Orion Energy Systems, Inc. (OESX) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Orion Energy’s First Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference, Victoria Sivrais. Please go ahead.

Good morning everyone and thank you for joining Orion Energy Systems’ first quarter of fiscal 2016 earnings conference call. Participating in today’s call will be John Scribante, our Chief Executive Officer and Scott Jensen, our Chief Financial Officer. John will open today’s call by providing comments related to our quarterly result and business outlook. Scott will then discuss our financial results for the first quarter in greater detail. John will then make some closing remarks and will open up the call for questions. The Company has made an accompanying slide presentation available on its website at www.orionlighting.com in the Investor Relations section. Additionally, for anyone who has not able to listen to today’s entire call, an archived version of this call will be available later this morning. Please visit the Investor Relations section of Orion’s corporate website to access the replay. Before John begins his commentary, I would like to review Orion’s Safe Harbor statement. This call is taking place on August 4, 2015. Remarks that follow, including answers to questions, include statements that the company believes to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words such as believe, anticipate, expect, or words of similar import. Similarly, statements that describe future plans, objectives, or goals are also forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that the company has described in its press release issued this morning and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update these forward-looking statements, which may not be updated until the company’s next quarterly conference call, if at all. With that, I’ll turn the call over to John. John?

Good morning everybody. Thank you, Victoria. Today we reported solid fiscal first quarter results, with revenues of $16.6 million, growing 25% year over year and gross margins of 22.7%, reflecting a 16% margin improvement year over year. Additionally, lighting revenue for the first quarter increased 35% compared to prior year period. During the quarter, we saw the majority of our sales driven by our commercial and industrial sectors, with the remaining coming from our agricultural and exterior sectors, due to increased demand related to our channel marketing strategies. Over the last several quarters, we focused on aligning our business to capture the significant LED market opportunity, improve operational efficiencies and rationalize costs in anticipation of the inevitable industry shift to LED. As a result of these investments, we’re seeing an increased momentum in the business and evidence that our strategies are working. In fact, our results during the first quarter were the strongest that we’ve delivered since the technology transition occurred at the start of calendar 2014, setting up Orion for a terrific year ahead. As we communicated last quarter, our priorities for fiscal 2016 are first to continue to grow our LED sales; second, drive innovation in the business; and third, improve gross and operating margins. Let me begin with providing some color on our progress around driving LED sales. During the first quarter, LED product revenue comprised 60.9% of total lighting product revenue, compared to 21.4% in the year ago period. The strategic evolution we’ve undertaken in the past several years, while disruptive to our business, had positioned us to well capture an increasing share in the LED retrofit market. As you know, we focused primarily on the retrofit market in these distinct sectors: industrial, commercial and exterior. What separates us from the pack and why Orion is unique is not only that our products are higher quality and more innovative, but we also have a deep understanding of the retrofit market and what it takes to service the unique needs of retrofit customers. It’s not just a low cost or better performing fixture. As a result, we’ve squarely built our business around these unique needs, such as reducing job site cost, maximizing one-for-one replacements, rapid delivery and project financing, in addition to providing products that offer better light, guaranteed energy savings and more profits for end user customers. During the first quarter of our fiscal 2016, Orion sold more than 100,000 fixtures, with LED-focused products gaining a greater share of that total. And particularly, as we clearly projected in February, we have started to see an increased traction with our higher margin APOLLO and ISON [high bay series] which have accelerated following the launch of the product families in October in 2014. As we look forward, we’re focusing on efforts on several areas to further grow revenues. First, there is a tremendous opportunity within our install base, virtually all of our 4 million fluorescent fixtures installed in more than 11,000 facilities can be upgraded to LED with less labor, less material cost compared than removing the entire fixture and replacing it with a competitors’ system. To date, less than 5% of this opportunity has been retrofitted with our new LED technology. In other words, our customers have a built in upgrade path in place with Orion that we can capture. Beyond our installed base, we see a lot of possibilities within new markets, such as healthcare, governments, airports and educational facilities. We’ve had a number of key wins in these markets and believe that there are many more to come. And finally, we’ve developed a more productive sales structure, aggressively engaged and cultivated our reseller network and included traditional distribution sales channel to better serve our resellers and end users. These initiatives are well underway and we believe they will pay dividends as we move through the year. Turning to our second priority, innovation, Orion was a pioneer in the first wave of industrial energy efficient retrofits over the past two decades. With that in mind, we’re committed to our culture of innovation throughout our organization from products to process. Over the last year, we’ve been building a team including multiple industry hires that is charged with driving this innovation. We believe this focus will allow us to execute against our key strategies and achieve our long-term goals. In addition, we recently opened and staffed our technology hub in Chicago, which allows us to enhance our technical competency and to date we have designed, developed and are implementing robust product development process and broadening our offering in an efficient and thoughtful manner and that delivers consistently higher growth profit dollars. We focused heavily on the needs of our end users and partners during this process as well as the performance of our products. As a result, our strategy has established a detailed product roadmap that will allow us to increase the cadence of new product introductions, including major enhancements of our product lines throughout the remainder of this year. From an efficiency standpoint, we have also created a commonality across product families and classes that enable us offer our customers more choices to meet their needs, while reducing our manufacturing cost. All this is being done without [taking our] promise to our customers as superior design and performance, underscoring the strength of our brand. Innovation as we view it extends well beyond our products. We are developing unique applications that will support our value propositions to our customers, make our partners more efficient and reduce install costs, all simplifying the project design and implementation. We look forward to updating you on these initiatives as we move through the remainder of the year. And lastly, I want to touch on our margin expansion plans that we discussed back in February. We are seeing the benefit of these initiatives which include focusing on our core competencies, examining our long-term supply agreements and further adopting lean principles in manufacturing. More specifically, we implemented a number of lean manufacturing initiatives that have increased plant efficiency and improved supply chain dynamics. For fiscal 2016, we are taking these efforts one step further, including optimizing our product portfolio, strengthening our supply chain, aligning pricing structures and focusing on higher margin business opportunities. Before I turn the call over to Scott, I’d like to talk about our capital allocation priorities. In February, we completed a $19 million public offering. This offering has provided us with the opportunity to fund many customer projects that are driving our growth, while also significantly de-risking our business during a period of market disruption. As we look forward, our capital allocation priorities remain squarely on funding our core business for accelerated growth. However, at this point, M&A activity is not a priority. Going forward, we remain solidly capitalized to carry out all of our initiatives. In addition, during the quarter, we announced a new nominee to our Board of Directors, Anthony Otten, Chief Executive Officer of Versar, Inc. Tony is a highly qualified and accomplished individual who will add tremendous value to our board. We believe his significant expertise will further strengthen our board. To conclude, we’ve made great progress on aligning our business to achieve a strong profitable growth path. All of the fundamentals in our business are improving and supporting our fiscal 2016 financial objectives. We are positioned well to capitalize on the positive trends in LED market adoption and we see a long runway of growth. I’ll now turn the call over to Scott for some insights on our financial results.

