Orion Energy Systems Inc (OESX) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Orion Energy second quarter fiscal 2017 conference call.

(Operator Instructions)

As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Mr. Gary Abbott. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining Orion Energy Systems' second quarter fiscal 2017 conference call. Participating in today's call will be John Scribante, Orion's Chief Executive Officer; and Bill Hull, Orion's Chief Financial Officer.

John will open today's call by providing comments related to Orion's quarterly results and business outlook. Bill will then discuss the financial results for the second quarter of fiscal 2017 and subsequently open the call to questions from the audience. Additionally, for anyone who is not able to listen to today's entire call, an archived version will be available later this evening. Please visit the Investor Relations section of Orion's corporate to access the replay.

Before John begins his commentary, I'd like to review Orion's Safe Harbor statement. This call is taking place on November 2, 2016. Remarks that follow, including answers to questions, include statements that the Company believes to be forward-looking 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 the Company has described in its press release issued this afternoon and in its filings with the Securities and Exchange Commission. Except as described in these filings, the Company disclaims any obligation to update these forward-looking statements, which may not be updated until the Company's next quarterly conference call, if at all.

With that, I'll now turn the call over to John Scribante. John?

Thank you, Gary. Thank you all for joining us today, good afternoon. So by now I hope that everybody has had an opportunity to review our financial results, as we were very pleased with our performance during the second quarter. Our strong performance was the direct result of our dedication and focus over the past two years on margins, innovation and operational improvements.

So now let's walk through the quarter. First from a financial standpoint, revenue was in line with our expectations of $18.7 million and we added incremental backlog for the remainder of the fiscal year ending at $14.6 million. During the quarter we did see some revenue slippage due to flooding in the south in August and Hurricane Matthew in September. Those weren't major impacts, but revenue might have been a bit higher if those events hadn't occurred. We also exceeded our 30% gross margin target and generated strong cash flow from operating activities. Specifically, we achieved a 33% gross margin with about $2.9 million in positive cash flow from operations, reflecting strong adoption of our High Bay product lines. And we ended the quarter with $18.7 million in cash.

Our second quarter results were in line with our expectations and show that our business is structurally sound. The increased margin on operating cash flow illustrate what Orion can deliver. These results are indicative of our current operating model within the context of normal seasonality that favors the second half of our fiscal year. As we've stated on a previous conference calls, we typically generate 40% to 45% of revenue in the first half of our fiscal year, and the remaining 55% to 60% in the back half. We expect this to be a normal year with the usual macroeconomic caveats, and we believe that we are on-track to achieve our guidance.

We previously guided to revenue growth of 10% to 20% in fiscal 2017 and remain comfortable with that target. We also expect gross margins to remain at/or near 30% for the balance of fiscal 2017. While we believe 33% gross margin is consistent with our long-term goal to show gross margin increases, we do not expect to see a repeat of this level in the back half of fiscal 2017; that is because gross margins are subject to the mix of business and will fluctuate a bit from quarter-to-quarter, and Bill will go into this further in a few moments.

Right now I'd like to change gears and talk a bit about our products and sales initiatives. First, let's talk about our products; for the past two years we have focused on developing best-in-class LED fixtures as a strategy to excel in the industrial retrofit market. And for the past few years, Orion has not only delivered record breaking performance, we have maintained that through leadership position despite attempts by our competitors to catch up to us. We believe that product innovation drives pricing power, but product performance is only one thing; to deliver our customers product cost competitively and within only a few days after the order received, that is unprecedented. Orion is uniquely serving the retrofit market, and it shows in our operational performance.

For the past year or so, we've generated about 75% of our product revenue from LED fixtures. This quarter we reached 81% for the first time. This is significant because it's a strong indication of the success of our technology evolution, having been a 100% fluorescent-based company just a few years ago. In terms of revenue, our total revenue grew by a respectable 19% in the second quarter. Better yet, our LED product revenue grew 33% from the year ago quarter. Our LED product sales increased from $10.6 million in last year's second quarter to $14 million in the second quarter of this fiscal year. Clearly, we are doing well.

