Orion Energy Systems, Inc. (OESX) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Orion Energy's Systems Fiscal 2019 Third Quarter Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the call over to Bill Jones, Investor Relations. Sir, you may begin.

Good morning and thank you for joining Orion Energy's call. Participating today are Orion's CEO, Mike Altschaefl; and CFO, Bill Hull. Mike will review Orion's business progress and the company's favorable outlook for the balance of fiscal 2019 and moving into 2012 as it focuses on it's competitive strengths and resources to drive meaningful sales traction particularly in the area of large national accounts . Bill Hull will then provide some financial highlights, and then we will open the call to questions. An archived replay of this call will be available later today in the Investor Relations section of Orion's corporate website. The call is taking place on Thursday, February 07, 2019. Remarks that follow including answers to questions include statements that the company believes to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally will include words such as believe, anticipate, expect or words of similar import. Likewise, 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 than anticipated. Such risks include, among others, matters that the company has described in its press release issued this morning and in filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update forward-looking statements. With that, I'll turn the call over to Mike. Mike?

Thanks, Bill. Good morning and thank you for joining our call today. I will review our third quarter performance, highlight a few recent notable business wins, and then discuss growth opportunities that we see shaping our outlook for the balance of fiscal 2019 and fiscal 2020. As anticipated, our revenues are strengthening in the second half of fiscal 2019 with much of the improvement occurring with large national account opportunities. Due to the increasing pace in projects and order activity, our third quarter revenues improved 23% on a sequential basis over our second quarter, but represented a 5.6% decline versus our year ago third quarter performance. We expect revenue to trend favorably in our fourth quarter both sequentially and on a year-over-year basis. Based on recent order activity, meaningful sales efforts currently under way, as well as anticipated projects from recurring long-term national accounts, we are encouraged by building visibility for a meaningful improvement in sales in fiscal 2020. The scale and scope of new business activity seems to be progressing in the right direction and we are highly focused on moving projects forward as quickly as we can. However, individual customer considerations regularly come into play when converting expected orders into actual business activity within a specific time period. As we have discussed on past calls, we have actively taken steps to diversify our revenue sources into three distinct areas; large national accounts; resellers, which includes energy service companies or ASCOs and electrical contractors; and our agent driven distribution channel. We are making progress in all three areas. However, on a quarterly basis, there remains a fair amount of variability in each area and we have been developing the strongest business opportunities through longer-term dialogues with large national accounts. Our success in gaining traction in this market segment is centered on our unique ability to offer turnkey LED lighting solutions for customers with large and dispersed national operations, and to do so in a very nimble and customer centric manner. Orion begins with initial site assessments followed by custom design and engineering to meet the customer's objectives with both lighting and controls. We then leverage our high quality U.S. manufacturing, rapid product availability and disruption free installation, all wrapped in high quality service and end-to-end project management by a team committed to high quality customer care and responsiveness. We hear firsthand from these customers that the biggest competitors in our industry are just not set up to serve customers on a true turnkey basis and certainly not with any level of special design or engineering. They may be able to provide LED fixtures in large quantities at a competitive price, but when it comes to linking all aspects of the process true to installation, few companies can match the capabilities and network we have established to deliver true turnkey value. Of course, this value is something we continually need to prove on each and every project. Making Orion an even more compelling option on top of our turnkey project capabilities, we are seeing increasing opportunities to deliver even greater value by helping our customers deploy state-of-the-art control systems along with their LED upgrades. New control technologies which fall under the Internet-of-Things banner, enable our customers to achieve even greater long-term value from their lighting system investments. As an example of our progress, we recently secured a Letter of Intent for $11 million LED lighting retrofit project from an existing national account customer. The project involves conducting initial energy audits, custom designed fixtures, the incorporation of wireless control systems, and full project management and installations at a number of their locations nationwide. We expect to complete much of this work during our fiscal 2019 fourth quarter. Similarly, we recently secured $3.6 billion and follow-on contract awards from U.S. Government customers to replace legacy fluorescent light systems with our energy efficient LED lighting systems at two facilities. In both cases, we believe there are very significant future opportunities with these customers provided that we successfully execute on all aspects of these projects. Along with growing customer demand, Orion keeps a long-term focus on product development, innovation, and new features and functionality, including the incorporation of sophisticated control systems. These efforts ensure we remain at the cutting edge of product performance and customer ROI while also continuing to build our line of value priced LED systems designed for resellers and the agent driven distribution channel, where we have been asked to help meet the budget pressures of their customers. In catering to this price sensitive or value segment of the market, we developed modular, upgradeable systems to address near term cost requirements while also providing a high quality product with a cost effective upgrade path to meet their future needs and budget. Building out these solutions to meet identify partner or customer needs is an important part of our new product development effort. Turning to the issues of tariffs and rising industry input costs that are ongoing concern to our industry, I can confirm that we feel Orion is very well positioned and do not see these more global issues as meaningful obstacles to our future performance. We are supported in this view in particular because we are a U.S. manufacturer and we sourced many of our components from countries where tariffs are not in place. With respect to rising component costs like most of our competitors, we have responded by implementing product price increases of 8% to 15% during Q3 of our fiscal 2019, to offset this cost based margin pressure. We believe these increases will mitigate most or all of the impact from rising input costs, but we continue to closely monitor component and other cost trends so we may make appropriate adjustments as required. Finally, with respect to our updated outlook for fiscal 2019, we have reiterated our full fiscal 2019 revenue growth goal of 5% to 10%. While this might seem modest compared to the solid national account momentum we have discussed, it merely reflects the anticipated timing of current project activity through March 31st of this year and our desire to have Orion achieve our publicly stated growth goals. Given the results of our first three quarters, our 5% to 10% growth goal would require fourth quarter revenue between $20 million and $23 million in order to achieve the full year growth range. And though our quarterly results will continue to vary based on project timing and other factors, a Q4 performance within this range would underscore the growth we are actively working to achieve. While we are not providing financial goals beyond fiscal 2019 today, we are confident in Orion's growth outlook based on strong demand for our energy efficient turnkey LED lighting solutions, as well as other opportunities across the business. In line with our cautious optimism regarding the future potential of the business, Orion has committed to participating in a few investment conferences in the first-half of calendar 2019. Bill and I hope to see many of you at these events which include ROTH Capital, March 18 in Southern California; Sidoti, March 28, in New York City; and LD Micro, June 5 in Los Angeles. With that overview, I will turn the call over to Bill to provide some detail on our Q3 financial results. Bill?