Thank you, John. As John noted, we established a new record for LED revenue as a percentage of lighting product sales during the quarter. Our total revenue was up 25% to $16.6 million, which compares to $13.3 million in the first quarter of fiscal 2015. Product revenue increased 29% year over year to $15.8 million which compares to $12.2 million in the first quarter of fiscal 2015. Within lighting product revenue, LED sales comprised 60.9% or $9.6 million compared to 21.4% or $2.6 million in the comparable period. This reflected a growth of 269% in our LED revenue. Service revenue decreased 26% to $800,000 in the first quarter of fiscal 2016 from $1.1 million in the first quarter of fiscal 2015. The decline was attributable to a $500,000 reduction in service revenue from solar projects year over year. We’ve previously discussed our exit of the solar business and our fiscal 2015 first quarter was the final quarter where solar revenue was meaningful. Total gross margin was 22.7% for the first quarter of fiscal 2016, reflecting a 310 basis point improvement over the 19.6% gross margin reported in the first quarter of fiscal 2015. The improvement is a reflection of our margin improvement initiatives we have disclosed in the past few quarters and was driven by component cost declines, a favorable mix impact from increasing sales of higher margin LED high bay products and the benefits of our fiscal 2015 cost containment initiatives. Total operating expenses increased by 6% year over year to $7.4 million, but decreased 790 basis points as a percentage of revenue to 44.4% compared to 52.3%. This improvement reflects reductions in compensation costs and other discretionary expenses, again resulting from our February 2015 reductions. We did incur higher than anticipated legal expenses related to legacy matters and some short-term project consulting expenses during the quarter. We reported a net loss of $3.7 million or $0.13 per share in the first quarter of fiscal 2016 compared to a net loss of $4.4 million or $0.20 per share in the prior year period. Moving to the balance sheet, we finished the quarter with $17.9 million in cash, which compares to $20 million as of March 31, 2015. We have working capital of $35.3 million which compares to working capital of $29.7 million at June 30, 2014. Our cash flow used in operations was $2.1 million and was negatively impacted by approximately $3 million related to delayed collections on several government projects and utility rebates related to our previously completed foreign projects. We anticipate collecting these funds during our second quarter. Had these payments not been delayed, we would have generated cash flow from operations of $900,000 during the first quarter. While inventory grew approximately 10% year over year in anticipation of a strong calendar back half, trailing 12-month inventory turns at June 30, 2015 delivered an [80%] improvement over June 2014. Our accounts payable balance grew on the increased inventory purchases and favorable vendor terms. And as we get closer to our year end, and our fiscal – the calendar year end and our fiscal year end, we do see a potential of large order volumes that could increase working capital temporarily and increase our borrowing under our revolving credit facility at December 31, 2015. With that, let me turn the call back to John. John?

