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Edited Transcript of OESX earnings conference call or presentation 4-Jun-19 2:00pm GMT

Q4 2019 Orion Energy Systems Inc Earnings Call

Manitowoc Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Orion Energy Systems Inc earnings conference call or presentation Tuesday, June 4, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael W. Altschaefl

Orion Energy Systems, Inc - CEO & Board Chair

* William T. Hull

Orion Energy Systems, Inc - CFO, Executive VP, CAO & Treasurer

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Kurt Caramanidis

Carl M. Hennig, Inc. - VP

* George Gaspar

* William R. Jones

Catalyst Global LLC - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Orion Energy's Fiscal 2019 Fourth Quarter Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Bill Jones. Sir, you may begin.

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William R. Jones, Catalyst Global LLC - VP [2]

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Good morning, everyone, and thank you for joining Orion Energy Systems Fourth Quarter and Fiscal 2019 Conference Call.

Participating today are Orion's CEO, Mike Altschaefl; and CFO, Bill Hull. Mike will open up today's call to discuss Orion's fiscal 2019 progress, financial performance and its business strategy and goals for fiscal year 2020. Bill Hull will provide 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. This call is taking place on Tuesday, June 4, 2019.

Remarks that follow, including answers to questions, includes 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 its 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.

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [3]

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Thanks, Bill. Good morning, and thank you for joining our call today. Fiscal 2019 was a pivotal year for Orion as we returned the business to growth with full year revenues increasing 9% to $65.8 million, driven by a strong fourth quarter performance. We also achieved solid improvements on the bottom line as a result of growth combined with our ongoing cost discipline and significant operating expense reductions achieved in fiscal 2018. We also achieved positive adjusted EBITDA for the second half of fiscal 2019. Key to our improved revenue performance was strength in our major national accounts channel as well as growing engagement with our energy service companies or ESCO channel. Our agent-driven distribution channel performed below expectations. More important than the revenue growth we achieved in fiscal 2019 is the foundation we are building with a major national account, including a project valued at approximately $110 million in turnkey LED lighting and controls retrofit installations. We expect roughly $100 million of this project to be completed and recognized as revenue during fiscal 2020.

This project is rooted in a few key areas that differentiate Orion from other larger commercial LED lighting providers, including our ability to provide high-touch turnkey project management from initial site assessments to custom project design and manufacturing through to nationwide installation and controls integration. It was this unique offering of customized products and services, all highly coordinated, scheduled and managed by Orion that allowed us to prevail in this major national account opportunity versus far larger competitors.

While we must continue to execute well on this project, there's also the potential for additional business from this customer in fiscal 2021 and beyond. Importantly, we believe that this model's repeatable with other national accounts and, over the past year, we have focused our efforts on a range of potential opportunities that we hope can progress into programs over the course of the next several years. Fueling these potential opportunities are some proprietary products that we developed to substantially enhance the performance and cost effectiveness of our LED retrofit solutions as well as the integration of state-of-the-art control systems that help our customers drive a range of business process improvements. We also continued to complete a solid base of projects that were follow-on orders from other major national accounts that have been long-term customers.

During fiscal 2019, we completed multiple LED retrofit projects for 2 large automotive OEMs and for various U.S. government facilities. We believe these customers returned to Orion for additional LED lighting retrofit projects because of our proven ability to design, develop and install customized, highly energy-efficient, U.S. manufactured LED lighting solutions on a turnkey basis. This, coupled with our ability to provide -- fulfill orders in record time and to deliver the highest levels of customer service throughout the process remain key selling points for repeat business.

Based on the success of our large projects, we believe Orion has clearly demonstrated a very compelling turnkey offering, and we plan to be very active in presenting to large customer prospects the value, performance, energy efficiency, cost and control benefits of Orion's customized turnkey LED retrofit programs.

While I focus my remarks on our customized national account relationships and competitive position, I do want to touch on our agent-driven distribution channel and our ESCO channel, which represent very important go-to-market channels for Orion going forward.

Efforts aimed at supporting the success of our agent-driven distribution channel are ongoing. However, the progress has been slower than we have hoped, largely due to the highly price-sensitive nature of this channel. When the purchase decision focuses primarily on price, much of the substantial value that Orion provides over the long term can get lost, so we are expanding our portfolio of price-competitive solutions while also working to help educate our agents and their customers on the value-added benefits of Orion, which make us a more compelling solution.

