Good day and welcome to the Willdan Group Second Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.

Thank you, Kevin. Good afternoon, everyone and thank you for joining us to discuss Willdan Group's financial results for the second quarter ended June 30, 2017. With us today from management are Chairman and Chief Executive Officer, Thomas Brisbin; Chief Financial Officer, Stacy McLaughlin; and Mike Bieber, President of Willdan Group. Management will review prepared remarks and will then open up the call 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 Form 10-K for the year ended December 30, 2016 and subsequent quarterly reports on Form 10-Q. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. 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 services and other direct costs and EBITDA. We believe revenue net of subcontractor services and other direct costs allows for an improved measure of the revenue derived from the work performed by our employees. 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. With that, I will now turn the call over to Chief Financial Officer, Stacy McLaughlin. Stacy?

Thanks, Tony. I'd like to add my welcome to those joining us on today's call. I'll start with an overview of our income statement, then our balance sheet and finally, our guidance. Total contract revenue for the second quarter of 2017 increased 21.9% to $71.8 million from $58.9 million for the second quarter of 2016. By segment, including both organic and acquisitive revenue, Energy Efficiency Services revenue increased 26.1% to $53.7 million; Engineering Services contract revenue increased 11.1% to $14.1 million; revenue from Public Finance Services increased 14.7% to $3.5 million; and Homeland Security Services revenue decreased 15.1% to $527,000 in the quarter. With the 1-year anniversary of our acquisition of Genesys Engineering occurring in March, all of the 22% increase in our total contract revenue in the second quarter was organic growth. Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $30.2 million, an increase of 9.1% from $27.6 million in the year-ago quarter. Direct costs of contract revenue were $53 million for the second quarter of 2017, an increase of 29.1% from $41.1 million in the same period last year. The increase was primarily as a result of the growth in total contract revenue in the Energy Efficiency Services segment and the corresponding increase in subcontractor services and other direct costs. Our direct costs of contract revenue were 73.8% of our total contract revenue in the second quarter of 2017, up from 69.7% in the first quarter of 2017. We expect to see some volatility in this ratio, as it is a byproduct of the mix of project work that we have in any one particular quarter. However, given the pipeline of work ahead of us, we think that our direct costs as a percentage of contract revenue have most likely peaked, primarily…

Thanks, Stacy and good afternoon, everyone. We had another good quarter generating revenue and operating earnings that were in line with our expectations. This was a significant increase over the prior year, largely driven by the performance of our Energy Efficiency and Engineering Services. Through the first half of the year, we have executed well. We're delivering on current programs while effectively staffing up to launch new programs we have won over the past year. We continue to see strong growth in our energy efficiency. Total revenue increased 26% over the second quarter of last year. Most of our major programs were fairly consistent in terms of the revenue contribution, while the increase primarily came from a ramp-up in our work with PacifiCorp and the city of Lawrence, Kansas. We also continue to see more work coming in newer markets such as New Jersey, Connecticut and Oregon. This reflects the trend we're seeing of an increasing number of states and municipalities starting to evolve more funding to energy efficiency, energy resiliency and distributed energy resources. As a result of this trend, along with the new target markets and skill sets that our recent acquisitions have brought, for example, Genesys and 360, we're seeing our energy efficiency revenue become more diversified. Thus, there are meaningful revenue contributions from utilities, state agencies, colleges, hospitals and municipalities. Over the past few years, we have positioned Willdan to capitalize on a rapidly evolving market for distributed energy resources. And today, we look -- and today, we took another significant step with the acquisition of Integral Analytics. They're a recognized leader in data analytics. IA, for short, merges economics with power engineering to provide more precise forecasting and utility operation decisions. As we have done with acquisitions in the past, we have gotten to know…

[Operator Instructions]. We'll take our first question from Moshe Katri with Wedbush Securities.

Nice performance on DSOs and expenses for the quarter. Can we get an update on some of the large potential opportunities on the West Coast, California, Illinois and New York? And then maybe also an update on some of the opportunities in what you guys called load pockets last time we met?

Okay. California, we're expecting that they will make a decision, time frame October, November, on how they're going to outsource energy efficiency through the utilities. I said on the phone before, they're mandated to go from 20%, the mandate originally was 100% outsourcing, they've settled on a number of 60% and we expect to see a decision October, November on how they're going to procure it. So California is kind of lagging behind, I'd say, about 6 months right now. Illinois, they basically increased -- Illinois Commerce Commission wants more energy efficiency from Commonwealth Edison and the utilities served by Illinois Commerce Commission. And the proposals we sent in about 7 months ago, we turned them in again with the bigger values and we're waiting to hear on -- they're going to have an oral before they finalize their decisions. So we're at the point that we've turned in the proposals and we'll be waiting for an oral hopefully in August. New York. New York, the Brooklyn-Queens demand side management program that we participated in which we call a load pocket, is -- seems to be in the direction kind of New York is going. They came out with 2, what they're calling, nonwire solutions and it's basically load pockets in New York. They've identified 2 which we've proposed on and we expect 5 more coming out either the end of August or beginning of September. So the Brooklyn-Queens model, at least on the East Coast, for load pockets and how to reduce the amount of energy seems to be the direction the East Coast is going. And just as a reminder for Brooklyn-Queens which is the model for the nation, when they asked for 30 -- 50 megawatts, Willdan delivered 35 of the 37 that they've gotten. So we feel that we're well positioned both on the East Coast and nationally to work in that type of environment.

