Orion Energy Systems, Inc. (OESX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Investor Update. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to today's host, Bill Jones. Sir, you may begin.

Thank you for joining today's call to discuss Orion Energy Systems' updated revenue outlook announced in this afternoon's news release. Following prepared remarks by Mike Altschaefl, Orion's CEO and Board Chair, Mike and Per Brodin, Orion's CFO, will respond to investor and analyst questions. An archived replay of today's call will be available after today in the Investor Relations section of Orion's corporate website. This call is taking place on Tuesday, January 18, 2022. Remarks to 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 include words such as anticipate, believe, expect or words of similar importance. Likewise, statements that describe future plans, objectives or goals are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than expected such with 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 the filings, the company disclaims any obligation to update forward-looking statements which are made as of today's date. With that, let me turn the call over to Mike Altschaefl. Mike?

Thank you, Bill. Good afternoon, and thank you all for joining us today on such short notice. As we have not yet completed our full results for our fiscal third quarter ended December 31, there is a limit to what we are able to address on today's call, but we did want to provide an opportunity to discuss our updated outlook for fiscal '22 and respond to your questions. I also want to make it very clear that despite project delays outside of our control, we remain very confident in the long-term growth potential of our business. Our confidence is based on the strength of Orion's product and service portfolio and a growing base of customers, our unique turnkey capabilities and our continued success and commitment to delivering a very high-quality customer experience that also provides a compelling return on investment. For those who may not have had a chance to review today's news release in detail, we announced that principally due to slower-than-expected customer activity, we have reduced our fiscal '22 revenue expectation to $130 million, down from our prior expectation of at least $150 million, and we announced that we expect revenue of $30.5 million for our fiscal '22 third quarter ended December 31. Our updated outlook implies anticipated revenue of approximately $28 million for our fourth quarter ending March 31, '22, and full year revenue growth of 11% versus fiscal '21 revenue of $116.8 million. While this change in outlook is disappointing, our reduced revenue expectation is almost entirely due to customer delays on several larger LED projects we are expecting to complete during fiscal '22 -- we were expected to complete during fiscal '22 but which we now expect to complete in fiscal '23 and '24. These projects were delayed by our customers as they focus their resources and decision making on responding to the impact of supply chain and COVID-19-related disruptions to their own businesses. Importantly, the Orion team has been very successful in navigating these same challenges in our own business, and we have continued to meet product and service commitments to our customers with only limited impacts. Specific project delays that contributed to our revised fiscal '22 revenue outlook include a major long-time automotive customer that has postponed approximately $7 million in expected revenues from fiscal '22 project activity principally due to component shortages in their operations; a major online retailer that has temporarily halted new facility construction projects due to shortages and delays in obtaining key construction materials and equipment, impacting roughly $5 million in expected fiscal '22 project activity; the delay of a government-related turnkey LED retrofit project of approximately $7 million; and slower-than-expected activity with our 2 large national logistics customers caused by multiple factors. We remain in active dialogue with our customers, and these inputs underscore our belief that these projects will proceed as these customers are able to overcome current supply chain COVID-19-related and other challenges. We also expect to benefit from our U.S.-based LED lighting fixture production capabilities, which enable us to respond very quickly to customer requirements generally within 2 weeks as compared to many of our competitors that source their products from Asia and are facing long lead times that can range from 6 to as many as 12 or more weeks. Additionally, business with our largest customer, a major national retailer, remains strong and continues to evolve into new opportunities while also serving as a compelling reference for our unique turnkey design, build, install and maintenance capabilities. We expect our business development efforts with our large national accounts to remain and build momentum as current business disruptions subside and both new and existing customers can return their focus to longer-range planning. We are making good progress in the build-out of our lighting and electrical maintenance business, which we believe provides an attractive opportunity for growth and the formation of an expanding base of recurring service revenues. We've been moving carefully to develop and test our service model working with our major national retail customer and other customers over the past few quarters and plan to roll out this business on a broader basis. To accelerate growth in the scope and scale of this business, we recently completed the acquisition of Stay-Lite Lighting. Stay-Lite brings 50 years of lighting industry experience and a nationwide network of service coverage that includes the team and infrastructure to self-perform lighting and electrical maintenance services in 15 states. We believe this expanded service platform along with our existing maintenance business should generate annual recurring revenue in excess of $20 million in fiscal '23 while also opening the door for potential product sales to customers that are not currently Orion LED lighting customers. We believe it's important to note that Orion remains well positioned for a rebound in activity as our customers' businesses normalize. Moreover, our Board and management team remain confident in and committed to our long-term strategic plan of building a business for approximately $500 million in annual revenue over about 5 years. Orion's strategic plan envisions average organic growth of at least 10%, supplemented by external growth, including strategic acquisitions like Stay-Lite and other business partnerships and initiatives. Orion remains well funded to support our strategic plan with a cash position of approximately $17 million and approximately $24 million available under our line of credit after funding the Stay-Lite acquisition. We will provide more perspective on our fiscal '22 Q3 quarter and the company's outlook for the release of final third quarter financial results. And our regular quarterly call currently is planned for February 9. So with that overview, I will open it up for questions, please.

