Orion Energy Systems Inc (OESX) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Orion Energy's Fiscal 2020 Third Quarter Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Bill Jones. Sir, you may begin.

Thank you, and good morning. Orion's CEO, Mike Altschaefl, will open today's call with some highlights, followed by a discussion of the company's business strategy and a review of Orion's financial goals for fiscal 2020.

Orion's CFO, Bill Hull, will then review some additional financial items and we will then open the call to your questions.

An archived replay of this call will be available later today in the Investor Relations section of Orion's corporate website. This call is taking place on Thursday, February 6, 2020.

Remarks that follow and 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 generally will include words such as believe, anticipate, expect or words of similar import. Likewise, 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 than anticipated.

Such risks include, among others, matters that the company has described in its press release issued this morning and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update forward-looking statements.

With that, let me turn the call over to Mike. Mike?

Thanks, Bill. Good morning and thank you for joining our call today.

First, I want to again thank the Orion team for their contributions in getting our business to the strong position we're in today. As anticipated, Orion delivered another quarter of solid year-over-year growth resulting in both a profitable quarter and year-to-date performance along with healthy operating cash flow.

I'm very proud of what our team has accomplished by focusing the business around our key areas of strength and comparative advantage and how this strategy is resonating with new and existing customers.

Through the first nine months of fiscal 2020, Orion has grown revenue 188% to $125 million and achieved a gross margin of 25%. Meanwhile, we held operating expenses to $17.9 million, an increase of only 14% versus $15.6 million in the prior year period resulting in significant improvements in profitability, cash flow, and our financial position.

Year-to-date net income rose to $13 million or $0.42 per diluted share versus a loss of $5.8 million or $0.20 per share in the prior year period, an improvement of nearly $18.8 million.

These results demonstrate the financial leverage inherent in our business model, enabling incremental revenue to have a substantial impact on our bottom line.

Our fiscal 2020 results are benefiting from strength in our national accounts business mainly due to a turnkey LED lighting and controls retrofit project for a large national customer. We expect to complete initial awards for this customer in the current fiscal fourth quarter and commence work on an initial $18 million to $20 million expansion of their LED lighting retrofit and controls project, which we expect to complete in our fiscal 2021 first quarter, which begins April 1.

We anticipate further expansion of this customer's project during fiscal 2021 and will announce any awards as they are received. This project is obviously notable for its size, but more significantly, it highlights the unique set of capabilities Orion has developed to execute such large turnkey mandates. Our turnkey capabilities include individual site audits, custom engineering and product design, U.S.-based manufacturing, on-time delivery, installation and commissioning of controls, along with project management that are resonating with large national customers.

Customers with extensive national operations appreciate the value and efficiency of centralizing their LED lighting retrofit process with one point of contact.

Further, Orion's commitment to high-quality components, industry-leading energy efficiency and our ability to incorporate a wide range of lighting and Internet of Thing control systems allows us to deliver a much more compelling return on investment. We're proving successful in demonstrating that our systems, which might cost a bit less on the front-end, inevitably lead to far higher energy consumption, reduce reliability and higher maintenance or repair expenses over the life of the systems.

Similarly, Orion is focused on future-proofing our lighting systems with designs that allow for cost-effective upgrades, including the addition of controls or IoT capabilities down the road as the customers' needs and budget permit.

Importantly, a growing portion of our projects involve innovative lighting controls and Internet of Things, or IoT solutions, which further increase the importance and potential value of new LED lighting systems. Increasingly, lighting systems are the base of a valuable facility-wide network, we call, the smart ceiling grid or connected ceiling.

In this context, our systems provide not only light and energy management capabilities but can also serve as the nerve center that supports a growing array of IoT solutions that collect and manage data in order to drive a range of business performance improvements.

For example, IoT applications can collect valuable movement or activity data in a warehouse, manufacturing facility or retail environment. This data is used to support management decision-making regarding energy consumption, utilization, asset tracking, maintenance requirements, overall facility usage and more.

Orion's value is in helping customers understand these added benefits and then integrating these systems into one framework rather than requiring multiple networks to be installed and maintained. IoT systems are being included in more and more projects, and we believe the trend will continue.

Wrapping these capabilities into our turnkey solutions creates an even more compelling return on investment for the deployment of Orion solutions. This trend is also positioning Orion to develop recurring revenue streams, such as receiving a portion of a SaaS revenue arrangement when we are able to play an instrumental role in securing IoT deployments as part of an LED lighting retrofit project.

We continue to explore ways to leverage our unique set of capabilities to create other recurring revenue streams to further strengthen our business and enhance revenue visibility. For example, we're looking at ways to leverage our nationwide project management and installation capabilities to create ongoing lighting and electrical maintenance service contracts for large national customers on a turnkey basis, with one point of contact.

Underscoring our ability to deliver on such service opportunities, $31.2 million or approximately 25% of our year-to-date revenue was derived from services, principally related to installations completed within our turnkey design, build, install retrofit programs. This compares to approximately $5 million or 11% of revenue in the first 9 months of our prior fiscal year.

Going forward, our growth strategy will remain focused on expanding our penetration of large national accounts with turnkey LED Retrofit solutions customized for each customer's unique needs. With U.S.-wide facility conversions to LED lighting still estimated at less than 25% of the total market, the opportunity is still many billions of dollars, providing a very ample runway for Orion's growth.

To pursue this opportunity, over the past few quarters, we have expanded our senior sales team, adding 4 veteran industry sales executives, each of whom brought very strong industry knowledge and customer relationships.

These individuals joined Orion because they believe in our products, customer service, commitment and the strength of our turnkey design, build, install model and how it resonates with large national accounts. While it does take time to fully train and onboard new sales talent, we're already beginning to see the fruits of these new hires in the form of new and expanded customer dialogues.

While much of our business development activity is too early to review in more detail, we're encouraged by our progress in several areas where we hope to secure and announce awards in the next few months. These include: One, automotive, a strong area for Orion historically, which is poised for a strong fiscal 2021; retailers and distribution centers, including big-box retailers and a national grocery chain, an example is, the very recently announced project award for a major global online retailer; three, logistics companies, moving to enhanced facilities and capabilities, principally driven by e-commerce growth; four, the U.S. government, including the military, the U.S. Postal Service and the Veterans Administration, where we continue to be selective for ongoing work; and five, maintenance and electrical services.

In addition, we continue to work to enhance the growth of both our energy service company or ESCO partners as well as our agent-driven distribution channel. Through the first 9 months of fiscal 2020, our ESCO channel has achieved solid revenue improvement from the year-ago period. We believe this improvement is largely due to more recent efforts to fully reengage with this important channel and certain historically strong ESCO partner relationships.

The nature of the ESCO channel, which is sometimes compensated for actual energy savings realized by their customers, aligns very well with our energy efficiency and quality initiatives that reduce long-term cost of ownership.

We continue to have some challenges in our agent-driven distribution channel where revenue for the first 9 months of fiscal 2020 declined versus last year.

However, we are optimistic about the future for this channel. Our migration to a revised market strategy is progressing well, and we are seeing improvements. We're confident that we will grow this channel in the future. Part of our confidence is based on our development of high-quality, competitively priced products.

For example, we have developed a base of line of fixtures which are upgradable to higher power lumen packages or to IoT controls and monitoring capabilities. This upgrade option is a compelling feature for customers who need to make price orientated near-term decisions and prefer to have the optionality of upgrading down the road, whereas most other fixtures in these price ranges do not offer such future-proof capabilities.

Also on the product development front, later this quarter, we will be announcing product line extensions in both our indoor high bay and our outdoor product categories. These are strong and highly competitive new product introductions that we developed primarily based on feedback from the market. We've received very positive initial reviews, and we will have more to say about these specific products once our marketing plans are solidified and we launch these new products into the market.

Considering our year-to-date performance, the recent project expansion commitment and our expectations for Q4 of fiscal 2020, we recently increased our fiscal 2020 revenue goal to a range of $150 million to $155 million from a range of $135 million to $145 million. The timing of a national customer activity can be subject to sudden changes that impact a quarter or a fiscal year into which the revenues will fall. And for this reason, we continue to take a conservative view on revenue timing given the potential for shifts in the scheduling of large projects.

Based on achieving our revised revenue goal, we expect to achieve an EBITDA margin of at least 10% for fiscal 2020. Based on our current cash and balance sheet position, combined with anticipated cash flows, we believe Orion is very well positioned to execute its business plan for the balance of fiscal 2020 as well as fiscal 2021.

Although it takes time to advance sales dialogues, particularly with larger, more complex national account opportunities, we feel increasingly confident in our sales outlook for fiscal 2021 and beyond. We will continue working to utilize the strong competitive turnkey solution set we have developed while also seeking to enhance our performance in the ESCO and agent channels with an ongoing focus on cost and margin management to drive results.

With that overview, let me turn the call over to Bill Hull for additional financial perspective on the third quarter and year-to-date results. Bill?

Thank you, Mike. Orion's third quarter revenue increased 110% to $34.2 million compared to $16.3 million in Q3 of 2019, primarily due to increased product sales and services related to turnkey LED lighting and control installations for a major national account customer.

Product revenue rose 85% to $25.9 million and service revenue increased 258% to $8.4 million.

In the first 9 months of fiscal 2020, revenue rose by $81.6 million to $124.9 million when compared to the prior year period, also principally due to the increase in turnkey national account LED Retrofit activity. Third quarter gross margin declined to 24.2% compared to 25.6% in Q3 of 2019 and 26.5% in the second quarter of this fiscal year. Relative to the prior year period, Q3 2020 gross margin was impacted by a revenue mix that included a higher proportion of large project revenue that yielded somewhat lower margin than in the prior year period. Q3 2020 gross margin was also modestly lower than Q2, mainly due to lower sales volume sequentially and its impact on overhead absorption.

Operating expenses were $5.8 million in Q3 of 2020 compared to $5.9 million in Q2 and $4.8 million in Q3 of 2019. The 23% year-over-year increase was well below the pace of revenue growth and reflects higher sales and marketing expenses.

Also resulting from higher revenue, higher gross profit and operating leverage, Orion's third quarter net income rose to $2.3 million or $0.07 per diluted share versus a net loss of $0.7 million or $0.02 per share in the year-ago quarter.

For the first 9 months of fiscal 2020, net income improved to $13 million or $0.42 per diluted share versus a loss of $5.8 million or $0.20 per share in the first 9 months of our fiscal 2019 period.

Orion generated EBITDA of $14.7 million in the first 9 months compared to an EBITDA loss of $4.1 million in the prior year period, an improvement of $18.8 million. Year-to-date, Orion generated $14.3 million of cash from operating activities versus a use of $1.6 million in the first 9 months of fiscal 2019, principally due to higher sales and net income.

At quarter end, Orion's cash and cash equivalents rose to $13.8 million, up from $11.1 million at September 30, 2019, and $8.7 million at our March 2019 fiscal year-end.

Net working capital increased to $19.4 million from $14 million at March 31, 2019, and shareholders' equity improved to $31.4 million at December 31, 2019 versus $18 million at March 31, 2019.

We reduced our debt, primarily borrowings under our revolving credit facility, by approximately $8.4 million since March 31, 2019, to $0.9 million as of the close of our third quarter. Also, we had unused borrowing availability of $13.9 million on our credit facility.

We believe our cash on hand and our borrowing capacity provide ample financial resources to fund our business and growth opportunities going forward.

Finally, I did want to highlight the cash flow benefit we are experiencing due to substantial net operating loss carryforwards from past operating losses.

Effectively, our NOLs are now shielding current operating income from federal and state taxes, thereby benefiting cash flow.

As of our prior year-end, we had net operating loss carryforwards of approximately $88 million for federal tax and $74 million for state tax purposes.

And with that, let's open the call to questions. Operator?

(Operator Instructions) Your first question comes from the line of Eric Stine from Craig-Hallum.

Well, clearly, you're very confident about what's going on with the current customer and additional wins here going forward. I'm just wondering on this new global online retailer. I know you've talked about doing 2, visibility into 5 more. Just wondering if there's anything you can kind of fill in just about what the -- I mean, assuming you obviously need to get the business, but what this could look like in terms of an overall opportunity?

Sure. Thanks, Eric. Great question. We're very excited about that recent win, and it's actually one we've been working on for a while, and it's a customer that we've worked with previously. And as you -- we mentioned in our press release a few days back, it's a global online retailer. So we do see that -- we announced the initial $4.8 million of business with that with visibility for an expansion that we think will be in the $8 million to $9 million range during our current fiscal year. We think this is a program that could go on for 2 or 3 years beyond this as the program continues with this retailer as part of their business strategy to construct additional warehouses. And one important note about this, it's actually a new construction opportunity, which -- it demonstrates our ability to compete not only in retrofit but to compete very effectively in a new construction environment.

Got it. And yes, and I guess that was going to be another one of my questions, in terms of the new construction piece. So maybe just moving on to the new sales hires. Well, first of all -- so it sounds like this global retailer was not a result of those new sales hires?

That's correct.

Okay. And I know it's still early in that initiative, and I believe you've got 4 people who have joined. Just curious, you're not there yet, but, I mean, confidence that you will get a true look at kind of all the opportunities out there. I mean any commentary about maybe how you view or what you think you're seeing today and what that could look like when they're up and running?

Absolutely. Well, first of all, we have felt that we've had a very strong sales team for a number of years. When we looked at it and analyzed the market and looked at the potential, particularly in the large national accounts, for retrofit opportunities and the amount that we think is going to be placed in programs over the next few years, we wanted to make sure we were getting a look at more or all of the opportunities.

And so that was the primary reason we sought out to add to our very competent sales force, some additional people. So we now feel with this added sales team, which has effectively doubled the people that are going after large national accounts for us, we're much more likely to get a look at many large programs across North America. That's primarily because of their past experience as well as customer relationships. As we've said a couple of times, we're already seeing traction with those new sales executives.

And as when they joined us, it takes us some time because you got to get into the cycle of capital improvement projects with their contacts and/or new customers that they are seeking. We fully expect to have impact and significant impact from those new sales executives during our fiscal 2021 based on where we stand today on some project proposals and testing that we are doing. In addition, we continue to have very good activity with our legacy sales force in the same manner. So we continue to be very optimistic about what we can do in 2021 and beyond.

Yes. Well, good segue, and this is my last question, but I know that one of your initiatives was targeting customers with the Lithonia fixture that is commonly used by C&I customers. Just curious how -- how that process is playing out?

It's continuing to go well. It -- there -- as we've mentioned, that fixture that we did retrofit for the very large customer we have this year is a very common fixture in the industry, particularly in the retail environment. So we have identified those targets, and we're working very actively to seek new projects as they look to retrofit their prior fluorescent technology to LED technology. So it's progressing. And we would expect to have business in those areas as we go into fiscal '21.

Your next question comes from the line of Marc Wiesenberger from B. Riley FBR.

With regards to the additional $18 million to $20 million coming from the large national account, was the process for securing that similar to when you announced the first $11 million award last January? And can we expect maybe a similar cadence to what we saw in 2019 for maybe additional award to come in?

I would have to say that it's not really similar, Marc, because it really revolved around these great customers' process of deciding what cadence they want to go at as they complete the retrofit of their other locations. And so it was more of their internal process of deciding there were capital allocations and what cadence they wanted to be on. And so we've now gone to the point where they made decisions of what locations they would like to do and have awarded those to us, which we equate into this $18 million to $20 million expansion. On the other side, we do expect as last year to have this likely come in several phases beyond this as they continue their analysis as to which locations and at what speed they want to do the retrofits.

Great. Assuming you're able to get some additional awards beyond the $18 million and $20 million from this customer and then potentially get some other large national account wins. What would that do to your capacity utilization going into fiscal '21? And where could gross margins expand to with significant volume expansion?

Well, first of all, from a capacity standpoint, we feel very comfortable with our ability to handle significantly additional revenue. If you go back even to our quarter 2 of fiscal '20, our manufacturing volume going through our facility was about 4x what it had been in the prior year, and we were able to ramp up to execute on that, continuing to have primarily executing on one shift in most of our operation, and we also have the physical capacity continue to grow. So we have very limited concerns about the ability to ramp up the manufacturing process to handle additional volume.

To further answer your question, it certainly would have a positive impact as we grow from where we are going forward to the extent the product is U.S.-based manufacturing as we have fully absorbed our fixed costs. So you could see margin improvements.

I think we've said in the past, we feel our range as a company is that 25% to 30% margins, and we certainly could see some ability to grow beyond the 25% we're at today as we get additional volume. But also, we always actively work on our supply chain to work more effectively with our suppliers and increased volumes to give us more ability to negotiate pricing or look for alternatives that work well for us. So we do think there's still upside from a gross margin standpoint in our business.

Great. And just one more from me. A number of your competitors have talked about weakness in their lighting businesses, which seems to be in pretty stark contrast to what you're seeing. Do you have any sense of the ROI your products are generating in an uncertain time frame relative to your competitors that's making it easier for you to kind of gain share?

Well, I'd say a couple of things. First of all, I -- internally, we seldom or never talk about market share because our view is that this market is so large, there's so much opportunity, our job is to execute on our sales strategy and outperform, out-design, out-manufacture, out-install, out-customer-service our competitors and the projects are large enough that we feel we can grow regardless if the industry is flat or growing modestly or shrinking modestly. So I really don't compare ourselves to our very large competitors, thinking about market share because if we win a large project, you can have a significant impact on our growth capabilities.

Secondly, I can't speak to other people's products, but on many of our projects, the return can be 50%, 60% energy savings, driving 3, 2, and sometimes 1-year paybacks on these projects. So it's a very compelling energy savings story. And so as we can demonstrate that and show that to people, we think that also helps to generate more projects going into energy-saving solutions.

Your next question comes from the line of Craig Irwin from Roth Capital Partners.

