Orion Energy Systems Inc (OESX) 2011 Q3 法說會逐字稿

Good afternoon, and thank you for standing by. Welcome to the Orion Energy Systems third quarter 2011 earnings conference call. (Operator instructions.)

I will now turn the call over to Mike Harris from Orion. Mike, you may begin.

Thank you, Tyrone. Good afternoon, everyone, and thank you for joining us for the Orion Energy Systems third quarter fiscal 2011 conference call. Once again, my name is Mike Harris, Investor Relations Officer here at Orion. With me on the call today are Neal Verfuerth, Chief Executive Officer, and Scott Jensen; Chief Financial Officer.

As a reminder, the earnings press release issued today once again includes a section that briefly discusses the supplemental information document that was posted to the Company's website. We introduced this supplemental information during last quarter's earnings press release which provides additional details and analysis on Orion's financial performance for the third quarter and year-to-date results.

Also, the earnings press release issued this afternoon includes within the section titled Fiscal 2011 Outlook some additional guidance regarding expected forecasted ranges for some key financial statement line items and metrics for fiscal 2011. This section also discusses the seasonality and revenue that Orion has experienced historically during the fourth quarter of a fiscal year relative to the third quarter.

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 & 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.

Thank you, Mike. Good afternoon, and welcome, everyone, to the Orion Energy Systems third quarter fiscal 2011 conference call. As we outlined in our release last week we are very pleased with the record levels of revenue and operating income for the quarter. Additionally, our contracted revenue for the quarter saw a continuation of double-digit growth.

Last week I had the honor and privilege of hosting President Barack Obama, and I'm told as many as 60 million viewers to the Orion Technology Center located here in Manitowoc, Wisconsin. This event further validates our business model and technology offerings.

Some time ago Orion introduced a bold concept that we've come to refer to as Permanent Distributed Load Reduction Generation. We believe and have now since validated our ability to deliver significant permanent load reduction combined with renewable energy generation at the point of use, end use, in a way that surpasses grade parity. Just like a power plant we compared the investments on the lifecycle cost per kilowatt hour delivered basis.

The value proposition Orion delivers impacts not only our end use customers by reducing their monthly operating costs, which are significant, many customers tell us they in the top five expenses in their businesses. Also on a macro level we [have] electric grid, as the need for new generation and transmission and distribution infrastructure investments are required we offer the least cost alternative to comparing our investment to a typical coal plant and its associated transmission and distribution investments. Additionally, siting and generating assets at the point of use is more efficient than other traditional [central pad] models.

In the future we see our customers actually using our technology including the renewable direct into their facilities and actually having the grid be the backup. Since 2001 Orion has saved its customers over a billion dollars in operating costs while permanently reducing the need to generate and distribute over 500 megawatts of power.

Furthermore, the social benefits are reduction in carbon emissions by 9.5 million tons and the creation of green jobs in our direct manufacturing operations, within our vendors, and the tens of thousands of man-hours with the building trades who have to install our products.

Looking ahead we continue to see encouraging indicators in recent months that lead me to maintain my cautiously optimistic outlook for the future. Given our performance last quarter and the increased volume and tenor of our customer interactions we will continue to pursue the aggressive expansion of our sales force, also known as feet on the street campaign. At the close of Q3 we had a total sales force of 75, primarily through our elite integration partners. We're looking to build upon our existing base within the elite partners as well as add new partners throughout North America. As a reference point we even saw one of our elite partners had $1.3 million in wholesale purchases with Orion in the month of November.

On a parallel path here at Corporate we are continuing to refine our sales processes with our objective being to streamline the recruiting and training process, build a qualified pipeline, reduce the gestation period, and most significantly increase our closing ratios. As we expand our reach geographically our objective is to prioritize the areas with prevailing external drivers, primarily high cost of kilowatt and kilowatt hours and utility incentives that may be available.

