Orion Energy Systems Inc (OESX) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Energy's first-quarter fiscal 2012 conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Scott Jensen, Chief Financial Officer.

Thank you. Good afternoon, everyone, and thank you for joining us for the Orion Energy Systems first-quarter fiscal 2012 conference call.

Once again, my name is Scott Jensen, Chief Financial Officer of Orion. With me on the call today is Neal Verfuerth, Chief Executive Officer of Orion. 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 documents provides additional details and analysis on Orion's financial performance for the first quarter of fiscal year 2012.

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 would like to turn the call over to Neal Verfuerth, Chief Executive Officer of Orion Energy Systems.

Thank you, Scott. Good afternoon, everybody, and welcome to our Q1 conference call. We are pleased with our operating performance and optimistic about what we see for the future here at Orion. At this time I want to share some of the highlights from this reporting period, as well as some of the new opportunities that we see out there covering both new markets and new products.

Starting with some customer wins, as well as actually in some of these customer end market -- or, excuse me, product wins, we secured a piece of business with a large municipal parking garage project that includes 2100 fixtures that we design a new optic for light distribution incorporating our InteLite scheduling and ambient light control system. We have a major win at a major Detroit automotive assembly plant that first released 1650 fixtures with an additional 3000 pieces expected over the next couple of months. We had a major international chemical company visit us here at the Orion technology center in Manitowoc, and we discussed plans to target 100 sites across North America. So far we have completed projects at five sites, a mixture of cash and OTAs. 10 other sites have been approved, including the headquarters facility, along with 14 more in the queue.

In addition, we are working with this customer on renewable and load shipping projects with the load shipping using ice storage.

One of our integration partners located here in the Midwest has installed 70 C-Store sites with our recently released florescent canopy fixture with another 50 to 60 sites forecasted over the next 60 days. This same partner has also recently retrofitted several full service hotel properties with a major national chain owned by a management company with our exterior product, and we anticipate retrofitting about 60 hotels for this management company and look to use this as a platform to secure a national rollout with the parent organization.

Our freezer fixture LED product offering continues to gain traction. In addition to getting retrofit business, we are getting a lot more new construction business than we have had in the past with this product offering, and we have got a lot of interest amongst several mass merchandisers and national retailers and grocery chains, along with our existing customers in the food and beverage industry.

A market that we have worked on for some time and we are finally starting to get some traction with is the REIT and industrial tenant space markets. We received our first order within six days of the initial meeting with a large Chicago-based industrial REIT. This particular REIT has about 1800 tenants and 60 million square feet under roof here in the US.

Also, in that REIT industrial tenant space, we closed a turnkey project for a Midwest real estate owner who has about 50 million square feet of industrial space. We have already got one facility done, and we have got serving another 600,000 square feet with an additional 1.3 million in the survey process.

So one of the tenants here is one of the largest third-party logistics firms based in the US and was very impressed with Orion's fast order turnaround and quick installation.

On the utility front, we closed a $1.2 million deal -- it was actually an OTA -- in Tennessee Valley Authority territory with one of our integration partners. This particular job will deliver the entire TVA energy savings project for that state for the entire year in just one project.

On the financing front, we had a recent favorable SEC ruling on the revenue recognition for our OTA allowing us to treat OTA contract as sales type leases with more preferential revenue recognition for Orion. And we recently closed another OTA debt funding round with an equipment financing company at a very competitive rate, increasing our cash flow.

On the operations side, we have established a very unique third-party logistics relationship with a privately held trucking company that will help Orion reduce our operating costs, improve our customer service and reduce freight claims. The Microsoft AX ERP system went online April 1, and it has been very successful to the point that we are actually now started implementing some additional modules and online portals, one of them which will provide a lot of operational efficiency gains. Our partners will be allowed to actually enter their orders into online in like an EDI system and it actually will release all those orders, eliminating any potential for double entry and potential product interpretation or data entry errors. The project module will allow for an increased visibility for forecasting our pipeline and provide business intelligence to be used by both internal and external users as it relates to ongoing project implementation updates.

