Orion Energy Systems Inc (OESX) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the Orion Energy Systems conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Erik Birkerts, Chief Operating Officer. Please go ahead.

Thank you Nikki and thank you for joining us on such short notice for our conference call regarding the preannouncement of our first quarter fiscal year 2009 results. Joining me on the call today we have Neal Verfuerth, President and CEO; and Scott Jenson, CFO.

The call format, the call will be 30 minutes in length and approximately 15 minutes will be devoted to Q&A. And before we began, let me read the Safe Harbor Statement.

Our remarks that follow including answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements will include words such as believe, anticipate, expect or words of similar import.

Similarly, 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 from those expected.

Those risks include among others, matters that we've described in our press release issued this afternoon and furnished to the Securities and Exchange Commission on Form 8-K and those that can be found in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly conference call if at all. Now, I would like to turn the call over to Neal.

Thanks Erik. Thank you all for taking the time to be with us on the call today. As you all saw in our press release issued last night, we announced preliminary revenues for the first quarter of fiscal '09 and revised annual revenue guidance for the full year due to a series of factors Scott, Erik and I will discuss in more detail.

We've also made a few management changes I'd like to discusses as well. First of all, Dan Waibel has been appointed as President of the Orion Asset Management division. In this position Dan will be responsible for creating Orion's customer financing products, managing Orion's utility and demand response energy management efforts as well as continuing to build Orion's emissions monetization platform. These efforts are critical in furthering Orion's leadership position in the market and I highly value Dan's skills, leadership and dedicated focus on these long-term strategic opportunities.

As we noted in our release, we have promoted Scott Jenson to CFO and Treasurer assuming the responsibilities of Dan Waibel. Scott has been with Orion for over four years in the position of Controller and Vice President of Corporate Finance and I have personally worked with him closely during that period.

Scott's responsibility will be to further build our financial organization and financial processes and procedures to continue to meet the needs of our rapidly growing business. Given Scott's previous role with Orion and intimate knowledge of our financials, he's fully ramped up and his work is underway.

Furthermore we have promoted Eric Birkerts into the newly created position of COO. Erik has been working with Orion for the last several years first as an external consultant and then as Orion's Vice President of Strategic Initiatives. As COO, Erik's key responsibilities will include business planning, budgeting, forecasting and tracking key performance metrics to ensure operational execution. Erik will also play a key role in the Company's communication with investors and other key constituents. Before I go further details into the quarter, I'd like to turn the call over to Scott Jensen, our newly promoted CFO to take you through some of the numbers. Scott?

Thank you Neal. To provide a bit of background and to build upon what Neal outlined, I have been with Orion for four years in financial positions including Corporate Controller and Vice President of Corporate Finance.

During this time which was characterized by significant Company growth and more recently public company requirements, I've helped to build Orion's financial controls and integrity in our accounting, reporting systems, processes and financial statements. I'm well acquainted with Orion's business activities and understand our key financial metrics.

Prior to Orion, I spent over ten years with public companies in various management roles that included divisional planning and budget capacities. This experience has prepared me for this job and I look forward to working more closely with all of you in the months and years ahead to provide understanding of and visibility to our business.

As you saw in our release yesterday, we announced that we are expecting revenues for the first quarter of fiscal 2009 to be in the range of 16.1 to $16.3 million. The softness we experienced during the quarter was due in part to the significant investment of time and effort we made in our sales organization and in part to the current economic environment.

April and May were clearly soft months in the quarter and we regained our footing to get back on track in June. The first quarter resulted in valuable time lost towards achieving our original revenue target. Although we will push hard to make up for lost time, we feel it is prudent to revise our annual revenue guidance.

We now expect fiscal 2009 total revenues growth to be in the range of 25 to 28% which equates to approximately 101 to $103 million in annual sales for the year. This is conservative guidance which reflects the business realities that we see in front of us.

Our revenues in the quarter were all also negatively impacted by an unexpected lengthening of the sales cycle due to the economy. It is worth noting that we're not seeing customers decide against implementing our technology but instead we are seeing more protracted decision-making processes.