Moving on to some product updates, starting with our InteLite, just kind of a recap of the introduction of InteLite, we actually launched the product officially in September of 2009. Since the launch we've sold approximately 66,000 units and have deployed them throughout our customers' installed base. We've been building the inventory up until just last August, August 2010, so the total sales ramp, the 66,000 units, 46% of these or 30,200 have shipped within the last two quarters.

While we've been getting this product out in the market, essentially seeding the clouds and validating amongst our installed base we've also layered in some product enhancements. We've added the Apple iPad and the iPod Touch as user interfaces. We've offered another communications module giving us additional speed and the ability to configure larger buildings in a more complementary and time sensitive way. They will auto configure and self-heal as it relates to the communication network throughout the facility, making the larger million, million-and-a-half square foot buildings a lot easier to configure.

We've added wireless metering. I mentioned earlier many of our customers, energies in the top five of their expenses will now have the ability to offer our customers wireless metering and exporting that data up to a business intelligence interface we've developed that includes cloud computing that allow our customers to compare facility to facility, data, process to process data, et cetera, all exported up into an Excel spreadsheet.

Our outdoor product line continues to gain traction. Since that product was launched less than two years ago we've experienced numerous technology demonstration wins against both the LED and induction lighting technologies, as well as other linear fluorescent. To date we've had overwhelming success in these technology bakeoffs, and I'm pleased to report our 363% year-over-year increase on our sales in this category.

The last product or service offering I want to talk about is the OTA, the Orion Throughput Agreement. As American business looks forward to reinvesting and expanding and retooling we believe our OTA project financing will continue to contribute significantly to our growth. A major corporate initiative here at Orion will be coming to fruition in Q4 as it relates to the OTA structure and documentation, with our expectation being more favorable revenue recognition and more accurate matching of our SG&A cost of revenues.

So, once again, thank you for the investment at OESX. We look forward to continuing to build a Company that will deliver long-term shareholder value that is both scalable and sustainable.

With that, I'll turn the call over to Scott Jensen, our CFO.

Thank you, Neal.

First, I'd like to start by restating our guidance for fiscal 2011 as communicated in our earnings release earlier today. We expect contracted revenue between $100 million to $110 million, GAAP revenues in a range of $78 million to $84 million, and GAAP earnings per share of $0.01 to $0.03.

Let me spend a few minutes discussing how we achieve our GAAP revenue guidance for the last quarter of this year. On a year-to-date basis through the first three quarters of fiscal 2011 we have GAAP revenues of $58.1 million. We have a cash backlog entering the January timeframe excluding solar orders of $4.7 million. We expect to recognize GAAP revenue from existing OTA and PPA contracts in the quarter of just less than $1 million.

And we're expecting to recognize GAAP revenues from our solar cash backlog of approximately $1.2 million. And we're taking a conservative approach as it relates to our solar backlog given the unpredictable weather issues on the East Coast right now and the impact on installation timing and revenue recognition.

What we've identified brings us to a total of just approximately $65 million, meaning to hit the midpoint of our GAAP revenue guidance we need to deliver an additional $16 million over the final three months or a simple average of $5.4 million per month. With encouraging customer dialogue regarding calendar 2011 and increasing feet on the street we feel confident in our ability to achieve our revenue guidance.

Details of our financial results were provided in today's earnings release and the supplemental information provided on our website but I'd like to cover a few key items. Included in our record-breaking $29.7 million of revenue for the quarter was $8 million of sales of solar products through Orion Engineered Systems. Included in this $8 million was $5.8 million of revenue from the single $8.2 million order received during our second quarter.

During the quarter our wholesale channels contributed 47% of our total revenue for the quarter excluding the impact of the solar product revenue. Our gross margin for the third quarter was 31.1% which was impacted by the increased mix of solar project sales. Gross margins from the $8 million of solar product sales were 17.2%. Our product margins from our traditional integrated energy management systems were 38.2%. Our manufacturing cost reduction efforts have continued to sustain mid to high 30 gross margins despite our relatively low equipment utilization.

