Orion Energy Systems Inc (OESX) 2009 Q4 法說會逐字稿

Good afternoon. Thank you for standing by. Welcome to Orion Energy Systems Fourth Quarter 2009 earnings conference call. Your lines have been placed in a listen-only mode until the question-and-answer segment of today's call.

This call is being recorded. If you have any objections, you may disconnect at this time. I'll now turn call over to Erik Birkerts, Chief Operating Officer. You may begin.

Thank you, Jamie, and thank you for joining us for Orion Energy Systems Fiscal 2009 Fourth Quarter and year-end conference call. With me on the call today are Neal Verfuerth, President and CEO, and Scott Jensen, CFO. Before we begin, I'll read the Safe Harbor Statements. All 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 are generally 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.

Those risks include among others matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings, 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'd like to turn the call over to Neal.

Thanks, Erik. I'd like to welcome everybody to our fiscal 2009 year-end conference call. As we reported earlier this afternoon, business was down 10% as we ended our fiscal 2009 with revenues of $72.6 million versus $80.7 million in fiscal 2008. However, we remain profitable in this difficult environment as net income for fiscal 2009 was $511,000, compared to $4.4 million for fiscal 2008. Earnings per diluted share were $0.02 versus $0.19 for fiscal 2008.

In March, I had the opportunity to meet personally with President Obama and he stressed that clean energy was a top agenda item for his administration and a key foundation for our nation's long term economic prosperity. The American Recovery and Reinvestment Act of 12,009 is evidence of this committment. When surveying a popular press, articles about energy efficiency, clean technology and grade reliability are everywhere.

Looking back, it was only a few years ago that our salespeople had to work hard to convince skeptical customers about the benefits of saving energy. Energy just wasn't a big concern, access to it was almost considered a birthright. Today, that's no longer the case. Commercial industrial customers understand the financial gains and sustainability benefits that accrue from energy efficiency initiatives. However, the overall uncertainty in the US economy is still having an adverse effect on our sales closing rate and length of time to get to close.

The economic decline has accelerated through the fiscal year reaching unprecedented lows during our third and fourth quarters; quarters that have traditionally been our strongest. Frankly, the power of our value proposition couldn't defy the extreme pain and dislocation taking place in our C&I end use markets. As we've said in the past, our customers continue to be playing by declining capital expenditure budgets, limited access to capital, lengthening sales cycles, accelerated plant closures, downsizing, and job losses and all of the uncertainty that brings with it.

For instance, in our fourth quarter, we experienced a delay involving a significant $5 million series of facility rollout with one of our Fortune 500 customers. It's difficult for our value proposition to overcome the fact that headcount reductions eliminated all of our key engineering and purchasing contacts within this company. But this is just one example.

Having said that, how we're thinking about the future is optimistically over the long term. First of all, we're confident that our value proposition remains strong. Over the last several years, our systems have saved our customers close to $600 million in energy costs and prevented approximately 5 million tons of CO2 from being released into the atmosphere.

We believe we have the best products on the market to deliver sizeable, permanent, distributed load reduction. Our belief in our products is supported by the numerous awards and customer accolades we continue to receive. Some of the more recent awards we received were the Plattes Global Energy Award for sustainable technology innovation of the year. And we were named Cisco's Facility Supplier of the Year for the second year in a row.

Given the fact that this country's at risk energy situation is now at priority level, we stand before an unprecedented market opportunity to build a great company and create long term shareholder value. Clean low cost and secure energy is the lynch pin to our nations future competitiveness and the centerpiece of the Obama administration policy agenda. We believe now is not the time for Orion to retrench.

Moving into Fiscal 2010, we plan to take advantage of our financial strength. We have approximately $43 million in cash and short-term investments to position ourselves for the upcoming recovery in the economy. We will take a balanced and measured approach to manage costs while making the investments necessary to reignite growth. To that end,Scott will discuss some of the expense reductions and efficiency gains we have been pursuing over the last several months.

Nevertheless, we will continue to invest our time and resources to further leveraging existing customer relationships, expanding our partner networks, developing technologies and building our sales pipelines so that when -- we're prepared to strike when the economy ultimately begins to improve. Eric will discuss some of our initiatives in further detail, but let me make a few comments before he does so.

Regarding our salesforce, we finished the year with 73 people on the team. We believe we now have the resources in place to methodically build our pipeline of opportunities and lay the ground work for the future when the purse strings loosen. This team is diligently focusing on capturing the $10 billion plus retrofit market that lies in front of us.