We have also recently learned of a few plant closings tied to prospective deals that are in our pipeline. These closings are a small percentage of total expected implementations today but something that we are monitoring closely.

To be conservative, we have incorporated these delays in closings into our revised projections and this change lowers projected annual revenues by about 8 to $10 million. We also continue to expect that the second half of our year will be weighted more heavily than the first and as we have outlined before, we expect the percentage contributed by the second half to be somewhat higher than the 55 to 60% we have witnessed historically.

With respect to profitability, we are still performing post-closing adjustments. But barring any unforeseen adjustments it looks like we will be slightly profitable in the quarter at less than $0.01 per share EPS. We will have full details available on August 5.

We're also working towards providing annual EPS guidance and hope to make this available to the market as soon as possible. This is a job of critical importance to our organization and I have every confidence in my team's ability to make progress in a short time.

Clearly, we're disappointed with our results for this quarter but believe that we have made the necessary adjustments both operationally and within our leadership team to capitalize on the significant opportunity that exists within our business going forward.

I'm excited for the opportunity to play a larger role in Orion's communication with the Street and I look forward to meeting you after our first quarter call. With that, let me turn the call back over to Neal to discuss in more detail some of the investments we've made in the sales organization.

Thanks Scott. I would like to spend a little more time now discussing some of the internal events that led to our results this quarter in more detail. The first quarter highlighted the inherent tension that exists between aggressively pursuing current growth opportunities versus making investments and preparing for sustainable growth in the future.

In May we announced our decision to invest time and efforts now in building our sales organization rather than (inaudible) future when the negative impact to our business [would like] to be more substantial. These investments diverted more attention from closing current opportunities than originally planned. One of the key goals of our new management team will be to ensure we remain focused on growing sales.

Let me outline some of the efforts of building our sales organization. Please bear in mind that not only with much time invested in recruiting and delivering training but time was also invested in developing training, content, tools and methodologies as well as training trainers; things that we never had to do in the past. We were a smaller company (inaudible) now essential for us to do for scalable and sustainable growth.

During the quarter, much of our efforts were spent on identifying, recruiting and interviewing as well as hiring new talent into our sales organization. In the first quarter we added 13 new people. Some markets in which we added field resources include Seattle, LA and Chicago.

These new hires required training on product applications and most importantly selling the Orion way. As a result, key members of our sales team were not focused exclusively on selling as they have been in the past.

We're now about 50% complete with our expansion of the sales organization that we discussed back in May. But the majority of the initial footwork necessary to recruit and train additional hires has been completed. We now have have define a profile to target and we have developed a streamlined process for recruiting, interviewing and hiring these candidates which will prevent future hiring from creating a significant drag on our existing core sales team.

In addition to the many man hours recruiting and hands-on training conducted by our seasoned salespeople, we conducted two sessions of what we call Orion University which is an intensive three-day training course. Our seasoned sales personnel acted as the instructor for portions of this program in which we trained over 37 employees and 11 contractors. Some of the employees who attended these sessions were there to learn how to conduct the training themselves in the future.

In the first quarter we also held two separate off-site sales meetings for which the whole sales organization was put out of the field for a total five days including travel. The purpose of these meetings was to set direction, introduce new products and provide engineering updates and continue our training on how to sell the Orion way. Again, this investment not only equips our salespeople to be more effective in front of customers, it also trains more of our people to assume future training responsibilities.

Key personnel also participated in Orion's partner summit which was held in April. Over 50 representatives from over 22 partner companies attended this three-day meeting to learn more about our new technology and engineering updates and to be further trained in Orion way of selling. The partner summit was also an important forum for establishing our joint strategic direction into fiscal '09.

Finally, (inaudible) mentioned that key personnel were involved in conducting five energy management workshops during the first quarter in which we educated over 100 end-users on issues surrounding energy efficiency and energy management and the application of Orion technology. These investments simply have been made for us to scale or else we would suffer later.

We're now in a position where our sales force is stronger and better equipped to hit the pavement and attack the (inaudible) retrofit opportunity in front of us. Looking back on the quarter, the month of April and May were weak. The good news is that were back on track in June. It looks like June's results will allow us to be in the black for the first quarter.

