Orion Energy Systems Inc (OESX) 2011 Q4 法說會逐字稿

Good afternoon. Thank you for standing by and welcome to the Orion Energy Systems fourth-quarter 2011 earnings conference call. Your lines have been placed in a listen-only mode until the question-and-answer segment of today's call. This call is being recorded. If you have any objections you may disconnect at this time. I'd now like to turn the call over to Mike Harris from Orion. Mike, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for the Orion Energy Systems fourth-quarter fiscal 2011 conference call. Once again, my name is Mike Harris, Chief Financial Officer of Orion. With me on the call today are Neal Verfuerth, Chief Executive Officer; and Scott Jensen, Chief Accounting 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. This supplemental information document provides additional details and analysis on Orion's financial performance for the fourth quarter and fiscal year 2011. 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.

Thanks, Mike. Good afternoon, everybody, and welcome to the Orion Energy Systems 2011 conference call. We're pleased with the reported operating performance and optimistic about what we see for our future. Today, I'm going to be brief with my comments, given the amount of time we think we're going to need to talk about various pieces of information and financial data, that Michael needs to cover later on in the call. I also want to talk a little bit today about some of the highlights from this reporting period and a little bit of what I see in the future.

One of the things I wanted to talk about today that I think is really germane to the conversation is the amount of units we shipped in some of our newer product categories. The top line sales, given the increased amount of wholesale business we do, don't always reflect the positive sales we're seeing in our various product categories, and the ramp that we're seeing in overall volume.

So we have in three of our categories the InteLite wireless shipments, they're up 52% year-over-year. The Apollo solar light pipe is up 71%, and the exterior lighting category is up 300%. So needless to say, we're really pleased with these products, given most of them are less than three years old from the initial development, so seeing a ramp like this -- and much of this is really just getting the cloud seeded. We continue to see the sales ramping up and the customer acceptance to be overwhelmingly positive, so we're pleased with these results.

As it relates to the sales, our elite integration partners continue to accelerate and expand their operations. With a group leader, as it relates to performance, realizing 195% growth in year-over-year revenue, and the group as a whole realizing 126% growth year-over-year. The volume of our new opportunity sales pipeline is ramping favorably as well, which allows us to focus our attention on developing new tools and strategies that will further compress the sales cycle and increase the closing ratio.

One such tool recently released is the InteLite SFV system, the site field verification. This is a portable metering system that we developed here at Orion that features wireless real-time metering and a custom proposal generation. Essentially, we take this portable device, install it temporarily in a customer's facility, we meter the existing HID system in the prospect's facility, we can compare that to the competition if the competition is hanging there, then the Orion solution. We can then populate the executive summary in our traditional proposal with real-time data measured at the customer's site under their conditions.

We feel this tool will further soften the too good to be true element of our value proposition. Additionally, given our continued sense of the economic headwinds diminishing on a real-time basis, we felt the timing was right to bring on a senior sales executive with the name of James Jackson. James and I from the time we met, I realized are completely in sink as it relates to driving a sales organization.

Sales quotas, as we see it, are not our best efforts tried, but a promise made if you want to keep your place on the team. So I expect to see great things coming with James on board and having somebody whose day job is to drive the sales, measure the progress, and make the expectations crystal clear to everybody on the team.

Some product updates. We have some additional technology offerings that we've been able to use our existing inventory in our product, add a couple of new algorithms and add a lot of features and benefits to customers, that I think are going to help increase the value proposition; and more importantly, make it easier for the customers and our salespeople to understand. The device that we formally referred to as the transceiver has now been renamed the dynamic control device.

We've added some features into this device, the units that we've had in inventory, essentially a new algorithm we developed that makes the device much smarter than it was previously; and it has the ability to act on a standalone basis. So as I mentioned, the additional energy savings are significant; but more importantly, the overall plug and play pre-packaged architecture that we've been able to achieve with this, will make the devises more end-user and sales person friendly.

Wireless metering, we have not only the wireless metering that I spoke about in the SFE kit, but we also have the ability now to wireless meter individual loads at a building at a price point to our knowledge has never existed before. So in our plan, as example, every piece of a production equipment, the air compressed systems, the wind generation, everything is now monitored and can be displayed either at the desktop or on a hand-held device like an iPhone.

