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Orion Energy Systems, Inc. (NYSEMKT:OESX)

F4Q10 Earnings Call

May 13, 2010 5:30 pm ET

Executives

Victoria Paris – Investor Relations

Neal Verfuerth – Chairman, Chief Executive Officer

James Kackley – President, Chief Operating Officer

Scott Jensen – Chief Financial Officer

Analysts

Glenn Wortman – Sidoti & Company

Brian Kremer – Roth Capital Partners

Operator

Welcome to Orion Energy Systems fourth quarter fiscal 2010 financial results. (Operator Instructions) Now your host for today’s conference, Victoria Zebras

Victoria Paris

Thank you for joining us for Orion Energy Systems fiscal 2010 fourth quarter and year-end conference call. With me today on the call are Neal Verfuerth, Chairman and CEO, Jim Kackley, President and COO and Scott Jensen, CFO.

Before we begin, I will read the Safe Harbor statement. Our remarks that follow including answers to your questions include statements that we believe forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally as such because the context of such statements will include words such as believe, anticipate, expect, or words of similar import.

Similarly, statements that describe future plans or objectives or goals are also forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to materially be different. Those risk include among others, matters that we have described in our press release issued this afternoon and our filing with the Securities and Exchange Commission. Except as those filings, we will disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call if at all.

Now I’d like to turn the call over to Neal.

Neal Verfuerth

Thanks Victoria, and welcome everyone to our fiscal 2010-year end conference call. As you saw in the press release, we issued this afternoon, fourth quarter revenues were $18.9 million, were up 23% from the fourth quarter of 2009, and were in line with our expectations. For the full year fiscal 2010, we reported revenues of $65.4 million compared to $72.6 million in the prior year.

For the fourth quarter, total bookings were $16.4 million. For our fiscal 2010 bookings were $73.9 million, up 3% from the $71.7 million last year. We’re pleased to see the year over year increase in booking during fiscal 2010. Bookings for 2010 included $62.2 million in cash deals, $11.7 million in financed deals from the OVPP and PPA technology contracts.

For the fourth quarter, we reported a loss per share of $0.04 compared with a loss per share of $0.05 in the prior year quarter. For the fiscal year 2010, we recorded a loss per share of $0.19 versus earnings per diluted share of $0.02 in fiscal 2009.

As we mentioned in our release, we recorded unusual one-time charges totaling $.03 related to severance and legal expenses. Excluding these charges, we recorded a loss per share of $0.01 for the quarter, which is in line with our guidance for the fourth quarter and a loss per share for fiscal 2010 of $0.16.

Let me switch gears now and highlight some of our accomplishments for the year as well as the key drivers of this quarter’s performance. During fiscal 2010, we made great strides in enhancing our operational structure to support our long-term vision for growth, which included new hires in human resources, sales, and engineering.

In addition, we implemented our CRM tool that will be used internally and now by our partners in the field, enabling us increased visibility and efficiency in helping drive the sales process. Finally, through our expanded product offering, including the outdoor lighting, our portable solutions, our message of providing energy solutions instead of just lights is resonating with our customers.

Our conversations continue to focus on leading them down the path of energy efficiency, ultimately taking them off the grid if they choose to do so and significantly reducing their energy spend.

In the fourth quarter we retrofitted an additional 36 million square feet, 238 facilities, bringing out total coverage area to 886 million square feet retrofitted across 5612 facilities. Since December of 2001, we have delivered on our promise, saving our customers a total of $857 million in energy cost, reducing energy consumption by 11.1 billion kilowatt hours, while reducing the carbon dioxide emissions by 7.4 million tons. On average, we save customers about $0.38 per square foot annually.

We continue to see increasing contribution from our wholesale business year over year as fiscal 2010 revenues from our partners made up 42% of the sales compared to 39% in the previous year.

Contributing to our solid results from our partner network was the addition of four elite partners during the quarter. In addition, as our partners begin to add to their staff, we’re increasing our overall feet on the street throughout North America.

Our partner network is also able to meet our large deals in the fourth quarter, specifically for a large truck manufacturer, food products group and a leading manufacturer of farm and forestry equipment amongst others. We continue to devote resources to building out this channel and these wins are strong evidence that our partner recruitment and training programs are working.