As many of you know, Orion is dedicated to excellence in the building retrofit renovation space; a $200 billion installed base. Having the highest performing products enables Orion to deliver the highest return on investment for the customer. We ship our products in less than 10 days from our US factories, which allow our customers to realize the benefits more quickly. We also have very low job-site expenses with minimal disruption to the customer. This helps make the installer more profitable and leads to much more happy customers. Everybody wins, and this gives us a real competitive advantage in the marketplace.

With regards to the return on investments that our customer see, we set an industry record of 200 lumens per watt with our ISON class High Bay fixtures, which were just released in the second quarter. In a short period of time, we pushed the technology envelope and extended our lead from the prior efficiency benchmark that we set at 179 lumens per watt. In fact, most of our competitors still sell high-end solutions that are only about 160 lumens per watt, with one exception around 185. So from a customer perspective, the important thing is their financial benefits will be significantly greater by using an Orion Technology over any other brand.

As it stands, we know that we have a home run with our high-end products, and you can see in our gross margin it expanded from 19% in the second quarter of last year to 33% this quarter, and we realized this margin expansion from a prior generation of High Bay product without any contribution from our new ISON product line just released.

With that said, we know there is extreme customer excitement around our new products. In fact, after we made the announcement in September, Toyota, unquestionably a world-class manufacture, came to us and asked if they could be the first major company to adopt our new ISON High Bay fixtures. So naturally we obliged and they subsequently committed to a large transaction that we'll begin to deliver in this current quarter, or third quarter.

Now let's discuss our sales initiatives. We're very excited to see the growth in our distribution sales. Channel revenue from both distributors and large ESCOs combined to be 63% of second quarter revenue. Selecting and growing revenue through channel sales is key to our growth strategy; it provides the greatest leverage of our time and resources, and we saw significant progress in Q2.

Looking back, we put our plan into action about one year ago to transition our sales model to an indirect agency-driven distribution channel, starting with just a few agents. And subsequently, we rolled out the plan broadly towards the end of January 2016. By late April, we had agencies in place that gave us relatively comprehensive national coverage. And in the second quarter we continue to see strong growth from our agency business, which is now driving the overall growth of our channel and contributing to the total revenue growth of the Company. Enterprise and government customers are also driving top line growth. We've done particularly well with automotive and retail customers in recent quarters, and expect sales from this segment to continue to be strong, especially as we enter the high season of our business.

In summary, our strategies are paying off as can be seen by our top line growth, the percentage of product revenue from LED fixtures, our gross margin expansion, and the dramatic increase in revenue contribution from distributors. It is clear how far Orion has come, and we see many opportunities to build on our success. As we have promised to you in past quarters, we continue to focus on revenue, margins and operational excellence, and drive incremental growth in expanding profitability.

On that note, I'll turn the call over to Bill to discuss our financials. Bill?

Thanks, John. I'm going to review our fiscal Q2 results and provide some commentary and then open the call up for questions. Orion's second quarter financial results were solid. Our revenue was $18.7 million and grew by 19% over the year ago period. Product revenue was 95% of sales and services was 5%. Our product revenue from enterprise accounts was 37%, and our product revenue ESCO and distribution partners was 63%. And keep in mind that we also service enterprise accounts for distribution channel partners in many cases.

During the second quarter, we shipped over 2,200 customer orders, including 30 transactions over 100,000. Our average deal size was more than 8,300, and our backlog increased significantly during the quarter. At the end of the second quarter, our backlog stood at $14.6 million, which was the highest level in several years. The gross margin was 33% in the second quarter. We had a very favorable product mix and we exceeded our forecast. The gross margin increased significantly from last year's Q2 when we recorded a 19% margin. While we don't expect to revert back to last year's level, we expect gross margins to remain at or near 30% for the balance sheet of fiscal 2017. This slight moderation from the current level is the direct result of product mix and its impact on margins.