So Mike, can you remind us of your history working with your very large national accounts customer. How long ago did you start the dialogue with them and what was the process that you went through to win that first $10 million order and then the successive orders after that? If you could give us a color, particularly in the early stage of the process what that looked like? And whether or not you see a similar process likely being followed by others.

Okay. Yes, a great question. Thank you, Craig. So if you go back to the beginning of this, first, we'd have to say that given the size of this opportunity and this customer, we had been in conversations with this customer for a number of years just to stay in touch and talk about our capabilities. However, we had not done business with them before.

Secondly, we were in some active conversations with this customer in another area of their business and we were -- and then from that, we were introduced to the high-bay opportunity that we now are enjoying with them. And so frankly, we came a little bit late to the party, and our understanding is that the first wave of what they were doing had not gone as well as expected and we were then given a late opportunity to come in and do some test sites with them. We then performed well on some test sites, we went through additional conversations and tweaks to the product to really make it effective for them. And all of those activities then resulted in that initial award that we announced over a year ago for that first wave of locations for them.

Beyond that, it's been more of tweaking the program. And as I said earlier to one of the questions, it really has been around that customer making their decisions of cadence of what they want to do and how they allocate their capital.

What I will tell you is that we believe, and they believe, the performance of the product has been as well or better than what was expected, the paybacks are extremely good on the product, the product has got installations, have gone extremely well.

So what's different this year about the future expansions versus at the beginning, it's not about selection. It's just about working with them on their time frames of what they want to do. The second half of your question is, this program does help us as we talk with other large opportunities? It certainly is helpful for us to explain that we have a situation where we have done a large national rollout, sometimes doing 15, 20, 25 locations per week across North America for an extended period of time. So it's always one thing to talk about your capabilities where you can explain a case study of both how you manage installations on a turnkey basis across North America, the engineering, the design, the manufacturing, the logistics, the installation that takes place related to that and have it go very, very well as a powerful sales story. So we do think it helps all of our sales team out there to have that very unique capability and a very strong case study to explain to other large national accounts. And so we're seeing, I believe, some additional invites to the table for RFPs given the fact that we have performed well on this large opportunity.

Great. And then another thing I was hoping you might be able to clarify for us. When you complete these trials and you win one of these big national programs, is this typically an all or nothing situation, either you get all the high bays because the customer wants continuity between all of their locations and the quality that -- and consistency of one OEM or is this something where you could end up being maybe sharing a little bit of the mix with another OEM, a competitor out there?

Yes. That's a great question, Craig. And it can vary a little bit. In the -- to quickly cover the large customer that we're working with today, we believe we're doing all of the locations, once things switched over to us, and I believe it is for the consistency and the performance and their desire to have their locations look consistent and have one quality supplier provided to them.

And -- I'm going to -- nothing is absolute. In many cases, once you go through the process, you most likely are the sole provider of the product throughout their locations. There are also certain situations where perhaps they were using somebody else for a while on some of the locations as they started a retrofit, perhaps they weren't fully satisfied for whatever reason and you then get an opportunity to come in and do some test sites and start to earn your way in. And if you perform well, you might then become the primary provider and someone else might become the secondary provider.

What we often find are opportunities where somebody can't deliver product, and that's probably one of the more significant reasons where you might get a shot at these. And we believe that the fact that we have a substantial amount of our business with U.S.-based manufacturing, often where somebody hits a glitch due to logistics or in supply chain, we can jump in with a great product and show a great solution and earn our way in. So we would always prefer to do test sites and do the entire project right from the beginning. But we're very comfortable coming in sometimes where someone has not performed and then earn our way into the top spot.

Great. And then one of the things you touched on in there is deliveries. We're hearing from some of our contacts in the electronics manufacturing industry that getting components out of Asia is becoming difficult given some of the factory closures and the extended holidays for people in China. Can you comment maybe about the primary source of your LED supply? Do you have multiple suppliers? Do you have basic -- bins that would allow you to execute on not only your existing program but other large programs if you were to win them?

That's a great question, Craig, and it certainly is very prevalent for probably all manufacturing in the U.S. right now but also within the lighting industry. So first of all, every year, we plan for the Chinese New Year and what impact that has on your supply chain, and we plan for that well ahead of time to make sure we're in good shape for it, which we did again this year. Much of our product is U.S.-based manufacturing, but we do source certainly components and primarily electronics and light engines and controls tend to come from globally. So there is going to be some impact in supply chain. We're already taking actions to try to minimize it for our customers, but some of this is still not quite known as to how long it's going to last. And certainly, the linkage of the coronavirus with the Chinese New Year is kind of extrapolating the whole situation that we have.

