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Good afternoon, and welcome to Telkonet's Second Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. Before I turn the call over to Jason Tienor, Telkonet's Chief Executive, I would like to read the following statements.
Certain statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks and uncertainties such as competitive factors, technological development, market demand, and the company's ability to obtain new contracts and accurately estimate net revenues due to variability in size, scopes, and duration of projects and internal issues and the sponsoring client.
Further information on potential factors that could affect the company's financial results can be found in the company's registration statement and on its reports on Forms 8-K filed with the Securities and Exchange Commission. Telkonet is under no obligation to update items discussed today to reflect subsequent developments.
Lastly, I like to remind everyone that this call will be recorded and will be made available for replay via a link available in the Investor Relations section of Telkonet's website at www.telkonet.com.
With that, I would like now turn the call over to Jason Tienor, Telkonet's President and CEO, to discuss the results. Mr. Tienor, you may begin.
Thank you, operator. Good afternoon and thank you for joining us for Telkonet's second quarter earnings call. We're honored that you an interest in our business and performance and look forward to sharing our results with you and answering any questions you might have at the close of this call.
First off, I'm sure that everyone has seen the recent news that we've engaged ROTH Capital Partners to assist in a strategic review of alternatives for Telkonet in order to maximize shareholder value and ensure future performance.
As previously stated by Telkonet's Board of Directors, we want to ensure that we're taking into consideration all avenues to further Telkonet's growth while positively impacting shareholder interests.
Since the announcement, we've seen significant interest from numerous parties and have been working diligently to provide information and responses to all relevant questions. If anyone listening would like to learn more about these activities or receive additional information regarding this process, we recommend that you contact Brian Kremer of ROTH at bkremer@roth.com.
Moving on, this last quarter has demonstrated the transformational changes taking place in the world of automation and the Internet of Things. We'd recognize the shift in the market as the year began, but truly saw a difference throughout the second quarter.
With 40% year-over-year and 85% quarter-over-quarter growth, the market for automation has demonstrated its capacity for a dramatic increase in interest and expansion. Increasingly, we're concentrating on our recurring revenues regarding services and support, which increased by 20% in the second quarter.
We also continue to maximize efficiencies in our performance by improving operational metrics such as a 21% reduction in SG&A and a 15% reduction in operating expenses. Through diligent management of our manufacturing operations, we've been able to improve our gross margin to an incredible 51% in the second quarter. These metrics prove the ability to achieve our internal plans for 2018 and moving forward in a line with expectations for the remainder of the fiscal year.
In order to ensure growth of our target markets, we continue to enforce our channel-driven strategy through events such as our 2nd Annual Partner Week. This year's event was a fantastic success with marquee partners contributing to the education and significant growth over the previous year.
Utilizing an opportunity to put the largest and most active partners from Telkonet's universe in the same room at the same time for education, information sharing, and team building provides a phenomenal opportunities to support extensive gains at minimal expense. Due to the success of the event, Telkonet's marketing team has already begun to plan next year's event.
We also recognize the most successful showing that we've ever had at the largest hospitality conference held annually. HITEC was up in Austin this year due to diligent preparations by our phenomenal marketing team and an active showing by our sales team, we were able to leave with more than 190 contacts and had more than 300 attendees for an event that we hosted in cooperation with three of our partners. These events are the hallmark of our market education and have recognized such an impressive performance that's already begun to bear fruit in our pipeline and backlog.
Distribution of sales for the second quarter was exceptional as well with significant revenues been driven by hospitality, education, and public housing. As the most prominent solution in education involving occupancy-based energy management controls, we continue to demonstrate our leadership with projects during the quarter including Texas A&M through Johnson Controls, Penn State through UTC, KSU, NYU NC State, and several others.
We also expanded our hospitality efforts through rapid expansion across casinos including Pottawattamie, Cosmopolitan, The Stratosphere, and the Oxford Resort Casino. We've also demonstrated continued growth internationally with 10% of the quarter's performance coming from outside of the U.S.
A key contributor to this performance is our continued effort to expand and support our channel partners. Having recognized significant growth thus far this year, we're seeing consistently larger growth in our sales driven by these partnerships.
Additionally, our past efforts to cultivate new opportunities in new markets have increasingly been experiencing significant success. In addition to having been the first company certified to participate in a new initiative by one of the largest hospitality franchises in the world to provide a comprehensively connected room.