We are experiencing very encouraging signs of real traction from our efforts aimed at reengaging with our ESCO channel. We have dedicated greater attention and resources in supporting sales to ESCOs, and we have also developed a range of lower-priced, value-orientated products that respond to their customer needs. Reflecting on our initial progress, sales from our ESCO channel grew 24% in fiscal 2019 versus fiscal 2018.

Product innovation remains an extremely important ongoing focus of Orion, and we are constantly working to enhance the features, functionality and performance of our fixtures to ensure that we remain a leader in our industry and to ensure that we are delivering the value and the customization that our customers require.

Reflecting our ongoing R&D investments, Orion debuted several new fixtures and features at the LIGHTFAIR 2019 Conference last month in Philadelphia. In particular, we introduced the HARRIS Lumen Select, a fixture where the lumen output can be adjusted in the field. We also provide customizable capabilities, upgrade potential and a wide range of integration options for high-powered lumen packages, basic controls as well as new Internet of Things capabilities. The plug-and-play upgrade potential we are increasingly building into our products differs substantially from most of our competition. Importantly, it provides our customers with future optionality for additional controls investments while also providing Orion with potential future follow-on revenue opportunities.

Turning to the supply chain, tariffs have become an increasing factor in managing our global supply chain. We are fairly well positioned from the impact of tariffs, particularly because we are primarily a U.S.-based manufacturer and we source many of our components from nontariff countries. In addition, while we source certain finished goods from tariff-impacted countries, we believe we source a much lower percentage of our products from these countries than most of our competitors. We believe that these mitigation activities will assist to offset added costs, and we currently believe that such tariffs will have a limited adverse effect on our results of operations. However, it continues to be a very fluid situation making the future impact difficult to estimate.

Our overarching strategy is to position Orion as the strongest provider of LED lighting and control solutions that can be customized and designed and deployed to the best needs of our customers. We were pleased to see that this strategy was resonating with customers and enable us to return the company to a path of growth in fiscal 2019.

Based on our business pipeline, strong base of long customers and our developing ESCO and agent-driven distribution sales channels, we expect to deliver very strong growth in fiscal 2020. Orion has set an initial revenue goal of $135 million to $145 million for fiscal 2020, representing a growth of 100% to 120% over fiscal 2019. With this significant revenue growth and continued cost discipline, we would expect the company to achieve at least 10% EBITDA margins as well as positive net income for fiscal 2020.

We caution that our quarterly performance can and will vary materially on a sequential and year-over-year basis due to the size, timing and terms of customer contracts and due to economic, trade and industry forces outside of our control.

Finally, none of our success would be possible without the tremendous work and dedication of the entire Orion team. I thank all of our people for their contributions to supporting our growth and customer satisfaction goals.

With that overview, I will turn the call over to Bill to provide more detail on our financials. Bill?

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William T. Hull, Orion Energy Systems, Inc - CFO, Executive VP, CAO & Treasurer [4]

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Thanks, Mike. To quickly recap our performance, Orion's Q4 '19 revenue rose 49% to $22.4 million compared to $15.1 million in Q4 of '18, principally reflecting strength in our national account segment with orders from one customer.

Gross profit rose 36% to $4.4 million in Q4 '19 compared to $3.2 million in Q4 '18. However, due to the impact of product mix and certain large national account customer projects start-up costs, gross margin decreased to 20% in Q4 of '19 compared to 21% in Q4 of '18.

Total operating expenses decreased 18.4% to $5.1 million in Q4 of '19 compared to $6.2 million in Q4 of '18, adjusted for a nonrecurring item of $1.4 million for a contingency reserve reversal.

Reflecting the benefit of our cost-cutting efforts in fiscal 2018, combined with the revenue and gross profit increase, Orion's Q4 '19 net loss improved to $900,000 or $0.03 per share compared with a net loss of $1.5 million or $0.05 per share in Q4 of '18. Importantly, Orion reported that its Q4 '19 adjusted EBITDA loss was $49,000 compared to an adjusted EBITDA loss of $600,000 in Q4 of '18.

Turning to our full year results. Our fiscal (technical difficulty) rose 9% to $65.8 million from $60.3 million in fiscal '18, which came in at the high end of our revised revenue goal of 5% to 10%. The revenue improvement was primarily due to increased sales to major national account customers.

Gross profit was roughly flat at $14.6 million in fiscal '19 compared to $14.7 million in fiscal '18, as gross margin declined to 22.1% in fiscal '19 compared to 24.3% in fiscal '18. The decline in gross margin was principally due to product mix on higher sales to a large national account customer and related project start-up costs.