[Operator Instructions] Our first question comes from Eric Stine of Craig-Hallum.

So I know you talked about the majority of these projects and confidence that they're not lost and that they just are getting pushed a little bit. But just maybe a little more color on the delayed government contract and then also just the slower activity on logistics, you didn't necessarily call out supply chain as being the reasoning for both of those. So maybe just some color and then confidence that those two are not lost and that they're just more delayed into fiscal '23.

Yes. So I'll start with the first one, Eric, appreciate the question. And that is a larger government project that we've been working on for quite a while. And we are working on that project with other partners that are the primary the contract for the governments on this project would be a Tier 2. The negotiations between that very large company who is the primary contract with the government, it's just taken longer than people had expected. So we've been actively working on this for well over a year. We had expected our partners to enter into contracts with the government sometime during this year to allow us to have some of the revenues into this fiscal year. What I can tell you is that we believe those conversations are going well. We're actively engaged with our customer, which is the prime contractor, and we have confidence that the project will take place, has simply been pushed out from a decision-making process between them and the government entity. The good news about it is as the project has taken longer to get negotiated and finalized, the size of it continues to expand. So at the point where we do have signed contracts, we certainly will announce that and let everybody know where it is. And we would expect that for us to happen sometime in our Q3 or Q1 of fiscal 2023. On the second question, you are correct. We kind of made it a little more broad with the 2 large logistics companies that we have because there's multiple things going on. And part of it is they are in the business of owning properties and leasing those to customers. You have customers that have been impacted by supply chain or COVID situations. There has been slower decision process by some of them. So the retrofit activity for their existing facilities has gone slower than anticipated, which directly impacts us. In addition, on both of those situations, we have discussed in the past that we did not and do not expect to be the sole provider of product and service to those 2. So there are other activities going on as we work hard to make our proposals competitive to others. And to date, we feel we have been successful in many of those situations, and we welcome the competition. The positive about those 2, if I could just say one last thing is that those 2 opportunities combined have hundreds of millions of square feet to be converted to LED across North America. And it is going to take them a handful of years to do that. And you can generally put $1 to $1.5 per square foot depending on whether it's product or product and service or some mix on those. So it still is, we believe, tremendous future opportunity for us. And unfortunately, we expected more of it to hit during fiscal '22 than did.

Got it. Very helpful. And maybe just a follow-up for me. Curious, some of the supply chain issues being felt by your partners, how that's impacting your dealer business and also your ESCO business?

It -- much less so for those 2. And those 2 businesses continue to grow for us. And so as we're trying to dissect for people that, for the first time, as we mentioned back in November, we had seen these bigger impacts to our customers, particularly in the turnkey customers of their supply chain challenges. From our standpoint, we've been able to manage our supply chain well, and we believe we've lost only a modest amount of business to our customers due to our supply chain challenges that we're fighting our way through. To give you some perspective, Eric, now that we've kind of laid out what we think fiscal '22 is going to be and also our Q3 numbers, I'll go a little further for you to help show how that is growing for us. So with now our expectation of $130 million of revenue in fiscal '22, we expect roughly $60 million of that to be with our largest customer, which means $70 million is from our, let's call it, our non-largest customer. And if you go back to last year, to save you doing the math, in fiscal '21, we were at $117 million. We did $65 million with that large customer and therefore, $52 million. So the ESCO and the distribution business and contractor business, we now expect to grow from $52 million to $70 million during our fiscal 2022, which is about a 34% growth. So we feel good about the growth we're getting in our non-major account business. And yet we had expected it to grow even larger because we are actually achieving somewhat more revenues with our largest customer in fiscal 2022 than we had expected.