Finally, related to financials let me comment on our effective tax rate. GAAP accounting requires that our effective tax rate be calculated by estimating our annualized taxable income and estimating the annualized impact of our temporary and nondeductible differences or expenses. This rate is trued-up on a quarterly basis. As you will recall, at the end of our second quarter our estimated tax rate was 69%, and this rate was applied as a benefit against our second quarter year-to-date loss. If there had been no changes in our assumptions from that point through the end of our fiscal year all future taxable income would be taxed at the 69% rate and our ending annualized effective tax rate would also have been 69%.

In December Congress approved the extension of the research and development tax credit, a valuable credit to a Company like Orion where we are continually innovating. The benefit from the extension of the R&D credit has now reduced our annualized estimated effective tax rate to 58%, which will be a reduction in our overall projected tax expense. However, the reduction of our tax rate meant we had previously recorded too high of a benefit rate which was essentially trued up in our third quarter by recording more expense in the quarter and bringing our year-to-date benefit in line with our expected annualized rate of 58%.

Due to our earnings per share guidance range of $0.01 to $0.03 our effective tax rate remains very volatile due to the nondeductible expenses we incur for certain stock option expense applied against the smaller baseline of taxable income.

Turning to the balance sheet, our inventory levels decreased in the quarter by $1.5 million from the end of our fiscal 2011 second quarter. During the quarter we shipped some of the solar panel inventories and additionally through product sales we reduced our wireless controls inventory during the quarter by approximately $900,000.

As we've previously discussed, we've made strategic investments in inventory of approximately $15 million over the last 18 months. We're encouraged by the unit sales increases in our wireless controls product, that Neal discussed earlier, and we remain optimistic about the market opportunity to reduce wireless controls inventory which at a minimum encompasses the 6,000 plus facilities who have already adopted our HIF technologies.

On our second quarter call we made a commitment to reduce inventories by $10 million. In recent weeks we've been made aware through conversations with key vendors and from comments made by some of our competitors that the electronic component supply shortage situation previously thought to be subsiding has not improved. Accordingly, we're continuing to monitor this issue but we do not believe that a prudent course of action would be to significantly reduce our component levels of this inventory and jeopardize our ability to deliver products to our customers.

In regards to our liquidity and financing we finished the December quarter with $9.9 million in cash and $1 million in short-term investments. Our decrease in cash for the quarter was driven by our working capital requirements due to the $12.7 million increase in accounts receivable during the quarter on higher revenue.

In assessing our liquidity we have $13.3 million in availability on our line of credit with no current borrowings. We expect to generate positive cash flow from operations during the fourth quarter as our accounts receivable balance gets paid and we work down our inventory levels.

As previously announced, we have a commitment from a lender for OTA project financing of $1.3 million, which can be closed in the fourth quarter. Additionally, we expect to collect approximately $2 million during the quarter related to incentive funding for our renewable assets.

As Neal mentioned, our proposed changes to the OTA contract with regards to a more traditional structure of leasing terms not only will benefit us from a revenue perspective but will allow us greater opportunities to finance these contracts in equipment finance markets. More recently we've had conversations with lenders who have financed energy efficiency projects and are looking for entry into the commercial and industrial space. We do believe that we will close on additional OTA financing before the end of our fiscal year.

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

(Operator instructions.)

Our first question is from Phil Shin of Roth Capital Partners. Your line is open.

Hi, Neal, Scott, and Mike.

Hi, Phil.

Thank you for taking the questions. So my first question relates to your guidance. Your revenue outlook did not change but you brought in your EPS range substantially. Can you walk us through the thinking there and why you've brought it in so much?

Sure. Phil, this is Scott. As we've looked at how this year has evolved certainly the margin impact that we experienced in the third quarter related to increased solar panel activity through Orion Engineered Systems was not something that we had anticipated at the beginning of the year, so we're very pleased with how that business has been progressing and ramping up but it does have a margin impact.

And looking at our expectations for the back half of the year and recognizing kind of that 20 margin point delta between our HIF energy management systems and our solar sales we felt it was prudent to bring our guidance down. Additionally, on a lower level our tax rate is more volatile so we also took that into consideration, as well.

