Orion Energy Systems, Inc. ($OESX)

Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2026 Fourth Quarter and Full Fiscal Year Conference Call. [Operator Instructions] In this call, Sally Washlow, Orion's CEO; and Per Brodin, its CFO, will review the company's fourth quarter and full fiscal year results, as well as its fiscal 2027 outlook. Then we will open the call to investor questions. Today's call is being recorded. A replay will be posted in the Investors section of the company's website at orionlightning.com. I will now turn the call over to Per Brodin, Orion's CFO. Sir, please go ahead.

Thank you, Michelle. First, as a reminder, prepared remarks and answers to questions include statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally include words such as anticipate, believe, expect, project or similar words. Also, any statements describing future objectives or goals, company plans and outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other matters, those that Orion has described in its press release issued this morning and in its SEC filings. Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today. In addition, reconciliations of certain non-GAAP financial metrics through their nearest GAAP measures are also provided in today's press release. Now I will turn the call over to Orion's CEO, Sally Washlow.

Thank you, Per. Good morning, everyone, and thank you for being with us today. I am pleased to report our results for Q4, our sixth consecutive quarter of positive adjusted EBITDA and for the full fiscal 2026 year. Fiscal '26 represents an exceptional year at Orion. It was a year of growth in revenue and newly achieved profitability. It was a year of strengthened incumbencies in some of our most largest customers. and it was a year of product and market expansion. You may recall from earlier calls that we discussed 3 milestones for FY '26. Milestone one, to maintain our NASDAQ listing and maximize our opportunity for growth in shareholder value. We achieved this goal. Milestone two, by the end of the third quarter, the enactment of a growth profitability and cost containment initiatives that enables Orion to become a recognized long-term market leader. We achieved that goal as well. And milestone three, by the end of the fourth quarter, $84 million in revenue at or near positive adjusted EBITDA for the full fiscal year. We beat the score with $86 million in revenue and $2 million in positive adjusted EBITDA. Looking forward, Orion's FY '27 outlook expects revenue of $95 million to $97 million, with potential upside in the number of opportunities. Based on our enhanced operating discipline, our growth outlook should once again in [indiscernible] Orion to achieve positive adjusted EBITDA for the full fiscal year. We have come a long way to get to this point. Fiscal '26 marked the first year in some time that we experienced growth and positive adjusted EBITDA. Fiscal '26 represented a pivot point for this company, a year in which we embark on the course of increased revenue, expanded profitability and elevated prominence in our competitive market. When I arrived as CEO of Orion at the beginning of FY '26, I was immediately inspired by the team that greeted me. We agreed that FY '26 could be more than just a transition year of writing the ship. We had a stellar reputation for quality, along with a track record of growing our business with large Fortune 50 global leaders. We had an unrivaled built from the ground up proprietary supply chain that serve to insulate our customers for much of the brunt of [indiscernible]. And we had tailwinds from a multiyear invigoration of U.S. manufacturing facilities, private and public sector vehicle fleets and AI-driven data centers like the data center product that we announced last week. To put it simply, we plan, measured and executed and the results of FY '26 represented not only a market improvement over the previous fiscal year, but a jump above our originally announced expectations. FY '26 was indeed a year of rightsizing as we enacted a sustained and necessary cost containment initiatives. It was a year of sharpened focus on profitable growth illustrated by our 6 consecutive quarters of positive adjusted EBITDA through the end of the fiscal year. and it was a year of maintaining our NASDAQ listing and bolstering our