Orion Energy Systems, Inc. (NASDAQ:OESX) Q3 2024 Earnings Call Transcript
Orion Energy Systems, Inc. (NASDAQ:OESX) Q3 2024 Earnings Call Transcript February 7, 2024
Orion Energy Systems, Inc. beats earnings expectations. Reported EPS is $-7.0E-5, expectations were $-0.12. Orion Energy Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2024 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. I would now like to turn the call over to Mr. Bill Jones, Investor Relations.
Bill Jones: Thank you, operator. Good morning, everyone, and thank you for joining today's call. Mike Jenkins, Orion's CEO; and Per Brodin, Orion's CFO, will review the company's third quarter results, financial position and outlook and then we will open the call to investor questions. Today's conference call is being recorded, and a replay will be posted on the Investor Relations section of Orion's website, orionlighting.com. Remarks that follow and answers to questions include statements that are forward-looking within the meaning of 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 that describe future objectives and goals, plans or outlook are also forward-looking.
Such forward-looking statements are subject to various risks that could cause actual results to differ materially than currently expected. These risks include, among other matters, that the company has described in its press release issued this morning as well as in its filings with the Securities and Exchange Commission. Except as described therein, the company disclaims any obligation to update forward-looking statements, which are made as of today's date. Reconciliations of certain non-GAAP financial metrics to GAAP measures are also provided in today's press release. I will now turn the call over to Mr. Mike Jenkins.
Mike Jenkins: Thank you, Bill. Good morning. Thank you all for joining today's call. As previewed last month, Orion's third quarter revenue rose 28%, reflecting an anticipated acceleration in contract activity on large LED lighting projects in the government sector, projects secured through energy service company or ESCO partners and projects with our largest customer. Q3 also saw growth in our electrical maintenance services business, which is benefiting from a new three-year agreement with Orion's largest customer. Our Voltrek EV charging solutions revenue was flat with a year ago period and down on a sequential basis, principally due to the variability and timing of larger projects. We are, however, seeing very encouraging progress in the build-out of our longer-term EV charging project pipeline as we engage with new and existing customers to address their EV charging requirements.
Our business development progress makes us optimistic about our growth prospects across the business in quarter four and fiscal '25. In LED lighting, we have several larger retrofit projects that are underway and should contribute to growth over the next few quarters. These include the remaining $6 million in revenue from our European retrofit project for the U.S. Department of Defense, several million in annual revenue for external lighting for the next several years to support our largest customer as well as other potential projects with them. Ongoing retrofits for a large global warehouse and logistics customer, which we expect to range from $8 million to $9 million per annum for the next few years and a large multimillion dollar project for a global technology customer, which we expect to begin in the first half of fiscal '25.
In our LED business, we see continued expansion through our ESCO channel partners who continue to focus on our industry-leading high-efficiency lighting products as well as our new line of value-oriented fixtures, including our TritonPro retrofit high bay lighting fixtures and our Harris exterior LED lighting products. These products strike a balance between our commitment to high-quality components, design and energy efficiency and the budget limitations of some end customers. These new products expand our total addressable market within the ESCO and distribution channels. As an example, we recently won and are implementing a project for a national specialty retailer through an ESCO partner using TritonPro. Due to the customer specifications, TritonPro was the appropriate product to meet their needs.
This project should generate revenue of $3 million to $4 million for Orion over the next 24 months. We continue to work on our electrical contractor channel to increase our value proposition by adding the right partners, products and pricing to meet their needs. We have seen excellent quoting and pipeline build in this channel since we launched the TritonPro and our exterior Harris lines. Reflecting the strategic benefits of our U.S. manufacturing facility here in Manitowoc, Wisconsin, in the third quarter, Orion released a full line of new LED lighting fixtures compliant with the Build America, Buy America or BABA Act. These include energy-efficient LED high bays, LED strips and LED troffers. These fixtures exceed the requirements of both the earlier Buy America Act and the new BABA Act which mandates at least 55% of material content come from U.S. sources.
That the BABA Act stipulates that states, municipalities and schools use BABA compliant products when possible in order to receive federal funding. Certainly, it's important to us to be a leader in American manufacturing in the lighting industry, but it also unlocks federal funding opportunities for customers that can significantly increase their ROI and support their sustainability goals. In November, we attended the Federal Small Business Conference in Texas to showcase our BABA compliant products. We have received great interest from customers and our quoted pipeline is already over $1 million and growing. One additional area that should be noted is that there are now seven states which are banning fluorescent fixtures for commercial and industrial use over the next several years.
Our understanding is that these states, including California, will prohibit new fluorescent fixtures from being sold as well as prohibit replacement fluorescent tubes. We have heard from several customers that these requirements are motivating them to accelerate their timings on retrofit projects into the next 12 to 18 months. Turning to our EV charging solutions business. We have made good progress in building out the Voltrek team and its geographic reach to meet the needs of large national customers. We are now engaged with a broader base of customers and opportunities, which are contributing to growth in our project pipeline, which is now in excess of $50 million. Quarter three revenue of $2.8 million matched prior year quarter three, but was down slightly from last quarter due to project timing.
We do anticipate some variability in quarter-over-quarter performance of this segment due to the timing of what we expect will be larger regional and national projects. As you probably know, there has been some recent reporting on potential pushback in the EV space by auto dealers and rental car companies as well as questions about the forecast of EV growth reaching 50% of the new vehicle fleet by 2030 or 80% by 2040. While some of the earlier projections might prove to be a bit bullish it is clear that EV shipments are continuing at a significant rate and our communities and enterprises are very much behind in building out the needed infrastructure to support the current and future needs of EVs. Voltrek with its over 14 years of experience and impressive track record of EV charging station deployments is extremely well positioned to serve customers in this area.