Okay, thanks. And then you were talking about inventories just now, so as it relates to the electronic components shortage can you give us some more background on the issue? And then when do you expect this issue to subside?

Phil, this is Neal. We had hoped and were led to believe that was subsiding last quarter already but as we now look into the market and we're making our forward projections for the product we're looking for several months out, even quarters out, that's not what we're hearing. And one of our competitors referred to it, as well, on their recent earnings call just a few weeks ago that there are still significant shortages and even some reference made to expedited freight charges, et cetera. So we just don't want to be caught without anything, where we can't make our commitments to our customers, but we don't ship, we don't have any revenue here so we're just playing it close to the vest for right now.

Okay, and so there's no -- from your perspective there's not much, like you can't find an end in sight? Like is there any guidance that you can give in terms of do you feel like it could come back down or do you think the supply could be more available within a few months or what are your thoughts there?

Phil, I think it really changes from, literally from week to week depending on availability of just some very simple components. With the economy slowing down now things are ramping back-up, just about anything you can imagine that is an electronic device uses these similar components in their power supplies. So now there's a gray market that's out there and, of course, the folks that are more price sensitive are not as inclined to pay premium prices as somebody making a thousand dollar TV or something compared to a $12 ballast.

So many of these things are outside of our control, and we can only go by what we're told by a couple of other external sources. So, again, it just seems that there's been a couple of disappointments so far in this so it just seemed prudent to make sure that we are in a position to ship in the coming months.

Okay, and last quarter you guys guided to approximately $2 million of SG&A and COGs reductions, is that still on the table?

Yes, Phil, we're still working through manufacturing reductions. We're continuing to see that on our core product where we manufacture fixtures, and we also you'll notice we had a G&A decline in the quarter based upon some reductions, discretionary, and some headcount reductions, as well.

All right, great. One last question and I'll get back in queue. In terms of manufacturing utilization can you walk us through what your equipment utilization was in Q3 roughly and what is it now versus Q3? And then how does it compare to prior quarters?

In the third quarter it was certainly a little better based upon our revenue number. It still remains below 20%, Phil, and that's been historically where we've been in the mid teens up to 20% on the high end. So we have great opportunity. A lot of runway ahead of us to be able to grow our business without negatively impacting our cost structure and really leveraging our fixed costs in the plant to drive higher gross margins on our manufactured product.

Great. Thanks very much.

Thank you.

Thank you.

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

Hi, guys. Thanks for taking the question. I was just wondering if you could walk through your elite partners, formerly known as VAR partners? And how that affects margins as you shift over there? Specifically is there -- are you seeing any pricing benefit or does it mostly flow through the OpEx line?

As it relates to pricing, Scott, the benefit flows through the OpEx line where we're not incurring all the direct sales costs related to that. We certainly try to make good pricing decisions. We want our partners to be successful, as well, so we're sensitive to market pricing conditions. And we price accordingly.

As it relates to our direct national account business and our wholesale pricing there's not a real range of difference there so we don't get a lot of mix impact on our gross margins. The benefit to us is to really have that presence in market with people who can manage the operating expense side effectively but also be in markets and really manage the projects effectively.

Okay, and with you guys growing your wholesale force are they giving you much of an indication on how sell through is going relative to sell-in by [RI]?

We have access to their sales pipeline so we see the pipeline on our CRM as it develops every day, and where the closing, where the business is closing and those things I mentioned earlier as far as compressing that gestation period, increasing the closing ratio. So all the same metrics that they're using we have access and visibility of, as well.

All right, very good. And as we look out into next year, fiscal 2012, how are we looking at CapEx specifically for these leasing arrangements, the OTA arrangements? And are you guys going to tap into your credit facility potentially to finance some of that?

Hi, this is Mike Harris. Regarding fiscal 2012 I certainly can respect the question. We're not commenting on fiscal 2012 at this time or giving guidance on any financial statement metrics.