Our next question comes from Amit Dayal of H.C. Wainwright.

Mike, just one question for me. Was -- is there any inventory or any source of components, parts, et cetera, that were dedicated to serving the projects that have been pushed out? Just wondering if those parts, et cetera, can be used for other opportunities. Or are you expecting to be able to come back and fulfill demand for these customers and no real impact on inventory, working capital, et cetera?

Yes. Thank you for the question. I would say we would need to look at each project somewhat differently. And maybe I'll start with the large government project we are expecting is a very unique situation and where the product specific to that project and -- had not yet been purchased. So that one is kind of down the road for us, we'll purchase the product as things really firm up. For the 2 large national logistics companies, that product is very usable for other customers. It is more of our standard product line, so we're able to use any of the supply chain we've built up for that to take advantage of other opportunities that come along for us. And then a mixture in some of the other situations, the automotive situation is pushed out where we didn't have to buy certain components. And then for our -- the new construction situation, that product is a little bit more specific. And so some of that can be used, some of it will hold to be able to start up with them quickly as they start up. So a little bit of mixture along all of those areas, but it is not overall causing us to hold a lot of excess inventory. And it also is giving us some opportunities to grab some what we might call spot business, where a competitor cannot supply and we have the electronics and/or other products available to jump in.

[Operator Instructions] Our next question comes from Bill Dezellem of Tieton Capital.

First of all, how much delayed revenues were you anticipating in this fiscal year from the 2 national logistics customers?

We have not come to a specific number that we've put on that, Bill, because it was, there were a lot of different pieces to those 2 relationships and opportunities. And so we -- on those, we didn't feel we could get as granular as we did with the other customers that we described in the press release today. So I don't have an exact number for you, and I thought for us, it was more important to talk about the magnitude of what they can bring to the table for us in future years.

Totally. I understand...

But what I -- No, I'm sorry, let me add. I'm sorry to interrupt you, Bill. I wanted to add, part of what we wanted to accomplish today, I realize we're delivering unfortunate news to our investors at this point in time. But I wanted to try to give some context as to how we had developed our outlook of $150 million, that it was based on specific situations. And so I wanted to provide the list of the larger ones that have been impacted to help people understand the bridge between how -- what is that move from $150 million to $130 million by giving as many specifics as we could on these larger projects. I'm sorry. Please go ahead.

That's all right. So to help you do that, but without quite the level of precision, if I were to ask for a range between, say, 0 and 5, 5 to 10, 10 to 15, would you be able to aggregate those 2 and put a range on it that's -- and maybe it's not $5 million, maybe it's a $10 million range.

Maybe let me try to answer it a little bit differently and that is we specifically identified 3 situations and put numbers on them for disclosure. And those add up to $19 million. And we're here discussing the fact that, unfortunately, we've slipped $20 million in our expectation. And clearly, from the magnitude of those 2 accounts, it more than makes up the difference up to the $20 million. So it's -- I'm not going to put into a bucket for you, but it goes -- when you add into it, what we thought could have been possibilities for that. And there's also another reason we -- I'm a little uncomfortable about giving specifics on that one for numbers is that we also don't fully know what is going to happen for that customer during the last 2, 2.5 months of this quarter. There's probably more movement in that one than there is on those other customers, which is why we chose not to put a number there. So it's when you -- if you add in whatever it would be, it's going to be well beyond the $20 million that we're trying to explain today of the $150 million versus the $130 million.

That last part, in particular, is very helpful. Would you walk through for each of these delayed situations when you are anticipating they will -- that they will start turning to revenue? And maybe just block it by first half of '23 and then anything beyond that if you so desire.