On the national accounts side of our business, we also secured some sizeable deals in the fourth quarter, most notably a multi-million dollar deal with one of the nation’s largest close out retailers.

The win from both our partner network and the retail side of our business demonstrate that our compelling value proposition continues to resonate with customers that are looking to meet sustainability goals and reduce their energy costs.

In addition to our interior technology, our exterior technology sales continue to ramp. In the fourth quarter, Plant Engineering Magazine awarded our exterior fixture technology the Gold Award in new product award competition.

What’s even more encouraging is in the fourth quarter we secured a deal with a large Las Vegas Hotel and Casino looking for a parking garage solution, taking advantage of the opportunity to expand our market into businesses like hotels, restaurants and office complexes, that traditionally wouldn’t deploy our Hi-Bay technology, but have substantial savings opportunities in their parking ramp areas.

This product offering, while still a small part of our overall revenues, represents an immense opportunity for Orion with an estimate 20 million outdated HID parking lot lights in North America.

We’re confident that when electricity loads shift to off peak hours as the electric car and other battery charged products evolve, this exterior technology will play an important role in freeing up capacity for the utilities and the transmission and distribution infrastructure.

Our affordable Tyack technology continues to be well received by customers as the next step towards achieving energy independence. During the quarter, Coca Cola Enterprises unveiled a new technology as part of a ribbon cutting ceremony for its first lead certified facility in Cochela, California.

This technology, the affordable Tyack, in conjunction with the Orion solar light pipe, our control system and our electric lights are providing energy back to the grid while allowing Coke to run their distribution and sales at full capacity, so they’re actually selling power back to the grid to help relieve the pressure on California’s stressed electric grid, so they’re totally off the grid.

The early acceptance of the PV technology in our existing customer base during the last several quarters is a testament to the technologies’ superior performance and the strong relationships we have with our customers.

The momentum that began to build in the second half of our fiscal 2010 has continued thus far in 2011 as our technology continues to excel in the marketplace, outperforming competitors time and time again.

We continue to see signs that the economy is improving and remain cautiously optimistic. The next 12 months will be focuses on leveraging our strong foundation by executing on our strategy to drive the top line sale and improving profitability.

We will continue to build out our partner network. We clearly gained momentum on this initiative towards the end of fiscal 2010 as evidenced by one of our newest partners who generated north of $2 million in his first seven months of business.

We’re also leveraging the significant opportunity for our integrated lighting solution by identifying deals that include all three elements of our current lighting system while also going back to our large install base and facilitating their path to becoming more energy efficient with our wireless control system and renewable technologies such as the Apollo Light pipe and the photovoltaic solution.

We will continue to capitalize on the enormous opportunity for outdoor lighting. We’ve seen increasing customer demand for new ways to manage energy consumption and reduce operating costs. And finally, we’ll look to gain further traction with our innovative financing solution.

Before I turn the call over to Scott, let me touch briefly on our recent decision to transfer our listing to the New York Stock Exchange AMEX exchange. We made this decision after thoroughly searching our options and discussing the move at length with key constituents. It is the research and understanding that led to our decision to switch the exchanges.

We believe the move will further support the market for our stock, and we are particularly impressed by the New York Stock Exchange AMEX personalized specialist style designated market maker system.

With that, I’m going to turn the call over to Jim.

James Kackley

Thanks, Neal. Ten months ago, the Board and Neal asked me to step into management becoming Orion’s President and Chief Operating Officer. My assignment, work with Neal on the Orion management team to build a platform for growth to a much larger company. As Neal has outlined, today we have five market ready and accepted product lines, a greatly expanded sales network, a manufacturing plant ready to take on a significant increase in orders, a sound organization structure, a strong management team, enhanced IT systems and many strengthened internal processes.

All of these, together with an improved capital goods market has led to significant growth in orders forecast for 2011 that you saw in our press release. So in short, we’ve largely completed the assignment. Neal and I have decided therefore, it’s time for me to leave management and move back to the Board of Directors which I will do effective May 15.