Building our partner network will be a core element of our strategy moving forward. We will focus on recruiting and training new partners as well as insuring that existing partners grow their businesses. We are excited about the growth prospects of our InteLite wireless controls and our outdoor street lighting products. We are experiencing traction with these products and hope to report favorable developments on future earnings calls. We will accelerate our efforts to provide utilities at low cost capacity solutions; what we like to call permanent distributed load reduction.

While our efforts may result in some near term losses, we believe that we are laying the groundwork today to grow Orion to be a greater than $250 million in sales over the long term. As we've mentioned before, we believe that operating margin at these revenue levels can be in the high teens and low 20s as we fully leverage our manufacturing and organizational infrastructure. We're committed to creating a vibrant, sustainable and highly profitable company that delivers long-term shareholder value.

It all begins with sales. We will not rest until we reignite our growth trajectory. With that, let me turn the call over to Erik to take you through some of the operational details. Erik?

Thanks, Neal. Let me begin with a few comments regarding our fourth quarter which was weaker than anticipated, but within the range we provided in April. As we discussed in April, our sales team encountered unexpected delays around three significant national account opportunities. These delays drove our year-end results via approximately $8 million less than anticipated which was disappointing. The good news is that we are getting these deals back on track and we have already captured over $1.5 million of purchase orders from these customers since March 31, and we expect further purchase orders in the month ahead.

For the year, our national account rollout business contributed approximately 38% of our total revenues. We now do business with over 115 Fortune 500 companies. Of the total facilities operated by these Fortune 500 customers, we estimate that we have retrofitted less than 10% of their facility footprints. This leaves plenty of running room for our Phase I retrofit business, not to mention the opportunity to upsell Phase II and Phase III solutions to these customers. When taking into account other direct business, total revenue contributed by our direct salesforce was approximately 54% of revenues.

Moving to our wholesale business, the fourth quarter also witnessed a slowdown in the revenue contribution from our wholesale partners. Revenue contribution in the fourth quarter was about half of previous run rates. Clearly, our partners were not immune from the impact of the recession and we expect the wholesale channel to remain soft this fiscal year until we begin to see the economy recover.

Despite the weak fourth quarter and the current softness, our wholesale channel was a bright spot for us across the full year. Revenues generated by our electrical contractor channel grew 49% compared to fiscal year 2008. During the year, we added over 244 contractor partners and finished with over 450 contractors who conduct business with Orion on a recurring basis.

The VAR channel also performed well for the year, growing over 30% versus fiscal 2008. It deserves mention that this was organic growth on the part of our existing partner network which currently numbers just under 25 partners. Overall, our wholesale partners contributed approximately 40% of total revenues compared to the 54% generated by our direct salesforce.

Moving forward, as Neal mentioned, building our wholesale channel will be a key element in our go-to-market strategy. On previous calls, we discussed our Orion virtual power plant megawatt supply contract which we launched officially this past October. During the quarter, we secured 10 new agreements, representing gross income streams of approximately $600,000.

As of March 31, we had secured 20 supply agreements representing approximately $1.5 million in gross income streams. In the interest of building critical mass, we are currently holding these contracts on our books and have not elected to sell these contracts to a third party. The implication of this is that we recognize a fraction of revenue, essentially 1/60 of each deal each month versus the full amount up front as we would had we sold the contract.

As Neal mentioned earlier, we are taking steps today to position Orion to capitalize upon the eventual upturn in the economy and that our end goal is to build a sizeable and highly profitable company. Before I outline some of the initiatives we are working on to position Orion to sell into the upturn, let me highlight one asset that is already in place and that's our manufacturing capability. Our 266,000 square foot plant as currently configured can support upwards of $250 million in sales and we have attained production levels upwards of 6,000 units per day when required. We have already incurred the majority of capital investments this facility will require.

We've worked hard to make our operations as lean and efficient as possible. We have in place a dedicated, hard working and trained workforce. Currently, our excess capacity is impacting our margins. However, we believe that the overall industry's manufacturing capability will be constrained when the recovery comes, but we will use our capacity as a competitive weapon. As our volume increases, so will our margins and overall profitability.

Now, looking forward, let me take a few minutes to outline some of the initiatives we are currently working on. Let me start with sales. As Neal commented, we finished the year with 73 people in our sales organization. Within Q4, we added 11 new people to the team to lay the ground work for the upturn. With a team of 73, split equally between field sales, technical sales and inside sales, we believe we now have the appropriate resources in place. At this point, we do not anticipate further meaningful expansion of the team until the recovery begins to show signs of improvement.