Yes. I'll try to break it out somewhat for you but get as specific as we can at this point, realizing that there is -- given the situation today with the reason we talked about today, there is just uncertainty as when certain things may kind of kick up for us. But I'll start with talking about the automotive situation. That's going to be likely be included during our fiscal 2023. And so I can't even get that segmented to quarters for you on that. So that one is probably a broader '23 because some of it even slip into some of fiscal '24, it's a possibility. Those get dictated by their plans and availability of -- to their assembly facilities as they're going forward. On the new facility construction projects with the major online retailer, that one probably has the opportunity to start up the most quickly as any of those. We expect to start up some of those delays with them during Q1 of our fiscal 2023. And I would expect most of that to roll through during Q1, 2 and 3 at this point, would be my best expectation. So that's mostly a fiscal '23 situation. And the government project one, which is the next one with the $7 million, again, it's dependent somewhat on when our partner, the Tier 1 contractor with the government on that project, when they finalize their contracts and get things kicked off. But at this point, we would expect a fair amount of that to fall into our fiscal 2023 at this time. Some of it could go into '24. So when we kind of commented in the press release and my earlier comments, we said we expect to complete most of that during our fiscal -- what we said is completed in fiscal '23 and '24, probably more heavily weighted until '23, but they're just -- we can't be more specific at this time as to what quarters that might fall into, Bill?

No, that's helpful. And if we understood your comments about the logistics companies, then that will start at any point, but it will go for many years.

We certainly do expect that. We like to keep repeating that between the 2 of them, there is a tremendous amount of opportunity there for us. Do we wish it would come faster? Yes. There's -- and as I'm sure they would, too, because transitioning to LED for them is energy savings aspect that makes our properties more valuable. And so of -- we understand, we've been talking about these 2 for a period of time, and if they have developed more slowly. But as a company, we continue to be extremely optimistic about what the combination of both of those can bring to us as a company from a volume standpoint? So thank you, Bill.

That's helpful. And I can either jump back in queue or -- because I would like to ask about Stay-Lite. So we can either do that now or I can jump back in queue. What's your preference?

I think at this point, there's no one left in queue. So why don't you go with a couple more questions and we'll wrap it up, Bill. Thank you.

That's great. So relative to that acquisition, would you discuss what it is they bring to Orion, maybe in the context of what you were, I'll say, lacking, but what you didn't have before that they now bring to you?

So for us, while we had already and have been providing lighting and electrical maintenance services for some customers, in particular, our largest national customer, we were doing that with some of our existing systems and developing some of our processes, and it's going well for us. It's a growing revenue base for us. We felt that it was advantageous to accelerate that growth into that business by acquiring a company that had a number of things to it: number one, what we felt was an excellent customer base that is linked to our strength in retail; number two, a great group of people that have been in this business for -- a company have been in this business for 50 years and a great team put together right now, both the operational team internally but as well as the qualified technicians in the field to perform; and just the business systems that come along of the software processes and the infrastructure to run the business. And then fourth, we -- part of our strategy here is to build what the industry would call self-performing capabilities. So while we've talked in the past, in many cases, we hire installers to install our fixtures, over time, on the maintenance side, it's more advantageous to be able to fully control that and self-perform, have your technicians, your employee technicians out in the field carrying out that work. And this company, Stay-Lite, has those resources in 15 states already as well as a nationwide network of contractors to allow them to take on nationwide customers. So we thought accelerating our growth, combining it with what we've driven so far, getting this to a $20 million business going in 2023 gets us off and running on building recurring revenue stream.

Great. And then finally, what proportion of that $20 million is from Stay-Lite?

Yes. At this point, we're not going to bust it apart going forward, but you can look back and say, we've already announced that Stay-Lite was about a $9 million business. So I think that kind of gives you the pieces pretty close, Bill.

Best of luck with navigating the challenges.

Thank you, Bill.

Thank you. That does conclude the Q&A. I would like to turn the call back over to Mike Altschaefl for any closing remarks.

Thank you, Valerie, and thanks to everyone who joined today's call. We will provide you with more detail next month on our third quarter call currently targeted for February 9. And if you have any questions or wish to schedule a call with management, please contact our IR team, whose contact information is included at the bottom of today's news release. So thank you very much for jumping in to a call on very short notice. We appreciate it. And thanks, everyone, for your time.

Today's conference has now concluded. Thank you. You may now disconnect your lines.