Thanks Mike. Our third quarter revenue decreased to $16.3 million compared to $17.3 million in fiscal Q3, 2018, reflecting some delay in the start of large national comp projects and slower than anticipated sales volume to our agent driven distribution channels. Gross margin was 25.6% in Q3 of 2019 compared to 29.6% in Q3 of 2018. Principally related to less fixed cost absorption on lower revenues this quarter versus the prior year period along with some incremental expenses related to pursuing potential large customer opportunities. More than offsetting a decline in gross profit, we were able to reduce our operating expenses to $4.8 million this quarter versus $6.5 million in Q3 of 2018. This improvement included a full quarterly benefit of Orion's prior cost reduction initiatives and continued cost control efforts. Reflecting lower costs, Orion's EBITDA loss narrowed $2.1 million or $100,000 in Q3 of 2019 versus $0.8 million in Q3 of 2018. Turning to cash flow, we used $0.5 million of cash from operating activities during the quarter versus operating cash generation of $1.6 million in the prior year period. Year-to-date we have used $1.6 million in operating activities versus a use of $3.1 million in the prior year period with the improvement related to cost control as a working capital management efforts. At the close of Q3, 2019, Orion was in sound financial position with positive net working capital of $8.6 million including $6.6 million of cash and cash equivalents and we had $3.3 million in borrowings under our revolving credit facility. Seeing the need for additional working capital to fund the expanding sales opportunities we're developing for fiscal 2019 and beyond, in our third quarter Orion secured a new $20.15 million revolving credit facility with Western Alliance Bank. Replacing our prior $15 million facility, both of which are subject to borrowing base requirements on eligible receivables and inventory. And with that, let's open the call to your questions. Operator?