All right, that's fair. Thank you.

Thank you.

Thank you, sir. The next question is from Eric Prouty of Canaccord. Your line is open.

Great, thanks a lot. Guys, just first a question on your customers. Any sense when you think of your funnel or your pipeline of sales is it starting to get a lot more visibility than in the past? Are you seeing purse strings now fully opening up or are there still some clients on the sidelines because of the economy?

Hey, Eric. This is Neal. I think it's really a mixed bag out there, and we see even the pendulum swinging both directions within the same organization. What I can comment on that we're seeing, as we expected and hoped for in earlier conversations, you and I especially, is the leverage we're getting now with getting repeat sales from the existing installed base.

The discussion is so much different, Eric, as you might guess after you've already saved somebody a million or many millions of dollars or even $100,000, it's all linear, and to go back with the next technology makes that discussion a lot easier and it really can help compress that gestation period and that sales cycle, and that's what we're seeing a lot of now going out and talking to a good mix of new Greenfield opportunity as well as going back to our existing installed base.

Great. You've done a good job ramping up solar sales, as we've talked about or asked about in the past are there any other complementary products beyond solar you're looking at and seeing any traction with?

We've got a couple of things that we've been looking at for some time, probably the same things that were here when you were here last, Eric. We're still testing them out in our facilities here and it's really a matter of resource allocation. We've got a pathway in mind for what the next thing, the next thing, the next thing is, so we're always putting trial balloons out there with the customers that we think that the technology may be an application for. But the other thing that of course weighs in is what is the appetite and what do people really want to buy in solar right now. It's still hot amongst many of our customers. And now with our ability to demonstrate grid parity I think it's going to get even more interesting going forward, solar especially.

Great. And then, finally, you've done a good job actually keeping control on G&A, sales and marketing expense, et cetera. If we look, and I know you're not giving guidance for 2012 but if we look at a growth scenario in 2012 with the economy bouncing back in fiscal 2012, what is your ability to kind of keep a tight control and kind of keep flat expenses on the operating side so we can really start to see the leverage in this business model?

Yes, Eric, we certainly have the same opportunities and leverage on the OpEx side as we do on the plant side based upon utilization. We've got structure and support in place right now on the G&A side to continue to support additional revenue top line growth, along with some on the sales and marketing side in terms of support and marketing efforts. We did beef-up our R&D, new product development, engineering staff during this year, so we've been investing in new products.

We're going to, as Neal commented about adding feet on the street, we're going to go about it in an intelligent way, attacking markets where we believe that the best return on our investment, if you will, in terms of human capital will provide the best benefit in terms of earnings per share to our shareholders. So we've got the opportunity to leverage OpEx but we're going to be smart about the investments that we make into the sales force.

Great. And actually just one final one, gross margin it sounds like was a product issue, as far as more solar in the mix, the product mix issue. But are you guys seeing pricing pressure out there or is it really the same pricing environment?

I would say the pricing environment has really been unchanged. Our technology offering we continue to as this whole space matures, Eric, really get more credit for what we bring to the table, and customers are looking at the overall value proposition. When you -- I have a slide in my customer deck that shows the real cost of lighting, and in reality the acquisition cost of a light fixture, just a standalone entity as a light fixture less than 5% of the lifecycle cost is actually acquisition. The majority of it is the throughput, the energy.

So as time goes on customers are getting more sophisticated, we're getting a lot more credit for what we deliver in that regard, so it really allows us to take that conversation which maybe wants to migrate over to how much is your fixture into, well, how much can it save?

Yes. Okay, great. Thanks a lot.

Thank you, Eric.

Thanks, Eric.

Thank you, sir. And I'm showing no further questions at this time. I would like to turn the call over to Mike Harris for any closing remarks.

Thanks, Tyrone. Thank you for joining us today. Please feel free to contact me should you have any follow-up regarding the quarter. We look forward to speaking with you again in May regarding our Q4 and full year fiscal 2011 yearend results. Good-bye.

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