Orion Energy Systems, Inc. (NASDAQ:OESX) Q3 2023 Earnings Call Transcript

Orion Energy Systems, Inc. (NASDAQ:OESX) Q3 2023 Earnings Call Transcript February 9, 2023

Operator: Good morning and welcome to the Orion Energy Systems Fiscal 2023 Third Quarter Conference Call. Today's conference is being recorded. I would now like to turn the call over to Bill Jones, Investor Relations.

Bill Jones: Thank you and good morning. Mike Jenkins, Orion's CEO, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's CFO, will review the company's Q3 and year-to-date results, financial position and other matters and then we'll take investor questions. A replay of the call will be posted to the Investor Relations section of Orion's website at orionlighting.com. Remarks that follow and answers to questions may include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives, goals and the business outlook are also forward-looking.

These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently expected. Such risks include among others matters that the company has described in its press release issued this morning and its SEC filings. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today's press release, and available in the Investor Relations section of the Orion's website. Now, I will turn the call over to Mike Jenkins. Mike?

Mike Jenkins: Thank you, Bill. Good morning everyone and thank you all for joining our call today. As previewed in January, our third quarter results continued to reflect the impact of customer delays in the initiation of several large LED lighting projects. Specifically the previously announced $4 million plus project for our longtime automotive customers started more slowly than anticipated in Q3, but is now accelerating in Q4, and the start of a $9 million Department of Defense project shifted from third quarter of this year into first quarter of 2024. As mentioned previously, these projects are fully booked, and we look forward to their full activation and completion. We also saw some softness in our electrical contractor distribution channel, which seems largely due to the softening economic environment.

We also experienced a modest decrease in contribution from our Energy Service Company or ESCO channel in the quarter. The ESCO softness is more related to project timing as longer term opportunities continue to gain traction in this channel which is focused on delivering both environmental and energy efficiency benefits to end customers. We have been working hard with our ESCO partners and have built a strong pipeline of opportunities that should drive significant positive growth in fiscal year 2024. Offsetting these factors was a better-than-expected contribution from our new EV charging solutions business and steady growth in our maintenance services business, largely due to the two acquisitions we completed over the past 12 months. We reiterate our fiscal 2023 revenue guidance for the balance of the year and reconfirmed our outlook for revenue growth of at least 30% in fiscal 2024.

Our fiscal 2024 outlook reflects a growing array of significant retail logistics public sector and automotive projects in our LED lighting pipeline, as well as strong growth in our EV charging solutions and electrical maintenance services business. We plan to provide more color on our 2024 outlook in early June when we report year end results. Overall, we are seeing growing interest in our expanded array of products and services that meet rising demand for energy savings, environmental benefits, safety, workplace and efficiency enhancements and improved customer experiences. We are pleased with the reaction from our customers on our growing value proposition of multiple platforms that help our customers with their energy and carbon footprint reduction goals.

Leveraging our unique turnkey, design, build, install and maintenance solutions along with industry-leading customer service, we're able to deliver substantial value particularly to large or regional organizations that manage hundreds and sometimes thousands of locations. These characteristics provide Orion a unique competitive advantage that creates complementary paths to grow both by expanding the base of customers we serve and the array of solutions we are able to offer. To lead our internal sales efforts we recently recruited a new Executive Vice President of Sales, Ken Poole, from outside the lighting industry. As we continue to evolve as an organization, we are focused on building greater value for our customers through expanded product and solution offerings, coupled with execution models to best meet their needs.

We have talked about the strategic value that ESCOs bring to Orion and Ken comes to us from a super ESCO and understands the world of project business. He is also very familiar with multiple go-to-market models and his sales management acumen will be an important asset supporting our future growth strategies. While our history has been enlightening, we have expanded into new complementary areas including electrical and lighting maintenance services, and electric vehicle charging solutions. We believe that our competitive advantage and customer service and turnkey project management complement these new businesses. We know from direct experience that many of our customers have specific interest in one or more of these areas, and therefore they build on our customers for life commitment.

