Orion Energy Systems, Inc. Q3 FY2023 Earnings Call

Good morning and welcome to the Orion Energy Systems Fiscal 2023 Third Quarter Conference Call. Today's conference is being recorded. I will now turn the call over to Bill Jones from Investor Relations.

Thank you and good morning. Mike Jenkins, Orion's CEO, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's CFO, will review the company's Q3 and year-to-date results, financial position and other matters and then we'll take investor questions. A replay of the call will be posted to the Investor Relations section of Orion's website. Remarks that follow and answers to questions may include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives, goals and the business outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently expected. Such risks include among others matters that the company has described in its press release issued this morning and its SEC filings. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today's press release, and available in the Investor Relations section of Orion's website. Now, I will turn the call over to Mike Jenkins. Mike?

Thank you, Bill. Good morning everyone and thank you all for joining our call today. As previewed in January, our third quarter results continued to reflect the impact of customer delays in the initiation of several large LED lighting projects. Specifically, the previously announced $4 million plus project for our longtime automotive customers started more slowly than anticipated in Q3, but is now accelerating in Q4. Additionally, the start of a $9 million Department of Defense project shifted from the third quarter of this year into the first quarter of 2024. As mentioned previously, these projects are fully booked, and we look forward to their full activation and completion. We also saw some softness in our electrical contractor distribution channel, which seems largely due to the softening economic environment. We also experienced a modest decrease in contribution from our Energy Service Company or ESCO channel in the quarter. The ESCO softness is more related to project timing, as longer term opportunities continue to gain traction in this channel, which focuses on delivering both environmental and energy efficiency benefits to end customers. We have been working hard with our ESCO partners and have built a strong pipeline of opportunities that should drive significant positive growth in fiscal year 2024. Offsetting these factors was a better-than-expected contribution from our new EV charging solutions business and steady growth in our maintenance services business, largely due to the two acquisitions we completed over the past 12 months. We reiterate our fiscal 2023 revenue guidance for the balance of the year and reconfirm our outlook for revenue growth of at least 30% in fiscal 2024. Our fiscal 2024 outlook reflects a growing array of significant retail logistics, public sector, and automotive projects in our LED lighting pipeline, as well as strong growth in our EV charging solutions and electrical maintenance services business. We plan to provide more color on our 2024 outlook in early June when we report year-end results. Overall, we are seeing growing interest in our expanded array of products and services that meet rising demand for energy savings, environmental benefits, safety, workplace, and efficiency enhancements and improved customer experiences. We are pleased with the reaction from our customers on our growing value proposition of multiple platforms that help our customers with their energy and carbon footprint reduction goals. Leveraging our unique turnkey, design, build, install and maintenance solutions along with industry-leading customer service, we're able to deliver substantial value particularly to large or regional organizations that manage hundreds and sometimes thousands of locations. These characteristics provide Orion a unique competitive advantage that creates complementary paths to grow both by expanding the base of customers we serve and the array of solutions we are able to offer. To lead our internal sales efforts we recently recruited a new Executive Vice President of Sales, Ken Poole, from outside the lighting industry. As we continue to evolve as an organization, we are focused on building greater value for our customers through expanded product and solution offerings, coupled with execution models to best meet their needs. We have talked about the strategic value that ESCOs bring to Orion and Ken comes to us from a super ESCO and understands the world of project business. He is also very familiar with multiple go-to-market models and his sales management acumen will be an important asset supporting our future growth strategies. While our history has been enlightening, we have expanded into new complementary areas including electrical and lighting maintenance services, and electric vehicle charging solutions. We believe that our competitive advantage in customer service and turnkey project management complements these new businesses. We know from direct experience that many of our customers have specific interest in one or more of these areas, and therefore they build on our customers for life commitment. We work to educate our customers on the total cost of ownership of lighting and other energy systems, so that they can truly appreciate the substantial long-term ROI advantages and reduction in CO2 emissions provided by Orion's high quality, energy efficient products. We have three primary paths