Orion Energy Systems Inc (OESX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Energy first quarter 2013 conference call.

(Operator Instructions).

I would like to now introduce your host for today's conference, Mr. Scott Jensen. Mr. Jensen, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today for the Orion Energy Systems first quarter fiscal 2013 conference call.

First off, let me apologize. It's our understanding that our earnings release has not hit the wire yet and we're working frantically behind the scenes here to make sure that that happens as efficiently as possible, so I apologize. We'll try to provide a little more clarity on our earnings release for the first quarter and, again, we apologize for the delay in the earnings release being available to you.

Once again, my name is Scott Jensen, Chief Financial Officer of Orion Energy. With me on the call today is Neal Verfuerth, our Chief Executive Officer.

As a reminder, the earnings press release issued today once again includes a section that briefly discusses the supplemental information document posted to our website. This supplemental information document provides additional details and analysis on Orion's financial performance for the first quarter of fiscal year 2013. I will now read the safe harbor statement.

Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words such as believe, anticipate, expect or words of similar import. Similarly, statements that describe future plans, objectives or goals are also forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings, we disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call if at all.

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

Thanks, Scott.

As Scott had alluded to -- first of all, good afternoon, everybody. Thanks for taking the time to listen in on our call today.

As Scott had alluded to, due to technical snafu, our release has not hit the wire yet, so I'm just going to read what my statement was. It really fits quite nice with this call.

Given our recent release of the InteLite Integrated System, which addresses the market for both LED and fluorescent arranged dimming technologies, the quarter we're reporting is consistent with our expectations for our year?to?date progress.

Our value proposition continues to be validated by customer adoption. Furthermore, the higher average selling price of this product presents numerous growth opportunities well into our future.

So with that, I just want to talk a little about technology. I've been in the business now 30 years, and I probably have seen more advances in technology in the last 18 months than I have the previous 28 and a half years. The technology on a general basis in lighting has really been evolutionary at best since Thomas Edison first invented the first electric light source, the incandescent light bulb. In 120 years, there hasn't been really a whole lot change, again, mostly evolutionary, with the incandescent bulb still being a cornerstone of the lighting solution for many commercial buildings and most of the residential customers in America today. Only recently has the technology really become revolutionary, with the introduction of the LED technology. I read recently -- it's kind of really thought-provoking ?? that with the LED, it's only the fourth lighting technology in the history of mankind, starting back to fire, so it's really quite profound.

With that, there are challenges and opportunities, starting with don't be mislead, which is a campaign that we actually put out some time ago to talk with our customers because of all the hype that surrounds the LED technology. When we say don't be mislead, we've seen a lot of companies out there making a lot of representations essentially trying to defy physics and making promises as relates to performance and longevity that they're just not going to be able to keep. So when you're looking at launching some revolutionary technology, it's really important that the promises we make are going to be kept.

And a big advantage to Orion as we go to the market with this next generation, if you will, of technology is the fact that we have a very substantial existing install base. We have 8,000 facilities, 8,000 plus facilities, where people know us and we've saved them an aggregate over $1 billion. So for us to go there with the next thing, it's a much easier sell than customers -- or, excuse me, competitors -- that are out there trying to bring a new technology to the market and trying to acquire a new customer relationship at the same time.

Another challenge and opportunity, as we see it, is the expectations of the next best thing out there. With these new advances in the last 18 months or so, customers are saying to us, end users, what's the next big thing? Well, we here at Orion, we can say we have it. We have the Apollo® Solar Light Pipe, we have the InteLite platform and we have a technology pathway well defined into the future to take customers to the next level of savings, not only in lightning but in HVAC, simple control strategies, demand response, measurement verification, metering, process control, etcetera. We have a technology pathway that's well established and we're already talking to customers about where we'll be not just today but also well into the future, the next two or three, even five years out, with the InteLite platform.

And we, of course, have a pretty substantial renewable portfolio. We have really a core competency of the Company we've developed in installing renewable technologies, putting our customers in the position that we can make them super energy efficient and, if they should choose to do so, go all the way to the point of being off the electric grid for several hours a day actually generating power at their place of business. So, again, what is a challenge to some is an opportunity for Orion.