Fortunately, for us, most -- almost all of our drivers come out of Mexico and most of our LED chips come out of Korea or Japan. The second answer to one of the parts of your question, in most of our product categories we have usually 2 different options for both drivers and chips when possible to always protect ourselves against supply chain, and we've done that for years, and sometimes we have more options. Yes, we've already...

I'm sorry. Please go ahead.

Sorry, I was going to say that's excellent news, but I interrupted you, sorry.

Well, I was just going to say, but there is a reality that even for the driver manufacturers, and most of us come from Mexico, as I mentioned, and for the LED chips, some of their base components do come out of China. So we do have to manage that and strategically look at it, which we are doing. And so we're actively taking steps with our supply chain to put ourselves in as best position as we can. I think relatively speaking, we may be in better shape, but it doesn't mean we have to look very hard to do the best to avoid problems for our customers.

Great. And then last question, if I may. And I want to be careful how I ask this question. But we've learned from our contacts in the lighting industry, people we've known for a number of years that Orion is being taken very, very seriously as potential replacement for Acuity Brands with one of their top 5 global customers. Another thing we have learned from our contacts is Acuity is scrambling to potentially even do this business at negative margins to keep the business given the reputational fallout that will follow. When you have conversations with customers, does the sustainability of business at negative margins from other OEMs ever come into the dialogue? Do you help your customers understand why you have a superior cost structure? And do you discuss the long-term ramifications of business as a partnership that drives cost and benefit to both entities?

It's a great question, Craig. Thank you. I mean, first of all, we certainly always head down the path of trying to develop a long-term relationship with customers.

And while we have a project-orientated business, much of our business is repeating revenue with very large customers that have been with us for a number of years. Secondly, my personal philosophy, and the company's philosophy, is we really never sell negatively in the marketplace. There are always going to be some very large competitors. We respect their business and let them do what they're going to do. And we just seek to perform very, very well and to earn the business and worry about our own financial capabilities, our own financial strength, which Bill covered earlier to allow us to handle these companies. Secondly, I think we've been able to demonstrate given the large project that we currently have and the fact that we've kept our gross margins in the mid-20% range that we can be a viable business going forward working with these large national accounts on these kinds of rollouts. So we kind of worry about our own house, go after projects, win them by performing very, very well and let the other stuff kind of take care of itself.

Great. Well, congratulations for the transformation of Orion in the last year. It's really impressive.

Your next question comes from the line of Amit Dayal from H.C. Wainwright.

Great execution.

Thank you.

Just getting to sort of maybe a topic that is on everyone's minds, I guess, is there enough in the pipeline to match the performance you're seeing in FY 2020 in FY 2021?

Well, we will follow the same path we have in the last number of years' time and it's that we typically comment on our revenue expectations for the next fiscal year when we get to reporting our fourth quarter fiscal results for the prior year, which have historically been in the early June time frame. We believe, by then, we'll have much more visibility as to the decisions that are being made by some of our larger customers as to what cadence they want to take with respect to projects. In many cases, it's not so much if they're going to do it, but sometimes, it's a question of when they want to roll out some of their projects. So we feel it's a little bit preliminary to have extensive comments about fiscal 2021 revenues at this point in time.

At the same time, as I've said a few times this morning in my prepared remarks, we feel very confident about the momentum that we're seeing and the opportunities that we are seeing. We see the ability to continue to grow the ESCO market, which is very important to us, and we believe we'll make a comeback and start regrowing our agent-driven distribution channel.

So we're far from acknowledging that we're going to not stay at the level that we are in fiscal 2021. And as we have more information on projects, we will announce them. And certainly, when we get to reporting at our next quarter, we'll give everyone much more visibility about fiscal 2021. But at this point, we feel very confident about the pipeline and the opportunities that we are seeing.

That's fair, Mike. And just touching on the agent channel comments. I believe you've previously highlighted that you were sort of getting the product offerings better suited for that channel. Are you there already, or are you still in the process of getting those products for the agent channels into their hands?

It's both. We think some of the products that we have announced over the last couple of quarters are very effective for that channel as well as our other 2 channels of ESCOs and large national accounts. And in most cases, our product development really can feed off 3 of those channels. What we're extremely excited about is the fact that we do expand these product extensions in both our high-bay product, for the next-generation high-bay product and our exterior lighting products that we will be launching over the next quarter. And based on initial feedback we've had from the marketplace, we think these could be very strong products for us. And they will help all 3 of our paths to market, but I certainly think they will have an impact significantly on our distribution side of the business and help that also.