[Operator Instructions] First question comes from Eric Stine from Craig-Hallum. Your line is open.

So just wanted to start with the national accounts. I mean clearly this has been a strength for Orion for some time, but it also I mean it's also pretty obvious that your confidence level there in light of LOI but also just more broadly your confidence there is quite high. So what do you attribute of that to or the uptick that you are seeing in terms of what you're doing in the market?

I think its a few things Eric. First of all, as we talked in some of our prior calls starting about a year and a half ago we energized and increased our focus on some of our large national account opportunities. Some of these relationships take years to develop and so we continue to nurture those. And as we continue to look strategically at what makes us different in the marketplace, we continue to believe that our ability to truly handle turnkey projects is a real strength of ours that we’re doing our best to maximize the benefits from. And then I also would say that what we also are seeing is that the acceptance of the LED technology, the proven energy savings, the ability to link it with control systems we believe there has been an increase in some of these larger companies on a nationwide basis allocating additional capital dollars to these types of projects. So it takes a while for market to develop and you do test facilities and test locations. And we do see some of that coming together right now where while we are continue to be very focused on the other two as we have to the market we are making sure that we take advantage of the many opportunities on these large national accounts as possible.

And then I know this LOI with one customer, I mean are there any commentary you can provide without an outlook for 2019 but just the pipeline and similar opportunities out there in front of you?

Yes, we continue to feel good about our pipeline with that direct side of our business. There are other opportunities in several different industries. We've talked in the past that we've got a very strong presence in automotive and we believe we continue to expand in that area, as well as the other segments we have. So our optimism going forward in the 2020 is well beyond just the LOI we have from this particular customer is from some of the discussions and work we're doing at the front end with other opportunities.

And then just on the agent channel I know obviously I know you’re optimistic about as well last quarter kind of noted some softness there it sounds like that persisted here in the third quarter. So just I mean maybe - so maybe some color there, but also I mean does this do anything to change your view of that channel or maybe some of the steps you need to do it in terms of finding the right agents or how should we think about that going forward?

Great question, it does not change at all our view that we have made progress and will continue to make more progress in that agent driven distribution side of the business. It's a massive part of the market of how LED fixtures are sold throughout North America. We continue to work on developing our agency group that we work with. We have approximately 50 agencies across North America where we were in the prior quarter. We work with them, we provide training development, education, sales support to them. So we will continue to work hard to develop that as one of our three legs to our stool on the revenue side for the business. And in some respects over time we just see that even quarter-by-quarter one of our three segments might do better than the prior year or better sequentially. And part of it just how the sales process moves along and how larger projects come through for us. So we plan to continue to work strongly to develop all three of our paths to the marketplace.

Our next question comes from Craig Irwin from ROTH Capital Partners. Your line is open.

So when I look at this quarter everybody knew the lighting market is weak, it’s been very difficult across the spectrum. One thing that really jumps out to me in your results is your gross profit, your gross margins. And on the product side in particular those were healthy results and you haven’t been at these levels in about a year. Can you maybe talk about what's working for you there, have you taken any specific actions that delivered this, is this really the result of things that you've done over the last year. And what’s your confidence about this continuing over the next couple of quarters?

I’ll make a couple of comments and I'm sure Bill will add some additional detail for us Craig. We're certainly pleased with the sequential improvement in the gross margins. And there's always multiple reasons during any quarter when our margins can move around somewhat. It helps us when we have additional manufacturing going through our facility here in the United States because we are different in some of our competitors that we manufacture a significant portion of our product. That if we have revenues that are being manufactured that roll through our facility and we absorb more of our fixed cost and they can help our margins. We also can have a pretty big impact simply by the mix of products that we happen to have in any particular quarter. Some of our different product lines carry different margins in the marketplace and there are times without frankly as doing much which is the project we’ve landed that the margins can have an impact for us. So we feel good about where the margins were for this quarter and we also feel that we've been able to work hard to offset some of the price increases that have happened through electronics and others of the commodities throughout the current year. We commented that we implemented some price increases during Q3 not sure much of that really impacted our Q3 because it takes a while for those price increases to work their way through proposals and projects so probably see that having more as we go forward on into the future. I probably would say the comment I would make is that as we head into our quarter number four, each quarter for us we look at closely and we manage margin as hard as we can looking at cost and improvements where we can. But it is as you said it is challenging in the industry and we’re committed to making sure we win projects and at times we need to do that and take some aggressive positions early on in larger projects. And so we at times may make some investments that cause those margins to move in both directions in any particular quarter.

Just a couple of real quick things here just to add to Mike so. I think our operations people were very, very focused on cost reductions in all aspects. So how can we take cost out of the process to manufacture or make the product easier just reduce the cost in the product. So there's a lot of that that happens so it’s a continuous effort. We talked in the past about our goals for gross margin and we continue to focus on that and it’s very difficult to attain. As Mike said too, looking forward we talk about revenue next quarter. It could be a challenging quarter in terms of margin in our fourth quarter as for some the reasons I said just some of the things we’re doing.

But I mean you guys have outperformed on gross margins while the market leaders like Acuity have underperformed consistently over the last series of quarters. Do you think that there is room for your positive execution there to continue or do you feel like the weight of some of these things going on in the market is maybe catching up and we’ll see a slow continuation of the progress versus what we've seen over the past several months?

Great question. Craig, I’m going to kind of answer this way I think over the mid-term to longer-term we feel pretty confident that our margins can hold where they are at and perhaps increase and we don't see the industry pressures driving us lower. In some cases there are some larger industry players that have larger margin than us in certain areas. And so we feel we still have some upside potential there. But also we'd have to reiterate what Bill just said that when you look at a particular quarter over we’re launching some large accounts that might run for a longer period of time. Sometimes you have some upfront costs to start to get things geared up for particular projects. And so I actually see if our margins would change during the quarter, it's probably more due to short-term situations of ramping up for accounts or special projects soon after, but longer-term we feel that we should be able to be in the ranges that we are at.

That's much clearer to me now. I can appreciate capturing $11 million customer and having to handle things upfront there. So congratulations on that customer. My next question is about cost. So this is something you did just mention in the Q&A both in questions that Eric asked and in the questions that I've already asked. So you grew revenue 23% sequentially but your costs were basically flat on the G&A and sales and marketing and R&D side, I mean basically flat, that's some pretty tight operating expense discipline. Was there something unusual this quarter that had these really particularly low, are we just seeing the results of your again holding things pretty tight as the market allows you to execute? What is driving this out performance on costs?

So, Craig, there's nothing unusual in there you know one-time events or anything like that. As you could see it's similar to the prior quarter. It's really as we're trying to build the business, we still as we say you have to eat till we get there right. So we're really managing cost tight and give a lot of credit to the whole Orion team on, people who are carrying extra load and doing lot of extra work to get us through this as we look forward to grow. So we're managing this very tight, everybody is doing a good job on it. But as sales are going to move up, right, when the growth happens that we plan on, you're going to see those expenses start to come up. But we'll still have discipline in place. So I guess that's the best way to answer it.

That's definitely fair. So then adjusted EBITDA this quarter was positive on what we can call a relatively low revenue level. Assuming that we do see mid to high single digit growth over the next months and quarters, would you expect to likely have EBITDA profitability sustainably over the next couple of quarter, again just qualifying it on the revenue side assuming that the revenues do grow a little bit?

Yes, let me answer it this way. We've obviously brought our breakeven down so that with increased sales we would expect to see what you've just said.

Okay excellent well congratulations on the strong execution.

Thanks.

[Operator Instructions] Our next question comes from Amit Dayal from H.C. Wainwright. Your line is open.

Most of my questions have been asked. But I just wanted to get into the backlog versus guidance setup right now. Backlog is not as strong as it was in at the end of the previous quarter but I guess obviously optimistic about the fourth quarter given your maintaining your 5% to 10% growth number for the year. Has anything happened in the say last month/month-and-half that has allowed you to maintain the stance?

Well, we understand your comment that our backlog did go down quarter-over-quarter basis. But given what we have experienced during our first month of this quarter and the announcements we made about at least two of the projects, we feel pretty confident about the goal that we set out for our Quarter 4 from a revenue standpoint. So on a year-to-date basis, our bookings are up modestly on a year-over-year basis. And frankly sometimes the timing between bookings and revenues, at the end of the day obviously revenues are what count when you're actually are able to produce the product and/or install it and build for the products. So we're going to have quarters where you might enter it with lower bookings but have very good revenues and just the reverse that could happen. And as an example, for this particular quarter the $11 million of business that we've announced that much of that will likely become revenue during our quarter number four, is not in those bookings numbers of 5.1 coming into the quarter. So it's just a real specific example of how we have to look little deeper at times then just the backlog number when we're looking at the revenue forecast.

So, when you think about backlog sometimes we have this discussion is it really a useful measurement, but we get asked about it so we provide it. But backlog is firm committed orders, we have to have a PO with a delivery date and we might have a customer that says they're going to do this business for a period of time. But we can't put it in backlog because of what the rules are to qualify as backlog. So it's not the indicator that it might be in some other industries. So it's kind of hard to rely on that.

Understood. Just wanted to make sure we were looking at it the right way.

Sure.

This $11 million contract, Mike, it was an LOI when it was announced, is it now more concrete? And you said you are looking to recognize most of this in the fourth quarter?

We expect to recognize quite a bit of it in the fourth quarter. And once we go beyond the Letter of Intent on this particular project, it's then supported by just purchase orders as we go forward. So we've already begun to execute on the project and fully expect that what was indicated in the Letter of Intent will end up taking place.

Understood. Just one last question from me on the product development side. Features versus costs I mean it looks like you're focusing more on the cost aspects of bringing those advantages for customers. Could you talk a little bit about what we can expect sort of this year in terms of new product launches?

Sure. I do stress at times and I did in this call that we have to find products that are cost-effective for some of our customers, but I don't want to lose the fact that we also are looking at where we are at from a product standpoint on our medium or higher-end type product also. We continue to have the highest lumen per watt LED, High Bay fixture in the marketplace at 214 lumens per watt. We've had this since 2017 and nobody has achieved a higher efficiency with their product. We have a very active product roadmap and we continue to invest in certain - around the same levels of investment we made in the past on new product development. We have what we think are going to be some interesting products that will rollout coming up or during the LIGHTFAIR timeframe in May of this year across different products. And we also continue to make ourselves available with our product to incorporate systems and controls into our fixtures. And in that area I would just again say we believe we've taken the right strategy of remaining technology agnostic where our fixtures can work with many different systems that are in the marketplace and so we're able to partner with different systems depending on what the customer actually needs. So we're really optimistic on both the higher end product and the features it can bring to certain customers. And then we're also finding methods to bring cost-effective product to some of the distribution side of the business and the reseller area where they are really fighting competitive environment from time-to-time. But we feel good about our current product roadmap.

That concludes Q&A period. I would now like to turn the call over to Mike Altschaefl for closing remarks.

Thank you, Durendo. And I'd like to thank all of you for joining us today on our call. We look forward to updating you on our progress on our next call. Have a good day. Thanks.

This conference has now concluded. Thank you for attending today's presentation. You may all disconnect your lines.