We take this data and use this data and give our customers a cloud based business intelligence platform that allows them to use real-time data to better manage their facility and their production, in the case of our manufacturing customers. With InteLite, we can essentially monitor an infinite amount of control points, and measure and collect data once per minute; and measure items like energy usage, energy generation, pressure, temperature, equipment run time, take all of this data, collect it, and push it up to the cloud.

Customers can take any of this data collected and export it right into an Excel spreadsheet on their own, and then start plotting and looking at benchmark facilities and best practices, to compare these best practices across their entire footprint of facilities throughout North America. Taking a look at what is the energy spend per square foot or maybe even the energy spend per finished good they're producing.

Additionally, this measurement and metering capability is giving us the ability to provide customers a real-time data point for the man/machine interface, when looking at what is the real throughput of a production piece of equipment or a process. There's a direct correlation, as we've seen it here in our plant, with energy usage on a real-time basis and actually the productivity of a machine. So we believe that our ability to help a customer manage what has historically been two of the top five expenses, which they've never really had visibility on -- or the ability to manage and measure, is going to be very substantial and very valuable in the marketplace. Essentially, energy and labor, as it relates to manufacturing.

In our operations, we've got our new ERP system, the Microsoft Dynamics, up and running. It's proving to be as substantial and beneficial as we had hoped it had been as we're going through the integration here. We have Rick Gromer now on board full time as of this week to assume much of the day-to-day operations from Mike Potts, so Mike can spend more of his time out in business development functions with major customers and utilities.

In closing, I want to share with our stakeholders the extreme level of confidence that I have in the organization and its ability to deliver the sales and operating metrics, as outlined for our fiscal year 2012 in our guidance. With that, I'm going to turn over the call to Mike Harris. Thank you.

Thanks, Neal. The earnings press release issued this afternoon, combined with the supplemental information posted on our website, really provide a significant amount of details regarding our fourth quarter and full year fiscal 2011 results. I will focus my comments on first, summarizing the potential change in the accounting for our historical Orion Throughput Agreements or OTAs that we disclosed in our earnings press release. Second, I will give some brief financial highlights for the quarter. And third, I'll wrap up by discussing our guidance for fiscal 2012 as a whole, as well as the first quarter ending in June.

Regarding the potential change in accounting for historical OTA contracts, let me start off by saying we realize the disclosure in our press release is very detailed and creates some unfortunate noise to our financial results. Let me summarize the situation by saying that Orion's current accounting for our historical OTA contracts is conservative, relative to any potential change being contemplated.

Orion is still in the process of assessing the situation with our independent auditors, Grant Thornton LLP. However, we want to make it very clear that any potential restatement is expected to result in no impact to cash, cash equivalents, short-term investments, and overall cash flow, an increase in GAAP revenue for the full fiscal years 2011 and 2010, an increase in GAAP net income and earnings per share for the full fiscal year 2011, and a reduction in GAAP net loss and loss per share for the full fiscal year 2010.

In addition, any potential restatement would generally not impact our guidance for fiscal 2012 for the first quarter. If anything, it could provide some potential upside to our revenue and EPS numbers as the legacy OTA contracts, still being signed with customers, under the historical operating lease structure, could potentially be treated as sales type capital leases as well. Orion has always been of the opinion that accounting for our historical OTA contracts as sales type or capital leases, at some point during the term of the contract, is a better reflection of our underlying business activity and financial results, and better matches recognition of our OTA related revenue with our OTA related expenses.

This is why management began presenting non-GAAP revenues and earnings per share figures during the first two quarters of fiscal 2011. The reason we're still working through this process is that management wants to be absolutely certain that changing the accounting for certain OTA contracts from operating to capital lease, is indeed the appropriate treatment. Importantly, due to this potential accounting change, generally resulting in the acceleration of revenue and earnings, we have engaged a third party accounting firm to study this issue, and render an opinion on the appropriate accounting treatment.

Should the third party accounting firm concur with sales type lease accounting treatment, Orion would then likely voluntarily submit this determination to the office of the Chief Accountant of the Securities and Exchange Commission for their confirmation and to ensure accuracy. Now let's move on and talk about the continuation of our improving financial results that we experienced during the fourth quarter.