Total operating expenses decreased 25% to $20.7 million in fiscal '19 compared to $27.7 million in fiscal '18, clearly demonstrating the benefit of our fiscal 2018 cost-reduction initiatives as well as our ongoing cost management discipline.

Orion was able to trim its fiscal '19 net loss nearly in half to a net loss of $6.7 million or $0.23 per share compared to fiscal '18 net loss of $13.1 million or $0.46 per share.

Orion's fiscal '19 adjusted EBITDA loss improved to $3.5 million compared to an adjusted EBITDA loss of $9.6 million in fiscal of '18.

And turning to our balance sheet. Orion closed the year with a solid financial position to support the business over the coming year. Orion had net working capital of $14 million, including $8.7 million of cash and cash equivalents at the close of fiscal '19. In addition, yesterday, we executed an amendment to our credit agreement to increase our borrowing availability. Had this been in place as of March 31, 2019, we would have increased our availability by $4 million, bringing unused borrowing capacity from $1.4 million to $5.4 million.

We continue to believe that our working capital and cash position, combined with unused credit available under our revolving facility, provide us with ample financial resources to support the business in fiscal 2020 and beyond.

And with that, let's open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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So to start, I guess I'll start with the national account business. I mean, clearly, you've been dedicating resources to that for some time. And I mean that you're really starting to see the impact of that. I mean just curious -- well, first of all, when you think about this national account, I mean, provided that you execute well, which you have been, I mean, there's no reason why there's not more business for this customer, so maybe thoughts on that. And then also in terms of your overall pipeline, I mean, have you noticed at all that this is helping potentially in conversations with other national account customers?

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [3]

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Thanks, Eric. A couple of things. First, we do think that given we will continue to perform well for this customer, that there are ongoing opportunities with this customer in the future, and we would expect those things to develop over this year as we head through the fiscal year, and we will report on those when it's appropriate. The things we're doing beyond that, we do feel that when you do land a larger account like this, what we found in the past is that it can increase some of the incoming request for proposals. But even with that -- before that, we had seen some good activity in the RFP process and in the pipeline. In addition, what we are doing is that this particular customized product is a product that is retrofitting an existing fixture for this customer and that particular fixture is a fixture that, we believe, is in many facilities with many companies throughout the country. So it gives us the opportunity to also target particular customers who may have those fixtures and might be in need of retrofit applications.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Got it. And sticking with that, I mean, your outlook for fiscal '20 would seem to imply that the margins on this, and I don't know how much you can share, but I'll give it a shot, just that the margins seem pretty similar to your overall margins. At least that's how it's going to shake out. And then the start-up costs that you saw in the fourth quarter, I mean, is that something that we should view kind of onetime in nature? Or do you have those start-up costs as you continue through that customer's facility footprint?

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [5]

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I'll start on the answer for this one, Eric. I would think one should view that most of the start-up costs would be behind us, both in the fourth quarter of 2019, and I'm going to say real early in this first quarter of 2020. This project has been in place for a while, and so a lot of the activities are in motion and some of the early start-up costs are behind us. So I would think you should assume that most of that start-up aspect is behind us in fiscal 2019. From a margin standpoint, yes, I would agree with your comment. Go ahead, Bill.

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William T. Hull, Orion Energy Systems, Inc - CFO, Executive VP, CAO & Treasurer [6]

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Yes, I think, Eric, if you think about this project and some other projects and we've been leaning out our organization over the last couple of years. And with this, we have a plan to take out some more costs to improve the margins here, and I would think it'd be fair to think about the business as in the mid-20s in terms of gross margin where we're trying to get to right now.

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Operator [7]

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And our next question comes from Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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I had similar margin-related questions, but I'd take that off-line to what Eric was trying to get at. But just in relation to the strong guide for fiscal 2020, post your announcements of the follow-on order you received, consensus was calling for around $116 million in fiscal 2020. Your guidance has come in much higher. Just wanted to see if there were any new developments post those announcements or at the LIGHTFAIR that is driving this stronger sentiment.

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [9]

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I wouldn't say there's anything particular that has changed real recently, Amit. We just -- as you get further into this project and we look at our pipeline developing in other areas and we're 2 months into our fiscal year, it just starts to give a little bit more visibility. So we thought it was the appropriate time to give our initial revenue goal for fiscal 2020. And as we head through this fiscal year, we will update that each quarter as we get together and talk as where things might be. But right now, we felt very comfortable setting out this revenue goal range for fiscal 2020.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [10]

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Got it. And just in the context of your comments around quarterly variance in revenues, the first quarter and sequentially how should we sort of seeing this position? Are you actively deploying against this -- the large customer that you received follow-on orders for? Or is that happening maybe later on in the fiscal year for you?