to market which include our ESCO channel with partners who focus on delivering energy efficiency benefits to their customers. ESCOs value the industry-leading energy efficiency and high quality and reliability of our LED fixtures made with the highest quality components. Second, we serve the electrical contractor channel providing a range of lighting solutions to meet a variety of needs and price points with a focus on new construction and agricultural markets in their local geographic areas. The third, we have our national account group that is focused on developing long-term relationships with major national and regional customers across a range of industries and helping them to address their complex lighting, IoT solutions, maintenance or EV charging needs. To differentiate ourselves and adding value for these large enterprises, we are developing turnkey capabilities for executing lighting, maintenance and EV charging solutions from start to finish all from one centralized Orion point-of-contact and accountability. True turnkey solutions are highly complex to execute as they involve input and coordination across the entire organization, from initial site audits to design and planning, product development and customization, to product manufacturing in our facility in Wisconsin, through to shipping and on-site installation and system commissioning in hundreds or even thousands of customer locations. We also offer customers ongoing lighting and electrical maintenance support tailored to their unique needs. Now, turning to our new growth opportunity and EV charging solutions. Obviously, the electrical vehicle market is a high growth area with EVs expected to become nearly a quarter of new vehicle sales by 2025 and continue to grow from there. This trend is generating demand for EV charging stations at stores, businesses, schools, offices, housing complexes, healthcare, and other facilities. The ability to charge your electric vehicle will become an increasingly important component of high-quality customer experience for many and also important to attract and retain employees and visitors. $5 billion in Federal and state funding under the National Electric Vehicle Infrastructure or NEVI Act has been authorized to support EV adoption and infrastructure over the next five years. Many states are also supporting EVs in addition. For example, in Massachusetts, the Utility Commission recently approved approximately $400 million in funding over the next four years to support EV-related infrastructure. Other states are reviewing and implementing similar programs in addition to the NEVI funds. Our Voltrek subsidiary is well positioned to benefit from these and other project funding sources. We are currently working to integrate Voltrek Solutions into our organization and adding personnel and infrastructure to expand their reach. This includes building out a nationwide group of qualified electrical contractors to execute EV charging installations or broader rollouts for larger organizations. We recently announced a significant project providing Level 3 DC fast charge infrastructure for an electric school bus pilot program in Massachusetts. This project is broken into phases, and we announced the commencement of the first phase to support charging systems for 20 buses out of a fleet of a possible 145. The first phase of this project should provide Orion revenue of approximately $1.5 million. To support our growing base of product and service revenues, we launched a new website in December. The objective was to enhance the site's value and ease of use for customers and partners. Initial feedback has been good and we are already seeing higher overall website traffic and more targeted lead generation benefits from the overhaul. We encourage all of you to check it out. Before I turn the call over to Per, I wanted to make it clear to our shareholders that despite an anticipated $50 million year-over-year decline in our business from our largest customer and online retailer through the first nine months of fiscal '23, the balance of Orion's business grew by approximately 9% year-to-date and 5% in quarter three over the prior year periods. Our EV charging segment is off to a terrific start in its first quarter contributing to our results and our maintenance business remains on pace with our prior growth expectations. This confirms that the investments we are making to diversify and grow our business are working, though we are still in the early stages of integrating the new businesses and building out systems, management, sales and marketing and cross selling initiatives. We expect these segments will represent a significant portion of Orion's revenue moving forward in fiscal '24 and beyond, both with project work as well as a growing base of recurring maintenance revenue. We look forward to continued progress sourcing significant projects in our national account business, though the timing of these larger projects can be impacted by customer variables or other factors outside of our control. We continue to build out our base of productive ESCO partners and a pipeline of new product sales opportunities, including a few seven and eight-figure opportunities, some of which we expect to initiate in the first half of fiscal 2024. Reflecting these factors, we are excited about our growth prospects for the next several years. Now I will pass the call to Per Brodin to discuss our financials and specifics of our financial outlook for the balance of fiscal '23 and '24. Per?