Revenues in the fourth quarter of $31.6 million increased 68% over the previous year quarter, representing the second consecutive quarter of strong double digit revenue growth. The year-over-year increase was driven by $5.9 million of revenue from sales of renewable solar PB systems, through our Orion engineered systems division, $5.5 million of net revenue from OTA contracts sold to third party finance company, overall increased sales of our HIF lighting systems to both our national account and wholesale customers.

In fact, when excluding the impact of renewables in OTA sales during the quarter, Orion's base lighting and controls business increased 26% year-over-year. Our wholesale channels contributed 44% of our total revenue for the quarter, when excluding the impact of sales of renewable solar products and the sale of OTAs. Total overall gross margin during the fourth quarter was 29.6% versus 32.7% in the fourth quarter of fiscal 2010.

Our gross margins declined due to a higher mix of renewables revenue from our Orion engineered systems division, and the impact from the OTA contracts sold during the quarter. Gross margin for the fourth quarter from renewables revenue was 22.6%, and from OTA contracts sold was 20.4%. Gross margin for our HIF integrated systems revenue for the fourth quarter was 34.1%.

Let's talk about our tax provision. During the fourth quarter of fiscal 2011, we converted almost all of our existing incentive stock options, or ISOs, to non-qualified stock options. This conversion was applied retrospectively, allowing us to benefit $600,000, or $0.03 per share of income tax expense related to non-deductible ISO stock compensation expense, that was previously deferred for income tax purposes.

The conversion reduced our effective tax rate for the fourth-quarter of fiscal 2011 to 21.3% from a pre-conversion rate of 48.6%. Going forward, the conversion of ISOs to non-qualified stock options will greatly reduce the volatility of the effective tax rate that Orion has historically experienced at nominal pre-tax income levels. As discussed in our guidance for fiscal 2012 in the press release, we currently anticipate our effective tax rate for the fiscal year to approximate 40%.

A few comments on Orion's liquidity. Orion had $12.6 million in cash and short-term investments as of March 31, 2011. This represents a $1.7 million increase, compared to December 31, 2010. Total short and long term debt was $5.4 million as of March 31, 2011; a $500,000, I'm sorry, $500,000 decline compared to December 31, 2010. There were no borrowings outstanding under the Company's revolving credit facility as of March 31, 2011, which has an availability of $13.3 million.

The last topic I want to cover is our guidance for fiscal 2012 as a whole as well as for the current first quarter ending in June. Orion currently expects GAAP revenue for fiscal 2012 to be between $112 million and $118 million. Our expectation for GAAP earnings per share is between $0.18 and $0.22. I want to talk about our revenue guidance in the context of where Orion is at entering fiscal 2012, relative to where the Company was entering fiscal 2011.

The Company is entering the new fiscal year with an improving macroeconomic back drop. In addition, we have over 80 feet on the street entering fiscal 2012, versus less than 60 at the beginning of the last fiscal year. In addition, our revenue forecast does include meaningful contributions from some very important new sales and marketing initiatives currently underway. Orion is in the process of expanding its telemarketing effort by recently adding a Vice President of Telemarketing and new telemarketing staff, with plans to add more telemarketers in the near future.

Management has internal targets and expectations in place for additional sales appointments, pipeline, and ultimately closed orders that the increased telemarketing efforts should generate. We're very excited about the additional opportunities this will create for our existing sales force. In addition, Orion is in the process of opening up our first master rep agency, or MRA sales pod, located in the Southwest portion of the United States.

We are also identifying and pursuing opportunities to expand our sales presence in other regions of the country. We are targeting to do this in an efficient manner that will enable the salespeople to hit the ground running; and at the same time, minimize any short-term negative impact on earnings and cash flow. A quick comment on our anticipated solar mix for fiscal 2012. Solar and renewable revenue during fiscal 2011 was $14.7 million. Our expectation for fiscal 2012 is an essentially flat revenue assumption, plus or minus for our solar and renewables business.

