Orion Energy Systems Inc (OESX) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Orion Energy System's second quarter 2010 conference call. (Operator instructions) This call is being recorded. If you have any objections you may disconnect at this time. I'd now like to turn the call over to Victoria Paris.

Victoria, you may begin.

Thank you, Sarah, and thank you for joining us for Orion Energy Systems fiscal 2010 second quarter conference call. With me on the call today are Neal Verfuerth, CEO, Jim Kackley, President and COO, and Scott Jensen, CFO.

Before we begin, I will 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 are generally identified as such, because the context of such statements will include words such as believe, anticipate, expect, or words of similar importance. 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 our filings with the SEC, except as described in these filings, we disclaim any obligations to update these forward-looking statements, which may not be updated until our next quarterly conference call.

Now, I'd like to turn the call over to Neal.

Thank you, Victoria. First, I'd like to welcome everyone to the Orion Energy Systems fiscal 2010 second quarter conference call.

Let me begin by discussing a few highlights from the quarter before moving to a more detailed discussion where the (inaudible) on how Orion is positioned to take advantage of these trends.

As we reported earlier this afternoon, we exceeded our second quarter guidance reporting revenues of $14.6 million and a net loss of $0.06 per diluted share. Additionally, we realized positive operating cash flows for second quarter fiscal 2010. I believe the sequential improvement in our results show signs of stabilization in the market and actually a renewed optimism amongst our customers as we're seeing them actually starting to free up some of these CapEx budgets that have been frozen for the last several quarters.

Going forward in our attempt to give our investor base a little more visibility into how we see things, we're going to start reporting our bookings for the quarter.

Scott will provide a more complete definition of the bookings in his commentary, but I wanted to spend a few minutes setting the stage for how we measure our results.

Total bookings for the quarter were $20.3 million, including $2.4 million of our Orion virtual power plant supply agreement, which provide future recurring revenue for up to five years. Given the increasing number of OVPP deals we are completing, we believe this number more effectively communicates how we measure our performance on a quarterly basis.

Let me quickly review a few highlights from the quarter. First of all, we signed a new major customer with a large facility footprint across North America. The significance of this was this was a customer that we talked in terms of the integrated system right out of the shoot as opposed to looking at a phased approach for layering in our technologies. So the first POs from this customer included the Modular high intensity fluorescent technology, the InteLight wireless controls and the Apollo light pipes.

Second one of our national accounts, a global company, looking to utilize the best available technology in energy utilization and optimization invited Orion to participate in a competition to retrofit facilities in China and Chili. We are pleased to say that we demonstrated our thought leadership and our ability to deliver on the promise of energy savings without compromise and our technology was chosen as the vendor of choice for both of these projects.

We also gained traction selling our broader integrated system offering. I'm pleased to report that during the quarter we shipped more than 1,300 Apollo light pipes, which nearly doubled the amount of light pipes we've sold to date.

From a direct sales perspective, the national account business is starting to ramp up. Indications are that CapEx budgets are starting to loosen up and our contacts, many that are new to the organization or to the positions, are engaging in conversations with respect to increasing their overall energy cost reductions.

Our team is ready to have that discussion armed with a better training and marketing materials that we developed over the last several quarters and many of our established customers that have not purchased anything in over a year are starting to send purchase orders in again. We're ready to deliver these products quickly.

On the wholesale business side, contractors and partners are once again starting to bring in larger deals as their own customers increase spending as well. This business is more readily saleable and historically been a higher margin business for us. As such, we continue to enhance their effectiveness through training programs at Orion University and teaching them to sell the Orion way.

Equally important, the general market trends are creating the perfect storm of opportunity for Orion. In spite of the slowdown, ongoing concerns over secured low-cost energy, great reliability, emissions and environmental sustainability continue to beg for more energy efficient technology and solutions.

Additionally, governmental policy and legislation, in particular the energy bill is making its way through congress, is likely to benefit Orion no matter what form it finally takes. What's key to this discussion is that our solutions are in the sweet spot of these emerging trends. As many of you know, I visited the White House twice in the last several months to discuss this issue amongst various officials, legislators, and industry counterparts.