Thank you, Scott. To sum up, we’re very pleased with our first quarter results, which were in line with our expectations. We have never been better positioned to grow profitably and generate value for our shareholders. As we move through fiscal 2016, we remain committed to our three priorities: growing LED sales, driving innovation and improve gross and operating margins. While we know we have more work to do to achieve our long-term goals, we are confident in our ability to execute against these initiatives. This will allow us to achieve our full-year 2016 guidance that we outlined in May. Our first quarter results are indicative of our ability to achieve significant year over year revenue growth in fiscal 2016, significant year over year gross margin improvement, EBITDA profitability for the full year fiscal 2016, positive cash flow from operations for the full year and significant improvement in our GAAP EPS, including positive GAAP EPS in the second half of fiscal 2016. While we believe that the first quarter has positioned us well for the remainder of 2016, we do expect typical seasonality in line with our customers CapEx spending cycles, which will result in steady sequential improvement as we move through our second and third quarters, with the bulk of our revenue occurring in the back half of the fiscal year. Orion maintains one of the most innovative portfolios of lighting and retrofit products serving commercial and industrial applications. Our LDR fixtures set the standard for [proper] retrofits in the market and our ISON high bay products command a top spot in thermal and optical performance, regardless of the electronics and chipsets used. We will continue to deliver an unmatched value proposition to our customers, which will allow us to outpace in the market in innovation, execution and growth. And we are absolutely committed to deliver the results we have outlined for this year. Thank you for your continued support. And with that, I’d be happy to take your questions.

[Operator Instructions] Our first question comes from Steve Dyer of Craig-Hallum.

Just was hoping if you can give a little bit of color on your sales pipeline maybe over the next six months, industries that are driving it, sizes of deals, maybe relatively speaking, anything further there would be great.

Our pipeline continues to be robust. We see, as we normally do in the year, is things teeing up and starting to boil up for later in the year. The retail market sector remains strong for us, in the pipeline we have a lot of our traditional legacy customers, the industrial high bay is being a big driver. We see the school districts, that continues to build throughout the rest of the summer, but likely slowing down going into the school years. I think hospitals continue to move, our government business continues to be robust and that’s really a September 30 realization of all the work, the government business has a two or three year sales cycle and tend to culminate in that September month. So a lot of our traditional business, historical legacy business is now starting to come on line with our high bay products, which is driving a lot of margin improvements throughout the business. And then, LDR business that has historically been strong for us over the last 12 months, or 18 months or so is continuing. But we’re seeing the greatest growth in our industrial sector, particularly in our legacy space, the industrial high bay, which is good because that’s where most of our intellectual property is and quite frankly where a lot of the margin is.

Is your sales organization, I mean, do you feel it’s where you wanted both from a geographic coverage perspective, quantity/quality, I mean, do you feel like everybody there is set up and ready to go?

