Orion Energy Systems Inc (OESX) 2011 Q2 法說會逐字稿

Good afternoon, and thank you for standing by. Welcome to Orion Energy Systems' second quarter 2011 earnings conference call.

(Operator instructions.)

This call is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to Mike Harris, Vice President of Investor Relations.

Please begin, sir.

Thank you, Operator.

Good afternoon, everyone, and thank you for joining us for the Orion Energy Systems second quarter fiscal 2011 conference call.

Once again, my name is Mike Harris. I recently joined Orion as the Vice President of Investor Relations. With me on the call today are Neal Verfuerth, Chief Executive Officer, and Scott Jensen, Chief Financial Officer.

Please note the earnings press release issued today includes a section that briefly discusses a new supplemental information document that was posted to the Company's website. This supplemental information provides additional details and analysis on the Company's financial performance for the second quarter and year-to-date results. We believe providing this additional information should lead to a more comprehensive understanding of Orion's performance during the second quarter and year-to-date fiscal 2011.

Due to the introduction of this additional supplemental information, Neal and Scott's commentary during the call this afternoon will be more abbreviated relative to previous calls. Both of them will focus their discussion on topics and matters that we believe are more strategic, value added and most incremental to analysts, investors and other interested parties.

I will now 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 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 Verfuerth, Chief Executive Officer of Orion Energy Systems.

Neal?

Thank you, Mike.

Good afternoon, everybody. Certainly happy to be on this call today since we have announced our record contracted revenues for this second quarter fiscal year 2011. I'd like to also welcome Mike Harris aboard as our new VP of Investor Relations, as he just stated.

Also as Mike stated, we're going to spend more time, Scott and I, but specifically me talking about where we're going as a company and just what the overall strategy is that's going to help us get there and meet the goals that we've been talking about as an organization going way back before the IPO took place several years ago.

First and foremost, we're going to continue our development of and building upon the portfolio of products that we have that will help our customers go from where they are today, many of them largely inefficient, to taking them hopefully off the electric grid. We have a portfolio of products that are proprietary, many of them, and using our ability to master the thermal and optical properties of the product we can continue to deliver high-performance lighting that is more efficient, delivering more light output for less energy input than anything else on the market today as we continue to prove our technology out in bake-offs in customers' facilities. We have numerous patents protecting this technology, both design and utility patents.

We've been working and continuing to refine our manufacturing operations. We have a vertically integrated plant here in Manitowoc, Wisconsin, that allows us to provide our customers a promise of a two-week delivery, and we can do that and still compete with any other plant anywhere in the world as relates to the overall cost of goods sold and still be able to ship here from Manitowoc and get product to our customers within three days' shipping from any point in the US from here at Manitowoc.

We continue to develop our infrastructure internally, IT, customer service and our technical bench, so that as our sales ramp up we can support these sales and not have to be concerned about compromising the customer experience of Orion and tarnishing our brand that we've worked so hard to achieve this prominent place in our space.

Last but not least, with all these things in place we're putting a lot of emphasis on getting what I call feet on the street, getting more people out there trained up that can go out there and represent the Orion product line and follow our prescribed system in how to sell the product. In the last eight months we've actually run through about 60 new salespeople that are now on the street talking about Orion, telling our story, and, most importantly, telling the story exactly the way we want it told from the time the initial call takes place all the way through the sales process to the ultimate close, and then after that we've even got it prescribed as it relates to how to build upon that success with our environmental stewardship awards and referral programs, etc.

While we're working with these feet on the street we're also starting to better leverage utility company relationships. The dollars for demand-side management are starting to once again flow in really unprecedented levels. As an example, I had a meeting recently with some folks from Exelon Energy. This is the consulting company that's managing the program for Exelon. And what we're seeing from the 2008 to 2010, as an example, those three years their goals for megawatt hours were 920,100, and they had a budget of $247 million. We're seeing now for years '11 through '13 a $675 million budget and a 3 million-plus goal. So we've got a 3X increase in goals and 2.5 increase in the dollars flowing to these programs. So Orion is very well positioned now with these additional feet on the street to capitalize on these outside dollars that help to fund these programs and get customers to pull the trigger and make the decision to go ahead with one of our systems.