Thank you, Mike. Fiscal '23 third quarter revenue was $20.3 million versus $30.7 million in Q3 '22 and $17.6 million in Q2 '23. Through the first nine months of fiscal '23, revenue was $55.8 million versus $102.3 million in the prior year period. As previously discussed, the current year has been largely impacted by the wind down of the multiyear project with our largest customer, which had an $11 million impact on the third quarter. As Mike mentioned, excluding revenue from our largest customer and a large global online retailer, year-to-date revenue increased 9% over the comparable prior year period, reflecting our success in diversifying the growth drivers of our business. Our gross profit percentage decreased to 23.6% in Q3 '23 compared to 24.9% in Q3 '22 and 25.3% in Q2 '23. The decrease principally reflects lower absorption of overhead costs and reduced revenue and a higher mix of service revenue, which operates at lower margins. Gross margin for our EV business outperformed the overall average. Third quarter fiscal '23 operating expenses were $9.4 million versus $6.3 million in the year ago period. The increase was principally because of $1.9 million of acquisition costs, and higher general and administrative expenses associated with the inclusion of the Voltrek and Stay-Light businesses in our results this year. The acquisition costs incurred in Q3 include $1.5 million toward the accrual of the Voltrek earnout and transition costs—transaction costs associated with the Voltrek deal closing. Orion reported a net loss of $24.1 million or $0.75 per share in Q3 '23, compared to net income of $1.1 million or $0.04 per share in Q3 '22, primarily due to our establishing a valuation allowance against the company's deferred tax assets. Orion recorded the valuation allowance because we are now projecting a 36-month cumulative taxable loss through March 31, 2023, which requires the recording of this reserve. This non-cash entry does not impact our ability to offset future taxable income through existing NOLs. However, it will result in effective income tax provision rates that do not reflect statutory rates. Importantly, cash flow from operations was $1.3 million in Q3 '23, reflecting a benefit from the timing of accounts payable and accrued expenses partially offset by other working capital items. As of quarter end, net working capital was $24.5 million, including inventory investments of $19.3 million, which includes finished goods associated with our large automotive project, the addition of Voltrek inventory, and the balance of inventory intended to support product sales volume increases in the coming quarters. Orion had quarter end liquidity of $19.4 million, including cash of $8.1 million and $11.3 million of availability on our credit facility. This compares with $23.7 million of liquidity at the end of Q2 '23 prior to the funding of the Voltrek acquisition. As of the close of the third quarter, we had $5 million drawn on our revolving debt facility, the proceeds of which were used to fund the Voltrek acquisition. As you review our 10-Q, you will note that we have begun reporting Voltrek as a separate segment. Please note that the earnings reflected in that segment data include the allocation of some corporate overhead costs that are not incremental to Orion. The Voltrek business was EBITDA positive excluding those allocations. Turning to our outlook, we expect further sequential revenue growth in Q4 '23, which would result in our strongest revenue quarter of the year. Accordingly, we have reiterated our fiscal '23 revenue outlook of between $77 million and $80 million. While we expect an overall use of cash in Q4, we believe our cash and liquidity position will remain healthy at year-end, providing us a solid position to support growth initiatives across the business in fiscal 2024. As for M&A, while we continue to develop a pipeline of future opportunities, our near-term focus is on integrating our recent acquisitions, ensuring their success and investing in internal growth initiatives.

Our first question is coming from Eric Stine of Craig-Hallum.

So I think I'm going to focus on Voltrek here for my three. But, maybe first, could you just provide more color on the build out there, sales and service infrastructure? Maybe the timing and milestones we should look for? And when do you think you will have that in place and have the appropriate market reach that you're looking for?

Great question Eric, we're actively working on that now. So as we are adding to the team as we speak. And in our budget for this coming year, we certainly plan to continue that and accelerate that. I would say that we look to be at a different level of capacity, probably somewhere around, by certainly a second quarter of our fiscal year, and be fully active in cross-selling activities at that time.

And then maybe a follow-up. I mean, when you think about how Voltrek plays out. How do you see the end market breaking down? I know your first award, or at least the one that you have announced is an electric school bus pilot program but I also know that specifically some of your national account customers really were kind of pushing you to get into this area, are very interested in you getting in this area. So I mean, do you think this is more on the school bus side? Do you expect it to be more national accounts? Or how should that play out going forward?

Yes, another good question. I would say all of the above. Voltrek has got great momentum right now, with a lot of municipal work, fleet work, which the bus project is an example really of both government as well as fleet. So we plan to expand that. And then as I referenced earlier, in terms of the cross-selling, that's really where we get the leverage and the synergy from our existing base of customers. And again, all of them really are considering at this point, their strategy for EV moving forward, because it is such a large mega trend in the U.S. right now.

And then I guess last one would just be, obviously you mentioned, the significant funding that's out there, just curious steps you're taking to make sure that you're involved. You're part of that funding, and I don't know if there are steps you're able to take, but if there are it’d be great to get some color.