We continue to focus on recruiting and training new partners, as well as insuring that our existing partners grow their businesses. To this end, our new 70,000 square foot technology center will serve as both a training destination and a technology demonstration site. In Q4 alone, we trained 73 individuals for 46 companies at Orion University. Moving into fiscal year 2010, we anticipate continuing this pace of training and certification. We believe that having a network of well trained and trusted partners will not only drive sales, but also speed the implementation on our national account rollout projects as these partners can perform the project management and delivery on a local or regional basis.

Although our focus remains on a pursuit of Phase I retrofit opportunities, we believe our employee wireless controls will begin to contribute measurable revenue this year. We believe this technology is unmatched in the industry and expect it will be deployed in many of our future projects. We are also beginning dialogue with existing customers, regarding wireless control upgrades. To this end, we are working on marketing collateral, product documentation and have hired technical resources to support the product as it begins market penetration.

We are also optimistic about the launch of our outdoor lighting product, targeting parking lot and street lighting applications. We believe these applications present a market opportunity equal to or greater than the Phase I retrofit market and particularly factor in stimulus spending. We are already participating in street lighting RFPs and have been selected by the City of Pittsburgh to participate in their invitation only street lighting pilot which is encouraging as it demonstrates that our product is being seriously considered by decision makers.

To support our street lighting initiative, we're excited that Kevin Crawford has joined Orion as the Vice President of Business Development. Not only was Kevin the 20-year, six-term mayor for the City of Manitowoc, he was ultimately responsible for the largest municipal owned electric generating facility in the State of Wisconsin. Needless to say, he understands how business gets done on a municipal level.

Finally, we'll continue our push to work with utilities to provide permanent distributed load reduction. Our pilot with PSE& G in New Jersey remains on track and we have built a healthy pipeline of customer opportunities that will begin to close in Q2. We also recently added a new independent Board member, Mark Williamson. Mark brings over 30 years of executive level utility experience to Orion and Mark will provide indispensable counsel as we push into this market.

I'll now turn the call over to Scott to take you through the financial results in more detail. Scott can also describe some of the discretionary spending reductions and efficiencies we pursued in the quarter. Scott?

Thank you, Erik. Our reported revenues for fiscal 2009 were $72.6 million, compared to $80.7 for fiscal 2008 which represents a decrease of 10%. This decline was primarily driven by reduced revenue with national accounts in our direct channel, as customers froze capital spending budgets, rationalized facilities and delayed purchase decisions.

Our gross margin for the year was 32.5%, down from 35% in the comparable prior year. Our gross profit decreased $4.6 million to $23.6 million for fiscal 2009, compared to $28.2 million in fiscal 2008. This margin decline was driven primarily by lower factory activity. The full year impact of additional costs related to our new coating and roll former processes, and costs incurred in our third quarter including overtime to refine our work processes around our enclosure fixture production.

G & A expenses for Fiscal 2009 were $10.5 million or 14.4% of revenue versus the prior year of $10.2 million or 12.6% of revenues. These expenses included incremental public company costs for audits, accounting, investor relations and our Sarbanes-Oxley compliance efforts, totaling $765,000 of incremental costs year-over-year and class action litigation costs of $360,000. These incremental costs were partially offset by reduced executive bonus compensation in fiscal 2009.

Sales and marketing expenses for the year-ended March 31, 2009 were $11.3 million or 15.5% of revenues, compared to $8.8 million or 10.9 % of revenues in the prior year. This increase was primarily attributable to compensation expense, including stock option compensation for sales headcount adds of $2.3 million and marketing costs for advertising into our wholesale channel of $700,000. These costs were offset by reduced bonus and commission expense in the back half of our year.

R & D expenses for fiscal 2009 were $1.9 million or 2.7% of revenues, up slightly from $1.8 million or 2.3% of revenues in fiscal 2008. The increase in expenses for 2009 was due to our development of our new outdoor lighting products, wireless controls, and product and process improvements in our coating operations. Our loss from operations for the year-ended March 31, 2009 was $56,000, declining $7.5 million from operating income of $7.4 million or 9.1% in the prior year. Net interest expense for the year was $167,000 versus $1.4 million in fiscal 2008.