balance sheet. Through it all, we received a demonstratable show support in the market by existing and new shareholders. The results and expectations we report today are a testimony to Orion's success on a number of fronts including renewed aggressiveness in acquiring and expanding within large customers, a quantum improvement in the size and quality of our sales funnel, disciplined cost containment and an ongoing build-out of our robust proprietary supply chain. Today's report also speaks to some key growth parts that put us on this up and to the right trajectory. Our focus on expanding opportunities and revenues within new and existing large customers in the automotive, retail and public sectors, weather by deployments of LED lighting systems, electrical infrastructure or EV charging infrastructure. Our focus on maximizing our service to long-term EV charging customers, which is enabling us to manage our adjustment to the present environment in the sector and our focus on adding capabilities such as battery energy storage systems and electrical contracting. Adding capabilities continues to be a theme here at Orion as last week's entry into the booming data center market demonstrated. As you undoubtedly know, there is an immense amount of new construction of data centers being driven largely by exponentially increasing demand for artificial intelligence and cloud computing about 3,000 new data centers are being planned in the United States. ABI Research expects more than 10,000 to be operational by 2030 and with another 2,000 coming online before 2035. Orion fully intends to be the LED lighting provider of choice for many of these thousands of data centers. And as we announced last week, we have the product to do it. Orion's multipurpose linear lighting fixture brings to the current data center building boom a customizable product designed specifically to fit the architecture and floor plan of data centers. We listen to our customers. and we developed a product that fits the needs of these hyperscale data centers and ensures the flexibility and shortened lead times that come with building in-house right here in our Wisconsin manufacturing facility. And the needs of data centers are significant. Energy-efficient lighting is a priority in data centers, whose AI-driven applications imposed unprecedented demands on energy, requiring unprecedented levels of power data centers or prioritizing solutions to minimize their electricity consumption and carbon footprint. Hyperscale data centers emphasized 3 particular themes that we address squarely in the development of the product. AI workloads are increasing power density and uptime requirements across data centers. expanding demand for infrastructure solutions that can improve efficiency and lower total operating costs. For operators and investors alike, solutions that reduce energy consumption can offer meaningful economic value when deployed at scale across large footprint facilities. As AI-driven data center construction accelerates, products that combine performance, scalability, cost effectiveness and ease of integration may be positioned to benefit from a long-term infrastructure upgrade cycle. Hyperscale data centers can count on Orion because we are known for delivering on these points. We are reliable, durable and scalable. We are on time and on budget and we do it with our own proprietary supply chain, which serves to reduce customers' exposures to choke points, lengthening dwell times and market disruptions. Data centers are now learning what other large industrial facilities in retail, automotive and public sectors already know. Orion can provide the most energy efficient and reliable LED lighting solutions in the marketplace. We intend to become a provider of choice in this growing and long-term market opportunity. We have the same ambitions for incumbency and data centers that we have in our long-time historic markets. Decade after decade long-time customers stay with us and expand their scope of work with us because we are consistently deliver unsurpassed quality, unsurpassed reliability unsurpassed scalability and unsurpassed ROI. Again, today's report marks a milestone for Orion, and I am extremely optimistic about our future. With that, let me turn to Orion's CFO, Per Brodin, to review our financial performance and outlook.

