the phones.

Wyatt Carr, Monarch Bay Securities.

Just a couple questions on your remarks. You talked about winning eight of the eight awards that you bid on in New York on their Prize program, but said that the revenues were not material yet. This is Phase 1, so when would you expect to see some material revenues there, and when does Phase 2 start kicking in?

Phase 2 will go to about probably the first of the year. It will be -- what we won now is a feasibility study. We won eight of them. They are $100,000 each. There were about 80 cities got $100,000.

If the city is selected to go forward with Phase 2, which is a design, that's about $1 million. If NYSERDA likes the design and they say, okay, we want to go ahead with implementation, they are going to seed that city and I say -- or incentivize that city with $7 million. I would say those decisions probably on the $7 million will be made by the end of 2016, factoring in it takes six months to make a decision on anything.

Okay.

So we will be done with feasibility at the end of this year. We will know if we get selected for the $1 million and that will take probably six months, and by the end of 2016, they will be awarding probably $7 million to cities to go into design construction.

Okay, and you mentioned that there are near-term ops in Illinois, Maryland, and California. California's [ethic] program, where are they in that program?

Did you read that or did we tell you that on one of our calls?

I read that.

I can't remember. You read that? Wow. Yes, we're pretty excited about that one, yes. It is being talked about now.

So just like New York, you go out, you get your partners, a city or county, which is very good for Willdan because we know or work with most of the cities and counties. And then you submit, and the submission will go in in December -- November, December, last part of this year. And then just like NY Prize, they're going to probably pick, I don't know, 50, 60, 70 cities in California. We have no idea. I think there's $17 million to do feasibility studies.

Okay, that sounds good.

It's good because it's our hometown. New York guys on the phone saying New York is, so I shouldn't say that.

Are you seeing anything in the EES in the Chicago area?

Oh, yes. On microgrid or energy efficiency in general?

In microgrid.

Yes, ComEd. That's -- yes. ComEd is looking at three or four sites in their territory.

The only operating microgrid -- fully operating microgrid in the country is ComEd sponsored, Commonwealth Edison of Chicago, and that had also Department of Energy money in it and that is the campus of Illinois Institute of Technology. And that's why the Galvin Center and Dr. Shahidehpour are on board with Willdan because it is the most advanced microgrid in the United States.

Okay and --

And ComEd supported that.

Okay. And Stacy, in the past you had guided some kind of goals as to EBITDA margin, gross margin. Do you have any kind of guidance you can give us there?

She's working on it.

We haven't provided any guidance for EBITDA margin this year, unlike last year.

Okay. Would you say that there is still upside in the kind of EBITDA margin you've reported recently?

Can you repeat your question? Sorry, Wyatt, I didn't hear you.

Is there upside to the kind of EBITDA margins that you reported this quarter?

Yes, there is. In Q2, we had 8.9% margin, and we expect our growth to exceed our revenue growth in that as well.

Okay.

The answer is yes.

I said yes.

The answer is yes.

Wyatt, she said yes.

I got it. Thank you very much and congratulations.

Scott Kirkpatrick, Teton Capital.

Thank you for taking my question and congratulations on a solid quarter. I think you might help some of us as we're stumbling with the gross margin shift as you ramp up that part of your mix. If you could let us know if you expect improvement there, and I guess maybe if it's possible to parse out how much of the decline in gross margin came from the mix shift versus the acquired companies, that will be helpful. Or, alternatively, whether if we look at the combined organic Company now going forward, we can expect directional improvement in the gross margin, that will be helpful, too.

And then, my second question is you all have, I think, shared some public long-term targets for the business. I wondered if you are reiterating those today, and if so, what those are? Thank you.

On the first question regarding gross margin, it is essentially entirely due to the newly acquired companies and the fact that they have higher subcontractor costs, especially in the summer months during the construction season.

So we would expect a similar gross margin probably next quarter. I think it's the new normal for Willdan.

However, as Stacy mentioned, that doesn't affect the operating margin or the EBITDA margin at the end of the day because we are expecting to see a higher EBITDA margin for Willdan overall, and you have seen that in the numbers compared 2015 to 2014.

Yes, I'd love to see that EBITDA margin and I'm glad the target is even higher than what you have realized, but I guess what I am stumbling on is in the press release, you mentioned that part of the increase in the subcontractor costs is a function of the acquisitions and then there is also a component that is -- has increased primarily because of increased demand for the energy efficiency services.

So maybe another way to look at this is you gave us the revenue growth net of subcontractors. Can you give us a gross margin net of subcontractors? Or if you can't break it down to that level, can you help us understand whether the gross margin is going to be flat or down in that revenue segment? And I can follow up off-line if this is too challenging to do off the cuff.

We can follow up off-line and calculate that, but in general, if our energy efficiency work for the utilities outpaces and grows faster than performance contracting, the gross margin should climb back up.

I think a little bit of confusion, and I see it, is that we had a lot of subcontracting on -- let's just use Con Ed New York, and we said we wanted to self perform and reduce the amount of subcontracting, which we have. And then, along comes a couple of acquisitions that have a lot of subcontracting again and it affects the gross margin.

So they are separate types of subcontracting. There is the utility subcontracting and the performance subcontracting, and we need to separate that and we can get to a number for you, but not on the phone.

Okay, great. I will circle back on that. And just on the long-term target front, are those targets out there and what are they currently?

I assume you're talking about our deck that we put out, investor deck?

I may be. I just can't remember where I saw it. I just remember a nice revenue target that was out there a few years and I don't remember exactly the source of that.

The source of the one for this year is $135 million to $145 million. Are you speaking -- how far out?

Whatever is out there. I thought there might be a five-year target; I can look back and try to figure out exactly when I saw it.

In the investor deck that we have gone on the road with and it's public, it is on our thing, we have shown we would like to grow 10% acquisitively and 20% organically over the next five years, if that's what you are referring to. If you take that, it puts you in about a $500 million range five years from now.

Okay, maybe that's it.

I think that's maybe what you saw.

Okay, great. Again, congrats, and thank you.

There are no further questions at this time. I would like to turn the call back to Mr. Tom Brisbin for any additional or closing remarks.

I'd like to thank all of you for participating on our call today and for your continued interest in Willdan, and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.