With this said, Orion Engineered Systems has a solid pipeline of potential solar deals, and we anticipate this division showing a meaningful increase in closed solar projects in fiscal 2012 as measured on a megawatt basis. However, we're going to change how we structure our larger solar contracts going forward, which is targeted to eliminate the gross revenue and cost of goods sold running through our financials, from the purchase and reselling of solar panels, inverters, and other materials that Orion does not manufacture.

This change will better reflect the true nature of the value Orion brings to these solar projects, as we're the general contractor who brings all the necessary parties to the table, and then we design, engineer and oversee the construction of the customized system. The last major piece of fiscal 2012 revenue guidance comes in the area of our OTA contracts. As we previously have commented many times, in January of this year, Orion made some important changes to the underlying OTA contracts that results in immediate revenue recognition.

This change is expected to be an important catalyst in improving our financial performance going forward. We have started to see the benefit of the revised OTA contract structure in the fourth quarter, and expect this will accelerate as fiscal 2012 progresses. For example, 70% of the $3.6 million in OTA contracts entered during the fourth quarter were under the revised capital lease contract format. For some additional perspective on how the revised OTA capital lease structure could improve our financial performance, I wanted to give a simple example.

We disclosed in the supplemental information document that total contracted revenue for fiscal 2011 includes $14.6 million from OTA contracts. Orion was only able to recognize a relatively small portion of that amount at GAAP revenue in fiscal 2011, approximately $2 million. Due to the historical operating lease accounting treatment and deferral of revenue recognition.

Hypothetically speaking, if the formal change in the OTA contract structure would have been in place at the very beginning of fiscal 2010, and assuming all OTAs restructured as capital leases, the vast majority of the $14.6 million figure would have been discounted to a present value of approximately $12 million, and recognized as revenue throughout the year as the various projects closed.

One last important comment regarding our fiscal 2012 forecast that I want to point out, is that included in the EPS guidance is an approximate 12% increase in operating expenses over fiscal 2011, or approximately a $3.2 million increase when looking at the mid-point of the guided range. Approximately 80% of this increase is due to numerous sales and marketing initiatives that Orion is, and will be, investing in during fiscal 2012 as part of our growth strategy, some of which we have covered on this call.

Now, real quickly in our guidance for the first quarter of fiscal 2012. GAAP revenue is forecasted to be between $20 million and $22 million, and GAAP earnings per share between a loss of $0.02 to break-even. On a historical basis the first quarter of any given fiscal year is typically a seasonally soft quarter for Orion. In fact, Orion has tended to experience revenue in the first quarter that represents the lowest or second lowest quarterly revenue amount within any given fiscal year.

With all this said, the low end of the revenue guidance range of $20 million per Q1 fiscal 2012, still represents a 36% growth rate in comparison to the prior year first quarter. Also, when considering this revenue guidance, the EPS guidance of a slight loss to break-even for the quarter is consistent with our commentary over the past several quarters, that our breaking the even level in terms of sales as approximately $80 million in annualized revenue. This concludes our prepared comments. I would now like to turn the call over to the operator for the question-and-answer portion of the call.

Thank you, sir. (Operator Instructions) Our first questioner in queue is Eric Prouty with Canaccord. Please go ahead.

Great. Thanks. Excellent quarter, and good outlook, guys.

Hi, Eric.

Thanks, Eric.

First question is on the potential accounting changes that we might see. And then I might have missed this in your commentary, but would this necessitate -- would you go back and restate for contracts, or would you just change things going forward?

Eric, we would actually -- this potential restatement would go back and look at previous historical quarters, as well as previous fiscal years. And this all centers upon our historical OTA operating lease contracts, call them our legacy OTAs. And as we pointed out, the impact, big picture here, we're still working through the numbers, but it will result in an increase in revenue and net income for the full year fiscal 2011 as well as fiscal 2010.

Okay. Great. So that would be restated. It wouldn't hit in a big lump in 2012? You'd go back and restate when those contracts occurred?

That's absolutely correct. Now looking forward, as I briefly commented in my prepared comments, there actually is a little bit of a benefit going forward as well because even though we went to the new capital lease structure in January of this year, we had quite a pipeline of OTA operating leases, and some of those are still coming through. And normally we would have to defer revenue on those over a 5-year period. If we do indeed get the sales type capital lease treatment, we will be able to recognize revenue on those OTA contracts as well. But like I said, it's still preliminary in nature, and we have to finalize all this.