Understood. And you touched on recurring revenues. What level of difference or improvement in margins do you see from the recurring revenue opportunities you might enter into versus your core margins?

We think the recurring revenues that we're currently seeking and have some conversations going with respect to opportunities would likely be similar to the revenues that we are experiencing today.

Okay, understood.

I maybe said revenues, I meant margins if I said revenues. So similar margins to what we -- our business is generating today.

Your next question comes from the line of Aaron Martin from AIGH Investment.

Congratulations on the tremendous progress. You've mentioned again a couple of times over the last couple of calls about the large turnkey products will enable you to -- there's more IoT capabilities going in to generate a recurring revenue stream. Are some of those projects being done now in the existing projects you are doing now? I assume, obviously, that run rate is very low, but what can you tell us more about that?

Sure. Well, the one large project that we talk about a fair amount, given its size does include sensor control technology that provides for IoT solutions for that customer. So the hardware has been put in place as the installations roll out. And then that customer will, as time evolves, decide how they want to use that information for it. So given that we now have a extremely large installed base with a higher-end controls project -- product that we can demonstrate and show to people.

On the other front, from a recurring revenue stream standpoint, today, those revenue streams are rather modest, but we do see opportunities for us to participate in some of those revenue streams down the road with respect to controls and SaaS agreements that might be put in place.

So the situation is where our customer would typically need to bring in and utilize that controls company for their SaaS software products, and we may have a opportunity to participate in some of that revenue stream given our relationships and our efforts in getting that installed into that project.

So just to make sure I understand. So you talked about your installed base with the sensor capabilities. So does that mean now there has to be a sell-in to that customer for the whatever IoT capabilities that they can add on top or it's -- they had everything they need and it's just a reference, and there's no recurring revenue from that customer?

There's kind of 2 pieces to it. First, usually, any control technology that's being put in, whether it's basic or mid-level or smart controls, is going to have the basic features of dimming on and off occupancy and those controls are usually enabled immediately upon commissioning that product into the system. And that does not require additional software or third-party involvement, that is just happening and controlled by the customer through their energy management system or their building management system. So that's kind of the basic side of things.

Secondarily, sometimes customers will install the sensor technology that also can go above and beyond that, things we comment on like asset tracking or perhaps heat mapping or temperature, ability to record temperature. Those situations will often result in a customer needing to then utilize the manufacturer of those sensor technologies to utilize their software to then analyze and accumulate that information for them. So that then does require that third-party controls company to demonstrate the benefit to the customer of those control technologies.

So when you talked about having that installed base, which one of those 2 is that?

Well, the installed base of ours has both going on. The one very large project we have has the more sophisticated controls already installed on the fixtures.

Okay. So now it'll be a question of the third-party sell-in because the controls are already there?

Correct.

Congratulations again.

(Operator Instructions) Your next question comes from the line of George Gaspar.

Mike, great progress you're all making. I'd like to concentrate on this IoT if you don't mind. Can you give us an idea in first 9 months now this year, what revenue might be related to the IoT directly? And is it possible that you could give us a thought on what that might evolve into the 2021 fiscal year?

George, we have not historically broken out the revenue related to controls technology, whether it's basic or IoT-orientated control. So we've not historically kind of broke those out and reported on those numbers. So I really can't help you there. So it's a little more higher level at this point of simply saying that we are seeing more interest and more of our fixtures are going out with controls that have higher level of capabilities to them, and we would expect that to continue in the future.

Okay. Let me ask it this way. In terms of the business that you've accomplished in, let's say, the last couple of quarters, I assume that there's IoT connections going in on the business that you've accomplished in just the last 6 months. Am I correct on that?

Yes, yes.

Okay. Now looking back -- let's say, looking back 2 to 3 years and the -- your total LED install, do you envision that there is a opportunity for you to get involved in going back in and doing IoT install in those projects going forward on a accelerated basis beyond going out and getting new national account business?

It's certainly -- yes. A great question. It certainly is possible, George. Something we've talked about for a number of years is that we use the term, we future-proof our product. So much of our high-bay product is set up such that a customer could later add controls technology by simply having a sensor that's connected to a modest-size bracket that literally plugs right into the end or the top of a fixture, providing them with the ability to then capture that information at the sensor level, send it through gateways to a server to use that information.

So our fixtures are capable of doing that. We'll have to see whether customers go down that path of saying, let's go back and incorporate sensor technology. But we do think it's an opportunity for us because many of our fixtures have that capability to go back and add sensor technology in a very effective -- cost-effective and in an efficient way to go and do that.