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We work to educate our customers on the total cost of ownership of lighting and other energy systems, so that they can truly appreciate the substantial long-term ROI advantages and reduction in CO2 emissions provided by Orion's high quality, energy efficient products. We have three primary paths to market which include our ESCO channel with partners who focus on delivering energy efficiency benefits to their customers. ESCOs value the industry-leading energy efficiency and high quality and reliability of our LED fixtures made with the highest quality components. Second, we serve the electrical contractor channel providing a range of lighting solutions to meet a variety of needs and price points with a focus on new construction and agricultural markets in their local geographic areas.

The third, we have our national account group that is focused on developing long-term relationships with major national and regional customers across a range of industries and helping them to address their complex lighting, IoT solutions, maintenance or EV charging needs. To differentiate ourselves and adding value for these large enterprises, we are developing turnkey capabilities for executing lighting, maintenance and EV charging solutions, from start to finish all from one centralized Orion point-of-contact and accountability. True turnkey solutions are highly complex to execute as they involve input and coordination across the entire organization, from initial site audits to design and planning, to product development and customization, to product manufacturing in our facility in Wisconsin, through to shipping and on site installation and system commissioning in hundreds or even thousands of customer locations.

We also offer customers, ongoing lighting and electrical maintenance support tailored to their unique needs. Now, turning to our new growth opportunity and EV charging solutions. Obviously the electrical vehicle market is a high growth area with EVs expected to become nearly a 1/4 of new vehicle sales by 2025 and continue to grow from there. This trend is generating demand for EV charging stations at stores, businesses, schools, offices, housing complexes, healthcare, and other facilities. The ability to charge your electric vehicle will become an increasingly important component of high quality customer experience for many and also important to attract and retain employees and visitors. $5 billion in Federal and state funding under the National Electric Vehicle Infrastructure or NEVI Act has been authorized to support EV adoption and infrastructure over the next five years.

And many states are also supporting EVs in addition. For example, in Massachusetts, the Utility Commission recently approved approximately $400 million in funding over the next four years to support EV related infrastructure. Other states are reviewing and implementing similar programs in addition to the NEVI funds. Our Voltrek subsidiary as well positioned to benefit from these and other project funding sources. We are currently working to integrate Voltrek Solutions into our organization and adding personnel and infrastructure to expand their reach. This includes building out a nationwide group of qualified electrical contractors to execute EV charging installations or broader rollouts for larger organizations. We recently announced a significant project providing Level 3 DC fast charge infrastructure for an electric school bus pilot program in Massachusetts.

This project is broken into phases, and we announced the commencement of the first phase to support charging systems for 20 buses out of a fleet of a possible 145. The first phase of this project should provide Orion revenue of approximately $1.5 million. To support our growing base of product and service revenues -- or service offerings, we launched a new website in December. The objective was to enhance the site's value and ease of use for customers and partners. Initial feedback has been good and we are already seeing higher overall website traffic and more targeted lead generation benefits from the overhaul. We encourage all of you to check it out. Before I turn the call over to Per, I wanted to make it clear to our shareholders that despite an anticipated $50 million year-over-year decline in our business from our largest customer and online retailer through the first nine months of fiscal '23, the balance of Orion's business grew by approximately 9% year-to-date and 5% in quarter three over the prior year periods.

Our EV charging segment is off to a terrific start in its first quarter contributing to our results and our maintenance business remains on pace with our prior growth expectations. This confirms that the investments we are making to diversify and grow our business are working, though we are still in the early stages of integrating the new businesses and building out systems, management, sales and marketing and cross selling initiatives. We expect these segments will represent a significant portion of Orion's revenue moving forward in fiscal '24 and beyond, both with project work as well as a growing base of recurring maintenance revenue. We look forward to continued progress sourcing significant projects in our national account business, though the timing of these larger projects can be impacted by customer variables, or other factors outside of our control.