Sure, and then what I think is a big picture question, and maybe a question on everyone's mind, you're looking for some pretty good growth, some good profitability. We know we're getting a little help from the economy here, but given you're not really a backlog business, you hit your contracts during the quarter, which they hit. Could you just give us some confidence beyond the number of salespeople you have? What gives you guys the confidence of hitting those revenue numbers you put out there?

Eric, we have a significant investment in our CRM systems, and we continue to make them robust over the years. It really comes down to looking at historical performance, essentially 3 metrics. It's all about pipeline -- the gross pipeline, what are we seeing from that what we call the gestation period and our closing ratio. And with that, we're very comfortable in our ability to predict what's going to come out the other end as it relates to top-line sales. This maybe a little lumpier than we would like it quarter over quarter, but we've done this long enough that we know, again, in normalized times what we can expect to come out the other end just based on realtime data and historical data.

And Eric, one thing I would add to Neal's commentary is that included in our forecast that we just presented, the solar piece, 76% of our forecasted solar revenue is already under contract. And also, on top of that, during my prepared comments I talked about the benefit of going to a capital lease quota structure, and how if you had $14.6 million of OTA contracts during fiscal 2011 and we were only able to recognize $2 million in revenue during fiscal 2011. Assuming that same scenario where, if all these changes had been in place at the beginning of the fiscal year, we would have recognized the vast majority of discounted value of that $14.6 million as revenues in fiscal 2011. We don't have the base OTA business up at all in our forecast for fiscal 2012. So hopefully that gives you a little more clarity as to our confidence in our full year fiscal 2012 forecast.

Yes, so 2011 really instead of the kind of $90 million that you printed GAAP, what would that have been? You'd said $11 million higher if you were able to recognize the contracts?

Well, let me give a clarification. We said we originally recorded $2 million of revenue. We would have recorded $12 million, so there's an incremental $10 million right there. And also we did sell a little over $7 million of OTA contracts in the current quarter as well.

Okay. I'm just trying to figure out what kind of the apples-to-apples growth would be with the accounting in place. Would there then be any ability going forward to sell those contracts and recognize the revenue; or if the accounting goes through, they are all going to be retroactively recognized in the previous quarter so you won't have the ability to sell big blocks of contracts anymore?

Right. Well, that's a very good question, Eric, because if the restatement happens and all those OTAs -- well, we did sell some OTAs during the quarter, so we have roughly $7 million or so left of revenue to recognize on them. If all those are treated as sales type or capital leases, the revenue is recognized at that point, and it's not really a sale. It's like a factoring of receivables at that point.

Okay, and then just a couple more questions, if I might. The solar renewable revenue, why is your expectation that that will merely be flat, and not growing in '12? Are you defocusing in on that revenue? Is it your outlook for the business itself?

Eric, by us saying our solar GAAP revenue being flat year over year is no indication of our optimism for that business. Actually when you look at it on a per-megawatt basis, our expectations for closed solar contracts in fiscal 2012 is for a pretty meaningful increase. The reason why our GAAP revenue guidance within that -- .

Change in how you're looking at it.

Right. We really want to get the gross revenue and gross cost of goods sold for the larger solar deals, really off our financial statements.

Sure.

You can appreciate, 70% to 75% of these solar deals is the value of the solar panels themselves. We don't manufacture the solar panels. I mean, the solar panels some would argue are commodity at the end of the day, and so we want to really have it reflected in our financial statements the true value we're bringing to these solar deals, and that's the general contractor, and designing and engineering the system.

Great, and then finally, the telemarketing that you're starting up. That's an interesting sales approach. Could you give a little more detail of exactly what these people will be focused on? Is this lower-end type sales or what's the strategy there?