As leading power technology enterprise, our energy efficient and direct renewable technology will permanently reduce the need to generate, transmit, and distribute electricity. These save our customers significant dollars in energy cost without compromising their operations and we deliver capacity to the grid during peak hours without costly and cumbersome transmission issues that are a result of other energy solutions and many renewables in the market today.

Each and every member of our workforce here at Orion is committed to our vision of taking our customers from being many largely inefficient consumers of energy to completely off the grid should they decide to go the distance with us into the future.

The successful deployment and results of our technology in our large install base has positioned us as energy experts and our customers are now looking to Orion as the go-to source to advise them on how to continue to improve their energy utilization and optimization in their operations and meet their commitments to sustainable business practices. These strong customer relationships are part of our core strategy going forward.

We have the opportunity to sell to our customers the additional -- the existing customers the additional InteLight controls, the wireless devices, the Apollo light pipes, at those customer sites that have already been proven what Orion can do for them with the Compact Modular what has been referred to in the past as phase one, our HIF lighting system.

Additionally, the HID retrofit opportunity alone stands at 26 billion square feet of real estate below the roof of commercial industrial space that we are pursuing to further expand our base of customers.

Our technology has demonstrated time and time again the ability to deliver to our customers $0.38 per square foot in energy cost translating into reduction of more than 6.5 pounds of carbon dioxide or avoided [emissions] into the atmosphere, and electricity consumption of $4.9 kilowatt hours per square foot annually.

To date, we've retrofitted nearly 807 million square feet, representing more than 5,000 facilities across North America.

We also have an opportunity to further penetrate our install base through the sale of our next generation products, such as our wireless controls, direct renewable, Apollo light pipe and exterior lighting fixtures, as well as other new technology we're exploring.

These are exciting times for Orion and our customers and we look forward to updating you as we move forward. With that, I'll turn the call over to Jim Kackley.

Thank you, Neal. As many of you know, my role recently changed from being a Board member to Chief Operating Officer, which brings with it a different perspective on a company. So I want to spend a few minutes today discussing my initial perceptions since stepping into my new role in July.

I'll also discuss what we see as barriers to entry into our position in the marketplace, the operational organizational initiatives already underway, and my area of focus going forward.

After being completely immersed in Orion's business over the last three months, I continue to be impressed by the caliber of talent within this organization. Innovation is at the heart of everything we do and employees all level share a passion for solving problems by developing technology and services that will take our existing and potential customers off the grid. They're creative, smart, hard working and understand the enormous opportunity before us.

Orion's aggressive R&D strategies far exceed those of our competitors and the result is a smart product line that outperforms in the marketplace.

Testimony to this is that Orion has won jobs lately retrofitting facilities that had recently been retrofitted with competitors' fluorescent technology.

I've also spent time with customers and I see a lot of others in the business world. It's clear to me now that the discussion of energy efficiency is a top priority for businesses as well as for our administration.

The converging macro trends make it almost irresponsible for companies to avoid talking about how they can reduce not only their energy consumption, but also their strain on the grid. Oftentimes stakeholders are asking for it, in some cases pressuring corporate management teams to act sooner than later.

Given all this, I'll share what I see as barriers to entry. Neal and the Orion team have worked diligently over the years to create a position in the marketplace that is well armored with more than 5,000 facility retrofits and over 800 million square feet, including multiple national rollout projects, we've developed sound relationships with our customers and have perfected a set of skills that are in sync with their needs and unmatched in the industry.

Our customers trust that we will bring solutions to their energy challenges, that we'll deliver on our promises, and we won't disrupt their operations.

Our experienced technical services group houses the unsung heroes of our operation. These project managers are on the front lines of our facility auditing process. They're the face of Orion to facility personnel and contractors and the reason we deliver on promises under tough timelines with a vast array of customer businesses and personalities.

The modularity and integrated nature of our product line is protected by 22 patents with 23 pending and the fact that it outperforms other technology in the marketplace is a testament to our position as innovators and thought leaders.

Our state-of-the-art vertically integrated manufacturing capabilities include the ability to customize products to meet the unique needs of our customers and deliver within a two-week timeframe.