Sure, sure. Well, I would say that's part of the infrastructure that we're further building out. I mean, Voltrek has been very strong and understands the processes well to access those types of funds. So certainly as we look to scale the business, we'll be adding resources in that area as well.

And maybe a little more color for you, Eric. That comment we made about the funding in Massachusetts was in the backyard of Voltrek. So they're very tied in to that piece of it. And then Federal basis, we're obviously continuing to look at that, as Mike said.

Our next question will be coming from Alex Rygiel of B. Riley.

A couple of quick questions here. Any way to quantify the EV charging station backlog or pipeline or sort of market/bidding opportunities that you see in the intermediate term?

Nothing specific at this point, I think maybe the best way to think about it, just for some context is, when we announced the Voltrek deal in October, we said we expected them to do about $3 million to $5 million of revenue in the second half of the year. On today's call, we said that they essentially exceeded our expectations in the third quarter, coming in at about $2.8 million of revenue. We expect them to continue to operate at that level and above so it will be exiting the year at a nice rate. And then given the infrastructure that we're adding, we expect to see significant growth above that in the coming year.

And then also as it relates to your ESCO business, any way that kind of frame the size of that business today and what the backlog or pipeline opportunities could look like over the intermediate term?

We have been working diligently with our ESCO partners and have several large projects in progress. These projects are in the range of seven to potentially eight figures that we expect to start in the first half of next year. While we do not disclose our total backlog, I can say that we are experiencing a growing pipeline year over year with some substantial projects.

The next question is coming from Andrew Shapiro of Lawndale Capital.

Several questions, I'll ask my three and get back in line. Regarding your large customer, I think it's Home Depot when it goes unmentioned. A few. When of the decline from this customer anniversary and what are the prospects of a return of some of the business? Were these deferrals of needed improvements and conversions for them? Was it saturation and completion of the roadmap? Or was it lost market share to a competitor?

We are nearing the anniversary of that project, which involved various components related to retrofitting the indoor lighting in most of their retail outlets. We've successfully completed that task. As mentioned in previous calls, we are continuing to undertake additional projects and also providing maintenance services for them. We anticipate that they will remain a significant customer moving forward. They have indicated that their spending could reach around $20 million per year in the coming years. This offers a bit of perspective on their current status. It's not that we lost any work; it was simply a well-defined program focused on retrofitting the indoor lighting in their stores.

So it's kind of a saturation of the completion of the project. And you have an ongoing relationship and business.

Yes.

Okay. Second question, is on the revenue delays that you refer to. Can you provide a little more context or color on the delays in the DoD and automotive industry projects? Are they the same causes? It sounds like they might not be. And what are those causes or what are the big issues in each?

Sure. On the automotive front, it was really around project timing, we work with this automotive company, we work with a lot of their labor. And so it's a jointly scheduled. And those schedules, there were some conflicts in it on their side. And so that caused some delays. So it was not related to any macro factors outside of their own dynamics around their labor. On the DoD side, this is a very large, complicated project. We are part of a broader project on this for the Department of Defense, and that overall project has experienced some delays. So again, it's just the dynamics that are unique to that situation.

Subcontractor on a bigger project, yes.

That is correct. Yes.

Okay. I don't know if that's completed my three, I do have other questions. I'll back into the queue if you need me to.

Sure.

The next question is coming from Amit Dayal from H.C. Wainwright.

So with respect to Voltrek, now that you've run the business for few months, Mike, how should we think about the potential operating leverage? You did mention, you have some synergies and leverage opportunities on the customer side? But on the operating side, how should we think about operating leverage for that business?

This is clearly an investment year for us as we are making significant investments in the business. We still expect it to be an EBITDA positive year, and we are eager to scale rapidly. As we look ahead, we anticipate gaining more operating fixed cost leverage as we continue to grow our revenue.

And does the EV charging opportunity now exposing new opportunities in storage, et cetera as well? Or are you not sort of entering or not looking to enter that segment?

We are not currently active in that segment, but it is certainly a related area and could be part of a larger solution. It’s something we will consider as we progress.

Just last one for me. Is there any inventory et cetera, that you guys are sitting on related to the DoD and auto project push outs?

