Orion Energy Systems, Inc. (OESX) Q2 2027 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Orion Energy Systems' Fiscal 2027 Second Quarter Conference Call. [Operator Instructions] In this call, Sally Washlow, Orion's CEO; and Per Brodin, its CFO, will review the company's second quarter results as well as its fiscal 2027 outlook. Then we will open the call to investors' questions. [Operator Instructions] Today's call is being recorded. A replay will be posted in the Investors section of the company's website, orionlighting.com. I will now turn the call over to Per Brodin, Orion's CFO.

Thank you, Corey. First, as a reminder, prepared remarks and answers to questions on this call include statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally include words such as anticipate, believe, expect, project or similar words. Also, any statements describing future objectives or goals, company plans and outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other matters, those that Orion has described in its press release issued this morning and in its SEC filings. Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today. In addition, reconciliations of certain non-GAAP financial metrics to their nearest GAAP measures are also provided in today's press release. And now I will turn the call over to Orion's CEO, Sally Washlow.

Thank you, Per. Good morning, everyone, and thank you for being with us today. In the second quarter of fiscal 2027, we delivered growth of 9% year-over-year. All of Orion's business segments, LED Lighting, EV charging and Maintenance recorded expected levels of financial performance in the second quarter and continue on a trajectory to meet our full fiscal year guidance. As a reminder, those expectations, which we recently increased are to achieve positive adjusted EBITDA on revenue of between $100 million and $102 million, an increase from prior guidance of $95 million to $97 million in FY '27. As we head into the second half of the fiscal year, FY '27 shapes up as a continuation of the successful turnaround we began in FY 2026, which came in at $86 million in revenue and $2 million in positive adjusted EBITDA. FY '26 represented a return to growth for this company in both revenue and profitability. Orion's unrivaled supply chain and project management capabilities are attributes that I cannot emphasize enough. Our resilient supply chain provides a competitive advantage that is consistently cited by Orion's customers. Many of our customers come back to Orion asking to expand the work we are doing with them, whether it is expanding the scope of work at a single facility or adding increased opportunities at additional locations. These projects run the gamut ranging from lighting only to EV infrastructure projects to electrical contracting. Our existing expectations for this fiscal year reflect our confidence in the continuing growth trajectory for the company, along with recent industry research that informs us that we are about to begin a new industrial LED lighting replacement cycle. The October cover story of a respected industry publication, Lighting Management & Maintenance, reports that 10% to 20% of America's LED installed base may already be due for replacement. For commercial, industrial and outdoor applications, the segment that Orion serves, that replacement cycle may be 20% to 30%. Orion's recent announcements serve as early indicators of this replacement cycle. As for FY '27 specifically, the quarter included a number of milestones. Q2 marked an additional multimillion deployment of our data center lighting solution for one of the world's largest hyperscalers. This followed June's announcement of our first multimillion-dollar deployment for this globally renowned hyperscaler. We believe we are still in the early innings of deploying our cost-saving and energy-efficient solution with this hyperscaler, and there is still growth in this segment, evidenced by our discussions of finalizing additional scope to our already announced wins. Our customizable lighting solution manufactured right here in Wisconsin is capable of delivering higher energy efficiency, resiliency and decarbonization in LED lighting. Another announcement, our latest $10 million to $15 million engagement with a major nationwide retailer. Our long-time customer made a follow-on commitment to us in the second quarter for a new LED lighting project estimated to represent $10 million to $15 million. We believe we will achieve the higher range of this commitment, and we will keep you apprised as we execute this project in Q3 and Q4. This latest scope of work involves retrofitting interior LED lighting and IoT system installations at locations we had not previously retrofitted. This is the most recent in a multiyear sequence of engagements for us with this well-known brand. Furthermore, we believe this will expand to additional stores, which could equal or be more than our previously announced project. We've seen adoption of the full spectrum of Orion's products and services, typified by our recent announcement of a global automotive leader that is deploying both our LED lighting solutions and our EV charging infrastructure. We will continue to focus on scaling EV charging across a broader customer base and geographic footprint. More than ever, industrial America requires full-footprint LED lighting, EV charging and electrical infrastructure. It needs it at scale and at the maximum of efficiency and cost effectiveness. We believe strongly that we will continue to be a provider of choice for AI and IoT-driven electrification to Fortune 100 corporations and other global leaders. With that, let me turn it over to Orion's CFO, Per Brodin, to review our financial performance and outlook.