Neal often says that in the power technology business, time is money. When we put a proposal on the table for $50,000 in energy savings a month, there is a three-month delay in starting a project. That's serious money.

My focus moving forward is to build on an already strong foundation within the Orion team by identifying areas to increase overall efficiency and productivity.

My job is execution, helping to grow revenue and building operating income. To that end, we're making changes where necessary in our organizational structure to increase the lines of communication within our teams across departments.

We recently promoted Jennifer McKew to Vice President of Sales. Our decision to promote from within for this role again highlights the caliber of talent within our organization. Jennifer is tasked with optimizing the sales organization structure and processes, strengthening an already significant asset of Orion.

We hired Stuart Ralsky as our Senior VP of Human Resources. Stuart's extensive education and organizational psychology and experience in leadership development positions us well to further develop our existing talent. Stuart and I will work together closely to build an organization of human capital that is well prepared for the growing opportunity before us.

In August, we created Orion Technology Ventures, or OTV, a division of OESX, and we appointed John Skrovonty as President. The OTV division is a small group that specializes in exploring and deploying advanced energy systems such as solar and wind technologies and capitalizing on already established customer relationships. Orion Technology Ventures will conduct research on renewable technologies, make recommendations regarding the technology's viability, develop commercialization tactics, and ultimately deploy the technology into Orion's sales engine.

For two years, we have researched photovoltaic technologies. One of our engineers has worked nearly full-time researching PV and LED technologies, both based on semiconductors.

Now, OTV is completing our research with three test projects. The installation of these systems will help us answer technological, installation, and economic questions before determining how photovoltaic technology fits into Orion's overall business plan.

The creation of OTV was driven by customers who were looking to Orion for solutions to generate electricity on site to further reduce their carbon footprint and their dependence on the grid.

One of our competitive advantages as a Company is our sales engine and our continued focus remains on further equipping our sales team with the necessary resources to capitalize on the significant opportunity ahead within our install base and beyond.

Additionally, we have made significant progress on installing [Nuvision], a software platform designed to simplify and streamline our highly specialized business processes. The functionality of Nuvision will help drive our business forward with more efficient alignment of processes within our business segments.

Neal and I are encouraged by our results during the last quarter. The fact that we exceeded guidance, we're generating positive cash flow from operations, and that we can provide revenue guidance for Q3 at 13 to 23% higher than Q2 is proof that we're on the right track.

Now I'd like to turn the call over to Scott for a quick review of the financials.

Thank you, Jim. Our reported revenues for the second quarter of fiscal 2010 were $14.6 million compared to $18.8 million for the second quarter of fiscal 2009, which represents a decrease of 22%. This decline in revenues was primarily driven by the continued impact of the overall economy on our wholesale and retail customers, as well as the increase in our financed customer deals.

Partner revenues for the quarter were 43% of total revenues, up from 32% of total revenues in our most recent first quarter.

On an annual basis, we continue to expect that partner revenues will contribute approximately 40% of our total revenues.

As Neal mentioned earlier, our financing or OVPP deals, continue to gain traction. During the second quarter of fiscal 2010, we secured 31 new Orion virtual power plant mega watt supply contracts, representing gross income streams of $2.4 million.

Revenue for these customer projects will be recognized across the 60-month term of the agreements. If these projects had been structured as cash transactions, Orion would have recognized $1 million of incremental revenue within the quarter and reduced watts per share by approximately $0.02.

Bookings for the quarter were $20.3 million, including $2.4 million of OVPP supply agreements versus $20.2 million in the same period last year.

For the six months ended September 30th, bookings were $35.8 million, including $4.7 million of OVPP supply agreements, compared to $33.6 million during the first six months of fiscal 2009.

Since this is a new metric we will be providing, let me give you some color on how we define our bookings. Our reported bookings have two components. First, our cash bookings are based upon customer purchase orders received in hand. Second, our OVPP bookings are based upon the gross future revenue streams over the expected life of the agreement.

We consider an OVPP contract booked-to-business upon the customer's execution of the contract agreement.

Given the volatility with revenue recognition, including the timing of project completions and the increasing volume of longer term recurring revenue contracts, we believe that our bookings provides a better indication of the performance of our sales team.