As relates to financial goals for the fiscal year, the balance of the fiscal year, actually, we've got some goals out there that are going to help our financial performance significantly. First and foremost, we've got a planned 30% inventory reduction between now and the end of our fiscal year of March 31. We're very comfortable right now that the shortage in electronic components that have existed for the last 18 months or so that's really just played havoc in the overall supply chain is starting to ease up. So we're very comfortable right now that we can start to delete these inventories that we've had that were really strategic in nature so we weren't in a position to run out of ballast or run out of controls and, again, not be able to make that commitment, that promise to our customers to deliver within the two-week time period that they're accustomed to.

We've got already identified cost reductions, SGA and COGS, that we believe very comfortably we can get another $2 million there in savings and cost reductions.

So the plan is working exactly as we had laid it out, again, as I said, prior to the IPO. A little bit of setback, of course, with the economy, but we're targeting these goals that we have and we are prepared to essentially reaffirm our guidance for the year that we stated at the beginning of the year. And what we're seeing out there now in talking to customers is things are definitely loosening up, and I think just what's represented in our contracted revenue is the best testimony as to what we're seeing out on the street today. Things are starting to move again in a favorable direction.

So with that I'll turn it over to Scott.

Thank you, Neal.

As Neal mentioned, we are reaffirming guidance for fiscal 2011 of contracted revenues between $100 million and $110 million, GAAP revenues of $78 million to $84 million, non-GAAP earnings per share of $0.25 to $0.33, and GAAP earnings per share of $0.02 to $0.10.

Let me spend a few moments discussing how we achieve our GAAP top-line guidance for the back half of this year. As reported for the first half of fiscal 2011, our GAAP revenues were $28.4 million, and we enter our fiscal third quarter with a record GAAP cash backlog right now of $13.7 million. So we're very encouraged, again, evidence as to Neal's comments about improved environment, customers placing purchase orders and the success that Orion is encountering.

Additionally, earlier this year we talked about an investment in solar inventory based upon a purchase price opportunity. Orders for solar cash deals were received in early October totaling $3 million. If you look at our supplemental information you'll see that our expected revenues from completed OTA and PPA contracts will deliver another $2 million in the back half of fiscal 2011. And within our national account base we've identified an additional $4 million of business from customers who have made commitments within calendar 2010.

The sum of all of these adds up to a total of $51 million that we've identified right now as orders that we have either in-house or high probability of receiving. To deliver on the midpoint of our GAAP guidance, range, then, of $81 million, we need an additional $30 million. That hasn't taken into account any of the impact as Neal spoke about earlier increasing feet on the street in our partner channels, and $30 million spread out over the back half of this year, we feel very comfortable that we can deliver on that.

Additionally, October order flow has been very solid. We've been very pleased with the start of this quarter in terms of new contracted revenues, and we're encouraged by dialogs that we're having with customers who are planning for calendar 2011 budget. So we feel very confident in our ability to hit our GAAP guidance.

On the earnings side, Neal mentioned the cost reduction plans that we're putting into place. This will allow us to be able to deliver on our bottom-line guidance, as well.

I'll touch briefly on a few financial highlights for the second quarter. Details of our financials were provided in today's earnings release along with the supplemental information that Mike referred provided on our website. But let me touch briefly on a few key items.

For the second quarter, our wholesale channels contributed 53% of our total revenue in the quarter, the second consecutive quarter we achieved greater than a 50% contribution. For year to date we're also at a 53% contribution, so we're encouraged by the traction and success that we're seeing in being able to scale our partners across the country.

Our gross margin for the second quarter was 36.2%, over 350-basis-point improvement from the prior year second quarter. This is testament to our manufacturing cost reduction efforts from last year, where we've continued to sustain mid-30 gross margins despite our relatively low equipment utilization. We're doing this by managing our production efficiencies, our premium costs for overtime and just improved throughput through our manufacturing facility.

Finally, let me briefly comment on our effective tax rate. If you take a look at our effective tax rate you'll notice that it went up on a benefit level. The tax rate as it stands today is very similar to our fiscal 2009 year, where we had similar pretax and earnings results, with two key differences, being that in fiscal 2011 we've currently been reserving for state tax credits where we do not believe we'll be able to utilize them within the time frame available to us, and a slight increase in nondeductible expenses due to increased sales and marketing efforts.