Thank you, Sally. Today, we reported fiscal Q4 '26 revenue of $25.7 million as compared to $20.9 million in Q4 '25. For fiscal '26 as a whole, we reported $86.3 million in revenue compared with $79.7 million in fiscal '25. LED segment revenue in Q4 '26 was $20.3 million compared to $20.9 million in Q4 '25. For fiscal '26 as a whole, LED lighting segment revenue was $55.9 million compared to $47.7 million in fiscal '25. Q4 lighting segment revenue performance reflected increased project activity and distribution channel sales, partially offset by a decrease in ESCO channel sales. Orion's expanded LED line project pipeline and efforts to drive growth in the distribution channel are continuing to contribute to higher expected revenues in fiscal '27. Lighting achieved a Q4 '26 gross margin of 40.4% versus 28.3% in Q4 '25. Lighting margin benefited from a contract amendment payment of $1.3 million, which did not have any associated cost of sales. Excluding the effect of that payment, lighting segment margin would still have exceeded 30%. For fiscal '26 as a whole, lighting recorded gross margin of 33.8% and compared to 26.6% in fiscal '25. Maintenance segment revenue decreased to $3.2 million in Q4 from $4.1 million in Q4 '25, reflecting the timing of some seasonal work. We achieved a maintenance segment gross margin of 22.1% in Q4 '26 versus 24.6% in Q4 '25. For the entirety of fiscal '26, maintenance segment revenue increased 6% to $16 million while gross margin came in at 23.7% in fiscal '26 versus 18.2% in the year-ago period. EV charging solutions revenue was $2.3 million in Q4 '26 compared to $5.8 million in Q4 '25 reflecting the sector-wide uncertainty regarding the market environment in the United States and a very strong performance in Q4 '25. EV achieved a gross margin of 27.5% in Q4 '26 versus 27.9% in Q4 '25. For fiscal '26 as a whole, the EV charging segment revenue was $14.4 million versus $16.8 million in fiscal '25. While gross margin came in at 37.7% in fiscal '26 versus 28.3% in the year ago period. Our overall gross profit margin increased to 37% in Q4 '26 versus 27.5% in Q4 '25. For the entirety of fiscal '26, gross margin came in at 32.6% compared to 25.4% in fiscal '25. We expect our overall gross margin to remain strong throughout fiscal '27 although it will likely vary on a quarterly basis due to revenue mix and volume. Total operating expenses increased to $10.3 million in Q4 '26 from $8.4 million in Q4 '25. Q4 '26 OpEx included $1.7 million of earn-out true-up expense and $1.1 million for a noncash write-off of solar assets, while Q4 '25 included $0.5 million of earn-out expense and $0.9 million for severance. For the year as a whole, total operating expenses declined to $29.7 million in fiscal '26 from $30.8 million in fiscal '25, with fiscal '26 reflecting ongoing overhead and personnel expense reductions and the $1.7 million of earn-out expense and $1.1 million of noncash solar asset write-off and $500,000 of executive sign-on bonus. With stronger gross margin and lower operating expenses, Orion's Q4 '26 net loss was $1.5 million or $0.39 per share compared to a net loss of $2.9 million or $0.88 per share in fiscal Q4 '25. For the fiscal year as a whole, FY '26 net loss was $3.2 million or $0.89 per share compared to a net loss of $11.8 million or $3.59 per share in fiscal '25. Adjusted EBITDA improved to a positive $0.8 million in Q4 '26 versus $0.2 million in Q4 '25. As for the full year, adjusted EBITDA improved to positive $2.2 million in fiscal '26 versus a negative $2.9 million in fiscal '25, reflecting increased gross profit cost control and financial discipline. As Sally mentioned, this was Orion's sixth consecutive quarter of positive adjusted EBITDA. Today, cash used by operation activities was $1.1 million in fiscal '26 compared to cash provided by operations of $0.6 million in fiscal '25. During fiscal '26, we also had a net paydown on our revolving credit borrowings in the amount of $4 million. Net working capital was $11 million at Q4 '26 versus $8.7 million at year-end fiscal '25. Available financial liquidity at the end of fiscal '26 was $15.4 million versus $13 million at the previous year-end. Of additional note, we raised net proceeds of $6.4 million in fiscal '26 through the issuance of 500,000 shares of common stock which provides us with growth capital and the ability to pay down amounts outstanding on our revolving credit facility. Plus, effective in May, we extended the maturity of our credit facility from June 30, 2027 to June 30, 2030. Regarding our outlook. As Sally noted, we have increased our expectations for growth and profitability for our current fiscal year, which began April 1, having announced that we expect a continued increase in profitable growth in fiscal '27 with positive adjusted EBITDA and revenue of between $95 million and $97 million. And this concludes our prepared remarks. Operator, would you please commence the question-and-answer session.