Service revenues in the quarter accounted for 6.2% of our total revenues. Service revenues were down as a percent of total revenues for the quarter as a result of reduced turnkey revenue projects from our first quarter and an increasing backlog of projects in process at quarter end. This backlog is simply driven by the timing of project starts and completions.

Our blended gross margin for the second quarter was 32.6%, down from 33.8% in the comparable prior year period.

Our gross profit dollars decreased $1.5 million to $4.8 million for the second quarter of fiscal 2010 compared to $6.3 million in the second quarter of fiscal 2009.

Our product margins for the quarter were 33%. This compares to product margins of 33.6% for the second quarter of fiscal 2009.

We are very pleased with the improvements generated in our second quarter on our product margin line as product margins were down only 60 basis points despite the 20% year-over-year decline in product revenues.

We've addressed production headcounts, streamlined our operations to improve efficiencies, and have worked hard to minimize discretionary spending and premium costs like overtime. These cost reduction efforts and improvements are key to paving the way for continued margin expansion with the opportunity to leverage more volume through our facility in future periods.

Our service margins for the quarter were 26.2% and were within the normal expected range.

G&A expenses for the quarter were $3.1 million or 21.5% of revenue versus $2.9 million in the second quarter of fiscal 2009 or 15.4% of revenues.

During the second quarter, we incurred over $300,000 of charges related to write downs of long-term investments and receivables risk. The impact of these charges was just over $0.01 on our after tax earnings per share.

Additionally, in fiscal 2010, we continue to incur billing occupancy costs for our corporate technology center of approximately $250,000 per quarter.

Sales and marketing expenses for the second quarter of fiscal 2010 were $3 million or 20.3% of revenues, compared to $2.7 million or 14.8% of revenues in the prior year period.

As we have discussed on prior calls, we have continued to invest in revenue-generating opportunities. The increase in expenses from the prior year was due to compensation costs resulting from headcount additions focused on opportunities in utility, governmental, outdoor lighting markets, and technical resources to support our controls product offerings.

R&D expenses for the second quarter were $492,000 or 3.4% of revenues, up from $373,000 or 2.0% of revenues in second quarter of fiscal 2009. We are committed to continuing to invest in new product opportunities and further improvements within our current product offerings.

We remain optimistic about the opportunities around our exterior products, smart motion controls, and other new product developments.

A loss from operations for the second quarter of fiscal 2010 was $1.8 million, decreasing from income from operations of $298,000 in the prior year period.

Interest expense for the quarter was $74,000 versus $41,000 in the second quarter of fiscal 2009. And interest income for the second quarter was $76,000 versus $550,000 in the second quarter of fiscal 2009.

The reduction in interest income was due to declines in market rates and also due to the change in cash balances over the last 12 months resulting from the execution of our share repurchase program and the construction of our technology center.

Our income tax benefit for second quarter of fiscal 2010 was $430,000 versus income tax expense of $354,000 in the prior year second quarter.

Our annualized effective tax benefit rate at quarter end increased slightly to 16.5% from our prior quarter benefit rate of 12.4%.

This increase in benefit rate resulted from a decrease in non-deductible stock option expense, which was driven by reduced headcounts as a result of cost reduction initiatives and an increase in federal tax credits that are available to us.

Our fully diluted loss per share for the second quarter of fiscal 2010 was $0.06 on weighted average fully diluted shares outstanding of 21.7 million shares. That compares to fully diluted income per share for the second quarter of fiscal 2009 of $0.02 on weighted average fully diluted shares outstanding of 27 million shares.

As of September 30th, we had 21.7 million common shares outstanding. In addition, we have warrants and options totaling 4.2 million shares outstanding.

Turning to the balance sheet, we finished the quarter with $34.4 million in cash and equivalents and short term investments on hand compared to $34.1 million at June 30th.

We continue to maintain our investments in short term highly liquid vehicles to provide for maximum liquidity.

Our inventory balances in the quarter were $19.7 million, a decrease of $560,000 from our June 30th balance.

Related to our cash flows, we made very positive strides in managing our working capital and generated cash flow from operations of $2.5 million in spite of the net loss.

Additionally, we generated total cash flow in the quarter of $300,000 while continuing to invest in our business and the revenue opportunities that Jim outlined.

Turning to our outlook for the third quarter, we are anticipating revenues to be between $16.5 and $18 million.

Earnings per share for the third quarter of fiscal 2010 are estimated to be between a loss of $0.03 and earnings of $0.01 per diluted share.

With that, I'd like to turn the call back over to the operator for questions.

Thank you.

(Operator instructions)

We'll take a question from Glenn Wortman with Sidoti & Company.

Can you guys just talk a little bit about -- give more detail on where you saw the improved order rates during the quarter and how those order rates are tracking so far in the present quarter.

We're definitely seeing an improvement from what it has been over the last couple of quarters and are optimistic that the order will be consistent with the guidance that we put out there for the next quarter.

Okay. Do you expect to stay cash flow positive in the second half of the year?

We're certainly working hard to that end, Glenn. Having said that, we're not ready to commit to an annualized number and we also are very cognizant of our cash balances and putting our cash to work in the areas where we think it brings the greatest return to our shareholders.

Okay. And then, just moving on to everyone has been talking obviously about the Stimulus Package for a long time. Can you just talk a little bit about those ongoing power projects you've referenced in the past and are you getting any traction with some of those newer product lines, the street lights and the parking lights?

We're getting some traction certainly that all of these various sites are going through is working out very favorably. I just saw a very interesting article, actually almost a white paper of sorts come out from the Dark Sky Association. Essentially their latest recommendation is for street lighting. The linear fluorescent is the best choice due to LEDs providing some adverse effect on humans and animals. So that certainly works out in our favor and Dark Sky is an initiative that's been in the works now for several years, way beyond what the Stimulus kind of was the catalyst to.

So, still the Stimulus, still a lot of uncertainty is just how the dollars are flowing and there's a lot of moving parts out there, but we have a lot of lines in the water and we're just going to keep doing what we're doing and we're optimistic. We've got the right product, we're talking to the right people. Now we just wait for things to run the natural course.

Okay. Thank you very much, guys.

We'll take our next question from Bill Nasgovitz with Heartland Funds

What level of sales do you need to break even in the business on a quarterly basis?

I think if you read into our guidance there, Bill, you would assume that that would be in the $17.5 to $18 million dollar range.

Do you expect your buyback to be active in this quarter?

We do not.

So you're husbanding cash?

We are for now.

Our next question comes from Brian Kramer, Roth Capital Partners.

A few of my questions have already been touched on. I might go back to one clarification. I know you mentioned the OVPP 31. Is that for the quarter or for the first six months?

That's for the quarter.

Okay, that would probably be smaller projects relative to some last quarter. Is that something that you're seeing? Do you expect that -- I mean last quarter I think it was about 16, but it was roughly the same size in terms of revenue. What's kind of the dynamic there? Is there -- read anything into that? -- is it just the way it worked out this quarter?

This is Jim, Brian. When I look at the list, there doesn't seem to be any particular pattern to it. I think as more and more people get interested and understand what we've got to offer here, I expect we'll continue to see a variety of levels of deals and perhaps some larger ones.

The outdoor lighting and the solar, you mentioned there was three -- Jim, I think you mentioned there was three projects. Were these all in the solar area, the OTV, the Orion Technology Ventures group was looking at? Were those all [PV] projects?

Yes, there were three PV projects that we're working on at the moment.

Is one of those Salindra or is that separate?

That's actually -- Salindra is a manufacturer. We're continuing to look at the different technologies, but the end users are other companies.

Scott, maybe if you could just go over the margin improvement again. One more time. I know -- I think you were saying less overtime. Could you hit on those again one more time.

Sure, Brian. The real key margin drivers certainly for us in the quarter and as we referenced on our last call, we did have some headcount reductions in our production facility, but really took the opportunity of what has been certainly as everybody is aware of a slower economy and taking the opportunity to really reorganize and reengineer some of our assembly stations and the product flow of product within the facility.

So we were able to get some efficiencies then around just throughput within the plant and really reducing premium cost where in the past we might have had to incur overtime to get the same number of fixtures out.

We've continued to really focus on areas of discretionary spending as well, but we're very pleased with the margin improvement that we delivered in this quarter.

Our next question comes from Eric Prouty with Canaccord.

Scott, I don't know if you might have mentioned this number earlier, I might have missed it, but what is the total value of the VPPs that you've signed up so far since inception?

Eric, we've got 67 contracts right now that we have signed with $6.2 million of gross future revenue streams.

Great.

Also, from a sales standpoint, guys. Do you have the team [base] as far as headcount goes that you need to execute in your plan or are you adding sales people at this time and just what's the current number you have?

Current number we have is 78 that are involved in our sales process and that includes everyone from those that are out calling on national customers to those that interface with our partners and contractors to those that work on warranties and all aspects of that.

Are we continuing to hire? I would say the answer to that is yes, very selectively. Our new head of HR is working with us on a process to really refine the way we select sales people so that we have as high a hit ratio as we can and we always look for really top notch people that might be available.

So we're continuing to look in that direction. The job that Neal has assigned me is to have the organization ready so that when we hit more growth than even the ones that we've commented on today, we're in a position to be able to handle it. So that's what our target is.

Great. And then, just a couple more questions, if I may. In the past, you've worked with utilities in helping to implement some of their efficiency programs (inaudible) were I guess seeing a little pickup in activity starting in that arena, are you guys seeing any interest out of the utility channels? Is there any opportunity there going forward?

Yes, Eric, this is Neal. Absolutely. I think some of the impetus behind these programs fizzled out a little bit when the economy slowed down and the utilities didn't have quite the same needs as they had just a year before that in meeting their demand requirements. But again, just like everything else, it's cyclical and it's coming back around again and I've had some very interesting conversations myself with some large utilities and I think they're starting to really view our value proposition as a big part of their advanced planning and meeting our objectives, because they just can't get the other generating assets they traditionally would put in place and permitted and all the other issues that they've been plagued with over the last couple of years. But they've had a little bit of a reprieve of sorts just over the last three quarters or so.

In a similar vein, any opportunity to link up and work with some of the larger esco-type companies to help them implement some of their projects, larger or government oriented projects that they work on?

Yes, actually, we've got a project going on right now, Eric, with the light pipe down to the military base and I think it's actually the second largest military base in the system. And that would be through an esco and we see that as an opportunity. I have had a lot of experience over my career dealing with the JCIs and Honeywells, et cetera, and I think we're going to start seeing more business from them giving the fact that not only do we have the product, we also have the ability to help deliver the savings [as their partner] bundled up package.

Great. Well, good. Congratulations on seeing some improvements here. Thanks a lot, guys.

Next we'll go to Jeff Osborne with Thomas Weisel Partners.

Thank you. And congratulations on the improved order trends. Just a couple questions for Scott and Neal.

Scott, you mentioned a couple of things on the G&A front with one-time expenses. I heard the $250,000 for the facility, but I missed something -- the other figure you gave. Was that a receivables write-off that you mentioned?

Yes, it was an adjustment for some receivables and a long-term investment that as we evaluated felt that that asset was imperative and we needed to make an adjustment. It was just over $300,000, Jeff.

And you wrote it down to zero, I assume, so there's no additional write-offs for that?

I don't want to specifically answer that, but we took a healthy charge.

Also for you, Scott, can you just mention what CapEx was for the quarter as well as depreciation and any preliminary reads? I would assume CapEx next fiscal year is substantially lower now that the building is complete and you've take the time during the slowdown to retool and configure pieces of the manufacturing line?

The G&A was $646,000 and then CapEx in the quarter was just over $700,000. Really right now as we look at the business and where we're investing our dollars, certainly the software projects, the ERP system, and some other opportunities that we have on the sales side to really provide more effective tools to our sales force is where we're spending our money. So that number has come down.

Having said that, we're certainly spending some resources in terms of human capital to look at new opportunities. So we'll evaluate those opportunities as they present themselves in the future, but you're correct. We've got a facility that is set up to run significantly higher volumes than what we've been experiencing and we're set up to be able to quickly turn orders in a growth mode and we don't need a lot of capital infused into our manufacturing facility and the tech center is in place now.