Going forward, I've made these changes so I can focus more of my time and attention where I can add the most value -- meeting with customers and working elbow to elbow with our sales team to execute on the market opportunity in front of us. My job, one, is to ensure that we aggressively grow sales and are profitable and look forward to updating you in August on some of the customer wins we will be in a position to announce.

To conclude, we remain optimistic about the future and believe the key themes surrounding our business remain intact [with those being] we consider ourselves to be the leading provider of energy management systems to the very large commercial industrial markets. The lighting and retrofit opportunity (inaudible) a market we've been successful in for over ten years is estimated to be larger than $9 billion. Our customer wins and track record demonstrates our leadership in this area.

We believe we have the best products to sell in this market opportunity. Moreover we have the engineering and project management expertise to ensure that customer projects unfold on a schedule as promised. We provide turnkey solutions whether required at a single facility or across 100 facilities within a customer's in North America real estate footprint.

We have a world-class, vertically integrated manufacturing facility which is a key competitive advantage that on average can produce and ship products in under two weeks. In the business of energy efficiency, time is money.

Finally, we believe our sales organization is second to none. Our team, our sales methodologies and sales practices allow us to compete very effectively. Time and time again in direct competition, our sales (technical difficulty) better able to demonstrate the superior performance of our product and to intelligently discuss energy efficiency with prospective customers. The time and effort we're spreading in the first half of this year to recruit and train new members of the team will pay dividends down the road.

I would now like to turn the call back over to the operator. Thank you.

(OPERATOR INSTRUCTIONS) Eric Prouty, Canaccord Adams.

Could you just I guess give a little more detail on the shortfall in the quarter $6 million decline sequentially? Could you break that up between declines in existing customers as opposed to new customers not signed? Did you have any large customer installations that might have finished up and kind of rolled off during the quarter?

I don't really have at my fingertips, Eric, the exact mix. There was a couple of large deals that we have been working on that we were from both sides, our end and the customers, we were planning on closing and shipping in that quarter that just didn't happen due to some issues that were going on in the overall economy and as related to their businesses.

The point that -- when we went back and really started doing the analysis of how the results unfolded, what was clear was that we weren't losing opportunities. It was really things were getting pushed out into future months.

Even with existing customers were pushing out installations?

I can get into more detail but a large percentage of our revenues are tied to what we call rollout accounts. And that calendar which shows in which months we're going to complete which facility for which large customers, that is really -- that calendar has been largely solid and has not been shifting around. The lengthening sales cycles that we have seen have really been about prospective deals in our pipeline are taking longer to close.

Great, and then another question just on revenue. Any shift or mix shift between your kind of internal sales force focused on the Fortune 500 as opposed to the more channel oriented revenue? Was one weaker than the other?

I wouldn't say that one was weaker than the other. Although, I will say that as we're seeing things unfolds on the first call we projected -- we mentioned that we projected that our channels will contribute about 25% of our revenue. The channels have actually been on track.

As Eric mentioned earlier we have seen kind of a push-out on our national accounts. And historically our national account mix has been over 50%. For the first quarter it was slightly under 50%. So we saw that shift change there. We didn't see a real mix shift otherwise in our contractor or reseller networks.

Great. And then just finally before I jump back in the queue, we're getting off to a slow start to the year here. We need a good ramp especially in the back half of the year. I guess, put a little meat in bones of the confidence level here.

I mean what leads you to believe that you can get that ramp up? I mean do you have kind of signed orders that you know are going to be hitting in the back half of the year or are you just counting on the maturation of the sales force and your new hires getting up to speed? Give us a little more detail on what gives you the confidence in the back half ramp up?

Good question, Eric. Our revised guidance is based on greater visibility and what we consider to be a conservative modeling approach. I will let Erik speak to this as he has been working closely with the sales team on drilling down into our pipeline opportunities and the timing of when our revenues will hit.

So, Eric, I think what would be most beneficial is for me to kind of on a broad stroke basis outline our forecasting model. The key point to get to your question is that we have -- there's four major components to our forecasting model and the first two components which represent well over half of our forecasted revenues moving forward are tied to drivers on which we have good visibility.