No, I think there is clearly opportunity to build and we continue to do that. I think the strength that we have built on over the last year in building up our reseller network, we’ve added some industry – more industry sales people that are coming online and starting to show some strength in their pipeline. But also, just leveraging the opportunities within our resellers and the channel that’s out there, that’s really our focus this year, is leveraging what we already have. And while geographic coverage is pretty good, there’s always room for some more resources in some of the underserved markets. This is why one of the big focuses that we have in driving our LED sales is just that coverage and mine share within our existing customers.

Last one from me and I’ll hop back in the queue. Operating expenses, I don’t know if you touched on this, they were a bit higher I think than maybe I would have thought, given the reductions that you’d made, is this a good run rate to think about for the remainder of the year or was there anything one-time in there?

Steve, there were some one-timers there. We had some legacy legal issues that we continue to work through and some projects that we’re working on, almost $0.5 million actually of one-time expenses. And so from a run rate standpoint, if we think about the balance of the year, we do expect that our R&D spend is going to continue to increase related to John’s earlier comments about new product to processes and our plans to roll out a number of products over the back half of the year.

Our next question comes from Craig Irwin of ROTH Capital Partners.

In your prepared remarks, I think you used the word ‘growth’ about two dozen times and you’re very clear that you want to get back to profitability [indiscernible] profitability generating cash flows in the back end of the year. But when we look at the actual results, this is the second quarter in a row where we’ve had sequential declines in LED fixtures revenue. And when we look at the bookings and backlog, it’s actually the weakest that it’s been since before you introduced most of your LED products, we got to look back to 1Q 2014 for a weaker set up. Can you maybe bridge the gap for us, help us understand what you’re looking at that gives you confidence in the outlook that you’re sharing?

So I think first let me tackle the revenue and the results standpoint, June is our seasonally softest quarter. And when we look at LED revenue and we speak to growth, we’re looking at the LED revenue growth as a percentage of the lighting revenue. And while that’s down a little bit from the preceding two quarters, it’s still up pretty significantly versus the prior year and in total our revenue has increased on the lighting side 35% year over year. So that absolutely gives us encouragement that the strategies we’ve implemented over the last year and a half, as we worked through this transition, are working. We saw great contribution in the quarter from our reseller network as John just discussed. The channel revenue was a little, about 73% of total revenue. And we see the enterprise accounts starting to continue to gain and garner interest in that high bay products. So great expectations for the back half. And then as John talked about, it’s the pipeline growth that we’re seeing across new market opportunities, schools, government, everything that I don’t need to repeat the prior message there. But those things give us a lot of encouragement about our ability to deliver the expectations that we’ve communicated for fiscal 2016.

So then what you’re saying we should not pay as much attention to the actual backlog [indiscernible] in hand, the $5.2 million at the end of the quarter, is that really what you’re suggesting?

That’s fairly consistent with what we’ve always suggested with regards to our backlog. It’s not that meaningful on a quarter to quarter basis, simply because of our ability to deliver our product quickly. Our backlog is typically never more than a week or two worth of orders. Historically, it was higher, but it was higher as a function of those large solar contracts that converted into revenue.

When we look very specifically at your LED spend, HIF backlog right, your lighting backlog, in 1Q 2015 you had 56% coverage into the second quarter. Right now, you have less than 30% coverage into the second quarter. You’re also mathematically at the lowest level in lighting backlog in many quarters, if we go back to $1.3 million in 4Q 2014, you’re saying that that’s not a concern that there may be other things that you booked since the end of the June quarter that give you comfort?

Again, the backlog is really timing around the ebbs and flows out of our manufacturing facility. And often times, the timing of significant larger orders. So the backlog for this quarter at, from a lighting standpoint, $5.2 million actually is pretty good. We’re encouraged by that. It does continue to include the [Ford] project that we’ll recognize in the back half of the year. But from a backlog standpoint, Craig, our lighting backlog is typically not more than $2 million, it seasonally hasn’t been, unless it’s lumpy around timing.

Actually I’ll correct that, it’s been well above $2 million since the end of fiscal 2014, $7 million, $11.8 million, $7.1 million, $6.9 million and now $5.2 million. So strictly I would agree for your fluorescent fixtures, but you may want to go and check those numbers?