We continue to build out our base of productive ESCO partners and a pipeline of new product sales opportunities, including a few seven and eight figure opportunities, some of which we expect to initiate in the first half of the fiscal 2024. Reflecting these factors, we are excited about our growth prospects for the next several years. Now I will pass the call to Per Brodin to discuss our financials and specifics of our financial outlook for the balance of fiscal '23 and '24. Per?

Per Brodin : Thank you, Mike. Fiscal '23 third quarter revenue was $20.3 million versus $30.7 million in Q3 '22 and $17.6 million in Q2 '23. Through the first nine months of fiscal '23, revenue was $55.8 million versus $102.3 million in the prior year period. As previously discussed, the current year has been largely impacted by the wind down of the multiyear project with our largest customer, which had an $11 million impact on the third quarter. As Mike mentioned, excluding revenue from our largest customer and a large global online retailer, year-to-date revenue increased 9% over the comparable prior year period, reflecting our success in diversifying the growth drivers of our business. Our gross profit percentage decreased to 23.6% in Q3 '23 compared to 24.9% in Q3 '22 and 25.3% in Q2 '23.

The decrease principally reflects lower absorption of overhead costs and reduced revenue and a higher mix of service revenue, which operates at lower margins. Gross margin for our EV business outperformed the overall average. Third quarter fiscal '23 operating expenses were $9.4 million versus $6.3 million in the year ago period. The increase was principally because of $1.9 million of acquisition costs, and higher general and administrative expenses associated with the inclusion of the Voltrek and Stay-Light businesses in our results this year. The acquisition costs incurred in Q3 include $1.5 million toward the accrual of the Voltrek earnout and transition costs -- transaction costs associated with the Voltrek deal closing. Orion reported a net loss of $24.1 million or $0.75 per share in Q3 '23, compared to net income of $1.1 million or $0.04 per share in Q3 '22, primarily due to our establishing a valuation allowance against the company's deferred tax assets.

Orion recorded the valuation allowance, because we are now projecting a 36-month cumulative taxable loss through March 31, 2023, which requires the recording of this reserve. This non-cash entry does not impact our ability to offset future taxable income through existing NOLs. However, it will result in effective income tax provision rates that do not reflect statutory rates. Importantly, cash flow from operations was $1.3 million in Q3 '23, reflecting a benefit from the timing of accounts payable and accrued expenses partially offset by other working capital items. As of quarter end, net working capital was $24.5 million, including inventory investments of $19.3 million, which includes finished goods associated with our large automotive project, the addition of Voltrek inventory, and the balance of inventory intended to support product sales volume increases in the coming quarters.

Orion had quarter end liquidity of $19.4 million, including cash of $8.1 million and $11.3 million of availability on our credit facility. This compares with $23.7 million of liquidity at the end of Q2 '23 prior to the funding of the Voltrek acquisition. As of the close of the third quarter, we had $5 million drawn on our revolving debt facility, the proceeds of which were used to fund the Voltrek acquisition. As you review our 10-Q, you will note that we have begun reporting Voltrek as a separate segment. Please note that the earnings reflected in that segment data include the allocation of some corporate overhead costs that are not incremental to Orion. The Voltrek business was EBITDA positive excluding those allocations. Turning to our outlook, we expect further sequential revenue growth in Q4 '23, which would result in our strongest revenue quarter of the year.

Accordingly, we have reiterated our fiscal '23 revenue outlook of between $77 million and $80 million. While we expect an overall use of cash in Q4, we believe our cash and liquidity position will remain healthy at year-end, providing us a solid position to support growth initiatives across the business in fiscal 2024. As for M&A, while we continue to develop a pipeline of future opportunities, our near-term focus is on integrating our recent acquisitions, ensuring their success and investing in internal growth initiatives. And with that, I'll turn it back to the operator for the Q&A session.

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