CapEx constraints are still a challenge, even in times as we are seeing today, certainly better economically than they were 18 months ago but nonetheless there're still CapEx challenges. We have customers that are sitting on the fence deciding where to prioritize these CapEx expenditures, so they put them into production or new tooling and fixturing or into cost savings initiatives and, as you might expect, many times when the economy is picking up as it is they're looking at putting the dollars into their core business. So we're developing additional innovative financing solutions, most recently the megawatt supply contracts, allowing our customer to put the technology in, the Orion technology, without technology or financial risk.

As we continue to perfect that, we see our business more and more moving towards financing, allowing customers to keep their CapEx dollars and put them into their core competency. And this is a program that we've been working on for some time, so we've already got a good track record of 400 plus facilities using our financing tools, and we see that expanding in the future as we get smarter and better at deploying these new financial tools.

The technology and learning curve, there's an awful lot that has to take place inside the organization here at Orion from a manufacturing standpoint and sales and project management and tech services and everything it takes to support this next generation of technology. We've made investments, as we've been talking about on previous calls, into Orion University and all of our training tools and facilities, and we see that as just another barrier to entry and a way to build up our position and real sustainable differentiation between us and many of our competitors out there that have not made these investments.

So, again, it's a lot more complicated than business with the digital lighting and controls, but it's going to keep a lot of the people that are in the fluorescent space today out of the business because of the level of complexity that surrounds this new technology, not only understanding how to build it but how to integrate it, how to support and service it, and sell it in the customers' facility.

Thermal and optical optimization, that's been a core competency of Orion going back many years, and that doesn't change regardless of what the technology is. We're talking the basic physics of optimizing optical and thermal performance. So what we've learned over the years in our fluorescent offerings and the Apollo Light Pipe, even in our InteLite controls, as it relates to managing thermal and optical in most of our products also comes into play, allowing us to produce a world class LED product.

Contra to what many people think, we've had our toe in the water for some time, actually several years, as it relates to LED. We've done in excess of 3 million square feet of retrofit for many of our food customers ?? Cisco, US Food and others. What you see here if you're online is a photograph of a job that we had done in Arkansas for one of our national accounts, replacing existing fluorescents with the new generation LED with the controls. So 3 million plus square feet is more than what a lot of our competitors that are running around are talking with people about what they've done. We actually have hard evidence and have continued to refine our product line to go beyond freezers into the normal ambient operating temperatures with an iFrame configuration similar to the platform we now use for fluorescents.

I'm starting to categorize the business as it relates to our go to market strategies and the way we're looking at training and communicating and messaging to our customers essentially the existing lighting value proposition which, if you look at the far left, still today's many customers are out there that have existing HIDs using 65 watts with a $400 operating cost. We have pretty good penetration here at Orion and with our competitors replacing the traditional HID legacy product with a fluorescent fixture, whether it's a G8 or a T5-based technology, generally using 220 watts or so, cutting that operating cost from $400 down to $196.

Several years ago, as we started to refine our optical and thermal performance, we were able to get the same light levels that customers were desiring with their legacy product for less wattage than what the competition was getting. We're down to 145 watts, and that's just factoring in superior fixture performance and design.

So we're taking everything we've learned over the last several years and, looking into the future, this is how we're going to build out our business and deliver the top line dollars that we talked about at the last call in the next five years.

It starts with technology. We're not going to stop where we are today. We continue to file patents have had additional patents submitted and approved. And we have, as I alluded to earlier, an expanded InteLite platform in mind and well into the development cycle to be able to continue to build upon the system and the savings that we've offered our customers several years ago and well into the future. Everything we've done in InteLite is forward compatible and reverse compatible from a technology standpoint, so our customers won't be stranded out there with some obsolete technology from Orion.

We're also looking at, on an ongoing basis, both Scott and myself and some of our engineering folks, complementary bolt-on technologies or companies that might complement what we're doing here and further offer our -- enhance our value proposition to our customers, something in the energy space.