Our fully diluted earnings per share for fiscal 2009 were $0.02 on a weighted average fully diluted shares outstanding of 27.4 million shares. That compares to $0.19 for the prior year based on a weighted average fully diluted shares outstanding of 23.5 million shares. As of March 31, 2009, we had 21.5 common shares outstanding. In addition to that, we have warrants and options totaling 4.2 million shares outstanding.

Let me now comment on our recently completed fourth quarter. For the fourth quarter of fiscal 2009, revenues decreased 31% to $15.4 million, compared to $22.3 million in the same period of the prior year. As Erik commented earlier, in Q4 we experienced a decrease in partner revenues along with delays in our national account base. Gross margin for the fourth quarter was 30% versus 36.2% in the fourth quarter of the prior year.

G & A expenses for the fourth quarter came in at $2.5 million or 16.3% of revenues versus the prior year of $3.4 million or 15.4% of revenues. Sales and marketing expenses for the quarter were $3.1 million or 20.1% of revenues, compared to $2.5 million or 11.3% of revenues in the prior year. R & D expenses for the fourth quarter of fiscal 2009 were $804,000 or 5.2% of revenues, compared to $498,000 or 2.2% of revenues in the same period last year.

For the quarter, we redeployed personnel to focus on improving processes in our production facility, primarily focusing on our coating materials and applications and our enclosure assembly lines and product flows. Additionally, we incurred product development and testing costs related to our exterior fixtures. We do not anticipate this level of spending to recur in future quarters and expect our R & D spending to normalize to about 2.5% of revenues.

Our loss from operations for the fourth quarter was $1.8 million versus operating income of $1.6 million or 7.2% of revenues in the fourth quarter of fiscal 2008. Interest expense for the quarter was $26,000 versus $118,000 in the prior year quarter. Our loss per share for the quarter ended March 31, 2009, was $0.05 on a weighted average 22.5 million shares outstanding. That compares to earnings per share of $0.05 for the same period in the prior year, based on a weighted average fully diluted shares outstanding of 30 million.

Turning to the Balance Sheet, as of March 31, 2009, we had a total of $42.7 million in cash and equivalents and short-term investments on hand, compared to $80.7 million at the end of our fiscal year ended March 31, 2008. For the year, cash flow from operations generated was $3.2 million, driven by a reduction in receivables resulting from improved DSO and our net income in non-cash expenses. We also invested $13.1 million in capital expenditures which was primarily attributable to the construction of our new corporate technology center and IT system costs.

We used $29.3 million during the year to repurchase our common stock. At this juncture, we have effectively completed our share repurchase program. I'd like to conclude with a look ahead at the first quarter of 2010.

Given the weak and unpredictable macroeconomic environment and the associated challenges with forecasting results, we are suspending annual revenue and earnings per share guidance. However, the Company will continue to provide revenue and earnings per share guidance on a quarter-to-quarter basis. As such, first quarter fiscal 2010 revenues are anticipated to be between $12 million and $13.2 million. Our loss per share for the first quarter of fiscal 2010 is estimated to be between $0.08 and $0.10 per share. Included in this estimate are first quarter severance costs of approximately $0.01 per share.

Finally, as Neal mentioned earlier, we are taking steps to manage our cost structure and improve efficiencies. Items that I would like to highlight include $1.1 million of fiscal 2010 expected savings from headcount reductions, reduced work hours and elimination of open positions; $700,000 of fiscal 2010 savings in production efficiencies, headcount reductions and reduced production hours; and $600,000 of fiscal 2010 savings for reductions in discretionary spending. 80% of this identified $2.4 million in cost reductions have already been implemented and we expect that the remaining amount will be implemented within the next few weeks.

Additionally, we believe we still have opportunities before us to improve our production efficiencies and continue to improve our gross and operating margins. Although we do not expect to realize the full benefit of these cost reduction efforts in Q1, we do expect to benefit the full value of these initiatives in fiscal 2010. Operator, we would now like to open the call up for questions. Jamie?

Thank you, sir. (Operator Instructions). We'll take our first question from Glen Wortman with Sidoti & Company.

Good evening guys.

Hi, Glen.

Looking at the first Q forecast, can you break down what your expectations are between the national accounts, the partner business and this go-get business?

Glen, I'm going to back off on breaking it down to that level at this point.

Okay. And moving on to the stimulus money and now we're looking at a possible comprehensive energy bill in Congress, can you talk a little bit more about the potential impact on your business? I know you were looking at street lighting and perhaps some other initiatives.