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William T. Hull, Orion Energy Systems, Inc - CFO, Executive VP, CAO & Treasurer [11]

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So Amit, this is Bill. So we're in full swing right now on the revenue side. And our quarters could be kind of lumpy, particularly in a holiday quarter, we have Thanksgiving and Christmas, which is our third quarter. So that might be a little bit more of a tough quarter in terms of revenue just because of those holidays and what's happening. But other than that, we're in full swing and moving ahead.

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Operator [12]

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And our next question comes from Kurt Caramanidis with Carl M. Hennig Incorporated.

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Kurt Caramanidis, Carl M. Hennig, Inc. - VP [13]

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Congratulations, guys, on your recent success. Is there any opportunity for recurring revenue on this Internet of Things with your products or subscription fees or anything? Or is at all you buy it and you get it all?

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [14]

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It's a mix. We have chosen to stay tech agnostic, and so we work with 10 to 12 different technologies for controls and integration of controls and can build those into our fixtures so they can be add-on platforms. What we have been able to achieve in certain situations is that by bringing a partner to the table, we may sometimes be able to have an agreement with that partner to share some of their ongoing software revenue from that customer for data analytics or other aspects that they might bring to the table. So we are attempting to begin building a modest recurring revenue source from participating in some of the ongoing revenues that our partner-control companies may achieve from a customer.

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Operator [15]

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(Operator Instructions) Our next question comes from George Gaspar, a private investor.

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George Gaspar, [16]

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Congratulations for the progress that occurred the last fiscal year and the momentum that you have going. Just I'd like to stand a little bit on the Internet of Things applications, two things on it. Does 5G create a situation that will create a better, even an expanded opportunity for you going Internet of Things into lighting systems? And the second half of my question is, with -- if this Internet of Things really takes off for you, the existing lights that you've installed, the LEDs along the way, would they be -- could you adapt the Internet of Things to those lights or would they have to be replaced by a new LED system that you've developed on a shorter-term basis?

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [17]

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Sure. Thanks, George. Appreciate your comments. On the 5G aspects, we -- it may or may not have an impact on it. I think the way perhaps could help in the future, sometimes where you have a great deal of data collection going on through a control system, you could have some bandwidth issues. So I think, perhaps having 5G could broaden the amount of information that could be passing through these wireless systems ultimately. So it could have some impact, but I've not heard a lot in the industry so far of the impact of 5G. On your second question, one of the real positives, I think, about the Orion Solution is that many of our fixtures, even if a customer has decided not to integrate controls initially into their systems, we allow a platform where the sensor can be easily attached to the fixture in the field at a later point in time. So the fixture stays in place. All the wiring stays in place. There is a control box that hangs on the top of the fixture that literally a person can go up and just plug it into the top of the fixture and then integrate that control system into the system that the customer wants. So the fact that we have these upgradable IoT solutions, we think, is very positive for our customer base going forward. But we're also seeing increases in where people do want to have the sensors attached to the fixtures immediately. So we can both integrate them right into the fixture or they can be a plug-and-play feature initially or a plug-and-play feature in the aftermarket for our customers.

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George Gaspar, [18]

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Okay. All right. And then my second question is regarding the applications exclusive of interior facilities. Any chance of trying to broaden your offerings into -- for example, street lighting or sign lighting and that sort of thing?

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [19]

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No, you are correct that a lot of our business today has been on the inside of the buildings, both high bay, low bay, distribution centers, et cetera. We do have a fairly substantial product offering in the outdoor category, which would be area lights, vapor tight lights for agricultural purposes, garage lighting, exterior building lighting. And so we have some of that product, and I think we will continue to look at that area as one where we can continue to develop and/or find products that fit the needs of our customers on the commercial and industrial side for certain outdoor product.

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Operator [20]

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Thank you. That concludes our Q&A period. I will now turn the call over to Mike Altschaefl for any closing remarks.

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Michael W. Altschaefl, Orion Energy Systems, Inc - CEO & Board Chair [21]

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Thank you, Daniel. I do want to mention that we will presenting tomorrow at the LD Micro Invitational in Los Angeles and look forward to seeing some of you at that conference. Thank you all for joining us on today's call, and we look forward to updating you on our business progress and outlook on our next call. Have a great day. Thank you.

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Operator [22]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Everyone, have a great day.