Okay. And then just as a follow-up. IA clearly has a different business model. Maybe you can share with us, how do you go to market with it? And when you look -- when you're talking to sales, how are they planning to kind of market this offering, considering the legacy part of the business that looks totally different?

Mike's been working with this acquisition day and night and we -- he's going to answer that question.

Yes, there's two aspects to it, Moshe. First, they have a customer set which is 2/3 new to Willdan. 2/3 of the utilities and municipalities they work for, we don't work for here at Willdan. So we'll be cross-selling Willdan's historical services to those customers over the next few years. Secondly, we have customers that they don't work for, like Con Edison, one of our largest customers here which Integral Analytics does not serve and many others like that. We'll be cross-selling those services to customers that we have good relationships. So we've got a strategy that we've laid out over the last 2 weeks. We have detailed targets which we've already started cross-selling even before the acquisition closed and we'll be working very hard on that over the next 6 months.

Brilliant. And then a final question on margins. How should we think about margins beyond 2017? And maybe we could talk about some of the levers here in the model.

Well, first, we mentioned that, in Tom's script, Integral Analytics should contribute about 70 basis points to our margin if all things other than Integral Analytics are static. That's '18 over '17. So that'll be a good contributor. Secondly, you mentioned over the longer term. We've mentioned that we believe that we could move this model up towards 9%-or-higher EBITDA over the next several years. The primary leverage is back-office costs, as we get larger, are more effectively absorbed. They're not increasing, as you've seen SG&A increase more slowly than the pace of revenue growth. So we're better able to absorb those costs and that will also contribute to margin improvement over the next 3 years.

We'll take our next question from John Quealy with Canaccord.

Congratulations on the deal. A couple of questions. First, on the IA deal. If I read the 8-K, this was a $18 million purchase price, cash and shares, with a $12 million earn-out, is that right?

That's what the 8-K says.

Mike, in terms of -- to your point about maybe an accretive $10 million in the guide in the fiscal '18 time frame from IA, I imagine, those contracts, that would be applicable to the earn-out if they were to get that. Or just walk us through in terms of the $10 million. Is that the stuff that's already been specifically identified and the guys currently -- or men and women, I guess, at that firm are chasing as -- those contracts down now and part of their earn-out?

Yes. So as mentioned in the 8-K, they have a 3-year earn-out. $10 million represents the weighted average pipeline which we've gone through in due diligence and which they've been cross-selling over the last 6 months. Their sales cycle lasts anywhere from 6 months to a year. So anything in the '18 pipeline right now, for the most part, has already been begun and the $10 million is our best estimate on the weighted pipeline in 2018.

Got it. Okay. And just back to your point about the sales cycle of IA. As utilities acquire this analytic capability, is this put out to RFP? Are these rate case or rate case-enabled? Do you mind just giving us a little bit of context on, those of us on the outside, how we can try to dig into win rates and timing on RFPs and things like that?

Many of their procurements, I would say more than half, are not competitively procured. They go in and make technical presentations and the customers buy that software application. In other instances, they need to go out for competitive procurement and they'll write a specification which only few in this world can meet. Integral Analytics have very few technical competitors and with one of their applications has no competitors. So this is -- there's only a few players in this market.

Got you. And my last question on that IA. So given the sort of license-based model, this is on-prem software or is this all cloud or a mixture? I know you said cloud in the release, but I just wanted to get more technical.

It can be either. And Integral Analytics actually doesn't care. The software can be hosted at the client's house or can be hosted by Integral Analytics in the cloud.

Got you. Okay. Back to the core business as it is today, maybe for Stacy, just in terms of your comments around the subcontractor piece of gross profit in trends and in peaks. What sort of degradation in the peak would you expect maybe back half of '17 into '18? What sort of magnitude should we be looking for, for that?

For the last half of 2017, we would expect it to decline, but fully, not a drastic drop-off. But we would expect it to decline from the $58.6 million that we had year-to-date through June.

[Operator Instructions]. We go next to Wyatt Carr with Western International Securities.

The first one I have is regarding the Internal Revenue Code 179D. You said that they are not available in 2017, but is this something that you still think will be enacted and will be available later in the year?

It hasn't been approved by Congress yet in 2017 because of the discussion by the administration of the change in corporate tax rates. At this point, we cannot take any type of deduction related to that and we're uncertain of whether or not that will be approved. It has shown in the past that it has been approved each year, but we cannot take any type of tax deductions for that right now because we're uncertain of that.

Okay, Stacy. And one other just quick question. On the acquisition of IA, is that already reflected in the balance sheet that was released today?

No, it is not because the balance sheet today is as of June 30, 2017 and the acquisition closed on July 28. So it will be reflected in the balance sheet that comes out for the third quarter.

And ladies and gentlemen, there are no further questions at this time. I'll turn it back over to management for any additional or closing remarks.

Okay. We'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 and thank you.

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