Voltrek's experience and capabilities are even more compelling when compared to the many industry newcomers with little or no technical or EV charging deployment experience required to plan, deploy safe, successful and reliable EV charging solutions. Now turning to our maintenance services business, which achieved solid revenue growth year-over-year and sequential margin improvement in the third quarter. The improvement was attributable to the contribution of a new three-year agreement to provide preventative lighting maintenance services for our largest customers approximate 2,000 retail locations nationwide. Our performance also reflects the benefit of our effort to secure price increases with key customers. Given a range of significant inflationary pressures over the past several quarters, many of these older contracts were no longer profitable.
In response to higher costs, we have raised our pricing to bring our profit margin more in line with our overall business. Over the past few quarters, we have worked to reprice legacy contracts and have successfully converted three of our four customers to our new pricing structure within contracted periods. Because we are committed to returning this business to a solid margin profile, we are prepared to exit relationships where we are unable to secure adequate pricing and margins. Many of our Stay-Lite legacy customers have their three-year maintenance RFP processes in our current quarter four period, so we do expect some revenue headwinds as we move into fiscal '25 in our maintenance segment as we continue to focus on profitability. Overall, we believe that maintenance services offers key accounts additional value and provides Orion with recurring revenue.
We are active in our business development efforts and have new business in our pipeline that we believe could come to fruition in the first half of our fiscal '25. Having touched on each of our product and service offerings. I want to reiterate Orion's focus on delivering the highest quality, energy efficiency and value to our customers with the highest levels of customer service. Our complementary go-to-market approaches of working with ESCOs and distribution partners, along with our unique turnkey solutions allow us to participate in a broad segment of the overall market. Our turnkey approach starts with visits to each site and progresses to custom project and product design, configuration and project planning, including utility and government rebates.
We then can manufacture the LED fixtures or procure the EV charging hardware from industry-leading partners and manage delivery, permitting, installation and commissioning at hundreds or even thousands of sites. All with just one point of contact and accountability. Our initiatives to diversify the business over the past two years are starting to make meaningful contributions to our growth from both new and existing customers. We continue to see significant cross-selling opportunities, particularly with long-standing large national account customers with potential needs across each of our three areas of operation. A priority in coming quarters is to effectively market each of our capabilities across our combined customer base. As a result of these initiatives, we expect our expanded array of solutions to support meaningful long-term growth in fiscal '25 and the years to come.
Now I'll turn the call to Per Brodin to discuss our financials and financial outlook in more detail.
Per Brodin: Thank you, Mike. As noted in today's press release, our Q3 '24 revenue of $26 million grew 28% year-over-year and 26% sequentially from Q2 of this year. Driven by anticipated strength in LED lighting and maintenance services. In prior calls, we noted several larger projects that we expected to ramp meaningfully in the second half. We began to benefit from that ramp in Q3. One of those projects is the $9.6 million Department of Defense project in Europe, which we had expected to complete this fiscal year. At this point, we have approximately $6 million remaining on this contract. We think approximately $1 million or more of that amount could roll over into early fiscal '25. Maintenance services revenue rose to $4.6 million in Q3 '24, which compared favorably to $3.3 million in Q3 '23 and $3.6 million in Q2 '24.
A significant portion of this growth came from our 3-year agreement for preventative lighting maintenance services for our largest customers, roughly 2,000 retail locations nationwide. So those were the growth drivers in the quarter. In terms of profitability, our gross profit percentage or gross margin increased 95 basis points to 24.5% in Q3 '24 from 23.6% in Q3 '23 due to the achievement of a more favorable sales mix of products, the impact of higher sales volume on fixed cost absorption and improved margin on services. Gross margin on services rebounded sharply to 18.5% in Q3 from slightly negative in Q2 '24 and 17.6% in Q3 '23. We expect further margin benefits driven by the continued impact of new pricing on renewing contracts in coming quarters.
Gross margin on Orion products improved approximately 220 basis points to 27.7% in Q3 '24 from 25.4% a year ago. The increase is attributable to new product sales as well as the benefit of higher volumes on fixed cost absorption. Reflecting steps taken in the maintenance business and our expectations for the business overall, we expect our blended gross margins to remain strong in Q4. Operating expenses declined to $8.4 million in Q3 '24 versus $9.4 million in Q3 '23 and $8.7 million last quarter. The year-over-year variance is primarily due to a lower earnout accrual in the current quarter and to acquisition expenses that occurred in the prior year period. Looking at the bottom line, we reported a Q3 '24 net loss of $2.3 million or $0.07 per share as compared to a net loss of $24.1 million or $0.75 per share which included a 56% shared noncash tax charge to record a valuation allowance on deferred tax assets in Q3 '23.
On a comparable basis, last year's net loss would have been approximately $6.3 million or $0.19 per share, excluding the adjustment. Cash generated from operations was approximately $1 million in Q3 '24, reflecting improved operating results and net positive working capital changes. On December 31, we had current assets of $45.7 million, which included inventory investments of $20.8 million, accounts receivable of $15.7 million and cash of $5 million. Net working capital was $15 million and our financial liquidity, defined as cash and revolver availability was $17.5 million. As such, we believe we are in a good position to fund our operations and growth goals moving forward. As a reminder, last month, we updated our revenue expectations for fiscal 2024 to a range of $90 million to $95 million, representing growth in the range of 16% to 23%.
On a preliminary basis, we are targeting growth of 10% to 15% for fiscal '25, and we will update this outlook when we report our full year results in June. And with that, I'll ask the operator to begin the Q&A session.
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