Those two components are -- the first component is national account rollouts. This represents revenue tied to multi-site national accounts in which we have a defined project plan and rollout schedule that's been developed in close coordination with our customers. And basically we know what projects will be initiated in which months. And based on this customer by customer walk-up, we have good visibility on the revenue coming from these rollouts in the months ahead.

And the second major components in which we have good visibility on is what we call our existing return on investment proposal pipeline. And this component of the model basically reflects the pool of our outstanding qualified ROI proposals that have various vintages. But what's really important to recognize is before we can generate an ROI proposal, we have been at the customer site for an initial meeting, the customer has agreed for us to do a facility audit and we have worked on a project design.

So there's been a lot of time invested in the customer relationship already so these aren't simple casual drive-bys. These are highly qualified proposals. In our modeling, where we are using conservative sales cycles and close rates, less than one-quarter of the pipeline currently is being incorporated into the revenue forecast for the year.

So again, those two components drive more than half of our revenue forecast for the year. The other two components are -- that comprise the remaining portion are pipeline creation. This is where our salespeople are on the street everyday opening up new opportunities and creating new pipeline. And then as I mentioned before, our partners in [VARS] which as we mentioned on our earlier call are contributing about 25% of our annual revenue.

Great, thank you very much.

Jeff Osborne, Thomas Wessel Partners.

Great, thank you. I just had a couple of questions. Can you talk about the disruptions in the sales force, Neal, that you would expect to see in the second fiscal quarter? You mentioned 13 new editions this quarter and you're about halfway done. Just when would you expect the other half to be done and we can look at the Company on a kind of full-steam steady-state basis?

Jeff, this is Erik. I will jump in there since I've been working pretty closely on the recruiting and rollout plan. In the first quarter we did hire 13 people and we are on track with our hiring plan as we've put some great new people on the ground. As we speak, we're actively recruiting more talent and we look to kind of hit our 50% gross growth target right around the end of second quarter, beginning of third.

And I know one of the questions to sort of anticipate is that well, is this problem going to recur going into the second quarter? And I just want to emphasize that a lot of the time spent this first quarter was spent on developing training content, pools, training methodologies as well as training trainers so that we can add more salespeople in the future and scale up in a sustainable basis without distracting our key people.

[It's my understanding] your sales approach is you have two to three kind of 'closers' that come in. Is it fair to say that those two to three individuals were distracted in this quarter and their time was put elsewhere and that was the reason? If that's the case, how do you just kind of break down and 6 to $7 million miss as to that reasoning versus the push-outs as you described?

Jeff, first off, our salespeople -- we have some guys who focus on the national accounts and other guys who are focused more on middle market opportunities. So I would not characterize it as we only have two or three closers. All of our guys can close.

But the point is that our senior most experienced salespeople, the people who have been around at least one year, they were not in the field either closing new opportunities or opening up new opportunities to continue building the pipeline for future months. And that is really where frankly we had more of an impact than anticipated.

Okay, and just if I'm doing the math right, the run rate exiting the fiscal year with the guidance of 25 to 28 would be essentially double the current levels? So you are assuming then all of people would be in place and that the push-outs would be not occurring in two to three quarters? Is that fair?

I'm sorry, I didn't quite follow the question.

So you did $16 million this quarter to do 1010 to $103 million for the year. You are assuming that at some point you're going to have a kind of 25, $30 million quarter out there? I assume that is exiting the year when your entire sales force is in place? And to hit the targets that you've laid out you're assuming that in three quarters there's no push-outs in the economy. Is that fair?

Well, I think frankly I think the push-outs are going to continue but you have to remember that we are also adding new opportunities and new customer wins, you know, in the process. It's very dynamic.

It's not a sort of a linear A equals B equals C because we are adding new customer wins all the time. But we are factoring in push-outs into our model and as Scott mentioned we have layered in about 8 to $10 million to account for that. I shouldn't say we layered in. We have backed out 8 to $10 million.

Just two quick ones then. If you could characterize maybe two quarters ago what the close cycle was, how many months it took and then what the degree of the push-outs is. And then just lastly with Dan being shifted over to the asset division it seems maybe perhaps a bigger focus on financing. Any working capital issues there and perhaps what the cash balance was ending the quarter?