Now, as far as our operating expenses are concerned, we maintain tight controls on our spending. We have primarily invested in building our distribution channel and our research and development efforts while keeping overhead expense increases to a minimum. As revenues continue to grow, we should benefit from operating leverage and generate improved profits. Our net loss from $3.6 million in Q2 2016 to $970,000 in Q2 2017; this was good progress and leaves us within reach of GAAP profitability. Since GAAP profitability is in sight, it's worth mentioning that we have $58.8 million in net operating losses available to potentially offset future taxable income.

We plan to use them appropriately and managing our income taxes within future quarters, and that should benefit our future net income and cash flow. Importantly, we had very strong cash flow in the second quarter of 2017 with $4.6 million of total positive cash flow, of which $2.9 million represents cash flow from operating activities. During the quarter, we had non-cash expenses of approximately $1.1 million, primarily consisting of depreciation, amortization, and stock-based compensation.

With all that said, I hope you can appreciate the magnitude of our financial progress. Our team has worked hard to build a solid foundation, and we are well positioned to advance from this point.

At this time, I will conclude my prepared remarks and open the call to questions.

(Operator Instructions) Steve Dyer of Craig-Hallum Capital.

It's actually Greg for Steve. I was hoping you could start off by maybe bucketing the various items that led to the improvement here. I mean, how much of the improvement is attributed to mix versus all these new products, versus your go-to-market strategy? Any color would be helpful.

I think a big part of the improvement to get to -- you're talking about margins, I would imagine. A big part of that improvement in the margins is really a combination of the efforts of margin improvement related to supply chain designs and tooling and other measures of increasing the overall profit of the products. And subsequently over the last couple quarters, we've been flushing out old inventories and inventories of some of the lower margin products from prior generations. So as we continue to innovate and bring new products to market, each and every time we're building in better designs, pulling out labor costs; going out excess of the supply chain costs and to some degree, some of the manufacturing processes is changing in order to continuously drive profit through that innovation. And so that was a large for the improvement.

Now, mix does impact our sales and we had a large contribution of High Bay products in this quarter compared to last quarter where we had more of a contribution from the LDR product, which is a slightly lower margin. So it really is a combination of just the sequential improvement from the product designs, supply chain, and manufacturing process combined with a more favorable mix. And just looking forward on that, that mix is going to bounce around a little bit as we go in future quarters, and it's going to take us a little while to normalize our LDR product margins, which have improved dramatically, but is not at the same pace. But we're focusing on that as well to help minimize that. But over the next couple of quarters you will see some variability in margin just due to that mix shift.

And I guess my question was maybe across the board, not just margins, but also top line growth via the nice improvement in the backlog sequentially. I mean, what do you attribute that to? Is that new products? Is that go-to-market? Are you winning new customers, or what would you say there?

We have had a significant increase in business that we are seeing coming through our distribution customers. As you know, about a year ago we had pivoted our sales efforts towards an agency-driven distribution model. And so as we've been implementing that strategy, what we're seeing is more business coming from distributors that we never knew about before because we weren't represented in those distributors. So now about 50% of our channel is now coming through these distributors that -- it's pivoting and shifting and that strategy is starting to pay off. So we would continue to see growth in top line revenue as a result of our continued expansion and progress moving more business through distribution and leveraging relationships through our distributors.

I think also we saw in backlog government projects; some of our larger automotive customers book, and as a result that continues to fuel backlog as well as we have added a few more sales people, and so we're getting more run rate in smaller business. So the overall progress I think is on all fronts, sales being certainly a driver. And then we're gaining more attention because of the product initiatives. We believe that innovation drives pricing power, but it also makes a statement in the marketplace from the customer point of view. When you have the highest performing product in the market, your competitors are on the defense. And as a result, we don't win every deal that we go after, but we certainly have a great shot at it from a performance point of view. So I would say that those three things are -- the margin through all the innovation stuff, the performance and the sales.