Our inventory levels increased in the quarter by $3.7 million from the end of our fiscal 2011 first quarter. In the second quarter, as Neal mentioned, we brought in an additional $2.7 million of electronic ballast inventories in response to concerns over critical supply shortages. We did this from a strategic initiative to make sure that we could support customer orders and the delivery promises and the energy savings promises that Neal referenced earlier.

Over the last 12 months we've made strategic investments in inventory of approximately $15 million, $7 million for the completion of our controls product rollout, which was completed in August, and, as Neal mentioned, we expect this inventory to start moving out and providing free operating cash flow. $2 million of that investment related to the solar inventory that I mentioned earlier, where we have orders in-house and we'll ship that product in the fiscal third quarter, and $6 million in an increase in electronic ballast inventory, again to protect supply-side issues. We expect to see inventory levels start to be depleted in the back half of fiscal 2011, as Neal mentioned, again providing strong operating cash flow to our business.

Finally, let me touch on liquidity. We finished September with $13.3 million in cash and $1 million in short-term investments. In addition to this liquidity, we have $15 million of availability on our line of credit with no outstanding borrowings. Moving into the back half of the year we also expect to generate free cash flow from our working capital.

In September, we're really excited about the closing of our first debt borrowing with a financial institution to fund completed OTA projects. This initial funding provided $2.4 million of cash at an interest rate of 7%. We believe the success of this initial deal validates our strategy and efforts that we can procure financing available at reasonable cost of capital, allowing us to fund these OTA projects and continue to grow our customer finance programs.

Ongoing, we continue to have conversations about larger capital deployments with large multinational banks, and on a parallel path we continue to have discussions with smaller regional banks, which are able to allocate capital in smaller tranches, similar to the success we had in September. We do believe that we'll close on additional financing during fiscal 2011.

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

Thank you.

(Operator instructions.)

We have a question from Glenn Wortman, of Sidoti & Co. Your line is open.

Yes, good evening, everyone.

Hi, Glenn.

Just kind of looking at the numbers here, your sales were down year over year, your core lighting business. You hear from some of your competitors that their retrofit business is up pretty significantly versus the prior year. Can you just give us a sense of maybe the disparity in performance on the core lighting business between you and your competitors?

I wouldn't really call it a disparity, Glenn. If you look at our contracted revenues in the quarter, we had a record quarter, and really it was timing issues for us. We received a large slug of orders at the end of September, and we'll ship those orders in our third fiscal quarter. So we're very pleased with the level of contracted revenues that we had in the quarter and that, I guess, the customer behavior that we're seeing going into the back half of fiscal 2011, as evidenced by the reaffirmation of our guidance.

Okay. And then, just looking at the contracted revenue, I think a big chunk of that, correct me if I'm wrong, about $8 million was from a cash -- from a solar power project.

Correct.

Is that right? Okay. So you think that type of project is a one-off? You think there's more of these projects out there? And when do you think -- when do you expect to realize the revenue from that particular order?

There are definitely -- Glen, this is Neal -- there are definitely a lot more of those projects out there. You know, that's one of the benefits that Orion has in this space as it relates to renewable opportunities. Unlike many of the players out there, we have an existing install base of some 6,000 facilities that we've saved these people, I think we just rounded $1 billion in a cumulative savings basis. We made a promise and kept a promise to them.

For us to go back there now and talk about renewables, it's an easier discussion to have than it is with one of our competitors greenfielding, and the track record that we have with them and an expertise, really a core competency in doing projects like we've done from coast to coast on what I would consider the more difficult side of the roof, the finished side of the roof, where all the production and distribution activities are going on. Now for us to go and do a project on the roof for somebody is really much easier for us to do and to scale than other people we see out there today, as evidenced with the fact that we've only been in the business in official capacity, that is renewable business, with our Engineered Systems Group, for about a year. We've been, of course, researching solar for several years before that. But we're really new to it, and I'd say we're already rising to national prominence as it relates to the amount of megawatts we have under contract already.

Do you expect to realize the revenue from that particular project in the third quarter?

I wouldn't anticipate we'll recognize all of the revenue from that in the third quarter, Glenn. Certainly we expect to ship the product. Solar installations and PV jobs, we typically expect that the revenue cycle on those jobs approximates 180 days, so six months. So we do expect by the end of the fiscal year that we'll recognize that revenue, but it won't all be in the fiscal third quarter.

There's a lot of moving parts with these jobs, and, again, that's part of the core competency I mentioned, that there's engineering work, there's load calculations, there are just a lot of things that has to go in. This is a major -- we're essentially installing a power plant on the customer's roof. So we take a very methodical approach to this rather than just slapping the stuff up on the roof and hoping for the best.

What we're seeing to date on all of our solar projects, we're actually running as much as 10% ahead of what our throughput calculations were prior to start of the install just based on the quality of job that our team in Plymouth is deploying out there on our customers' roofs. And now we see customers like Anheuser-Busch, as an example, signing on for the next phase with us. Again, no better evidence as to what kind of work we do and the systems that we deliver than having a customer place another repeat order. No better evidence --

How should we think about margins on these power projects relative -- solar power projects relative to your lighting business?

Well, certainly on the lighting business side, Glenn, we're able to deliver higher margins given our IP and our manufacturing input. We're working on improving solar margins. We've got projects ongoing right now related to installation that we've been testing and developing right here in Manitowoc with our own solar rooftop project, and I believe that we have the opportunity to start to approximate some of our lighting revenues, but they will be less.

However, the overall contribution, Glenn, the dollar amounts are significantly larger. We don't -- in my 25 years I don't think I've ever seen an $8 million lighting job. The amount of opportunity out there for the solar is significant, and it doesn't have -- place a burden on our manufacturing operations to be able to get those kind of top-line revenues and contribute to the overall company revenues. And it's one of those things that there's a large group of people out there that want to invest in renewables after they've made their buildings efficient, and they're going to buy solar from somebody. We'd just as soon it be from Orion, so we continue to be their energy partner not only for the efficiency but also on the renewable side of things.

And just the last question, so clearly that business is getting stronger for you, but just thinking about things sequentially, you also anticipate a significant improvement in lighting revenue moving from 2Q to 3Q. Is that fair?

I think that's fair given our backlog. Even outside of the solar order that's in our backlog we have a pretty heavy lighting backlog, too. For Orion, as Neal mentioned, when you make the promise of less than two weeks, your backlog is really never more than two weeks. So very unusual for us to carry in a record backlog, and we're -- based upon what we're seeing in terms of October activity we're very encouraged by expectations for Q3.

Okay. Thanks a lot for taking my questions.

Our pleasure.

Thanks, Glenn.

Thank you. Our next question is from Brian Kremer, of Roth Capital. Your line is open.

Hey, guys.

Hey, Brian. How are you?

Doing well, thanks. Okay, on the revenue line, obviously, there's been a question already. It came in below I think where a lot of folks were thinking. You obviously didn't provide any guidance on a quarterly basis and are maintaining for the full year, so I want to spend a little time on both looking at this quarter to understand it better and then the next two. So, Scott, we heard you and I think Neal also talk about things look good out there. I mean, obviously CapEx budgets are still a little tight. Your financing helps, but you seem upbeat, optimistic.

Is it a case of the numbers came in lower than when you were looking in the start of September and you were looking at your numbers, and obviously there was a quick turnover, and orders weren't coming in in early September, and then all of a sudden they came in in a rush in late September? In terms of this, the revenue, I guess I just want someone to make sure, the contracted revenue, that's just through the end of the quarter also, correct? And then I -- because I think you talked about also the beginning of October being fairly strong. So maybe if you could comment on those two, and then some follow-ups.

Sure. So, the contracted revenue number that we disclosed and talked about today was through the end of the second fiscal quarter, nothing to do with new business in October, front end. You know, it certainly is challenging to know exactly when a customer is going to place an order. So we would have loved to have had a lot of the activity that happened at the end of September happen at the beginning of September, but I think more important overall we received the orders.

We had a record quarter for contracted revenue. We've got a tremendous backlog right now of orders going into Q3. And we're just really encouraged. As Neal opened the conversation today, we're encouraged by what we're starting to see in terms of customers and their engagement and the activity of our partners and our scaling feet on the street. And so we are very optimistic and encouraged by what we're seeing.

Okay. Because if I look at the yearly change in how you guys now define contracted revenue, year over year it looks like it's up about $8.9 million year over year, and a big slug of that, the $8 million, obviously looks like it's coming from this large solar contract. So I don't know what other solar contracts might've been in a year ago, so I guess to go back to the earlier question about lighting and any -- I mean, it looks almost like it was a relatively flat year over year, maybe up slightly in terms of what you're seeing on the lighting side.

Brian, this is Neal. A couple of things just to kind of I guess calibrate this conversation. The team that's down at Orion Engineered Systems in Plymouth, Wisconsin, is really we took our A-team guys to get in more of this advanced technology, because not only are we talking about solar, but we're talking about our controls, our offerings in demand response, etc., so this is really the next wave for us. And not only does it provide revenue, but it also helps us create and maintain that real sustainable differentiation in the market rather than just being a lighting company. We've been telling people for years we are an energy company, and this is really now proof positive that we truly are an energy company, and that -- those solar sales help to foster and to bring in other business, as well, for our core business.

So now it's a matter of scaling the amount of people we have on the street, as I refer to the feet on the street. We had, approximately, from an outside sales standpoint, 15 people, give or take, as little as eight, 10 months ago, and now we have more than 60. So we're taking our A-team people, and not only are they working on the advanced technology but they're also assisting us in training and scaling up the amount of people we have so that these people that we put out there are eventually going to be as knowledgeable as what we have on our A-team. So we're just trying to replicate what we've done and been successful here with in Wisconsin throughout North America.

Okay. And then in terms of that, it sounds like those are all partners. Obviously I guess there was a comment earlier that some of the cost, SG&A costs you expect to be coming down, I guess, looking forward a little bit here. So these obviously aren't hiring a bunch of new sales folks. These are partners rather than new internal sales.

Right. Well, even right now, make no mistake about it, there is still a pretty substantial investment on our part required to assist in getting more people out there trained, so it's almost a double whammy if you think about it, Brian. We've got our people that we're taking off the street to help facilitate this training, but yet we're still seeing record contracted revenues. And the leverage is going to come now when we can take these skill sets and transfer this knowledge from this core group of people we've had for a long time amongst ultimately hundreds of people.

Okay. And then, on the next -- getting to your guidance for the full year, in terms of can you give us a sense of December quarter typically is your largest. I mean, last year there wasn't a big difference between your Q3 and Q4 relative to prior years, or at least '09 there was, '08 we're looking -- sorry, '07 there was a big difference, '08 -- '07 looked more like '09. Can you give us a sense of your feeling in terms of does it look more like an '09 -- I'm sorry, your fiscal year '10, where it was relatively flat between your Q3 and Q4 versus your fiscal '10, where there was a larger jump where you might expect it to be when folks were trying to spend CapEx dollars before the end of the year? Or, I mean, obviously I know it's early, but do you have any sense at this point?

Brian, this is Neal again. The only sense that I would have, you're looking at the traditional GAAP revenue, is I was having a discussion with one of the large investment banks talking about our financing activities, and he corrected me when he stated there's some $240 trillion sitting in corporate treasury right now just waiting for -- to see what's going to come of the future of the economy. So I think what you're describing over the last couple of years was that freeze on CapEx, where you traditionally would have kind of a purging of the budget at the end of the year people are just sitting on the cash.

So your guess is as good as any. That's why we're so encouraged, because that situation still exists. This conversation I had was just a matter of weeks ago. But yet we're still seeing the growth we're seeing on a contracted revenue basis, and that's why we've been so adamant about the value of our financing model, because we take that right out of the equation.

I'm still amazed today, Brian, quite frankly how many customers that have done two dozen facilities or three dozen facilities with us. They'll come through the facility here and say, "Oh, my gosh, we're saving so much money. I'll bet you can't make these things fast enough." And I'll remind them about the first couple of sales with them what it took, and then I'll say to them, "Well, why haven't you done your other 18 facilities?" And it comes down to the same thing, "Well, it's got to go through the CapEx budgeting process."

Okay. And then the solar, was it Solyndra? Is this $8 million project Solyndra, someone else? Can you say?

It's Solyndra.

Okay.

They are still by far and away our partner in this. We talk to other folks out there primarily just to know what else is out there so we're intelligent in the industry, but Solyndra is by far and away the best product we've seen on the market today. And when we're talking about an asset that we are promising is going to produce energy for the next 25 years, it's really important to us to be thinking in longer time horizons than just what is the price per panel per watt initial cost. Because even if it's a cash sale, Brian, the last thing you want to get is the phone call from somebody at year seven that says, "Well, this thing is so dirty it doesn't produce," or whatever, or, "It's causing leaks on my roof." We are looking at this as we believe it should be viewed as it's a power plant we're putting on their roof, and then when you're talking about power plants you're thinking in much larger time horizons than even the lighting retrofits.

And what's the longest now that a Solyndra project's been up and running that you guys have installed?

That would be our [AB1], and that's probably -- April, and we're actually seeing the throughput on a month-over-month basis. We're running about 10% ahead of what our projections were.

Okay. That's my next question. So it's performing as expected or better.

Sure. And one of the things about the Solyndra is the technology itself has been around for a long, long time. And then it comes down to installing on the roof and how do you seal out the moisture? And Solyndra just has a very robust design. We're also seeing with Solyndra, as we suspected our own test, a benefit in thermal performance as compared to the flat panels. The flat panels get pretty hot, so the thermal performance drops off.

Switching gears real quick, I think, have you seen any greater traction on the InteLite in terms of any other controls, outdoor lighting, anything to -- what kind of update can you give us there?

Yes, the integrated system as we talk about, and I think last time you and I were together we were talking about it, as well, essentially taking the compact modular light fixture and combining it with our InteLite controls. And what I think is really significant is the fact that we are just in the process of retrofitting one of our earliest adopters, a major retrofit. It's about 10,000 units across, I don't know, six or seven megaplants. We're actually taking out the original Orion product from '01, '02 vintage and still justifying to this customer, who has a very, relatively speaking, low cost for energy, using the OTA, and we're still showing him a positive cash flow, and we're also demonstrating the superior optical and thermal performance Orion has.

We're using our control system to create what we call a standby mode so the lights are running at only 130 watts but yet getting more light than what the first-generation Orion product was delivering down to the floor. So, not only is our market in the obvious sense replacing HIDs, but we've actually now validated the fact that we can go back to our earliest adopters that are now 10 years old and show them a new value proposition and cash flow even with the lowest rates. Imagine what we can do -- this is a $0.06 or $0.07 rate, imagine what we can do, Brian, in your neck of the woods at (inaudible).

Okay. Okay. Let me think. What was the -- okay. In the outdoor lighting, any traction, anything there?

Yes. You know, the first thing we had to overcome, of course, you're well plugged into this space, is we're not promoting LED. So that was the first thing. But it's interesting, the LED as it relates to the outdoor, in fact I sat in on a meeting, a presentation with one of our partners a couple of weeks ago to a company that runs about 100 (inaudible) stores, and the Focus on Energy people were there. They're not even rebating LEDs any longer. So we had to overcome this whole phenomenon LED, but now that we've done that and we've seeded the clouds we're up somewhere north of 5,000 units and climbing, and we're writing an awful lot of proposals out there for the outdoor.

The whole industry in my 25 years, Brian, it never changes. You introduce a technology. You validate it. And then you start seeding the clouds with various installations and kind of proving it out, and then you start generating pipeline. And the more pipeline you produce then it comes down to what's that gestation period and the closing ratio, and then you can get with a pretty high level of certainty what you're going to see out the other end as it relates to sales. And that's the same thing that's occurring with now the outdoor as what has happened in the early days with the original [luminator] product. First you have to prove to people you can actually do it, much like we had to do when we proved to people we could replace HIDs with HIFs.

Okay. And then, I guess, on that note, LEDs, you did have an announcement, I guess, in the quarter. You're doing some niche LED applications where it looks like they make the most sense, or they can make sense.

Actually, we've gotten -- I think right now we're probably 5,000 units give or take that we've produced, and the application is in freezers. (Inaudible), and, again, I think I've shared some of these with you as we've gotten together in the past, with (inaudible) the challenge is the basic physics. How do you manage the heat? So our tests, and we do exhaustive testing here, as you've seen firsthand, are suggesting that the only place you're going to get anywhere near the hours that the LED industry at large is claiming is in a freezer application at 20 below zero, so that's where we're putting them.