As part of this initiative over the last year, I’ve relied heavily on the support of Mike Potts, Executive Vice President and a Director on Orion’s Board. Going forward, Mike will continue to play a key role in the execution of the day-to-day operations to enable Neal to maintain his focus on working with large customers, partners, shareholders, utilities, government agencies and in developing new products.

With that, I’ll turn the call over to Scott for a review of our financials.

Scott Jensen

Thank you, Jim. Our reported revenues for the fourth quarter of fiscal 2010 were $18.9 million compared to $15.4 million for the fourth quarter of fiscal 2009, which represents an increase of 23%. This increase was driven by increased order volume in our partner and retail channels as well as the sale of a portion of the OVPP finance contracts, which were held on our books. These contracts were sold for approximately $2.7 million and recorded at a discounted net present value of $2.5 million.

For the full year fiscal 2010, we recorded revenues of $65.4 million compared to $72.6 million during fiscal 2009. Partner revenues for the fourth quarter were 27% of our total revenues, down from 50% of total revenues in our most recent third quarter.

The decline in the contribution from our partner channel was driven in large part by the seasonality we’ve discussed in previous quarters in which our partners and resellers look to complete projects that were closed in the previous quarter.

For fiscal 2010, our partner revenues contributed 42% of our overall revenue. For fiscal 2011, we expect the contribution from our partner network to continue to expand and become an increasingly larger portion of our overall revenue mix.

During the fourth quarter of fiscal 2010, we secured 35 new Orion new virtual power plant megawatt supply contracts representing gross income streams of $3.3 million. Revenue for these customer projects will be recognized across the 24 to 60 month term of the agreements.

If these projects had been structured as cash transactions, Orion would have recognized $1.3 million of incremental revenue within the quarter and increased income per share of approximately $0.02 within the quarter.

For the full year of fiscal 2010, converting our OVPP contracts to a cash basis, OVPP transactions would have provided an additional $4.5 million of incremental revenue and increased income per share by approximately $0.08.

Looking through the quarter, were $16.4 million including $3.3 million for OVPP supply agreements versus $14.5 million in the same period last year including $700,000 OVPP supply agreements.

For the fiscal year ended March 31, 2010, bookings were $73.9 million including $11.7 million of OVPP and PPA supply agreements compared to $71.7 million including $1.5 million of OVPP supply agreements during the year ended fiscal 2009.

As a brief reminder on how we define bookings, let me review. Our reported bookings have three components. First, our cash bookings are based upon customer purchase orders received in hand. Secondly, our OVPP bookings are based upon the gross future revenue streams over the expected life of the agreement. We consider an OVPP booked business upon the customer’s execution of the contract.

With regards to our solar PPA deals, which are generally in excess of 10 years, we’ve defined PPA bookings as the discounted value of revenues from energy generation over the life of the agreement along with the discounted value of revenues anticipated for renewable energy credits for as long as the programs are currently defined to be in existence with the governing body.

For the fourth quarter of fiscal 2010, service revenues accounted for 12.2% of our total revenues. Our blended gross margin in the fourth quarter was 32.7%, up from 30.2% in the comparable prior year period. Our gross profit dollars increased to $6.2 million for the fourth quarter of fiscal 2010 compared to $4.6 million in the fourth quarter of fiscal 2009.

Our G&A expenses for the fourth quarter were $3.5 million or 18.4% of revenue versus $2.5 million in the fourth quarter of fiscal 2009 or 16.3% of revenues. Year over year increases in G&A costs included $480,000 related to the settlement costs for the class action litigation, charges for severance costs and additional building occupancy costs related to the new technology center.

Sales and marketing expenses for the fourth quarter of fiscal 2010 were $3.4 million or 18.1% of revenues compared to $3.1 million or 20.1% of revenues in the prior year period. As we’ve discussed on prior calls, we’ve continued to invest in revenue generating opportunities.

The increases in expense from the prior year were due to compensation costs resulting from head count additions focused on opportunities in the utility, governmental, outdoor lighting markets and the technical resources to support our control and solar product offerings.