We've just recently won the first $1 million opportunity and expansive relationship that will see us installing vertical EcoSmart controls within consumer homes. This engagement is the culmination of more than a year of effort and was won competitively against several larger and more well-known consumer brands. We look forward to sharing more about this opportunity and future developments tied to it.
The past quarter also saw extensive new product iterations and releases. In addition to the new EcoCommander 5 Gateway, an AWS deployment releases, we've announced the upcoming release of our evolutionary Symphony platform with its composer dashboard and custom commissioning application.
We've also announced the development of a brand new Switch device developed on the request of one of our largest customers, but fulfilling a tremendous need in the markets we service.
We've also announced the completion of several new integrations with marquee partners including Sonifi, Assa Abloy, and Volara. These integrations and others set us apart from all competitors in our space, enabling truly comprehensive environments and experiences without the need to interface with multiple vendors.
Now, while we've seen strong performance in the second quarter and expect even greater results for the rest of the year, but business is experiencing several pressures that we're working to mitigate through a number of individual measures.
The new tariffs that have been enacted have a financial impact on our performance and a quick resolution to this issue will have a positive outcome for our business moving forward. We have a number of large opportunities that require new product development and those development timeframes will have an impact on revenue recognition and R&D cost in the short-term.
Through strategic planning and resource allocation, we're minimizing the impacts to our ongoing performance, while ensuring product deployment and as rapid and fast as possible.
As shared previously, we continue to experience material procurement pressure and are working diligently with our contract manufacturers to mitigate impact through inventory, quantity, and third market considerations.
Lastly, with the economy in the position we're currently in and unemployment at historic lows, we continue to recognize pressuring the job market to locate and secure talent for open positions. While currently not affecting our performance, this is an issue that we monitor closely and hedge through contract work and outsourcing.
As we've discussed, the industry has demonstrated a significant shift in awareness and growth. Due to this, we're expecting continued year-over-year revenue growth moving forward, matching or exceeding the second quarter results as we continue through 2018. We're also confident that the growth of our pipeline and the industry's trends are not temporary and expect our momentum to continue as we move forward.
With that, I'd like to hand the call over to Gene Mushrush, Telkonet's Chief Financial Officer to review the quarterly financial performance with you.
Thank you, Jason. Ladies and gentlemen, good afternoon and thank you for joining us. Today I will be summarizing our 2018 second quarter and year-to-date financial results. For the quarter ended June 30th, 2018, Telkonet reported total revenues of $3 million, a 40% increase compared to $2.1 million for the same period prior year. It also represented the largest revenue quarter in company history for continuing operations.
Educational revenues, a segment influenced by seasonal accessibility grew approximately 185% compared to the same period prior year. Recurring revenues with gross -- with average margins of 57% grew 39% to $153,000 compared to the same period prior year.
Gross profits for the quarter were $1.5 million, up 49% from $1 million last year. Gross margins increased 3% when compared to 48% for the same period prior year. An increase in recurring revenues, a decrease in labor, and an inventory valuation adjustment contributed to this improvement.
Operating expenses for the quarter were $1.7 million, an 8% decrease compared to $1.8 million for the same period in 2017. Selling, general, and administrative expenses fell to 43% of revenues compared to 70% for the same period prior year. This marks an historical low for continuing operations as well. Reductions in marketing, bad debt, and incentives comprise nearly 80% of the favorable variance.
We incurred operating losses from continuing operations of $207,000 and $869,000 for the quarters ended June 30th, 2018 and 2017, respectively. Income from discontinued operations was zero and $19,000 for the comparative quarters ended June 30th, 2018 and 2017, respectively.
We reported negative adjusted EBITDAs, a non-GAAP measure from continuing operations of $190,000 and $854,000 for the quarters ended June 30th, 2018 and 2017, respectively.
Total year-to-date revenues of $4.6 million, represented a 13% increase compared to prior year. Recurring revenues increased 20% year-over-year to $255,000. Hospitality revenues grew 22% year-over-year.
Year-to-date gross profits were $2.1 million, up 10% from $1.9 million last year. Gross margins relatively unchanged at 45% when compared to last year. A soft first quarter 2018 continue to impact current year-to-date results.
Year-to-date operating expenses fell 14% to $3.5 million compared to $4.1 million for the same period in 2017.
Selling, general, and administrative expenses fell to 56% of revenues compared to 79% of revenues last year. Reductions in marketing bad debt and incentives and non-recurring expenses related to last year's sale of the company's wholly-owned subsidiary were the primary reasons for the decrease.