Thank you, Sally. Today, we reported fiscal Q2 '27 revenue of $21.7 million compared to $19.9 million in Q2 '26. LED Lighting segment revenue in Q2 '27 was $14.9 million compared to $10.7 million in Q2 '26. Q2 '27 Lighting segment revenue performance reflected increased project activity and distribution channel sales, partially offset by a decrease in ESCO channel sales. Orion's expanded LED lighting project pipeline and efforts to drive growth in the distribution channel are continuing to contribute to improving performance in fiscal '27. Lighting achieved a Q2 '27 gross margin of 29.1% versus 27.5% in Q2 '26. Maintenance segment revenue was $4 million in Q2 '27 compared to $4.5 million in Q2 '26. We achieved a Maintenance segment gross margin of 25.3% in Q2 '27 versus 23.7% in Q2 '26. EV charging solutions revenue was $2.8 million in Q2 '27 compared to $4.8 million in Q2 '26, reflecting a year-over-year reduction in project volume. EV achieved a gross margin of 31.4% in Q2 '27 versus 45.8% in Q2 '26. Our overall gross profit margin was 28.7% in Q2 '27 versus 31% in Q2 '26. The Q2 '27 margin decrease was largely driven by a mix shift within the Lighting segment. We expect our margin rate to normalize back to the 30-plus percent neighborhood in Q3 and Q4. Total operating expenses were $7 million in Q2 '27 compared to $6.4 million in Q2 '26. Increases in stock-based compensation and general and administrative expenses, along with increased commission expense included in sales and marketing costs were the main drivers of the increase. Reflecting lower gross margin and higher operating expenses, Orion's Q2 '27 net loss was $0.8 million or $0.20 per share compared to a net loss of $0.6 million or $0.17 per share in Q2 '26. Adjusted EBITDA was positive in Q2 '27 and was $0.5 million in Q2 '26. As Sally pointed out, this was Orion's eighth consecutive quarter of positive adjusted EBITDA. Regarding our outlook, as Sally highlighted, we expect a continued increase in profitable growth in fiscal '27, with positive adjusted EBITDA and revenue between $100 million and $102 million. Given the remaining revenue needed to achieve this guidance, we expect both Q3 and Q4 revenue to be relatively even. Any upside mentioned by Sally would occur in Q4. And this concludes our prepared remarks. Operator, would you please commence the question-and-answer session?

[Operator Instructions] Our first question comes from the line of Sameer Joshi of H.C. Wainwright.

Congrats on the upgraded guidance. That was good to see. So on the hyperscaler wins that you are experiencing, how should we look at these? Are these for unique sites? Or are these for a set of sites? And what is the strategy going forward or rather the sales cycle going forward where do you expect the same hyperscalers to contract you for additional sites?

Yes. Thanks for the question. We expect with this hyperscaler, and as we've said earlier, how we've won is we first get approved on their campuses to install or to sell our lighting fixtures. We're not doing the installation. And then we win building by building. And each building is 7 figures of lighting fixtures alone. So we've won 2, and we're in discussions of another building as well that we expect to come shortly. So there's a lot of noise in data centers. But with the hyperscaler that we're working with and the locations that we're in, we think that they're going to continue to grow, and we're in the early innings with this hyperscaler on the amount of buildings that we'll be able to win with them and then share the solution with others as well.

Understood. And as far as the products that they want, is there any -- are you learning of new specifications that may need upgrade to your products, new products being offered to these hyperscalers in particular?

If you're looking at it from a lens of retrofitting data centers, not anything in our line of sight. This is with new buildings that have already been announced and in flight, in construction of these data centers.

Okay. On the EV sort of Voltrek and deployment at automakers, how is that sales process? Is it that the EV team gets the lead and they also get a lighting contract? Or is it the other way around where you are doing a lighting job and then EV gets invited?

So the good news is it's starting to work both ways. With the global automotive maker, it was a lighting project that we are doing, and then they brought the EV team in to help with that solution, in particular, and then we won EV charging at that one site. And quite frankly, we're looking at a couple of other sites with them as well. There are some other opportunities where the EV team has been in and looked at their lighting solutions and then are bringing our lighting team in to recommend solutions. So we are seeing more collaboration and a bit more opportunities in cross-selling between the 2 segments.

Understood. And then just a couple of sort of financial questions. Given that at least the 2Q -- fiscal 2Q service revenue was lower, should we expect the annual mix of product versus service to skew even more towards product revenues? And a corollary of that is if that happens, should we expect gross margins -- blended gross margins to be higher, relatively higher?

I think as we expect the rest of the fiscal year to play out, it likely will skew a little bit more toward product based on the projects that are underway. But I wouldn't call that a markedly significant change. And as I mentioned in my comments, we do expect our margin rate to, call it, normalize back to 30-plus where it's been most recently, because we did have a mix shift change that simply impacted Q2 of this year.