We continue to talk about feet on the street. We've expanded and continue to expand our partner network and put more feet on the street. At this point in time, we're about 2X feet on the street as it relates to sheer headcount as to where we were about a year ago.

And we're looking at different niche market specialists that bring us into various markets that we haven't even thought about that would be categorized in more of the traditional space into very little niche markets that we can tweak a product or maybe come up with a different brand name and find a different channel to market and pursue that business.

Our systemized sales process, something we've talked about and continued to refine since the Company's inception, we've actually gone as far as we've created a sales operations center that takes more of an active role, even working with our partners and helping them establish, starting with recon, establish appointments. We do the recon, we do scheduling, calendar management, and actually help drive the sales process from our sales operations center and provide management reports for our partners for the principals for them to help drive their sales people they have in market on a local basis, almost becoming their add?on sales manager and report writer, giving the data they need to drive the sales process.

This is all in our desire to increase our sales pipeline, not just quantity but quality, so I'll talk a little further on in my discussion today about the quality and what we're doing to enhance what we call our technology demonstration, comparing our technology versus a competitor's technology, one of our technologies versus another, etcetera, but giving customers the real hard data they need to make a buying decision and to make sure that the CapEx requests that are showing up in their organizations are approved with Orion because it's an absolute slam dunk when they see the savings and we can actually show them metered savings before and after so they don't have to worry about that risk of not having the project deliver as promised.

Execution and compliance as part of our sales operations center, we're actually enhancing our compliance to make sure that ?? in our testing to make sure that people are actually following our process. And our pricing strategies have been now tailored more towards compliance and making sure people are following the process as it's been laid out as it's been proven to be highly accurate with a high closing ratio and using pricing strategies to drive that behavior as opposed to the more traditional thinking and looking at just sheer volumes and transactional issues, getting people to follow the process. We know if you follow the process with the right activities, you'll get the results coming out the other end.

The Integrated System, as we call it, starts with the InteLite controls, making the light not just smart but intelligent. And we can apply this technology to both the full range dimming on the fluorescent side of the business as well as the LED. It really comes down to what is the best product for the application that we're looking at with the end user.

As you can see here, the value proposition on the left is the high-intensity fluorescent, the HIF, 148 watts when it's on full brightness. The control strategy, by using what we call the adoptive dimming, allows us to discern between motion underneath the fixture that is actually transient ?? people are just passing through -- or they're actually working underneath the fixture, and we control the fixture accordingly.

We believe the future for controlling buildings is to never turn the light totally off from a safety and creature comfort standpoint. As an alternative to that, adjust the light and the power based on what the actual activity is underneath the fixture itself, activity-based motion that makes the light intelligent.

So as you can see, the scenario here, whether it's the fluorescent or the LED, based on all the case studies we've done and the documentation in several facilities for our customers, we're seeing the fixture 90% of the time is at low and only 10% of the time is at high, meaning that 90% of the time the actual traffic underneath that given fixture is this transient traffic ?? people are passing through, not actually working underneath there ?? which allows us to get a lot more aggressive and then control the fixture accordingly, making the fixture perform at its optimum level. The longevity is ensured. And we're also adding another dimension in creature comfort and safety because we don't have large tracks of a building going dark.

What's interesting here is you'll see the operating cost as you extrapolate out both these numbers is very similar, within pennies, whether it's LED or fluorescent, so the point here being we're not counting fluorescent out yet. We still believe it's very viable and, in certain applications, it's going to make sense. Other times maybe the LED or even a customer preference may be driving that but, nonetheless, we have a solution that will deliver the savings and the lowest operating cost very cost effectively and accommodate a customer's desire to be in either technology and get the best possible lighting job for the application in their building.

As we compete in the market and we bring this technology, the Integrated System, out we're looking at not only the obvious, which is replacing existing HIDs, but part of the consideration for us is what about all the customers already that have converted to HIF, whether they're Orion customers or a competitive fixture?