And we've put our product up against other product, and we're outperforming the other product very much, almost on a linear basis what we see with the fluorescent. But for right now the only place I can justify the investment and keeping the promise to the customer for longevity and light output is in a 20-below-zero environment, a constant 20-below-zero environment. So there we're taking that and the ability to use our InteLite and getting very aggressive with duty cycling and really kind of exploiting some of the attributes that the LED has that fluorescent doesn't have as relates to cycling endlessly and having full lumen output in a 20-below-zero application.

Okay. All right. Great. Thank you.

Thank you, Brian.

Thank you. Our next question is from Eric Glover, of Canaccord. Your line is open.

I was wondering if you could talk about the SG&A savings that you were planning on. I believe you used the -- actually provided a figure of $2 million in savings, and what was the time frame on that, and exactly where is that coming from? Can you just provide some detail there?

I referred to it in two areas, Eric, SG&A and COGS. And we've got things already identified. We've got some product modifications we've been working on for some time and have proven out and are comfortable we can now integrate them into our product and our manufacturing processes. And then we've got, again, a lot of investment we've had to absorb over the last eight, 10 months in training people. So when our guys are out training you're not -- neither one of you are really selling. So we're going to start to see some savings there. And we believe with some of the investments we're making in technology, as our sales ramp up, as they are now, we're not going to have to, on a linear basis, increase the headcount and payroll. So, overall, just to really -- it probably could be categorized best as efficiency gains -- people, processes and then in our COGS, or cost of goods sold.

Okay, so I'm trying to figure out how we should expect this to sort of flow through the income statement over the next, I don't know, two quarters, four quarters.

Yes, it's targeted -- I'd say to Neal's point it's heavily skewed on the manufacturing side, Eric. You can figure two-thirds on the manufacturing side and a third on the SG&A side. And these are all things that we're planning on implementing in the near term here so that we can get the biggest benefit out of the remainder of fiscal 2011.

Okay. And that is factored into -- these savings are factored into your EPS guidance for fiscal 2011.

They currently are, yes, which is why we did not change our guidance range.

Okay. And then second question was on the -- could you talk about the progress you're making in terms of securing additional financing? You did mention the one $2.4 million agreement, but sort of beyond that kind of progress?

Yes, we've got another deal we're working on right now, and a little less than that first deal, but again providing capital in. And we're continuing to, as I mentioned in my portion of the call, parallel path this. We're having conversations with larger banks about larger deployments of cash, but we're realizing, too, Eric, that they're ready to deploy $50 million of cash tomorrow. We don't have the portfolio of deals to be able to deploy that immediately.

So we're engaging in dialogs, planning for the future, and in the interim we feel that the best opportunity for us in the near term to be able to finance projects is to be able to target regional banks. So if you think of it, if you will, marrying regional banks up with our partners in their geographies where they can go in into their backyards, do OTA deals, and we've got a relationship with a bank there who knows the customer, is comfortable with the due diligence of the credit underwriting process, and is putting money to work in their local markets, as well. And that was really the success that we saw in this initial deal, and we believe that we can scale that.

I think just as significantly, too, we're very aware that this is a unique financing model in terms of the term and energy efficiency, and from a financing perspective I think there's been a reluctance to be the first one in the game, if you will. Now that we're past that barrier, we believe that we've established a model. We've got a baseline for terms, and we can be able to take this structure out and leverage that first deal with additional deals.

Okay. Thank you very much.

You're welcome.

Thanks, Eric.

Thank you.

Thank you, sir. Our next question is from Scott Reynolds, of Stifel Nicolaus. Your line is open.

Good afternoon, guys. So, let's go back to the solar systems, and just to be clear, is revenue recognition there on a percent of completion, or is it going to come in one big chunk?

It'll be performance driven, so percent of completion, if you will, but driven by delivering product and completion of an installation.

Okay. And what do you see margins on that system to be?

They're a little less than 20, so, and, as we mentioned earlier, we believe there's opportunities on the installation and integration side to be able to take cost out, and we're working on that, because we do believe the opportunity to take those margins higher in the future is very viable and we can deliver on that.