Yes. Okay. And just one final on this whole process. The IoT area, obviously, is going to increase dramatically going forward. And your -- initially, you've been on the front end of a lot of this in terms of the LED market. Is there -- are you doing ongoing technology to try to improve what goes into the IoT at this point in time to give you even a better shot at accelerating your business in that area?

What we continue to do is we've decided years ago to stay technology agnostic. There are many different control technologies and sensor technologies, and we have the engineering capabilities and design capabilities to work with many of them. So we continue to explore new entrants into that area as well as some of the additional product line extensions or product improvements for the existing sensor companies that we do work with. So we're always trying to stay on top of that, and we'll continue to do that. And that just gives us more opportunities to take to our customer. We have decided that it's better to have multiple sensor technologies to take to the customer because they may have an existing system already, and it's got to fit in with that, where we can have our engineering staff tied in, where they may want a brand-new system, or we can then bring a couple of alternatives to them at different price points and capabilities to allow them to solve their problems.

Your next question comes from the line of [Bill Garden from Garden Capital].

One basic question. We're dealing in the weeds and I'd like to take an eagle eye view on this. We speak about on your release, competitive advantages of what we're selling out. And in addition to that, we spoke about the product line is resonating very strongly with the people. And of course, we've got some very strong competitors. Can you put a little meat on the bone as to what are we seeing? What is the advantage that we're seeing out of this whole thing compared to the outside competitors?

Absolutely. We believe one of the primary differentiations for us is that we not only manufacture the product but we bring a turnkey solution to our customers. And what we mean by that, Bill, is that a customer comes and wants to do a retrofit project.

We have the people that can initially talk with them on what they're trying to achieve and try to -- and then derive a product and a process that solves their problem versus saying, here, I've got these 15 fixtures, pick 1 and that it will work for you. So in many cases, for those larger situations, we have a team that; number one, will go out and audit their facilities to verify what they have in each of their locations; number two, we will work to design a product or modify an existing product to really specifically fit their needs in terms of lumen packages or color, what options they want on that fixture, what kind of control features they want to have. We then design -- finish the design, we manufacture that product, mostly in the United States.

Next, which is very important, is we can then manage the installation for them across North America. So we have the ability to line up all of the resources needed to install the product all the way through installing the controls, commissioning the controls and turning that system back over to their -- manage their -- their building management system or their energy management system. Many of our very large competitors primarily make product and sell the product to the customer, the customer then hires somebody to install the product, perhaps to commission the controls. And what we think is our primary differentiator is a customer can come to us to solve that whole stream of things that has to happen and go from 4 or 5 or 6 suppliers to 1 supplier that can handle the entire project. So that's what we mean by the turnkey solutions being able to bring that differentiation to them from a overall services standpoint.

So basically, as you are agnostic with regard to product lines, you're going to your customers and saying, listen, these are the alternatives you got, we can make some recommendations, but you chose and after you choose, we'll take the ball and run with it to the end of the game and finish it.

The only small thing I would change in that comment is that we're not totally agnostic on product. I mean most of our product is product that we are manufacturing.

So it's our product. We're not -- in most cases, we are using our product for these large projects. But we often are taking a product and then tweaking it to make it really fit what the needs of that customer is to make it work in their solutions.

So in other words, these are not branded products that you're going into. They are basically your own commodity-type product?

Well, they primarily are -- in most cases, it's product that we have designed and developed that we sell across our 3 market channels. And -- but in many cases, we do late-stage definition and late-stage modifications to product to very specifically meet the needs of those customers. So we think it puts us in a much stronger position than simply having X product that it's either this or something else. So thanks so much for your questions.

That concludes the Q&A session. I will now turn the call over to Mike Altschaefl for closing remarks.

Thank you, operator. Once again, I'd like to thank the Orion team for their hard work and dedication as reflected in the strong financial performance of our business.

I also want to thank our shareholders who have continued to support us, including those on today's call. In our continuing efforts to increase the awareness of Orion's business and investment opportunities, we expect to present at the Annual Roth Conference in Orange County on March 16, The Benchmark Construction and Industrials Conference in Chicago on March 19 and the B. Riley Institutional Investor Conference in Los Angeles on May 21.

We're reviewing other appropriate marketing opportunities over the next 6 months, and we'll make announcements as appropriate. You may also contact our Investor Relations team to schedule a meeting or call the management and their contact information is on today's release. So thanks again for joining us on today's call. We look forward to updating investors on our business progress and outlook on our Q4 call. Thank you. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.