R&D expenses for the fourth quarter were $576,000 or 3.1% of revenues, down from $804,000 or 5.2% of revenues in the fourth quarter of fiscal 2009. As a reminder, in the fourth quarter of fiscal 2009, we redeployed internal resources to focus more on new product developments and that was demonstrated by our rollout of new products during fiscal 2010.

A loss from operations for the fourth quarter of fiscal 2010 was $1.3 million decreasing from a loss from operations of $1.8 million in the prior year period.

Net other income for the fourth quarter was $208,000 versus net interest income of $143,000 for the fourth quarter of fiscal 2009. This increase in other income was due to a $250,000 benefit resulting from the forgiveness of debt resulting from job creations achieved over the proceeding five years.

Our income tax benefit for the fourth quarter of fiscal 2010 was $278,000 versus an income tax benefit of $87,000 in the prior year fourth quarter. Our annualized effective tax benefit rate at quarter end increased slightly to 24.4% from our prior quarter rate of 24.2%.

Our loss per share for the fourth quarter of fiscal 2010 was $0.04 on weighted average shares outstanding of 22.3 million shares. That compares to a loss per share for the fourth quarter of fiscal 2009 of $0.05 on weighted average shares outstanding of 22.2 shares.

As Neal mentioned, the loss per share for the fourth quarter of fiscal 2010 included charges of $0.03 from the settlement of the class action law suit and additional severance charges recorded during the quarter.

Our loss per share for fiscal 2010 was $0.19 on a weighted average shares outstanding of 21.8 million shares. That compares to fully diluted income per share of $0.02 for the prior year based on a weighted average fully diluted shares outstanding of 27.4 million. As of March 31, we had 22.4 million common shares outstanding. In addition, we have warrants and options totaling 3.6 million shares outstanding.

Turning to the balance sheet, we finished the quarter with $24.4 million in cash and equivalent and short term investments on hand compared to $32.9 million at December 31, 2009. We continue to maintain our investments in short term, highly liquid vehicles to provide for maximum liquidity.

The change in cash was primarily due to vendor payments for inventory purchases of wireless components related to our new product rollouts and balanced inventories along with our continued investment in the growth of our OVPP and solar equipment finance programs.

Turning to our outlook for the fiscal year 2011, as Neal mentioned briefly, we will be returning to providing annual guidance versus the quarterly guidance we had provided during fiscal year 2010. This change was driven by two primary factors.

First, as we have always noted, we view our business from a long term perspective, and annual guidance is more reflective of that perspective. Second, with the improving economic environment, we believe that visibility has improved somewhat, giving us more confidence to provide an annual outlook.

Additionally, given the increase in contribution that we have witness from our OVPP and PPA supplier agreements, we believe that bookings are more reflective of how we view our performance. To that end, we are shifting our top line guidance metric to total bookings versus revenue.

For fiscal year 2011, we anticipate total bookings to be between $100 million and $110 million. For the year, we anticipate the allocation of bookings applicable to our finance deals to be in the range of 20% to 25%.

As we have stated in the past, given our customer base that’s historically been focused on commercial and industrial sectors, our results tend to mimic CapEx budgeting which leads to an increase in committed projects towards the end of the calendar year.

As a result, as we move through our fiscal year 2011, we expect to see the greatest contribution to bookings coming in our fiscal second and third quarters. Our earnings per share for fiscal 2011 are estimated to be between $0.02 and $0.10 per diluted share, with the achievability of this range being highly dependent upon the percentage of revenue realized from our OVPP and PPA supply agreements.

With that, I would like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glenn Wortman – Sidoti & Company.

Glenn Wortman – Sidoti & Company

Can you help us better understand the sequential decline in revenue and the sequential decline in bookings?

Neal Verfuerth

I think from a bookings standpoint, when we went out with our guidance, the market was a little slower to respond than our expectations for orders coming earlier and faster, didn’t play out. What we have been encouraged by is that as we’ve entered fiscal 2011, those orders did materialize toward the end of the year and have continued steady and that’s in line with our guidance for fiscal 2011.

Glenn Wortman – Sidoti & Company

So for the first quarter do you expect a sequential increase on the top line and in bookings?