I know you maintain the full year revenue guide. Would you still expect the December quarter to be stronger than the March quarter, given impact of seasonality and budget flush? And then I know you sort of mentioned GAAP profitability, but do you envision getting there in either of the next two quarters, or is that a fiscal year or sort of 2018 thing? Any color there would be helpful.

Yes, I'll let Bill comment on some of that. We see the back half of the year coming in line with what we have projected. Our quarter-to-quarter numbers, as you know, they're seasonal and there's impacts one way or the other. But I'd like you to just concentrate on that year end number and know that we're focused on doing everything to deliver that and we believe that we're on track and certainly this quarter gave us a boost going into the back half, and the back half is usually seasonally stronger than first half. So our year-over-year comparison, we feel pretty good about it.

Bill, do you want to comment?

Yes. I think the only thing I would really add there is we're not given quarterly guidance, giving directional guidance. And as you can see, we're trying to improve on a quarterly basis. And as I said in the past, if you look at our break even at 30% gross margin, which we emphasize this last quarter, but we're seeing 30% maybe the rest of the year, with about $7.5 million of G&A, sales marketing, R&D expenses; I mean, I would say a break even is at around $25 million in sales. So we're still working hard to get there; a lot depends on where the gross margin comes in and where we end up with our sales execution.

(Operator Instructions) George Jasper, private investor.

In terms of looking forward in the current quarter, how much of that backlog can you deliver in the current quarter? I assume that all of it will be delivered in six months going forward, including the current quarter. And within that question, this Toyota contract I assume didn't start until this current quarter; correct me if I'm wrong on that, and how does that impact the remainder of the current fiscal year?

I think Bill has some insight on the backlog. But with regards to Toyota, first of all, Toyota have been a customer of alliance for a decade now, and continues, too; we continue to build on that success. And so, we have had some products ship -- some LED High Bay product ship in the last six months or so as they got started down this road. But once we released the product that we have out now, it really made them want to move forward and accelerate and really build out their portfolio with the new product. So that is shipping; a lot of this year, some of the shipping this quarter and it will continue to ship over the course of time over the next several quarters. So it's not a single thing that will just occur once in the quarter; it's going to have some tail to it.

Bill, can you comment a little bit on that?

When we take a look at the backlog, we think we hit about, let's say, 70% of that will happen in this fiscal year and the other 30% will fall in the fiscal 2018. And in that 70%, as John mentioned, some of that's Toyota that will fall into this year.

And as you look forward in trying to get to this breakeven number on an earnings bases, if I recall, you all mentioned something about - do you need $25 million to actually bring a number to the bottom line (inaudible) on that?

Well, I did the simple math with 30% margins, which is $7.5 million, which is kind of a guidance we had given. There's a lot of levers to pull there for a successful increase in our sales or increasing our margin and keeping our [thoughts] in check, there is possibility, yes.

And then I'd like to direct a question toward the R&D area. As you're moving forward beyond this wonderful development that you've come forward with now and broadening your market, where do you direct your R&D going forward from here? Which areas in the market do you see real opportunity that could really give you a momentum beyond what you've accomplished in the R&D area?

I'll give you a couple of thoughts, but I hesitate to get too deep in the call as to really what our future plans are. But I will say that on the LDR product line, which has been a high volume yet more from a margin perspective, a more challenging products. We have a strategy around building products that are designed more for unique applications. And so, rather being that broad product that fits in everything that's out there where there's a lot of competition, we believe there's some market niches where we can design some custom products - I shouldn't say custom, I should say some products that are uniquely fitted for certain markets and for certain applications that will allow us to be one of a few that in the opportunity as opposed to one of many that are in where there's margin and competitive pressure. So diversifying that product line, making it more vertical specific, more application specific, we believe we can maintain some pricing power there.