Eric, historically, especially up until the period of the IPO and then shortly thereafter, we've always been a big proponent of using our call center essentially to actually schedule appointments for our salespeople. In my 25 years of doing this, most salespeople don't like to do the prospecting. So for us to, again, get that predictability that we're talking about going forward, getting appointments and driving the activity so we know every day that they're out there seeing customers is key to achieving those operating metrics. And a big part of that is giving them actual appointments that are on their calendars that we populate every day to go on the appointments, and that's what these people do. This is what they're trained to do, this is their specialty.

Great, and then my final question. Looks like the share count popped a little bit during the quarter, and you're expecting more of a ramp in fiscal 2012. What's driving that increase in the share count?

Sure, well, as you can imagine, we have a little stock option creep going on, a little bit for this particular quarter. You have to remember our quarter ended March 31, and so we did have the average share price during the quarter a little bit higher than the December quarter. Regarding the fiscal 2012 share count assumption, as you know, when you look at the GAAP accounting in this area, you have to use the treasury stock method to determine ultimately how many shares that you're going to have for the year. And you have to make a call as to where the stock is going to be trading throughout the year. And so we made our assumptions internally regarding where we think the stock is going to be trading, and because of that more stock options become in the money and you take it from there.

Okay, fair enough. Guys, again, congratulations. Good to see things moving here.

Thank you, Eric.

Thank you, sir. Our next questioner in queue is Jeff Osborne with Stifel Nicolaus. Please go ahead.

Great. Thank you. Congratulations on the improvement. Just 4 quick questions from myself. I understand the moving pieces on the solar side. It seems to make a lot of sense. Do you have a sense of what the gross margins would be under the new contract terms for the fiscal-2012 revenue? I would assume higher than the 20-ish% that you experienced in the past quarter.

Absolutely, Jeff. Keep in mind that we, for fiscal 2012 we still have some solar contracts coming in under the previous contract structure, coming in in the 15% to 20% range. On a going-forward basis, especially for these larger solar deals, our gross margins are going to be pretty consistent with what we've seen historically with Orion in the mid- to high-30% range. So if you have a mix of both, we're looking at, for fiscal 2012, we have built in our forecast low 30% gross margins for our solar piece.

Good to know. Happen to know what total headcount was at the end of the fiscal year? Just trying to get a sense, as we plan for this OpEx increase, and maybe how many open slots or seats you're looking to fill with the new call-center initiatives?

Total headcount at the end of March, we had 268 employees, 42 of those were part time. Full time equivalent headcount is 247.

Okay, and you want to add another 20 to 30, or more than that?

I would say when you look at the budgeting we've done, that's in the ballpark, about 20. We actually have right now, we've added some people as we've talked about on this call. We have about 15 open positions right now.

2 quick ones. What's the mix you expect in 1Q? I may have missed this on the OTA and solar side to get to that $20 million to $22 million.

Right. On the solar side of that $20 million to $22 million, solar is about 10% of the revenues on that. On the OTA side, I'd have to go back and confirm this, but that's going to be less than 5%. I'm sorry, that actually, that should be around 10% as well.

And then the last one, any expectations as you built your model there for either cash generation or use during the year? What CapEx will be, inventory had some improvement here, but any room to go there? Just trying to get a sense of where cash will be over the next 3 or 4 quarters.

Sure, Jeff. In our press release, we did give guidance on capital spending. Traditional capital spending, we have $2.5 million to $3 million; and then capital spending for equipment under OTAs -- for the legacy OTAs still coming in, and assuming that it doesn't change to sales type capital lease treatment, we have $1.8 million to $2.4 million. As far as free cash flow overall, we really have a target of having free cash flow approximating accrual net income for fiscal 2012. And in order to achieve that, we're going to have to really focus on inventory days, receivable days, and payable days as you can imagine; but also we have to focus on trying to sell off these OTA contracts as well.

Makes sense. I appreciate all the detail, guys.

Thank you, sir. Our next questioner in queue is Philip Shen with ROTH Capital Partners. Please go ahead.

Congratulations on a nice quarter. I think you guys did a great job keeping OpEx down to enable profitability, so good job.

Thanks, Phil.