You can see here from left to right, the illustration in the far left would be a traditional high-intensity fluorescent, cutting the wattage down to 220 or so watts, less than $200 operating cost, and you can see how the Integrated System would compare at $30 and change operating cost versus a $200 operating cost.

Intentionally, I didn't even put an occupancy sensor on the traditional high?intensity fluorescent because what we're seeing in the field is a lot of these jobs that have been installed over the last several years, the occupancy sensors aren't actually turning the fixture on and off as much as people think because of the reset embedded into the device itself. So if you can imagine a forklift going down an aisle in a big warehouse and they drive down, they drop off a pallet, they drive back. Every time they pass through the field of view of that particular sensor with the old technology, it actually resets itself back to full high for another 30 minutes.

So we're finding in a lot of these big facilities the savings that they've realized to date are really as a result of taking the old HID out, going to a newer fluorescent, not so much from a control standpoint. So the InteLite system with the intelligent lighting, we're going to pick up additional savings there by making the light intelligent. And I can even see expanding that into getting more specific as it relates to on?peak versus off?peak savings, maximizing utility rebates, etcetera, and allowing us to extract more value, more rebate dollars, demand-side management dollars or demand response dollars in the future using the InteLite system.

So we have all the right technology, all the right pieces, now, as we talked about in the last call, we're looking at the future. We're investing in our pipeline. Our gross pipeline to date is well in excess of $300 million. The gestation period, which is what we categorize as the time we initially meet the customer to we're actually seeing a PO coming out the other end, is approximately 400 days. And the closing ratio is still in that 30% to 35% ratio, on the higher side if you actually follow our sales process.

So my constant focus here at Orion is looking at ways to expand the pipeline to get more pipeline out there, compress that gestation period with tools like financing and additional, more rigorous M&D and measure verification and validated savings, and what can we do to get our people better trained, an additional tool that's apt to increase that closing ratio.

But these are the inputs that we are using now to look at our business into the future and determine, based on these investments and these activities on the front end ?? establishing a relationship, the site assessment, field verification, get the incentives lined up, design engineering, getting a proposal delivered to a customer ?? what can we do compress that cycle and get that deal to fall out the other end.

Some hard data support our investments in this pipeline is a snapshot looking at the first quarter fiscal year 2012 versus fiscal year 2013, again, first quarter. We've actually doubled our market segments with the newer technology platform. We're looking at additional markets other than the traditional high bay that Orion has been most known for. So we're looking at commercial. We're established in hospitality. We've already done lightings projects for Marriott Hotels, as an example, and other hotels. We've done some outdoor lighting at banks. So we're looking at markets that go beyond our traditional high bay, big box warehouses or manufacturing operations.

The amount of appointments the call center is set up has risen 550% quarter?over-quarter. The dollar amount has gone up as it relates to the different technologies 570% and the proposals generated. The order counts have gone up 460%, individual orders for the technology demonstration. The average technology demo in dollars, most of those result in sales, has gone up 19.3% and that is as a result of including more controls and more bundled systems into our proposals as opposed to what we've done traditionally, just showing a customer a lighting solution.

So you can see here what we're illustrating is the investments we've been talking about last quarter and the quarter before, quarter before that, coming now into fruition and you can see the pipeline as it builds up and how it fits into the normal metrics of managing the pipeline. And take a look at these dollar amounts and these percentages. You can see and begin to feel how we're going to get to the goals that we talked about on our last earnings call.

And as I alluded to, the future market segments, it's something we're really excited about because it used to be that we were looking for just high bay HID opportunities and now we're looking at hospitality. The Company itself has a lot of experience in its early days dealing with all the major hotel chains ?? Hyatt, Marriott, Hilton, as an example, just to name a few. We've done a lot of work in the guest rooms years ago with fluorescents. Now we're going back and revisiting a lot of these same customers, same relationships, and expanding into exterior lighting, even looking at some interior lighting as it relates to LED reset cams and an introduction of a full product line in that regard.