We incurred operating losses from continuing operations of $1.4 million and $2.2 million for the six months ended June 30th, 2018 and 2017, respectively. Income from discontinued operations was zero and $591,000 for the six months ended June 30th, 2018 and 2017, respectively. We reported negative year-to-date adjusted EBITDAs from continuing operations of $1.4 million and $1.7 million in both 2018 and 2017.
We reported $502 million in cash and equivalents at June 30th, 2018 compared to $9.4 million at this time last year. Cash used in continuing operations during the first six months was $2.2 million compared to $1.8 million the prior year period.
On April 6th, the indemnification escrow related to last year's subsidiary sale was received free of any claims.
We reported a working capital surplus measured as current assets plus current liabilities of $7.7 million at June 30th, 2018 compared to a surplus of $10.6 million at this time last year. Although nothing was outstanding on our asset base line of credit at June 30th, 2018, we did have available borrowing capacity at $1.6 million.
As political discourse foreshadowed, the U.S. federal government began imposing tariffs on a large number of products imported from China in early July. Since our core products are manufactured in China, these tariffs could adversely affect our business. In order to mitigate any impact, we implemented changes to our pricing structures and have started discussions with domestic sourcing alternatives. If these changes prove unsuccessful, we anticipate margins will weaken.
The second quarter marked a nice rebound from a disappointing first quarter. In addition to the aforementioned revenue achievement, we also posted the smallest quarterly loss for continuing operations. This may seem inconsequential, however, it's proof-positive with those variables in place, profitability improvements will fall.
In closing, thank you for your interest and to our shareholders, specifically, thank you for your continued support.
I'll now turn the call back to Telkonet's President and Chief Executive Officer, Jason Tienor.
Thank you, Gene. With that, I'd like to hand the call back to our operator to take any questions you might have. Operator?
Thank you. [Operator Instructions]
We do have a question from the line of Mike [Indiscernible] with Private Investor. Please proceed with your question.
Hello Jason, how are you?
Good Mike. How are you?
Very good. I was impressed with this quarter -- this quarter's results. I thought -- to me, it represented what I thought was a turnaround quarter for the company. Do you agree with that?
I do.
I seem to recall last year you were predicting that it would take about this time of this year to kind of get these kinds of results. Are things, kind of, unfolding as you had thought they might last year?
I appreciate the memory Mike, and this is exactly what we foresaw. The industry for automation and IoT has been dramatically moving forward over the course of the last 12 months. As I mentioned within the call, a lot of the opportunities, especially, the larger opportunities that we've been working on, we knew that they would have a very long ramp-up period. And because of what we've seen over the course of the last quarter of closing some of those projects and those deals, we definitely see that we're nearing the end of that sales cycle.
And our pipeline if you were to ask our Director of Sales, I was speaking to just prior to this call, has never been more active. So, we definitely feel that the educational phase of automation within the markets that we service has moved passed and we're really now in the competitive sales phase.
Excellent. I would infer from the second quarter results that this current quarter, the third quarter, the company could become profitable and I know you don't always want to comment on that, but is that a reasonable inference?
I think that's a reasonable expectation Mike.
Okay. I mean that's going to be a first if I'm not mistaken, correct?
A first under the discontinued operations since the beginning quarter of last year, yes, that would be a first. And it's really what we are getting towards is making EcoSmart be a business on a standalone operating entities. So, I definitely think that we're all pushing in the same direction towards that.
In terms of the tariffs and the equipment issues you mentioned, any insight into what to expect? How much of an impact the tariffs are going to be for example?
Yes. Unfortunately for our business, our products, as Gene mentioned, our core products are listed as one of those products that are covered by the tariffs. So, we actually experienced during the second quarter a 25% increase in costs with regards to our products.
We are mitigating that by several different factors, both stacking the inventory prior to the tariffs having gone in place that will help us write-out some of the term that we expect the tariffs to be in place for. Obviously, no one truly knows when they might end. But we're trying to minimize the impact that they might have on our business throughout the current year.
Okay. Well, I just want to say congratulations. I think it was an excellent quarter and I'm very -- looking very much forward to the third quarter results going forward. Thank you.
Thank you, Mike. You have a good afternoon.
Thanks.
Thank you. [Operator Instructions]
It appears there are no further questions at this time. I'd like to turn it back to management for closing comments.
Thank you, operator, and thank you once again for everybody joining us this afternoon. Please feel free if you have any further questions after the call has ended to contact us at ir@telkonet.com. And hope everybody has a wonderful afternoon.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.