Understood. And then last one on accounts payable. I think, quarter-over-quarter, almost -- a little over $5 million in drop. Was there anything specific that happened there? Or is it just timing?

It's primarily timing. It really goes to the working capital investment we've talked about for some of these more significant projects.

Our next question comes from the line of Gowshi Sriharan.

Hope you can all hear me?

Yes.

Yes.

On the [indiscernible] grows, how much are you doing with your own crews versus subcontractors? And how have the subcontractor rates moved over the past year?

So you broke up right when you started your question. Can you repeat that?

Sure, sure. As the contracting grows, how much are you doing with your own crews versus subcontractors? And how are the subcontractor rates progressing?

Yes. We typically outsource or subcontract for all of our installations in the Lighting segment. Within maintenance, we do have a few people that -- our W-2 employees that work directly on maintenance projects. But in general, for the big lighting projects, that is all subcontracted work.

And on the IoT element of the retailer interior projects, does that IoT piece of that retailer project carry any ongoing software or monitoring revenue?

So we are working with the sensor or the IoT provider. It's not a system that we build or it's not our software. So we don't have a component of that. And quite frankly, in this system, I don't believe there is any component of it.

And on the pricing side of the maintenance review, compared with the previous contracts?

Yes, if you're referring back to the renewal of the 3-year contract, it's pretty similar with some inflationary increases.

Okay. And I'll just sneak in the last one. The purchase order on the interior projects, how are they flowing so far? How does the margin on the interior work compare with kind of your exterior programs?

I expect them to be in line with the exterior projects. We price those products pretty similarly.

And the timing, as we've said, is Q3 and Q4.

Yes. Maybe one thing I'd add since we didn't comment on this, in the 10-Q, you will see that our backlog at the end of September sits at about $21.6 million or $21.7 million. All of the firm POs that we've been receiving for the interior project are -- have been received subsequent to September 30. So those orders have been coming in, but none of them are reflected in that backlog number. Our backlog number as of the end of October is up actually fairly substantially compared to September.

Our next call comes from the line of Luke Persons of Craig-Hallum Capital Group.

This is Luke on for Eric. So I guess, first here on the data center, how have you leveraged your successes with this initial customer and the engagements with other potential data center customers? Is your distribution partner continuing to help you penetrate this market? And also, would you ever consider going to a direct sales model down the road in this market?

So our distribution partner with the hyperscaler that we're working with, we do plan to discuss with others within that partner. And then some of our other channels are getting involved as well in terms of how we will supply this product to the market. Direct, we're not in those discussions yet. A lot of it is new construction where a lot of times in lighting, the distribution channel is taking the lead on that. So nothing yet. We've been focused on building the right fixture and working with the partners in our distribution channel.

Got it. That's helpful. And just for our second question, kind of switching gears here. So on the pending refresh cycle with your large retail customer, how should we compare the opportunity here to Orion's initial awards with this customer in terms of magnitude and content per store? Also, can you break down some of the drivers for these potential awards? Would this be like a national decision made by this customer to really kick off the refresh cycle? Or would it be done more on like a regional or store-by-store basis?

So with this particular partner, it's done at headquarter level, on a national level. And then we're working with them on the various rollouts and segments of their footprint. So the one that I noted earlier would be of similar size to the project that we announced or to the higher end of that number.

And maybe just to clarify a little more on that, Luke, a little more on that. There are points of time when we get a, call it, a significant commitment on a project from this customer, similar to what we announced for the interior project in September and then they may, beyond that commitment then issue a store-by-store PO. So just a little bit of a nuance in how the orders roll in and flow into our backlog versus what the commitment is.

Got it. And I guess just for our last question here on the new roadway product. I mean, can you talk about why you haven't really participated in this market yet up until now and why this product will be able to compete? And also just how do you view the timing and magnitude of the market opportunity for this product?

Yes. There was an opportunity in the market where there were some challenges with some of the competitors that were building this product. And so quite frankly, brought to us by one of our distribution partners, the opportunity for us to participate in this segment. That being said, there's a lot of work that we have to do on our end, working with our partners to get it approved for state bids and things like that. So we think there's a long life of this product, and we're working on getting it ingrained in the channel so that we can win business.

[Operator Instructions] Our next question comes from the line of Bill Dezellem of Tieton Capital Management.