Again, I guess I speak to run rate and the ebbs and flows. The numbers you’re referencing included the lumpiness of the Ford projects from last year. We have expectations that we’ll anniversary a lot of the Ford revenue. We just don’t have the orders in hand yet. So it really comes down to timing across the customers’ capital allocation and expectations around delivery. But again, the backlog levels to us are not an indicator of our business and what we expect to execute.

Our next question comes from [George Gasper], a private investor.

First question would be in terms of – have you related to a projected range for revenue for this year?

We have not provided numeric guidance; directionally we have stated significant revenue growth. We’re really encouraged by the first quarter results and we stand behind the directional outlook that we provided earlier this year.

And then in terms of the backlog that you have now, is Ford in that backlog or is the existing – the previous orders that you received from Ford, have those flowed through and there’s nothing there from Ford right now?

The Ford orders remain in our backlog. We’ve had some scheduled push-outs related to the facility itself. And so in our backlog and we expect to begin that project later in the calendar year.

And then in terms of what you’re doing in Chicago on R&D, it seems like one of the strategy should be to broaden the product line within the LED area and I notice there’s been pressure on a lot of the LED companies in terms of performance and market performance also. One of the areas I’m noticing significant potential is the LED streetlight area and it seems like there are more companies coming into it and it’s not just a light system, it’s the internet connection possibilities that are starting to emerge in this area. Is this something that the company ought to look at from the standpoint that you got this high quality LED light system?

George, I’d love to answer that question. Let me just clarify on the backlog one point. I think this may also help some of the prior questions. Our backlog is equivalent to about one week’s worth of orders. And so, when you think about the backlog at the time we closed the quarter, that’s reflective of one week’s worth of orders that came in the week before. Now, in this month, there were some additional Ford business and every quarter there is going to be some incremental stuff that’s little longer than one week. But when we get an order in, we pretty much turn it in a week to 10 days. And so the only thing that backlog is as an indicator of what next week’s revenues going to be, it’s not an indicator of the rest of our year. So because we turn it so frequently, it’s simply a matter of when the books closed, what was on the book and what didn’t get out of the order the day before. So I just wanted to bring some clarity around that. It’s equivalent to about one week’s worth of orders in any given period or in any given day.

Could I just elaborate on that commentary you’re doing, if that’s correct, this suggest that if you can multiply the backlog of $5 million every week?

You can really look at it that way. I think it’s close, but it’s not going to be something that you should build a model around, because there are seasonal adjustments and there is a lot that goes into that. I guess, my point is that the backlog should not be treated as any great wisdom insight into the direction of the business, other than what happened in the last day of the month. In terms of your other question, we have a minimal streetlight, it’s historically not in the business sectors that we’ve identified as our targets. Obviously, the commercial, retail, school and the industrial and then the parking which is exterior but is not roadways, that’s street lighting. We do have a product that we do sell into some government locations that is a streetlight. We do offer that product, but there’s an entire industry channel around the traditional roadway lighting going into these municipalities. And many of them have power that’s sold to the municipalities through their own utilities and things, and you can have kilowatt hours in the $0.01 to $0.02 per kilowatt hour rate. And so there’s not a lot of payback from a retrofit point of view to be in a lot of these. And I think the opportunity is better served from Orion to really squarely be in the sectors beachhead that we’ve identified to be ours. With the only exception is when we have government contracts where we can build the perimeter lighting around the buildings and the roadways associated with getting to and from these facilities. But other than that, the Internet of Things, the control systems, we have partnership relationships, as you know we have our own industrial controls for the high bay space and then we blend the best of those technologies. Two and a half years ago, we exited out of the development, the software development side of our business and took a strategy around partnering. With a massive amount of money that it takes to develop software and with the massive entrants of new companies, it was a better strategy is partner with the best in the industry and then us focused on building the best light fixtures. And we do get an occasional order for the roadway lighting, but it has more to do with government projects than commercial, municipal I guess.

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to management for any further remarks.

All right, well, terrific. Thank you all for taking the time to join us today. We appreciate your support, your continued support. We’re very excited about what we’re going to achieve this year and we look forward to talking to you again in a few months. Take care.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a wonderful day.