My first question is kind of big picture. I wanted to get a sense of what the order book looks like. I think from the first caller, you guys touched upon this; and in Neal's prepared remarks, he talked about the economic headwinds diminishing. Now, I think over the past few quarters there has been a lot of talk about how customers had a lot of cash on the sidelines, and for short pay back type projects, this was an obvious type of project that your customers would want to take on, but it took a while to see revenue growth ramp up. I feel like we're starting to see that now. Can you just walk us through what -- give us some data points and perhaps just your perspective on how things are changing with your customers; and what is causing this inflection point to take hold?

Well, Phil, a couple things here. First off, I know that you look at some of these metrics pretty heavily, industrial production, capacity utilization. Certainly if you've seen how those have trended over the past several months, they're pointing very favorably. Capacity utilization is at 77%, and it's slowly approaching the magical threshold of 80%.

As you know, Orion, a heavy customer base of ours is commercial and industrial customers. And as those facilities are better utilized, companies make more money, and they are more willing to invest in their facilities. So I think we're starting to see the benefit of that macro trend going on.

Just talking to our internal salespeople, as well as our partners, and just getting some data points from the field, it's crystal clear to us that our customers and potential customers are more optimistic about their businesses in recent months, and more optimistic about the willingness to invest in their facilities going forward as well. And so we just have a lot of optimism in that area. And then once again, I don't want to sound like a broken record, but we do have the catalyst of these sales type capital leases, the new contract structure that's really going to result in immediate revenue recognition for us as well. So that will be beneficial.

Great. That's helpful. And Neal talked about the 3 metrics that you guys focus on -- pipeline, gestation period, closing ratio. Can you give us a sense of how these metrics are changing for you as well, where things were maybe 1 year ago and where they might be today?

Well, I think the pipeline, we're seeing improvement across all of them, Phil, starting with the fact that the stability we have and the staffs at our customers plants that didn't exist there even a few months ago, so there's a stabilizing factor there. So that allows us more access to develop proposals that are all looking, many of them for cost-savings initiatives, now that they're looking to get back up and do full operation again. So we see the gestation period compress.

We also, given the fact that we have a larger focus in market sales, the local industrial parks, we don't have the same kind of budgeting issues to be faced with making the right budgeting cycle, etc. You're dealing with an independent owner, if you present him with a good system with a good pay back, it's more often than not they can pull the trigger on it. So we're seeing some of the smaller sales, the gestation period. I'll give you some extremes, Phil. Private industry, 60 days. National accounts depending on where you kept them in their budgeting cycle can be 500 days.

Good, and the last metric was closing ratio. Can you give us a sense of how that's changed as well?

The closing ratio is, I think, pretty consistent what it has been. That's something we're working on; and again, it's making that separation between what actually is not just closing ratio, but how is it affecting sheer timing. As an example, Phil, if we're talking with a large customer that has a calendar year fiscal year, and if we don't get to them with our proposal before September of this year, as an example, it may have to wait 15 months for the next budget cycle.

Great. Let me move on to my last question. I think, Mike, you were talking about how you guys are really focused on improving your working-capital metrics. Based on my calculations here, your days sales outstanding we're about 76 days in the last quarter of this fiscal year. Days on hand was about 121 days, and days payable was maybe 51. Can you walk us through what you guys are targeting now, and just so we can get a better sense for how cash flow could end up?

Sure. As far as inventory days, let's start off with that, and, Phil, as you can appreciate, there's probably 5 different ways to calculate these financial metrics.

I absolutely recognize that.

Internally at Orion, we tend to look at it on a rolling 4-quarter basis. We want to get as many data points in the denominator as we can to smooth out any volatility or seasonality to our business. So when I look at our inventory days for fiscal 2011, they were at 181, and we have forecasted our expectation is to work that down a bit. We would like to work it down as much as possible, but we realize too we have some strategic initiatives in place where we do want to have inventory available for our customers.

So for inventory days, let's say 181 going down into the 170 maybe 165 range for fiscal 2012. As far as days sales outstanding, or DSOs, we had 72 for fiscal 2011. And actually this is going to sound like a little bit of a bizarre answer, but that is likely to creep up a little bit, not because of the trade receivables taking longer to collect. But remember, a higher portion of our sales mix is going to capital leases, and for those that we do not sell off, those remain as financed receivables on our books. And so it may be some cases where the financed receivables stay on our books for 30, 60, 90 days until we find another finance partner to sell these to, so that will result in some creep in the DSO number. But if you look at the base trade receivables number, we expect that to go down into the 65-day range.