General office, replacing troughers in offices, retail, both normal retail, low ceiling, finished ceilings or big box retail, we have solutions that we're working on for both. And again, largely untapped markets for Orion or the traditional high efficiency lighting players because nobody's come up with solutions and a way to penetrate these markets, and we believe we've got the product and the strategy developed to penetrate these markets as we're already starting to do, which are going to help deliver the numbers that we've been talking about over the next couple of years.

So with that I'm going to turn the call over to Scott to get into more specifics on the financial performance.

Thank you, Neal.

Consistent with our prior earnings announcement, we've provided a fair amount of content within the supplemental information document which was posted to our website earlier this afternoon covering our first quarter 2013 performance. Accordingly, I will not be walking you down the P&L on a line?by?line basis, but I will address some of the key areas in the quarter.

As a reminder, our first quarter is seasonally our weakest quarter within a given fiscal year.

Contracted revenue for the first quarter was $23.9 million, which included $10.1 million for solar EPC contracts.

Backlog as of the end of the June quarter was in excess of $50 million at $50.5 million, and we currently expect that $25.4 million of our backlog will be recognized as revenue during the remainder of fiscal 2013.

Revenue for the first quarter was $15.3 million, which included $2.7 million from solar projects and $13.6 million from energy management system sales.

Our mix of wholesale business during the quarter, excluding these solar revenues, was 61.5%.

Overall gross margin percentage in the quarter was 28.6%.

Gross margin on our lighting business was 27.2% for the quarter and was reduced due to the lower revenues from this segment and the impact of our fixed costs within our manufacturing facility. We expect that these margins will improve in the future on higher volumes.

Our gross margin from solar projects for the first quarter was 34.8% as we maintained the margin improvements that we recognized on projects during the fiscal 2012 fourth quarter.

Looking at our solar project backlog for orders that we expect to be completed during the remainder of fiscal 2013, we expect gross margins on these projects to be in the 28% to 30% range.

Our operating expenses in the first quarter increased from our prior year first quarter by 6.4%. The increase was due to higher one?time expenses in G&A related to the audit and legal expenses from the re?audit of our fiscal 2011 year. This impacted our earnings per share within the quarter by approximately $0.013 per share.

Our sales and marketing expenses increased due to the impact of the full quarter impact of our sales operations and retail sales initiatives which were implemented over the course of fiscal 2012.

And our R&D expenses increased within the quarter as a result of our continued investment into new product development, specifically, as Neal covered, our LED and controls offerings.

We finished the first quarter with a strong liquidity position, having $20 million in cash and cash equivalents.

There were no borrowings outstanding under our revolving credit facility as of June 30th, and we have availability of $13.3 million. We did not borrow against our OTA credit facility, which also has availability of $1.8 million at the end of the first quarter.

In the first quarter, our cash flow from operations was breakeven as a result of solid working capital management.

We were able to reduce both accounts receivable and inventories within the quarter. Our DSO continues to improve on the shorter cash cycles for our solar projects, and our inventory declined within the quarter on reductions of fluorescent lamp inventories and solar product shipments.

Our primary uses of cash during the quarter were for the repurchase of approximately 1.2 million common shares at a cost of approximately $2.09 per share. Our share repurchase authorization had $4.3 million remaining as of the end of the first quarter. We intend to continue to execute against this authorization opportunistically.

Other uses of cash included approximately $1 million for capital spending related to new product development, facility improvements, which included our R&D testing area, training lab, and our customer demonstration area.

During the quarter we also repaid approximately $700,000 under existing debt instruments.

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. Operator?

Thank you. (Operator instructions).

And our first question comes from Shawn Severson from JMP Securities. Sir, may you begin.

Thanks. Good afternoon, gentleman.

Hi, Shawn.

Shawn.

Neal, I was wondering if you could give a little more color on the type of pushback. I know we're still looking to the numbers that we know (background noise) revenue shortfall, and I'm just trying to understand the dynamics behind the customer decisions. Are these deferrals or is it harder to get in the door to pitch projects or are these projects that were kind of in the pipeline that are being pushed out? I'm just trying to understand the scope of it.

I think it's some of each. But even more importantly, as we make this transition now, Shawn, from the older technology to the new and much of it starts a discussion about LED because everybody's talking LED, even at the consumer level as it relates to our large end users.

Now we have to retool a proposal and get down to regenerating a proposal for the newer technology and to start over. We're at this inflection point as it relates to our customer messaging. We don't want to have a customer say hey, Orion, why didn't you at least talk about the new technology? And you put me into this older fluorescent, so we're actually going through this clunky transition time. We're saying look, you have these alternatives right now, and we believe this is the best alternative based on what we know today about your facility, how you use your facility, etcetera.

So we're revisiting a lot of customers that we've got proposals going through the gestation period and retooling them to show them this other alternative so that it doesn't come back that Orion didn't do right by them.

And I think that along with a lot of customers right now are scrambling to get orders out the door in their core business. These all come into play.

We don't have a situation right now, Shawn, where people are saying no or that we're not going to do this or we're put off into some time in the indefinite future. I think it's really a matter of a lot of these factors all coming into play and retooling everything we're doing here to get customers into this new technology.

You know, you keep in mind a lot of these people, Shawn, haven't changed a lighting system but maybe once in their carrier. And now they're hearing all the buzz about the LED, so they're saying okay, so is now LED what we should be doing? Just what is the right solution?

So it's something that's never occurred before in my career that we had this major leap in technology that people had to think about and that, of course, is factoring in because some people think well, okay, now should I be waiting for the next great thing?

In the transition to, you know, say an LED proposal versus traditional HID, for example, what's the price differential? I mean, are the projects coming out at higher prices with different returns on them or what's the color there?

The average selling price is considerably higher. It's not uncommon to see 4X difference between the LED and the fluorescent. However, we have a lot of utility demand side management programs that are underwriting a lot of these costs and we're finding we can get aggressive with the controls and our ability to precisely control that light energy, especially in a warehouse application. It allows us to many times use less wattage, again, application specific. And because we can dim more that light, many times we've even eliminated a fixture, 110 fixtures or something.

But as a matter ?? as the business gets more complex, it just requires a different sales process. And we have been very, very methodical about our entree into LED because we knew when that day came, that was going to put a hiccup into what we're doing today because, again, of everything I just mentioned.

But at some point in time, you have to make the decision to go and we decided to go because of not just the market situation but also because all of the vendors are lining up now, we're comfortable with all the players that are in this space, availability of components, etcetera. Now is the time to make this transition. And there's really no easy way to ease into it. There's going to be this launching point and that's what we're experiencing right now.

And having conversations with customers saying -- look, I just had a large customer in here. He's been a good customer for many years. They've got 70 facilities, we've got 30 more to go. And I'm like, guys, you want us to do what technology? We have many choices today. What a thing for you.

How do you book a proposal that you're working on? How many do you think you've already gone back to and shown them a new look with LED versus fluorescent? I'm just trying to understand how much of the pipeline has been addressed, talked to and given another proposal.

I don't have exact stats on that right now. I would say a small percentage.

What's interesting, Shawn, is despite all the hype in the LED industry or the lighting industry about LED ?? and, if you went to Light Fair, you'd stumble over LED suppliers, etcetera -- I'm amazed, really, how difficult it is to still get any size quantity components because it's still in this stage where things are kind of settling out. So just to go and call and get 2,000 power supplies, high wattage, is not that easily done.

So we've been making the investments. We actually are putting into service a clean room here at Orion for assembly with all antistatic controls, everything you need to do to make sure you're handling the semiconductors in a proper way. And we're putting all these pieces together and now it's just starting to do some -- what we call a technology demonstration, showing customers, whether they're comparing us to a competitor or early Orion fixture, whatever, what all the attributes are. So it's taken time to get all these things up to speed.

Okay. And just lastly kind of a qualitative question going back to deferrals and pushouts related to the economic condition. Certainly [IFM] has come down and general concerns versus the technology transition. I mean, is it kind of a 50/50 situation or is it heavily biased towards the technology versus the economy in terms of the delays?

Well, I can give you the best guess at this point. I would say 50/50.

You know I think people are realizing, because the economy has been top of mind for so long and, of course, it's something that has to be dealt with, but the reality of it is the order flow, they've booked it. You know, I've talked to a lot of customers. They can't keep up with their order volume.

And we're seeing at our end you can't get a lot of components. We've talked about this on other calls, and we're seeing that across a lot of industries. There the situation is it's bandwidth and, again, that competition for capital.

So there's a lot of different things coming into play. And I'd love to tell you that there's a one size fits all situation, but that's just not the case.

Okay. Thank you.

Our next question comes from Philip Shen with ROTH Capital Partners. Sir, you may begin.

Hey, guys, this is Matt for Phil. Just a couple of questions for you.

So we've heard about some of the capital budget constraints with your customers and actually seen a negative dip in commercial and industrial electricity prices over the past few months. Can you guys talk about where you see some strength in end markets for customers and which customers are giving you the most traction?

I think probably the distribution centers, whether it's food, service, or it could be really anything in distribution. Given the fact that they don't make anything, they rely on continuous cost reduction from operations to help their bottom line.

At the end of the day, no matter what your business is, there's only two things you can focus on, it's increasing revenue and reducing costs, you know, at the highest level to improve your business's operating performance. And the distribution guys, they have to make it their business because it'll make a product to continue to drill down on operating costs.

So we've got customers that we've taken out two-year-old Orion product, moved them to another facility, and they're putting in LEDs because we can extract addressed savings, you know, operating savings on a per square foot basis.

Okay, great.

You guys have also highlighted some of the substantial investments in your call center and the build out of your sales force. Can you give us a sense for ?? I know you gave us the year-over-year, but can you just break out the appointments from June and July, if that's possible?

Looking to see. Just a second, Matt.

Sure.

And is your question year-over-year?

No, just the raw volume, if that's possible?

Likely I'd venture to say that's a lie because of vacations. It's usually a little lighter. A lot of people, especially, you know, in industrial operations, there's a lot of companies that still have a shutdown around the Fourth of July, etcetera, so that's always historically a more challenging time to get people on the phone and, of course, you can't get them to make the commitment to the appointment if you can't get them on the phone.

Okay.

But part of the strategy, if it didn't come through is really increase the sheer numbers of proposals in the pipeline and the appointments, etcetera, so that is the ultimate hedge to making sure you're going to get more out the back end.

Okay. And then a follow-up on that, so do you guys provide a breakout between the appointments made for in?house versus your value added resellers?

I'll give you an approximation, Matt. We believe more recently it's about 30% direct and about 70% of our leads to our wholesale channels.

Okay. That's good. And then you guys shared the metrics on closing ratios and I was wondering, are the closing ratios on proposals made or are they on appointments? What's the percentage on there?

Well, think about it this way. We do a proposal and we do the technology demonstration. The average period from the initial visit until we're seeing it is over 400 days.

So you have to fill the pipeline, the deal has to resonate for something ?? 400 days or greater, I think I even heard of one that was -- I remember talking to this customer literally five years ago and started to get some traction now. They never said no. They didn't do anything. They've been just, you know, contemplating. But after that, then whatever -- a third of that comes out of that is about what we're seeing from a closing ratio.

So it really goes by blind gestation and then whatever that subset is, about a third of that you get to close. But the thing of it is, we don't get ?? I'll bet you less than 5% we get nos. We lose the deal to a ?? we certainly lose deals, but more often than not, with the competition, people aren't doing anything. They're just deferring the decision.

Okay. All right. Thanks, guys. That's helpful.

I'm showing no further questions, so I would like to now turn the conference back over to Scott Jensen for closing remarks.

Thank you, Operator.

Thank you, everyone, for joining us. We look forward to joining you again later this year for our fiscal 2013 second quarter earnings call. Good day.

Ladies and gentlemen, this now concludes your conference. You may disconnect.