On the product and technology fronts, we have got a couple of additions to the InteLite platform. We have got wireless digital to analog conversion device, which the first application is being used in offering wireless full range dimming, the first project being a large facility here in Milwaukee, Wisconsin that is a lead platinum application. We have got a wireless analog to digital converter that will allow us in the same application to actually integrate the Apple iPad and use it for a light switch, very user-friendly device that will allow customers to automate their facility and control it in a very intuitive way.

So, with that, I would like to turn the call back over to Scott.

Thank you, Neal. The earnings press release issued this afternoon, combined with the supplemental information posted on our website, provides a significant amount of details regarding our first-quarter results. Accordingly I would like to focus my comments on, first of all, summarizing the change in the accounting for our historical Orion throughput agreements or OTAs.

Secondly, I will discuss some of the highlights for the first quarter, and finally, I will wrap up by discussing our guidance for the remainder of fiscal 2012.

As disclosed in our press release on June 29, we did receive concurrence from the SEC to treat our OTA contracts as sales type capital leases. The restatement of our financial statements resulted in incremental revenue of $2.7 million for fiscal 2010 and $2.8 million for fiscal 2011 and incremental earnings per share of $0.03 in fiscal 2010 and $0.02 in fiscal 2011.

Most significantly, though, sales type leasing accounting better matches the costs related to OTA activities and allows us to record revenue from the contracts at the discounted value of the future cash flows upon the project completion. We generally expect to regard revenue from OTA contracts within 90 to 120 days of the initial contract signing.

Due to the change in accounting for our OTA contracts, we will no longer be providing contracted revenues as a non-GAAP metrics. We believe that our period GAAP revenue plus or minus the change in backlog from the prior reporting period effectively identifies our period contract revenue activities.

The restatement of our prior financials required considerable effort, costs and was a great distraction to management during the first quarter. We are pleased with the eventual outcome, which we have believed for some time was a better recflection of the true nature of the OTA contracts and sales type leases.

In conclusion, we have completed all required financial restatement filings and believe that we have regained compliance with the SEC and with the New York Stock Exchange listing requirements.

Now I would like to move forward and talk about some of the highlights of our recently completed first quarter. Our revenue in the first quarter of $22.8 million was a 34% increase over the prior year first quarter. The year-over-year increase was driven by $5.4 million of revenue from the sales of renewable solar photovoltaic systems through our Orion engineered systems division. This was a $5 million increase over our first quarter of fiscal 2011.

We also recorded $2.9 million of net revenue from completed OTA contracts during the quarter. In the first quarter, our wholesale channels contributed 61.8% of our total revenue for the quarter, excluding the impact of sales of renewable solar products.

Additionally we are seeing an increasing number of our OTA projects being closed through our channel partners as Neal mentioned earlier with the PVA. This is encouraging as our partners continue to become increasingly more comfortable with the presentation of a financed program opportunity to their customer base and the opportunity to continue to grow topline at Orion.

Turning to gross margin, our overall gross margin during the first quarter was 30.9% versus 33.9% in the first quarter of fiscal 2011. Our gross margins declined due to the higher mix of renewable product revenue from our Orion Engineered Systems division and the sales of the solar PV systems. Gross margin for the first quarter from renewables revenue was 17.1% compared to gross margins from our florescent integrated energy management systems of 35.2%.

As we mentioned on our previous earnings call, we are working towards changing the way we structure our larger solar contracts to eliminate the negative gross margin mix impact experienced in the recent quarters due to our purchase and resale of solar panels. This change in contract will allow us to focus on delivering higher margins attributed to the integration value that we provide for design, engineering, installation and execution of the projects and should bring our solar project margins in line with the margins that we currently experience for our energy management systems projects.

While we are working through these contract structured changes, some of our legacy pipeline deals were structured under the prior contracts, and we do expect that this dilutive gross margin impact will continue into our second quarter but at a reduced level.

Turning to the balance sheet, our inventory increased by $2.7 million versus our March 31, 2011, ending balance. Approximately $1.5 million of this increase was due to the timing of some solar panel purchases from those legacy pipeline deals mentioned earlier for contracts that we anticipate delivering product for during the second quarter of fiscal 2012. Additionally we increased work-in-process and finished good inventories based upon our growing backlog.

A few comments on Orion's liquidity. We finished the quarter with $13.6 million in cash and short-term investments, a $1 million increase compared to the March 31, 2011, balances. As Neal mentioned, during the quarter we completed our third tranche of debt funding for OTA contracts with a $2.8 million deal. We now have two debt sources along with the long-standing relationship we have had with an equipment finance company for the purpose of selling OTA contracts direct. All of these sources will continue to help provide the capital support for our growing OTA programs.

We had no borrowings outstanding under our revolving credit facility, which continues to have availability of $13.3 million.

Finally, we are reaffirming our previously provided annual guidance for fiscal 2012. We currently expect GAAP revenues for fiscal 2012 to be between $112 million and $118 million, and our expectation for GAAP earnings per share is between $0.18 and $0.22 per fully diluted share.

This concludes our prepared remarks this afternoon. I would now like to turn the call over to the operator for the question-and-answer portion of the call.

(Operator Instructions). Philip Shen, ROTH Capital Partners.

Congrats on a nice quarter here. So I wanted to talk about your outlook. I know in the past quarter you guys provided a quarterly outlook, and so you're not doing that this time around. But perhaps you can help us understand what to expect perhaps for Q2?

We provided a quarterly outlook really for Q1 based upon Q1 being our softest quarter in terms of seasonality, and we wanted to make sure we were messaging appropriately. I think Neal's remarks about the number of customer opportunities and the successes that we are seeing are really a good indicator of how we feel about the overall business and the reaffirmation of our annual guidance. So we are extremely encouraged by what we are seeing right now in terms of customer behaviors and encouraged about the opportunity to deliver on our annual guidance. But we would like to kind of steer away from quarterly guidance so that we can make the best decisions for the long-term benefit of our shareholders.

Okay. And then I know you guys are experiencing some positive things on the front lines with your customers, and that is very encouraging. Having said that, I don't know if you guys saw, but the market S&P 500 was down 5% today, and a lot of that is due to fear about a potential double dip recession. So given the lessons that you guys learned from the recent recession, what would you do if the US economy did experience a double dip? For example, do you guys have some recession plans in place to take them off the shelf? I know you guys are not feeling it right now in terms of what your customers are talking to you about, but it is just the topic du jour, if you will. So I wanted to get your sense of how prepared you guys might be and how you might be -- might think about how to operate under a double dip recession scenario?

A couple of responses to that question. I think as management we are always prepared for downturns in the economy, and we are also prepared to take advantage of opportunities as we see them. We have demonstrated in the past that we have the ability to drive significant cost reductions through our operations. If you will recall back to fiscal 2010, we took a little over $3 million of costs out of our operations, specifically in our manufacturing and through some headcount reductions, and that was in response to some of the initial recession and credit crisis concerns.

We also reduced some costs again in our manufacturing facility last fall the second half of fiscal 2011. So we will be as strategic as we can about trying to take costs out of the operation as necessary. I think we have demonstrated that we have the ability to do that.

Additionally then, too, a recession and concerns about capital spending really accelerates the OTA program as an opportunity to present that to customers. And, as long as we can continue to make sure we have got the right capital structure in place to be able to support those contracts, even in a down economy, the lighting facilitate costs could be fixed, and I think that most commercial and industrial customers have gone through their process of rationalizing facilities, and they have already eliminated facilities that were underperforming and not necessary to their core facility footprint.

So I think along those two lines we are absolutely prepared, and we will address the business environment as appropriate.

Great. Thanks. One other question. I noticed working capital increased substantially quarter over quarter as well as versus prior years, let me see, versus 2011 as well.

So days sales outstanding based on my calculation here is about 120 days now. At the end of Q1, that compares to last year's about 69 days. Can you walk us through what is going on there? Inventory is also -- I think there is a bit of seasonality as well ticked up. Just help us understand what happened to working capital and, then, on a go forward basis, what you expect to do?

Sure. I think one thing that is important to understand is the reinstatement of the revenue recognition treatments for OTA contracts will record receivables both for the current 12-month portion of those in our accounts receivable balance, along with the longer-term portion for the outlying years of the contract. We started disclosing in our prior 10-Q a financed receivables table to allow investors to better understand the long-term nature of some of the receivables. So I think the creep you are seeing in DOS is certainly driven by the increased finance contract receivables now on the balance sheet.

Secondly, as it relates to inventory, we have talked at great length about our investment in the wireless controls and InteLite. We are extremely optimistic about the opportunities. We did not talk about another customer recent win where we completed an OTA project last year for a customer at multiple locations with the [I2]. And they have subsequently brought in some cash purchases for an additional rollout of facilities, again, with the InteLite product being installed.

So we are encouraged about that. We believe that there is a tremendous opportunity to move through that inventory.

I talked a little bit about the timing of some solar orders that were delayed. We have made an investment in the panels. We will ship those here in the second quarter and get them converted into receivables. So we are certainly paying attention to the opportunity to convert working capital into cash, and we are going to work on that through the balance of the year to deliver our cash flow targets.

Great. That is really helpful. Thanks and congrats again on a nice quarter, and I will get back in queue.

Eric Prouty, Canaccord Capital.

Actually a bit of a follow-up question on the receivables in the inventory. You talked about a new system that you have in place to dialogue a little more seamlessly with the channel, etc. Should that over time have the impact of being able to lower the amount of inventory you need to keep on hand or the quickness of which you can collect payments? Do you expect any meaningful changes there?

Yes, great question. We absolutely do believe that will benefit working capital. As it relates to those solar projects, we are going to move to a more traditional construction AIA billing process. We will not have the inventory. The receivables will be on that percentage of completion, so they will be a decrease as it relates to the solar opportunity going forward. It has just taken us a little bit of time to get some of those converted contracts into the pipeline and start converting them into closed deals.

Just another question. On the OTA contracts in particular, I'm just trying to get the arms around the moving pieces with the new accounting. Will that impact for those particular projects, will they be of any higher or lower margin than a non-finance project, or does that just show up as maybe a reduced level of revenue because it is discounted and present valued?

It is a little bit of both actually. Certainly there will be the discounted revenue, and we will record interest income over the life of the contract. I think an impact as well relates to the velocity of OTA contracts through our partner channels. Because effectively, if you think about the gross margin impact where we are moving that product through at a wholesale value, it is being converted to a retail price point, and we are bringing that back onto our balance sheet effectively repurchasing the contract, and there is no margin for us in the markup, if you will.

So we will have an increase in revenue. The gross margins dollars remain the same, though. So there will be a little bit of a dilutive impact on gross margins.

As a percentage, but not from a dollar standpoint?

Right.

Okay. Perfect. That is good to understand. And then also concerning the channel, have there been any changes -- and you can talk in rough numbers -- but percent of product being sold through the channel internally, etc., over the last quarter?

We did have a nice increase sequentially. The channel partner revenues non-solar since that is all direct for us currently, we are almost 62%. We finished the prior year at 53%. So we had a really nice uptick, and a big driver of that is the number of OTA contracts that our partners are starting to execute and close.

Okay. Great. And then finally, on the topic of solar and maybe some of the other newer technologies, obviously what has been killing many of the solar companies, a pretty dramatic decline in module prices. We are also starting to see LED pricing decline significantly. Is that opening up a greater opportunity as it hastens the payback period for customers, or is that not a meaningful driver for business yet?

I think naturally to some extent it is a driver, Eric, given the fact that just the overall panel price has come down substantially. And needless to say that the overall project comes down, and I think we are starting to see the economics improve without having to have obscene incentives from the recs or the government, etc.

I don't know how low it can go. Certainly from where it was just a couple of years ago, it is almost hard to believe it has come down as it has, and I think we are going to have to see the bottom pretty soon. You are going to have to start expecting compromising quality of the overall product. But we are seeing in areas payback as little now as three years on a solar job. So it is going to get interesting.

Great. And then Neal, maybe just a follow-up to that. Is there any other technologies out there where you have seen either the pricing/payback come down or the consumer acceptance of a particular technology hit a level where it is starting to become more interesting for you guys to consider offering?

I think we have been ready much just sticking with our core product group. Of course, we are always looking at different things, but if anything, the increase in the wireless continues to ramp.

You know going back and selling jobs to people that we did the original project back in 2002 and 2003, and now we are reselling them our latest in technology both lighting and controls. So we're very comfortable right now with the product offering that we have. Now it is just a matter if anything looking at other market where we can take the exact same product and just kind of repackage it and with a different application like the C-Store canopy. It is the same essentially technology platform, fixture, etc. that the outdoor parking lot is. So we are looking more all along the lines of okay, what are other verticals we can get into without overextending our manufacturing or having to bring in additional inventories, etc.

Jeff Osborne, Stifel Nicolaus.

I missed, Scott, the solar revenue in the quarter, and I think you gave a sequential comparison, if you could just repeat that.

Yes, it was $5.4 million in the quarter. That was $5 million higher than the first quarter of 2011.

And what was it last quarter?

I don't have that. I will circle back with you, Jeff.

Okay. And then following up on Eric's question about the solar price drops, if my memory serves me right, I think you only thus far have only used Solyndra as a supplier, which is a unique architecture and many advantages for their approach. But given it is a private company, I was just curious, are they passing on that similar price drop that the industry has experienced in recent months, or have you decided to perhaps look for other suppliers to take advantage of the lower price?

No, it has been -- they are not going to stay in business long as you might guess by not being competitive. So we have been very impressed with the price reductions as they get more efficient, especially that new fab operation they have. So they have been very competitive as the other primary manufacturers have lowered the price. Solyndra has been very consistent with their price reductions as well.

Got you. And then, Scott, if I heard you right, on the solar side, I heard the 17.1% gross margin this quarter, and you will have some modest impact next quarter. When would you expect the projects to be completed and flow through the methodology that you have used in the past and see that switch in gross margins just as we think about modeling for the year?

We are starting to see some of that with some of the new deals that were closed in the current second quarter. We have seen a conversion. We had a few contracts that were still out there. I would say as we get into the end of the second quarter it is always going to be specific, but I think it will be continuing -- the dilution on the margins will be greatly reduced. So we are already starting to see it. We just have some of these legacy deals.

Got you. And then the last two-part question here. Just how do we think about the rhythm of OpEx through the year? Any hiring plans coming on, or would you expect to stay at this $7 million, $7.5 million run-rate that you have have been annualized or averaged between the past few quarters? And then also just any thoughts on tax rate as you hit profitability per quarter in the latter half of the year?

Yes, our OpEx I expect that you will continue to see a little bit of a transition moving forward into the next quarters. We are continuing to invest in the sales and marketing infrastructure here at Orion. We had a little bit of a higher tickup in some of our G&A expenses in the quarter just related to restatement activities.

So I think we are going to see that continue to move up. Our guidance has included an investment in sales and marketing where we will see that move from a $7.5 million to closer to an $8 million run-rate in the back half of the year.

Any thoughts on the tax rate -- (multiple speakers)

Yes, on the tax rate, our effective rate for the quarter was 39.8%, I believe. And, as we talked about at the last call, the conversion of the incentive stock options to nonqualified really eliminates the volatility in our effective tax rate. We believe that it's going to stay at levels that will be fairly consistent now in the high 30s to 40 range.

At this time I would like to turn it over to our speakers for any closing remarks.

We would like to thank you for joining us today, and we look forward to speaking with you again in a few months regarding our second-quarter fiscal 2012 results and updates. Thank you. Have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.