Regarding payable days for fiscal 2011, we were at 61, and our forecast for fiscal 2012 is to hold the line on that a little bit. We certainly want to continue to pay our suppliers and vendors on a timely basis. We never would want to cause a situation to disrupt the factory or the plant by not having enough available components and parts.

Great. Thanks very much, and congratulations again.

Thanks, Phil.

Thank you, sir. We do have time for 1 final question. Our last question comes from Herb Buchbinder with Wells Fargo. Please go ahead.

A quick question. Can you comment on the outdoor lighting opportunities, and how you're going to get after that market, and who the biggest competition is there? And I have 1 other one.

We are contemplating a couple of strategies here. What we've been doing historically with it is going to our existing install base that we have what we refer to as beach heads, Herb, that we've already saved them a substantial amount of money, so it's very easy to go back to them with a conversation about a new technology. One of the things we had to overcome, quite frankly, in the early days with our outdoor, we took a different track compared to the rest of the industry. Everybody else was very aggressively pursuing LED technology, which is now really starting to fade away because people are recognizing it won't hold up in time. And we've had several real significant bake-offs I'll call them with our major national account where they looked at the Orion fluorescent, other fluorescent, induction, LED, and we won hands down in all categories. So now as you can see as I reported in the call, we're starting to get the traction.

Okay. Second, you don't release backlog; is that correct? Or there isn't much to release, because I'm trying to get a feel for how much business of the $20 million to $22 million in the first quarter you've actually booked. You mentioned the solar part of it, but is the first quarter pretty well booked, or is a lot of that still yet to be booked in?

Herb, to answer your first question, we do release backlog figures on a quarterly basis, and that was $7.8 million.

Oh, okay.

-- at the end of the quarter. Just to break that out, $6.5 million related to our solar business, and the rest was our traditional lighting and controls business. Now, the lighting and controls piece, I mean, we are a pretty quick turns business, where orders that are received are typically shipped within 2 to 3 weeks; and so we would expect all that lighting and controls business to go into Q1 revenue.

Solar revenue, we expect that $6.5 million to be recognized over the next 3 quarters. We anticipate a little over $2 million of that to be recognized in the Q1 quarter. And regarding our visibility into our Q1 revenue guidance, over 60% of our revenues that we've guided to, we have visibility into already.

Okay, going back to outdoor, I assume it's less than what, 5% of your business even for fiscal 2012? Is it that small, or do you think it's a little bit bigger than that, or could be a little bit bigger?

It's less than 5%.

Less than 5%. How long do you think it could take before that -- could it be a 10% category? Is that in the long-term target of your Company, or you don't think it could get that big?

We think it can get that big. If you look at all of our customers, we haven't done anything real official, but they all have a fair amount of outdoor lighting. What it really comes down to is, like every product I've ever released in my career, there's about a 3-year cycle. And of all of the numbers we've talked about, the outdoor is actually the newest of the 3. So we're actually really tracking nicely and ahead of what we would typically see. And I think the biggest thing we had to overcome there was this notion with people that LED is the way to go. And so we've done that, and we do what we call seeding the clouds, which we've done with our national accounts, get them all a taste for it and a technology demonstration, and the orders start to come, and that's really where the point we are right now.

So we're getting some pretty big wins with some of our national accounts. One of our big soft-drink bottlers is starting to roll through their facilities. We've gotten some real high-profile car dealerships. There's a lot of opportunity in the outdoor lights; and as I always tell people, Herb, the outdoor opportunity's real simple. When you fly at night, you look out the window, it's enormous in size.

Driving around the same way, just going by car dealers, I agree with you. Thank you very much, and keep up the good work.

Thanks, Herb.

Bye.

Thank you, sir. With that, I'm showing no additional questioners for today's meeting. I'd now like to turn the program back over to Mike Harris for any closing remarks.

All right. Thanks, operator. I'd like to thank everyone 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 a few months regarding our first quarter of fiscal 2012 results. Have a good evening.

Thank you, sir. Ladies and gentlemen, this does conclude today's event. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.