Just two other quantification numbers and then one more strategic question for Neal.

Historically you've given the units sold or shipped in the quarter, I was wondering if you could share that number. I know it may be a little misleading now that $1.0 million of revenue impact with the OTV product line or sales channel, but it would be helpful just to get a sense of any pricing pressure that you might be seeing in the market. If you could share that number as well as the bookings that you've done thankfully on a quarterly basis.

Sure, Jeff, I don't have the units shipped in front of me, but I will certainly circle back with you. As I would say in regards to pricing, we're not really seeing anything different in the marketplace right now. Competitive behavior or any pricing pressure that's outside of the normal negotiation process on selling CapEx equipment.

Then the last quantification number, I think historically too you've talked about var and channel partners and this call you mentioned 40% of revenue going forward. How do we think about that channel strategy. Is it more geographic footprint, just kind of shotgun spreading it out, or are you going more targeted, one or two guys per region? Just how do we think about both of -- the exact number which you've given in the past -- but strategy under Jennifer's leadership.

Hey, Jeff, this is Neal. We actually have just in the last probably six months or so refined the vetting process. There's actually an application process that the individual that we're considering or the entity that we're considering to sign on goes through and we look of course geographically. We don't want to right out of the shoot create a bunch of channel conflicts for ourself with a bund of Orion people competing in the same turf.

So we look at geography, we look at what they have through their own customer base, and as things move forward one of the things we're doing is we've got our curriculum director here for Orion Univeristy. We're actually looking at a testing out procedure to make sure that as our technologies evolve and the product line expands, they have the right technical competence and bench strength to be able to service the market.

So I guess the essence of it is we're getting a lot more sophisticated in selecting the partners and making sure that not only do they meet the initial criteria but they can go the distance with us as we see our business evolve.

Also for Neal the more strategy question. Can you just talk about the nature of the three PV projects that you're doing. A, are you doing more EPC or are you just doing site design in combination with maybe a roofing partner that you've already worked with before? Just kind of what the strategy there is, but more importantly just as we move forward and fast forward this two to three years out, the solar installation business and integration for commercial buildings is a huge drain on cash flow for companies involved in that industry as people grow. So how do you intend to handle inventory management of inverters and modules and leverage the balance sheet, which Scott alluded to, while using for strategic options -- I assume this is one of them, but just how do we think about how much resources you're willing to put forth with this and actually what you're specifically going to be doing?

Right now, Jeff, we're really still in the testing stages, but what I think I can share with you from what I've seen out in the marketplace from some advantages that we have that others don't have from being the integrator is I'm hearing many, many times where the integrator is buying an option for access to the roof.

Given the fact we've got three quarters of a billion square feet of customer space that we've already converted the inside of the building and we've done them right and they've saved a lot of money. It's a much easier sell for us to go to the top side of the building. So I think that's one of the advantages that will save us from having the cash flow drain that many of the others are seeing out there. And I think we've developed a core competency here in doing projects from coast-to-coast in a variety of buildings and fast paced environments like a Coke bottling facility or an Anheuser-Busch brewery or Miller brewery or something, which gives us a leg-up on these guys that just don't have the experience in going across a national footprint.

Once you've worked on the inside of these fast paced buildings successfully and done it and kind of honed your skills working on the tops out on the roof where there's nothing else going on is pretty much a piece of cake.

Jeff, the other thing to is, Jeff, and I'll just leave you with this last thought. The other objective of Orion University is not only to get a lot of these contracts that sell the Orion product, but also to teach them about our business so they become our integration partners out there that are on the ground in market. So again, we don't have all the T&E and all the other expenses, the non-value added expenses that people are trying to do this across the national footprint have from one location.

So it's more right to think about this as an additive sale to the install base as opposed to something you're going to be marketing on a national basis going after the hundreds of seller integrators that are already out there? Is that fair?

That's absolutely fair.

Okay. Perfect. Thank you.

And with no further questions in the queue at this time I'd like to close out the call. We do appreciate your attendance and have a nice afternoon.

Thank you.