The great thing about the fiscal stimulus plan is that nobody yet really knows how it's going to unfold at the end of the day. The interesting thing is it's actually creating a little dislocation in the markets because some people are holding back from undertaking projects. Because they don't want to pull the trigger too quickly if they know they're going to get fiscal stimulus funding. Our customers are holding back just as much due to the uncertainty as due to the economy.

With that said, the overall impact is going to be a net positive. There's several ways that we've mapped out on how it's going to benefit our business. There's clearly -- on a national level, there's about $3.2 billion going towards energy efficiency and conservation which is going to be distributed to the states in the form of block grants. Those are actually going to probably flow down to individual municipalities and communities and be deployed towards street lighting initiatives, schools, ice rinks, gymnasiums and other public type buildings. Obviously, our street lighting product aligns very well against that opportunity.

Moving back to the federal level there's another $2.9 million worth of funds that is going into sort of a category known as energy program funding and that's going to be split between helping cite renewable manufacturing facilities in various regions, helping retool old metal bending manufacturing companies to become renewable and green in focus. But also about a third of that is going to go towards retrofitting existing industrial and commercial buildings with energy efficient technologies. That is where there's going to be a great deal of opportunity for Orion.

At the State of Wisconsin, about $55 million is coming into the state for that program. About a third of that, we anticipate is going to go directly towards funding energy efficiency projects at the commercial industrial level.

Okay. Thank you for that. And then finally, can you just give us a little sense of your cost assumptions moving into 1Q, maybe on the operating expense line?

Yes, Glen, this is Scott. Certainly, we're in the process of the cost reductions that I've already spoken to. What I can tell you year-over-year at least is that of that $2.4 million roughly $1.5 million of them will impact the operating lines in the future. In the short-term, we're being what I believe is conservative and prudently so around our Q1 expectations. I would answer that by saying that we're not anticipating any benefits in this first quarter yet of any substance, given some severance costs.

All right. Thank you for your time, guys.

We'll take our next question from Eric Stine with Northland Securities.

Hi, guys.

Hi.

I was wondering if I could -- just a bookkeeping issue. Could you just give us the breakdown in the quarter between product and service revenue and then maybe the margins on both lines?

Sure. For the quarter, service revenues were 21%. And then on the margin line, our product margins were 30%. Certainly, as Erik spoke to about our factory capacity that was driven primarily, Eric, by under-absorbed costs and our expectations, not knowing necessarily that those orders would be delayed. Then our service revenue margins were 31%.

Okay. I'm sorry, and I just missed the percentage breakdown between the two. Is it the typical 90/10?

No, actually our service revenues in the quarter were 21%.

Okay. I got you. Thanks for that. I was wondering if we could just talk about the $8 million that slipped and was the reason for the April pre-announcement. I think you indicated that the $5 million, the larger of the three that that was on track and that the $2 million and the $1 million projects were -- you thought that they either had shipped a portion or would ship shortly. Can you just talk about those? Do you still feel like those three projects will hit in the first half of 2010?

Yes. As we actually -- in the press release we issued, we delineated that we've already received 15 purchase orders for about $1.5 million of business. That's tied to the $2 million customer that we referenced. I'm hesitant to go on record as saying this, but the other $1 million customer we've got verbals. We've communicated that we've got sign-offs. We're just waiting for receipt of the actual PO at this point.

The $5 million tranch of business is -- we're working on them. We've had great conversations. We're revising proposals and refreshing proposals to get fresh numbers in there. All indications are that that deal is back on track and we're expecting it this year. Again, I just -- given the way we got burned on this one in Q4, I'm really hesitant to tell you exactly when it's going to hit.

Okay. There's definitely some uncertainty as far as timing first half, but you still are confident that it's in fiscal year 2010 that we should see that?

That's what we're being lead to believe, yes.

Okay. And then last thing, can you just update us on your CapEx plan for fiscal year 2010 now that your new headquarters is done and some of the things in manufacturing?

Sure, Eric. We're looking right now in the range of $2.5 million to $3 million. We still do have some residual building expense that will trickle into 2010.

I've mentioned in the past, our ERP system, we're continuing to proceed along that path. We also recognize we've got some other system infrastructure costs that we're evaluating, but it will certainly be less than the $13 million we spent in the current year.

Okay. Thanks a lot.

That does conclude today's question-and-answer session and that also does conclude today's call. We do thank you for your participation.