Historically, what we had seen on our pipeline was approximately 70% of the purchase commitments were made within six months of the proposal presented to the customer. What we have been seeing more recently in that decision cycle is customers moving their decision into a six to nine month range and that's effectively pushed out our revenue for the year and a big reason for why we felt it was prudent to bring our guidance down.

And then your second question in regards to Dan's new role, Dan will be focusing on the financing arm of Orion as well as leveraging the opportunity that exists within the monetization of carbon. At this time, we don't see any what I would consider capital expenditures but there would be some working capital related to the project that Dan will be working on.

I can't tell you that's been quantified at this time. We're pretty early in the stages of that project. And then your last question on cash, again I just caution these are unaudited although I'm not anticipating cash to disappear -- in the range of about $79 million for cash and cash equivalents.

Due to time restraints our final question comes from Eric Stine with Northland Securities.

I just wanted to ask a quick question regarding the quarter and the linearity within the quarter. I know that you said that April and May were weak and that June was a little bit stronger. I just want to get a sense of how much of that is attributed to the sales force build out and how much of that is typical that you see.

Well, what I would say to that question is that we saw April and May were slow in the range of 4 to $5 million each month. June was up in the range of about $7 million so we started to see some moving back.

It's a little difficult for us to quantify exactly what the opportunity loss was on revenue from our salespeople having training responsibilities and coaching responsibilities. But I would tell you we probably saw -- conservative estimate of about half of that $6 million first quarter miss tied more to push-outs and half of it tied to the sales transition and there's (multiple speakers)

(multiple speakers) typical quarter, it's pretty linear? There's no -- you're not -- it's not tied to the last month of a quarter typically? I'm just trying to get a sense of (multiple speakers)

The build out towards our internal target in the quarter, it was fairly -- the months of April, May and June were equally weighted in our internal plan going into the year.

And also, I mean I know a lot of your competitors and everyone has seen weakness in the commercial and industrial sector clearly given the steep drop in the revenue guidance you've given. You have seen that. Can you comment on that and also comment on you talked about some of the rollouts? I mean how should we think about revenue in the second quarter? Should we think of a little bit of a makeup, a sequentially up quarter and also just how that relates to percentage of revenue for the back half of the year?

Good question, Eric. One thing I want to stress here is we have not experienced any customer losses and we view that as very significant within the marketplace right now. In fact we expect to discuss several notable wins during our earnings call on August 5.

So while we have seen an overall slowdown, we feel confident that when a customer gets our proposal in place that based on the return on investment, as long as they have the ability within their budgeting structures that we believe they will pull the trigger. We've just seen a delay on the decision-making processes.

Just to add on to what Scott said, what's interesting is when we look at our close rates, a certain percentage of our proposals close within 30 days. A certain percentage close 60, 90 and so forth. And we kind of create a histogram if you will.

Historically we close close to 20, 25% of our proposals within the first 30 days. It was we went in, we made the pitch, it was a compelling value proposition and people pulled the trigger straight out of the gate. We're not seeing that rapid turnaround today as we did six months ago. People are just -- there's a lot more anxiety in the market and people are much more considerate about their purchasing decisions.

Okay, I mean is it fair to assume or think about then the second quarter given that June you started to see some strength, second quarter may be a little bit up sequentially and then you're talking about back half weighting of between 60 and 65%? Can you comment on that?

Eric, the first quarter was what it was and we're having this conversation today which none of us wish that we were having. But we are looking at the future. We're still optimistic as Neal said. We've got a huge market, great product, world-class manufacturing, top-flight sales team. So we are looking for an uptick in the second quarter. Frankly we don't want to be having this conversation again.

Eric Stine. Okay. No, that's helpful. I just wanted to get a sense of how to think about things going forward. So I appreciate that. Thanks a lot.

Ladies and gentlemen, that does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Birkerts for any additional or closing remarks.

No thanks. I think we are all set and August 5 is our earnings call and we will definitely be able to talk in more detail about the profitability component of our business model. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation and you may now disconnect.