And you said it was roughly 180 days to install one of these systems. You guys are going to be installing this pretty much in the dead of winter. So do you see any risk that this, a pretty large chunk of this doesn't get recognized in the fiscal year?

This is in a part of the country where the winters are a lot more -- a lot milder than what we have here in the Midwest. So we've done jobs in harsher environments. And the tradespeople we're talking to, they're used to working out in this environment. They need to work 12 months out of the year. So worst case scenario, once in a while you have to blow a little snow out of the way. But we'll keep moving along, and we've already got it factored in. I think we're very conservative when we're suggesting six months from beginning to end.

All right. Very good. And I was just wondering what do you guys see the ongoing inventory levels, whether it's on an absolute basis or a percentage of COGS, something rather that you can point to?

Well, as Neal talked about, our efforts to drive roughly a 30% reduction, we believe that -- good inventory management, and we'll continue to attack it and improve it, but we're targeting just over $20 million at that level.

Okay. And switching gears, I suppose, on the sales strategy, are there other competitors that are using the current PPA type of strategy, or is Orion the first here?

From the core lighting business?

Yes.

I think what you'd find out there would be probably characterized as more of a traditional performance contract or shared savings, nothing when it comes down to our model that we've seen yet today. And we are in a unique position, as we actually have some IP protection that's working its way through the system, through the Patent Office, so as far as somebody copying and trying to replicate the model line for line, I think it might be difficult, at best.

And now back on the sales strategy, this seems to be increasingly something that customers choose. Should we expect that this continues to increase as a percentage of your overall, I suppose, non-GAAP revenue?

Yes. That's been the plan all along. And it does a lot of things. What we're really looking forward to do is compress the sales cycle more than anything else.

Okay.

[$200-plus] trillion sitting in the sidelines of corporate treasury. This takes that primary objection, the money, off the table.

Okay. And it looks like despite maybe some of the inventory reductions that you might have to dip into that $15 million debt or revolver that you have. Is there any covenants on that?

There are covenants on that, standard debt covenants. Scott, what I would say is that's certainly available to us, but I think we feel that there's financing available that can be project specific, and that would be an interest that we would have, and then being able to utilize the line of credit to be available to just fund normal you can call it cash deals as the economy improves. But our intent to be able to bring cash in to support that would be project specific outside of our line of credit.

Okay, very good. Thank you.

Thank you.

Thank you. Our next question is from Michael Legg, of Merriman Capital. Your line is open.

Yes, Scott, when you look at the beginning of the quarter and the number of salespeople or partners you had out there versus the end of the quarter, was there anything different in your approach, in your numbers, in the pricing that helped drive the end of the quarter?

No, we didn't -- if your question, Mike, is did we do any dramatic discounting, we did not.

Okay. And were there any material difference in the number of partners you had out there trying to sell the product?

We brought some partners on in the quarter. I want to say it was probably mid quarter. And always when you bring somebody new and you're introducing and you're deploying internal resources, as Neal talked about, the training and getting salespeople up to speed, that takes some time before they're actually bringing orders in-house.

The largest number of new people would be working with the existing partners in having -- in helping them to build out their sales force.

Okay. On the raw materials side, we're talking about reducing the inventory, as far as obtaining raw materials now, are you seeing any problems out there?

I think that there are still some. The supply chain overall is still slow. And this isn't something that is just with the electronic ballast. Every device that has a power supply is affected by it, from -- I saw an article not that many weeks ago -- from Polaris ATVs to light fixtures. It's all around power supplies -- or iPhones. But we think that the move that GE is making, they're a pretty big player in the overall supply chain equation, and they've got quite a bit of stick as relates to working with the vendors and getting themselves to the front of the line, and we're comfortable based on what we have here and how long this inventory will last as we move through it and they're working on their end that we're going to be in good shape. They should intersect quite nicely when supply chains are normalized and as we work down the inventory.

Okay. Thank you.

Thank you.

I'm showing no further questions at this time.

I would like to turn the conference over to Mr. Mike Harris for any closing remarks.

Okay. Thank you, everyone, for joining us today. Please feel free to contact either Scott or myself should you have any follow-up regarding the quarter, and we look forward to speaking to everyone once again in roughly three months to discuss Q3 results. Good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.