Scott Jensen

We’re going to give numbers now on an annual basis and stay away from a little bit of the quarter over quarter commentary. We believe that we’ve given a number that provides good transparency with a longer term component to it.

Glenn Wortman – Sidoti & Company

Just looking at the gross margin, the revenue was a little lower but it looks like your costs were higher just looking at things sequentially. Was there anything unusual going on there?

Scott Jensen

We’ve talked about that in the past in terms of quarter over quarter. The prior two quarters were pretty even in terms of distribution of revenue flow and order flow. This was a little lumpier and that does translate into some inefficiencies in terms of estimating costs to make sure we honor the customer’s service commitments we have with our customers.

Glenn Wortman – Sidoti & Company

Looking at the OVPP agreements you sold $2.5 million of the contracts in the fourth quarter. Did you have a target for how much, what percentage of these bookings you want to sell each year or is it just kind of depends order to order.

Neal Verfuerth

We’re still evaluating that. I think not only in terms of selling contracts, but we’re evaluating other options too as well as opportunities to provide or infuse capital to continue to grow that business. We believe that’s a great opportunity for customers to take advantage of energy savings without technology risk and without upfront capital deployment and that we can continue to scale that business and do it in a way that provides profitability to the bottom line.

Operator

You're next question comes from Brian Kremer – Roth Capital Partners.

Brian Kremer – Roth Capital Partners

Back to the OVPP and PPA guidance for this coming year, could you walk us through again 20% to 25% so we’re looking at $20 million to $25 million. So that revenue if you keep it as a PPA agreement or OVPP, you’re going to recognize that revenue over a couple of years so that if we try to convert to revenue from that bookings which you obviously didn’t provide because you probably don’t know. Some of that could be converted to revenue directly through sales. What’s the best you can do in terms of providing some insight there and how you look at that next year, or how we should be looking at it.

Scott Jensen

Just to reiterate, when we evaluate our performance and our success, it’s really tied to bookings because we don’t look at a sale as a bad sale whether we get cash or the opportunity to finance a project. That’s certainly a reflection of the success of our product, our technologies, our sales processes, so what we’ve tried to do is at least provide a trail of bread crumbs so to speak to try to give you as much information and look at it, because I certainly appreciate the gap component in the revenue to the top line from a financial statement.

But you can simply work that math backwards and take 20% to 25% of the bookings out and treat the rest as cash and recognize that you can use somewhere about a three year average term to account for those future revenues and certainly some of that will occur in fiscal 2011 and a larger percentage of it will be deferred into future periods.

Brian Kremer – Roth Capital Partners

It doesn’t look like you didn’t do any solar sales in the quarter, right?

Neal Verfuerth

Actual sales there were none this quarter. Previous quarter and then more into queue with some of our big customers, and again, a lot of them – it’s interesting with the financing, many customers will say they don’t have the money in the budget, and then we put together all the financing and do all the vetting and everything and they end up paying cash at the end of the day.

As Scott alluded to, there really is not bad sale. I just look at the financing as a way to get the customer to pull the trigger first and foremost rather than just sitting on it. We’ve had many customers who actually take our financing and pay it out after they start the new budget cycle. So we’re just trying to take away every objection the customer might have to pull the trigger and starting to save with us.

Brian Kremer – Roth Capital Partners

G&A and sales and marketing, it looks like sales and marketing was up in the quarter but that looks like something that’s going to continue I would assume to stay at these levels. You’ve made that investment. G&A on the other hand there’s some one time items so it looks like it goes back more to the Q3 with maybe some growth there versus Q4.

Neal Verfuerth

Those are very accurate statements. Our G&A was impacted within the quarter as we outlined and we have been investing in sales and marketing. Our sales people are getting back out into the markets again and aggressively and we’re providing them right tools from a materials cost standpoint and the ability to get out and close deals.

Operator

There are no further questions at this time. I would like to turn the call over to your host for any closing remarks.

Neal Verfuerth

I’d just like to thank everybody for participating and that’s all we have for today. Thank you.

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Source: Orion Energy Systems, Inc. F4Q10 (Qtr End 3/31/10) Earnings Call Transcript

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