[Operator Instructions] And our first question is going to come from the line of Eric Stine with Craig-Hallum Capital Group.

So I mean, obviously, strongest backlog that you've had in cash 4 or 5 years. Just curious if you can give any commentary on what you're seeing early in fiscal '27? And I know things are hard to predict, but is it fair to say that -- I mean your confidence level is quite high. I mean do you expect to see this these order trends in this backlog growth continue throughout fiscal '27?

Yes. Fiscal '27, as noted in our backlog, and we're optimistic about it. It started strong. And when we look at the backlog, it's pretty distributed amongst our various segments as well. So we think we're off to a good start, and we'll continue to grow that backlog and execute the projects that we need to deliver on.

Okay. And maybe just on the -- you're executing on the outdoor lighting opportunity with one of your long-term customers. Maybe just an update on that was going to be split between Q4 and Q1 and maybe some in Q2. So maybe talk about the linearity of the revenues that you expect in fiscal '27 when you factor that in?

I guess I'll take that as speaking to overall revenue expectations for the year. I think we just completed Q4, which had revenue north of $25 million. And if you look at our guidance for '26 -- I'm sorry, for '27, I think our expectation is the revenue will play out relatively evenly over the year.

Okay. Got it. And I guess for my last one, I'll just ask about -- I know that this is an opportunity with a long-term customer. You've done 2,000-plus sites, and I know that there was some opportunity that you could expand in these specific 200-plus locations and maybe expand to some indoor work. Just any commentary on where that stands.

Yes. Those -- that opportunity continues to move along in what I'd say a positive way. There's testing going on to finalize selections and we're optimistic that we'll continue with that opportunity.

And when you say testing, I mean, is that testing is it you being considered versus someone else? Or is it just testing kind of the figure on next steps?

Good clarification point. Within locations. So we don't believe anyone [indiscernible] the mix.

Our next question comes from the line of Sameer Joshi with H.C. Wainwright.

Congratulations on a strong year and outlook are pretty good as well. On the fourth quarter '26, the LED lighting revenue, in particular, were pretty strong $20-plus million related to $11 million to $13 million in the prior 4 quarters. Was this because of some contract timing? Or are we seeing this strong performance and expecting it for the next few quarters?

I'll start with this question. So the -- we expect this strength to continue within the segment, not only from the fourth quarter, but the coming quarters as well. And it was really from a mix of the projects that we delivered. Some of the electrical contracting that we've been talking about was in there and along with the services that we deliver within the segment as well. So our expectation is for this to continue in the coming quarters.

Yes, I'm glad you mentioned the electrical contracting business. I think you have around $21 million in array of those projects with 7 customers. Can you give us a little bit insight into what that electric contracting work entails? And also, do you have working capital to service this kind of a backlog?

So yes, we have the working capital to service the backlog. In terms of more color on what some of these contracts look like, examples are with some of our larger customers work that we had not been doing before, but in terms of new store build-out and doing all of the electrical contracting within their new stores. Other examples are expanding work that we have within EV infrastructure and doing electrical contracting work in that realm as well. So we're seeing it from logistics customers, retailers, within some of the EV contracts that we had as well, where we're adding on additional work to those contracts.

Understood. And then you -- earlier this week or last week, you announced the entry into the base center AI domain. And you highlighted it on this call as well. Does the backlog that you spoke of include any of this? I know it's early days, but should we expect upside to this $95 million to $97 million based on your success potential success in the data center market?

So our backlog really reflects that -- does not reflect that currently. We do have high expectations for this segment. As you can imagine, though, we developed the product. We've been working closely with customers on this product. but we think that a lot of the revenue will come later in the year as these come online -- sorry, later in our fiscal year and then in the coming years as well.

Okay. And just last one. I think you have mentioned in the commentary in the press release, but is the Voltrek earn-out payment done -- are all the payments done and no more earn-outs should be expected in coming quarters?

Yes. And Per can expand on it.

Yes. All payment requirements are fully satisfied so that you'll see none of that carrying into fiscal '27 or beyond.

Congrats on the progress and good luck.

Our next question comes from the line of Gowshi Sri with Singular Research.

Sally, congratulations to you and your team completely in your first year as CEO [indiscernible] getting turnaround is in progress, impressive set of results. I just wanted to ask a few questions. A few questions designed to kind of stress test the momentum going into fiscal '27. I know the gross margin came in at 37%. If we strip out the solar revenue. It looks like it's on 33%, 34%. But even if it without around 31%. As we think about fiscal '27, is that 31%, 32% still kind of the right structural flow or does the mix shift towards electrical contracting, larger LED projects give you confidence that it can be sustained at a higher level?