There is some inventory related to the automotive project, which is underway. We recognize revenue associated with the service over time, but some of the product revenue will not be recognized until later in the project. Currently, there is over $1 million of inventory for that project that has not yet been recognized as revenue or cost of sales. Additionally, there is the Voltrek inventory that was added this year. In the 10-Q, you will see the opening balance sheet broken out in the acquisition footnote, which shows that when we acquired Voltrek, they had about $880,000 of inventory. While we do not separately disclose the balance as of December 31, this gives some context of the inventory magnitude in that business. However, there is no significant inventory on hand for the DoD project at this time.

We'll follow up questions coming from Andrew Shapiro of Lawndale.

So little follow up on that DoD questions. Your DoD project, is it one of your first as a subcontractor for the DoD? And is there a potential pipeline of additional projects to come based on whatever theme that is driving this DoD project?

Great question, Andrew. No, this is not our first project working for the DoD. And we are working with what we call a super ESCO who has the prime contract and then we are a sub. We have worked with this super ESCO on other DoD projects. There are some others that are in the pipe that we're working with other super ESCOs as well. So that's really one of our core models of working with the DoD, is working with ESCO partners.

And then go ahead, I'm sorry, I didn't mean to cut you off.

Yes, I was just going to clarify. We do occasionally and have historically done some work direct. We do have the ability to work direct on government contracts. Some we do direct, some we do as a sub.

We have a GSA.

Can you provide some insight into the Voltrek acquisition and the forecasts, building on previous questions? You've mentioned several costs in this quarter's results associated with acquiring Voltrek. What is the estimated dollar value of those expenses this quarter that you consider one-time costs related to the acquisition, as opposed to the ongoing expenses that are part of the incremental ramp-up?

I'd say the high-level way to think about the items we put in the acquisition related cost line are things that we don't believe are part, are related to the ongoing operations of Voltrek. It's either part of closing the deal, which is the majority of the costs incurred away from the earnout accrual in this third quarter. So the parts, anything that relates to their ongoing operations would not be included in that line but would be related to closing the transaction, accruing the earnout or some integration costs which are not a big portion of that. And just to clarify one thing for the audience on the earnout, the $1.5 million we accrued in the third quarter, if their performance continues, at the level it is, we would expect to record an additional $1.5 million accrual in the fourth quarter of our fiscal year, and then the expectation would be that, that would be paid sometime mid to late summer.

So to be clear, then it sounds like the whole line item that you've broken out and called acquisition costs, those are all one timers?

I would say yes, with the caveat that some accountants would argue about the definition of one-time.

And then on the earnout, is the maximum earnout $3 million?

Within this current fiscal year, correct.

Okay. And how many additional years is there an earnout measurement and subsequent payments?

It's a three-year earnout. This is the first year, which will conclude at the end of our fiscal year for this period. Based on our current trajectory, I believe we can achieve that. The second year will align with the next fiscal year, followed by a third year in fiscal '25.

And how much is the maximum to pay in each of the next two years?

In the first year, the amount is $3.5 million, followed by $4 million in the second year, and $4 million in the third year. Additionally, there is a potential bonus at the end of the third year, where up to an extra $4 million could be earned.

Okay. And the test for paying these, is it based on revenues, EBITDA, EBIT, what's the metric?

It's an EBITDA metric.

You're bringing on additional personnel to develop the sales and service infrastructure needed to expand Voltrek's reach throughout the U.S., moving beyond its current focus in the Northeast. Is this hiring mainly an internal fixed cost or outsourced and variable?

It's a combination of both, we execute the model through independent contractors in terms of site installation, but the internal resources are really on the project management side, the sourcing opportunities, and then the project management side of the business.

And are all of those costs then allocable towards the Voltrek side of the house and built into them the measurement of EBITDA?

That is correct.

And the other costs that are referenced or referred to here, are these like onetime investment costs or most of them ongoing and fixed costs?

Yes. This mainly involves hiring additional staff to handle the work related to sourcing and project management. The infrastructure costs are relatively low.

That concludes today's Q&A session. At this time, I would like to turn the call back to Mike Jenkins for closing remarks.

Great. Thank you, operator. As many of you know today, marks my first time with this call as CEO. I certainly look forward to meeting and engaging with all of you and other stakeholders in the coming months and quarters as we execute our growth plan. If you have any questions or comments in the interim, or would like to schedule a call with management, please contact our IR team whose information is included on today's press release. Thank you all again for joining us today and we look forward to talking to you soon.

This concludes today's conference call. Thank you all for joining and enjoy the rest of your day.