The High Bay line, obviously, is our flagship and we will continue to build performance attributes into that product. And then thirdly, we are beginning to identify some trends around Internet of Things and smart technologies; as you know, we've got a deep portfolio of smart building technologies. We have a portfolio of smart city technologies, and utilizing and maximizing the actual property that we have and building upon that and bringing more products to market that are enabled for the future, more enabled for providing business solutions as opposed to lighting products. Solving our customer's business problems by providing intelligence data and other analytics through lighting systems is certainly an area that we are focused on.

Just elaboration on that John, that smart technology, I think that's a broad area. Is there a possibility for the Company to move into the High Bay Wi-Fi connectiveness in the lighting systems?

Yes, absolutely. I mean, there's a lot of value. I mean, we certainly have been doing that since 2007; we were ahead of our time in a lot of our smart building technology in the high bay space, and we've built upon that, although over the last couple years we've taken a little bit of a breather in the development and broadened our partnerships with other developers of this technology. For us to invest millions and millions of dollars in something that is still in so much flux was a risk to us. And besides, we had another job to get done and that's to deliver profit margins on our core business on the lighting side.

This has allowed us over the last couple years to really step back, take a deep breath, understand where we want to play, where we can be competitive and where we can be strong, and take an approach that we believe is unlike what many others are taking. And I guess more to come on that in future quarters, but we're clearly focused on bringing to market an Orion-based product offering that creates real value to help solve business problems.

And then if I could squeeze in one additional. In terms of customer contact out in the field and when you start looking at the complexity of Toyota, the size of their facilities and so on. It brings up the potential of what else is happening in the market; when you look at a quarter-to-quarter bases at what Amazon is doing in terms of one quarter expansion in the United States was utterly significant. Are you jumping into that kind of business? I mean, you have opportunities for serving people like Amazon also has? And there's a lot of other companies that are adding a lot of the capacity all over the place. I just drove back from Tulsa, Oklahoma yesterday and all along 44 -- I mean, there was construction going on on a large building. So it would seem like you're right there with the product line now that can really capture this new business.

Well, yes, of course. And I think a lot of what you're seeing in our backlog and in our sales pipelines is what exactly would what you are saying. I mean, these large distribution and e-commerce and data centers - there is a lot of construction going on and Orion's getting a piece of that and that's very good business for us. I think a large healthcare applications, large retail, our traditional High Bay warehouse is - that's strong business, and it's good and it's solid and many of our old customers continue to come back to engage it with us. But these new markets are also very, very interesting for us and certainly driving revenue for us.

And in just summation -- just from my perspective; I look at the Company, look at what you're selling for in the market and look at this positive cash flow trend that you have going here and your book value. And you relate that to - and your cash position to manage your business. There's just a lot of elements of the equation that are turning very positive ,and yet Wall Street isn't looking at that yet, but they should really start along the way and that's, obviously, important to keep pointing these figures in the right direction. But I think you're on the right track.

Well our job is to build a business and stock will follow from the results that we deliver. We are clearly focused on delivering what we said we were going to do a couple years ago, and we had this massive transition and disruption in our business. And we buckled down, we pull ourselves together and focused on our core, and we knew that margin was the key more so than revenue at the time because without the profit margins, the more you sell the more working capital you need and more cash you burn. So we're focused on the right things on delivering the margin improvements, and now that we've got the margin in that range that we need it, it's all about revenue generation right now. Those are the elements and that's the sequence that needs to take place. The stock will follow as we deliver our performance and that's been our strategy here as we go forward.

(Operator Instructions) We have no further questions on the line. I'd like to turn the call back over to Mr. John Scribante for any further remarks.

Thank you. And I know that many of our analysts and others had conflicts today with other calls and that. So I'm sure will follow up with them soon. So, I appreciate everybody support, continued support in Orion and our management team. We look forward to talking to you again next quarter. Thank you and have good holidays.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect.