Orion Energy Systems Inc (OESX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Orion Energy's Third Quarter Fiscal 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Scott Jensen, Chief Financial Officer. Please begin.

Thank you. Good afternoon, everyone, and thank you for joining us for the Orion Energy Systems third 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 provides additional details and analysis on Orion's financial performance for the third quarter and year to date periods 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 importance. Similarly, statements that describe future plans, objectives, or goals are also forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters that we have described in our press release issued this afternoon, and in our filings with the Securities and Exchange Commission. Except as described in these filings, we disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all.

Now, I'd like to turn the call over to Neal Verfuerth, Chief Executive Officer of Orion Energy Systems. Neal?

Thank you, Scott. Welcome everybody to our third quarter fiscal 2012 conference call.

The last quarter -- actually the last several quarters, the Company's actually managed itself through several unprecedented challenges throughout fiscal year 2012. We had the Solyndra bankruptcy; critical components supply issues and price volatility; an SEC review; a restatement of our financials for fiscal year 2010, '11, and '12; and, a switching of our external auditor to a firm that is very well suited, we believe, to take us to the next level and beyond.

Despite these distractions, our future, we believe, has never been brighter. I'd like to share with you some of the key performance indicators we as a management team use to measure our performance.

Our contracted revenue is what we think is probably the best way to assess the [acceptance] of our value proposition and the power of our sales engine. The contracted revenues have increased 83% quarter over quarter and 49% year over year. Operating cash flow has increased from a negative $10.7 million to a positive $6.5 million. And the availability on our line of credit is $15.5 million.

We created our call center in Q1 of '12 to accelerate the increase in our sales pipeline as well as increase the overall utilization of our in-market sales people. The call center has booked appointments in 1,938 facilities, resulting in the creation of approximately $93 million in new pipeline.

Our wholesale channel sales have increased from where they were in fiscal 2008, 10% of our top line, to 64% of our top line in fiscal 2012. And I just want to remind our listeners that this mixed -- this increase in mix in the wholesale revenue versus what used to be our retail revenue can reduce our top line by as much as 60%.

However, this metric provides really two important KPIs as we look into the future. First of all, it validates the increase in demand for Orion's products. It also validates the effectiveness of the Orion sales process. We have now demonstrable evidence of repeatability and the ability to scale our sales process and integration into new sales people as they come on line.

Given the improvements we're seeing in the market and the consistent improvement in our internal KPIs, we started in Q3 to accelerate the ramp of our sales force expansion, primarily through our wholesale channel partners. In Q3, we've invested $2 million into this initiative. These investments include our new call center, our InteLite training labs, technology demonstration lab, and UL -- internal UL testing facilities. Furthermore, we've added headcount internally to our call center and our in-market sales and technical services group, which is reflected in an increase of $1.5 million in our SG&A expense.

We've had an initiative -- ongoing initiative we talked about in the last several calls that we call our Feet on the Street. To further facilitate that, we've relocated Dr. Stuart Ralsky, our Senior VP of HR, to a newly established Chicago office. The mission of this office is to provide a fee-based service for our recruiting, vetting, placing sales engineers into our partner organizations. Over the last year and a half, we've developed a proprietary methodology for assessing and selecting top sales and engineering professionals who subsequently demonstrated a high and sustained level of capability within Orion's industry.

On the customer win front, we have a new initiative that we'll talk about in further detail but just to give you a feel for where we're going with our business, this new initiative we're calling Energy Independence. One of our major national accounts has completed now its second facility in which we deploy the entire suite of products to include the compact modular, high performance lighting; the InteLite control; the Apollo light pipes; and a PV solar system. This holistic approach allows our customer to go off the grid during the summer peak times when it matters most at a life cycle cost competitive with the grid.

We continue to build momentum with the InteLite platform and expand its capabilities. We recently introduced what we believe will be the ultimate solution for high bay lighting. And what we believe is going to be this future is using our InteLite wireless controls on full range dimming ballasts. In combination with the InteLite and our dynamic control device, we have truly adaptive controls that will allow the fixtures to be dimmed and brought to full brightness depending on the actual level of activity underneath the individual fixture. So, for example, when a forklift or when a customer is just passing through underneath a fixture, we won't turn the fixture up to full brightness. We'll turn it up to maybe 30% or 40% brightness depending on the time of the day and only if we see sustained activity, will we turn the fixture up to full brightness.

What we've seen in our beta test in a DC customer of ours in the food service industry is an operating cost that ranges between $0.08 to $0.11 per day per fixture compared to $0.40 a day for a typical 6 lamp T8 solution and $0.80 per day for the HID legacy technology. So, given the reduction of approximately 90%, you can see how it's going to certainly increase our value proposition in the eyes of the customer. We'll actually further our capabilities in installing the newest generation of technology and that while removing HIDs and competitive fixtures but even Orion's first generation of fixtures as well.

We've also introduced as part of the InteLite platform wireless metering capability. The first use for this will be to demonstrate the actual savings, especially given the fact we're now telling customers we're going to be able to deliver a 80% to 90% reduction. So they'll be able to see it in real time in their facility, but also we're already talking to our utility customers about the ability we now have to provide permanent real time measurement verification. The InteLite platform will provide wireless permanent [M&B] with data being pulled from the system every minute and pushed up to the Microsoft Azure Cloud.

Going forward, the combination of Orion's superior technology, thought leadership, a proven track record which now includes over 7,000 facilities retrofitted, a billion square feet under roof, and a cumulative savings of over $1 billion helps us get that next sale for that customer, whether you're looking at the InteLite control, the Apollo light pipe, or even the PV solar. We have a world-class vertically integrated manufacturing facility that's only operating at 17% utilization, a repeatable and scalable sales process. We have a company that is very well positioned to take advantage of any and all opportunities in our target markets. And most importantly as we recruit partners to sell our product in the future, we have truly a sustainable differentiation in the market looking at our technology and overall value proposition.

So with that, I'll turn the call over to Scott.

Thank you, Neal. This afternoon I'd just like to take some time here to address and clarify a few items. First, I'll discuss the impact of the revenue restatement and how this change will impact Orion positively going forward. Secondly, I'll comment on our updated guidance. And finally, I'll briefly cover some of the key financial highlights within the quarter.

As we disclosed in our press release on February 1st and earlier today, the financial restatement related to revenue recognition from our solar contracts is a matter of timing. There is no impact to the overall earnings or cash flow from our solar contracts. We also believe that this change, while admittedly a distraction, provides some key benefits to our business as we move forward. Let me explain.

First, the percentage of completion revenue recognition method better aligns our project activities with our financial results. On an individual contract basis, the impact of this change will be to push out revenue from the product delivery until the installation begins. And also it will bring forward the installation revenue as the project progresses. We believe that this change will greatly enhance our forecasting ability and allow us to more accurately predict when our backlog will convert to revenue.

As our solar contracts have grown in size and complexity, this method change effectively helps to reduce most of the long-term forecasting risk related to estimating project completion and trying to predict that future date sometimes out over a year when a project reaches completion and several million dollars of service revenue suddenly gets recorded within the financial statements. In that scenario, a simple one-week delay on project to completion across a reporting period can have a meaningful impact on our results.

Secondly, we expect this change will provide better cash flow and working capital management. The decoupling of revenue recognition from the delivery of the product means that we can reduce material lead times and have the products arrive on the job site as the installation begins. The result is better execution of working capital management from the inventory purchase cycle to cash collection.

Finally, we believe that shortening the time period between the delivery of materials and the installation process also allows us to better manage vendor business risk. We recognize the volatility in the solar supply chain, and as Neal mentioned, we've experienced firsthand the difficulties in resolving project concerns when a supplier is no longer in business.

As previously mentioned, we have engaged a new external audit firm to re-audit our fiscal 2011 year end. We're working through this process as expeditiously and as thoroughly as possible. And we expect to complete this process and bring our external filings current in May of 2012.

Moving on to guidance, as we disclosed in our press release, we now expect revenues to be between $100 million and $103 million and earnings per share between $0.03 and $0.05.

Capital spending continues to remain challenging but our pipeline is strong. However, conversion of this pipeline into purchase orders still takes time. We continue to invest in the front end sales process to increase pipeline, converting that into revenue and orders.

Additionally, in the current year we've experienced a gross margin mixed shift as our solar business has increased. The mixed shift has impacted our original earnings per share estimates by approximately $0.06 in the current year.

Related to our third quarter and year-to-date financial performance, we've provided a fair amount of content within the supplemental information posted on our website earlier today. I really want to focus on a few key areas of our performance where we've excelled and then touch on some areas where we continue to work hard to improve.

First, our cash balance and our liquidity is strong. On a year-over-year basis, our cash and short-term investment balances have increased by $8.4 million or approximately 85%. Quarter over quarter, our cash position improved by $2.7 million. For the year-to-date fiscal 2012 period, we've generated $6.5 million in operating cash flow compared to $10.7 million used in operating cash flow for the same period of the prior fiscal year. That's a tremendous swing and evidence of the success of the Orion team to increase cash collections, manage vendor terms, and drive positive cash flow results.

There were no borrowings outstanding under our revolving credit facility, which has availability of $13.3 million. Additionally, we completed our OTA credit facility in September of 2011 with JP Morgan Chase. We did not borrow against this credit facility in the December quarter and we still have access to $3.2 million in capital for funding OTA projects.

In November, we announced the completion of a program agreement with De Lage Landen for the purpose of funding OTA projects. The agreement differs from our previous announcements on OTA funding sources in that it provides for the non-recourse transfer of ownership of the asset directly to De Lage Landen upon project completion.

We're pleased with the progress we've made in securing multiple varied funding sources to support our OTA program. Each one of these partners from equipment finance companies to traditional commercial banks have strong balance sheets and have recognized the sizable opportunities for financing energy efficiency projects. We do not view access to financed capital as a limiting factor on the ability to generate growth from our OTA programs.

As Neal mentioned, through the first 9 months of our fiscal 2012 year, we've already reached $111 million in contracted revenues, which is a record level and stacked up against any prior fiscal full year. Contracted revenues are a key indicator of the success of our sales force and customer acceptance of our products. Due to the increasing volume of longer-term solar business being won, we believe contracted revenues is a strong measure of our revenue growth success. Our backlog of $50.6 million is also at a record level and more than double from our September 2011 backlog total.

The investments we've made in expanding our sales staff, our sales operations staff, our engineered systems division and the development of new products like our exterior lighting product are delivering results. We continue to remain profitable in spite of a challenging capital spending environment and we remain focused on driving top line growth to unlock earnings potential that we have in leveraging our infrastructure, both from our manufacturing operations and our operating expense lines. In the December quarter, we reengineered product flow through our assembly production cells, which will allow us to deliver more product at lower costs.

While our performance through fiscal 2012 has shown improvement, we continue to work hard to improve in some key areas. We recognize the cash flow potential available to us through the management of our inventories. As Neal discussed, the supply side has created some significant concerns over the availability of critical components. As we've discussed in previous calls, we've also invested in new products like our InteLite wireless controls, dynamic control devices with a specific focus on broadening our product offering. We know we can improve on inventory management while continuing to manage supply side risk appropriately.

Finally, we continue to focus on margins and managing costs. Volatility in supply side often brings pricing volatility as well. And our margins were impacted slightly. In the third quarter, our cost of sales was impacted by 70,000 or about 30 basis points of margin due to increasing costs in fluorescent lamps. We're working to manage these cost increases through negotiation or passing along costs where we can.

We also continue to improve on our solar project operations to help drive higher service margins. In our prior quarterly conference call, we discussed our efforts to move out of the procurement side of solar panels within the solar contracts. While we have had some success and our backlog would have been an additional $8 million higher if we were continuing to contract for all solar materials, we recognize that our customers want an integrator that can manage all aspects of a project, including the materials procurement. In competing for business providing full turnkey solutions and managing all aspects of a project can be the difference between winning and losing. We believe that the revenue recognition accounting change and the benefits that I touched on earlier in managing working capital and the related cash flows will allow us to continue to make incremental margin and profit on the solar product of these projects. It may result in lower overall gross margin percentages but will deliver higher incremental earnings potential in the future.

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

Thank you. (Operator Instructions) Colin Rusch of ThinkEquity.

Yes, hi this is Noah Kaye in for Colin. Hello, gentlemen. Can you just ask about -- can you talk about the productivity of your sales hires that you're seeing?

The new hires -- it's a little early in the game but we're seeing just getting the better quality of (inaudible) form and driving their calendars through the call center. We're seeing even actually for the first time I think we had a record, the first 30 days we actually had a sale from one of our new guys. So and I think our ability to now screen them and vet them more thoroughly is going to make sure that we don't get nine months down the road or a year down the road and find out it's not going to work out.

Great, great. Can you also talk a little bit about the competitive landscape for lighting? How's the competition looking right now?

Well, the competition is certainly out there. That's one of the reasons that we accelerated the release of the full dimming InteLite solution just to give us that lead again that we like to have out on the marketplace as the unique value proposition, not another guy with a light fixture.

Great and last question, are you seeing lower LED prices opening up new opportunities in terms of new markets?

It is interesting. It's almost linear to what we've seen in fluorescent, which isn't a surprise given it's all semiconductor based. But we've seen probably 50% reduction in the price of LEDs in the last 9 months or so, but we still -- there's still the challenges that exist with using in a general area lighting, the quality of light, the visible comfort probability. What we've found probably the primary user to date has still been our freezer applications.

Great. Thanks so much, guys. I'll jump back in queue.

Thank you.

Thank you. Philip Shen of ROTH Capital Partners.

Good afternoon. Thanks for taking my questions.

Phil, how are you doing?

Good. Thanks. So, let's talk about your customers. Can you give us a sense for the types of customers that you're seeing that are maybe doing better than others or providing you more business than others? And if possible, is there a geographic mix of strength that you can share as well?

It's really kind of a mixed bag, Phil. We're seeing a lot of activity from Detroit in the automotive sector. Not only at the prime manufacturer level like Chrysler. We've done another nice facility and we're getting some other tier 1, 2, and 3 suppliers. So, we're seeing a lot of good movement there. We're seeing in our typical soft drink and beverage customers. So a lot of the same suspects. What we are seeing that's unique though is as the economy starts to get some wind at its back, a lot of the folks are struggling with to getting their own critical components for making their product, which ends up being a deferral to us because they're busy just trying to get their supply chain issues in order and getting just people and resources to fill their orders.

Right and I think I recall seeing in your release that CapEx budgets remain tight. What's your latest thinking on that or at least your sense of what needs to happen in order for those purse strings to open?

Well I think right now it's they're tight and the -- kind of ties into my last comment, Phil. The focus is on deploying capital in fixturing machine tools etc. to enhance their core business.

Right.

So, the way we, the optics are for us is that the CapEx is still tight and it's certainly getting released but what we're seeing released right now are a lot of core business capital spends because as you would certainly understand that's the first priority for these companies. And a lot of them through the downturn really had some pretty deep staffing cuts. So they're not only scrambling to get tools and raw materials and these rare earth phosphors shortages are affecting a lot of industries. There's a lot of volatility in the pricing. They're also scrambling around trying to get people that can run machines and just the normal processes it takes to make whatever their finished good is.

I think we're seeing capacity utilization in the industrial economy kind of just hover right below 80% still. So, perhaps if we can break through that, you guys can start to see some additional business or additional growth let's say. Can we transition to solar for a moment?

Certainly.

I know Solyndra was a bit of a hiccup for you guys. On the last conference call, you guys talked about Yingli as a potential supplier. Who are you guys thinking about or working with these days, given the fact that your backlog has grown substantially. I think your bookings for solar were about $35 million. Who do you expect to supply you guys with the solar panels?

Suniva out of Atlanta.

Do you expect to primarily single source?

Well, we're going to have our primary partner. If there's an occasion where a customer has a different idea for whatever reason, there's a lot of people out there right now with a lot of capacity looking for a home for it. So, we have our primary partner and that's who we lead with. But there are other applications or relationships or whatever that may change that. But from our perspective, Suniva is the primary for us right now.

Great. And do you have a sense for what kind of megawatt volumes you could see in 2012?

It's just -- there's a lot of opportunity out there. There's a lot of projects where we're seeing right now that are stranded out there because the integrator they were working with is gone because of the change in the ITCs. You know the financing they had has maybe been pulled back or retooled and it's not cost effective. We're just finding a lot of opportunities out there right now and are selectively looking at them and deciding which ones we want to pursue, which ones we want to take a pass on.

Good and when you think about that backlog that you have for solar, what's the overlap that you have with existing customers that have purchased lighting products from you? And what's the other mix or piece of that that are from customers that had projects that are stranded and you've never done any lighting business with?

I think we've -- it's probably strong to the side where they're existing or excuse me they're new relationships, which is good for us because they always have lighting, exterior lighting, interior lighting, light pipe opportunities. So we look at it either way it works for us. But it is kind of nice to acquire a new relationship as part of the solar transaction.

Right and are you finding that the solar -- it's harder to sell to like a Chrysler or a Coke? Are you selling any PV into some of those more established distribution centers or companies?

It's really kind of a mixed bag out there right now. We've done several Coke facilities. They're off the grid applications that I referred to in my script earlier. It's just all over the place. Then there's the companies that you never heard of. I know one of the larger jobs is the company that distributes Fiji water out in California and I think that one was about 3 megawatts. That was a pretty good sized system.

Great. One last question if I may and then I'll jump back in queue. In terms of OpEx, with the pull back in guidance, can you give us a sense for how OpEx might trend perhaps in dollar terms through the year?

Phil, you're talking about the last quarter of this year?

Well I guess I'm speaking more to the calendar year. How do you see OpEx trending through the calendar year?

Let me -- and so we haven't provided any guidance yet which covers a predominant amount of the next calendar year. But what I can tell you is that the G&A if you look year over year has been relatively flat. We've held the line there. R&D has been fairly stable for us. We're looking selectively as Neal mentioned at our sales investment but also as he also mentioned about our Chicago office trying to selectively recruit for our partners in market as well. So that we're not incurring that direct cost in our operating statement lines. So, what you saw for the December quarter and the kind of trend for the current fiscal '12, it'll maintain at that level and it may increase a little bit variable as our revenues move.

Great. Thanks very much.

Thank you.

Thank you. Our next question is from Steve Shaw of Sidoti & Company.

Most of my stuff was touched upon. Forgive me if you already mentioned this. I was disconnected a few times. Can you just provide some general color on what's going on in the solar market today? I know you spoke about the supplier change and what's going on with Solyndra. But just anything in general on the current solar market?

Yes, even with the change in the ITC December 31, we're very optimistic. We're seeing a lot of projects out there that were in the queue and are now stranded because the integrator is gone or the financing has been changed or actually taken off the table. We're seeing a lot of projects. We're getting a look at a lot of projects that are well down the path of approval. Now it's just a matter of getting somebody that the owner feels comfortable in doing the deal. There's been a lot of people that we were competing with especially in that Jersey market that are just gone, plain and simply they're gone. So we're actually pleased with what we've seen. There's been really a consolidation in the industry and a lot of the guys that got into the business quickly, kind of the quick buck guys, are getting out just as quickly. A lot of opportunity there.

Okay, thank you.

Thank you. There are no further questions in the queue at this time.

Okay, thanks operator.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Everyone have a good day.