I think we can sustain that what would be a high level for us, and we think we're very proud of the margins we achieved in fiscal '26. In '27, I think a round number of 30% is probably the way to think about this as we enter the year. And as I mentioned, somewhat subject to quarter-by-quarter mix shifts that can occur. But based on our, say, the infrastructure we put in place a year or so ago, plus some of the other changes we've made with the increases in sales volume, we believe that we can achieve margin at that level.

Got you. And net-net, is Orion exiting the solar business, is there -- will there be any noise still embedded in the fiscal '27 numbers?

That was the last remaining bit of solar business we had left. That was a 30-year contract that we amended to essentially stop any further activity in the solar business. So there will be no carryforward activity in that area.

Yes. I know you guys in your last call, you were still at the early stages of electrical infrastructure. This seems like kind of a genuine segment now. Are you at a point where you're considering reporting it separately? And what kind of revenue run rate should we think of as we kind of think about fiscal '27 and beyond?

Yes. It's really something we haven't thought about breaking up separately at this point. It certainly has some momentum behind it as we've stated in different releases that we put out. That is managed largely in our services group. That's part of the turnkey services. So at this point, we think that would remain managed by that group and reported. And to the extent we have significant projects that come along, we would announce those as they -- the orders are received.

Got you. And I'll sneak last one on the EV side. With the battery energy storage deployment in California, what is the approximate revenue per site? And do you have a target number by -- for '27? And is it embedded in the 95%, 97%? Or is it kind of still an upside to it?

It's part of our 95% to 97%. We think there's a lot of opportunity within that segment, whether it's through the EV work that we do or other work that we do. with customers as well, but we're pretty early in that solution.

Congratulations and good luck.

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

Two questions to begin with. First of all, I have never gone into a data center and looked at the roof or the ceiling as the case may be, would you walk us through what's different about your data center product and why they need anything different or special than any other 4-wall box that has a ceiling?

Well, I won't get too technical on the call, but what we've done is we had a multipurpose linear light that we worked closely with the end users to make sure that it was hitting the right efficiency that they needed as well as some certain other requirements that they had that were under NDA for some of it. And so -- it's a product that we've made that we have customized for data centers. And then another part -- the interest from data nurse was our ability to customize and make it within our Wisconsin facility to shorten the lead times as well as their rollouts and their needs grow.

Great. And that sales effort, is that taking place through ESCO partners? Or are you going direct? How does that sales process look like it will unfold?

In particular, this started with our distribution channel, and the partners within that channel, although because of our manufacturing and ability to customize, we think that this solution could be utilized by our other channels as well.

Great. And then relative to the [indiscernible] and partner deals. You -- in the last several quarters, enhance the leadership in that arena, would you bring us up to speed as to those activities? And what -- where we're at in the process of bringing that back to a well-oiled machine?

So Bill, you cut out at the beginning of your question, but I think it is rounding that channel specifically the distribution channel?

It is, and the leadership changes that you made and the implications.

Yes, yes. So month-over-month, we're growing in that channel. And specifically working closely with customers, that the leader of that channel brought this opportunity to us. And we've been working, obviously, for quite some time to bring it together, and it is leadership like that, that will help us expand in that channel and continue to grow and have the right strategy to not only the strategy to service that channel but then also what other products do we need to bring to help us be stronger in the channel as well. So we think there's a lot of opportunity there.

Sally, I will follow up on that last comment relative to products to service that channel. Their gaps at our meaningful revenue opportunities that you all are in process of addressing with your product lineup?

I think another product to speak to that we've talked about is a roadway product and that's another opportunity that we're working through the distribution channel as well. So that's a product that goes on the streets and highways of America. So we think that there's opportunity as well there.

This concludes our question-and-answer session, and I will turn the call back to Sally Washlow for concluding remarks.

I want to thank everyone again for taking time today to join us. We look forward to updating investors on our first quarter FY '27 call in August. We look forward to meeting with many of you whether in person or virtually between now and then. We will be presenting at a number of conferences, so please watch for our forthcoming announcements regarding scheduling. Please also reach out to our Investor Relations team to set up a meeting for any other information. Their contact information is at the bottom of today's press release. Many thanks again for your interest in Orion. I look forward to continuing to update you on our progress.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.