So first of all, I'd like to talk about your guidance. If we look at the midpoint of your guidance, revenue guidance, that is, that implies that Q3 and Q4 are both going to be approximately $27 million in revenue. And you haven't -- you all haven't had $27 million in revenues in a quarter for years. But what's changing leading to that? Because I think you said in the opening remarks, you'd anticipate these being reasonably even with potentially upside to Q4. So more detail would be really terrific.

Yes, Bill, I think the main thing that we see is the continuation of some projects that are underway and the interior project, which we announced in September will have a big influence on the revenue volumes in Q3 and Q4.

And that upside that Sally referenced, I missed exactly what you said there, Sally. Would you circle back to those comments, please?

Sure. So for the announcement that we made of $10 million to $15 million for this project, we're thinking we'll hit the upper end of that range for that project in particular. And we are in discussions to launch another project of similar size. We're working on the timing of that now, which then could provide additional upside in what would be our Q4 if we can hit the timing of all of this.

That's helpful. Congratulations. And so relative to that higher revenue level that you have not achieved for -- again, for years, is that really just simply project specific? Or is there something changing structurally improving at Orion?

I think that -- I mean, structurally, there are things improving and some of our distribution channels are starting to grow, as we mentioned, we've refocused on our distribution, our ESCO channels. We're seeing increased activity from those channels as well where we're confident that we're going to hit our guidance. And we think that there's potentially more to go there. But we are definitely seeing increased project work as well. But the product-only side of our business, we're seeing strength.

Great. And then, Per, you put a tantalizing comment out there that your October backlog was significantly higher than the number reported in the 10-Q. What was the October backlog?

Sorry, Bill, but we're not going to get in the habit of disclosing interim backlog, but I want to at least give you a flavor for where we are relative to the previous quarter end.

I was simply giving you the opportunity, Per.

Appreciate it.

One additional question then, please. Relative to the automaker that chose to procure both lighting and EV charging, you gave some general comments about that. But would you please describe how that customer chose to procure both from you all and essentially how you go about that cross-selling in the future?

Sure. So it's a long-standing customer of ours, and we do work at several of their sites. We were in there discussing the lighting project with them, and they shared the need for EV as well. And we quickly brought in our experts on the EV side to help them come up with the right solution for this location. And then you wrap that around with the decades of work that we've done with this customer on the lighting side and our execution and delivery of these projects and then pair it with our EV segment that also has decades of experience as well, that they were confident to award us additional work in EV and help us manage it all, where in the past, maybe we hadn't been emphasizing our other solutions enough, but it's certainly front and center that we will be sharing all of our solutions even with long-time lighting customers.

And using that customer as an example, is it the same procurement team? Or do they then -- does the customer then bring in a separate team for that effort? How does that tend to work? And really, the spirit of the question is lighting and EV charging seem pretty disparate other than that they both have electricity involved.

Yes. So to answer that question, it varies because it does vary. With this particular customer, this was the decision maker. But within other customers, EV charging could be managed by even whoever runs their fleets as well as a customer might be electrifying their fleet. So then it's our job to stay wired within the customer and ask who we're working with, whether it's on the lighting side, who does EV, who leads that effort within your organization and get internal referrals within those customers as well. So it can work that way or it can work through other industry contacts that we have as well. But it is not always the same customer.

Our next question comes from the line of [ Steve Rudd of Blackwell ].

I just need a little clarification on the back half. On the math that Bill shared with us, the second half, we would expect revenues of $27 million and $27 million, respectively, for third and fourth quarter. However, I thought earlier, Per, you mentioned that the third quarter would be flat on the revenue side, but up by about 4 percentage points on margin. Can you address that conflict on the flat compared to Q2, which is about $22 million versus just the basic math from Q3 and Q4 being $27 million a piece?

The math I was trying to give was that Q3 and Q4 would be relatively flat to each other. So the math that Bill did is appropriate. So it would be in the $26 million neighborhood per quarter, at the low end of our range, Bill gave the midpoint, and so the high end of the range would be a little bit higher than that. And at those levels and with the shift of projects normalizing, that's why we expect the increase in margin in addition to better absorption because of those revenue levels.

Okay. Well, that's dramatically better.

This concludes our question-and-answer session. I will now turn the call back to Sally Washlow for concluding remarks.

I thank everyone again for taking the time to join us today. We look forward to updating investors on our third quarter FY '27 call in February. We look forward to meeting with many of you, whether in person or virtually between now and then. We will be presenting at a number of conferences, so please watch for our forthcoming announcements regarding scheduling. Please also reach out to our Investor Relations team to set up a meeting or for any other information. Their contact information is at the bottom of today's press release. Many thanks again for your interest in Orion, and I look forward to continuing to update you on our progress.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.