Orion Energy Systems' (OESX) CEO John Scribante on Q3 2016 Results - Earnings Call Transcript

| About: Orion Energy (OESX)

Orion Energy Systems, Inc. (NYSEMKT:OESX)

Q3 2016 Results Earnings Conference Call

February 09, 2016, 04:30 PM ET

Executives

Victoria Sivrais - IR, Clermont Partners

John Scribante - CEO

Bill Hull - CFO

Analysts

Steve Dyer - Craig-Hallum Capital Group

George Gaspar - Private Investor

Craig Irwin - Roth Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to Orion Energy Systems’s Third Quarter Fiscal 2016 Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Ms. Victoria Sivrais, Investor Relations. Ma'am, you may begin.

Victoria Sivrais

Thank you. Good morning everyone and thank you for joining Orion Energy Systems’ third quarter fiscal 2016 earnings conference call. Participating in today’s call will be John Scribante, our Chief Executive Officer and Bill Hull, our Chief Financial Officer.

John will open today’s call by providing comments related to our quarterly results and business outlook. Bill will then discuss our financial results for the second quarter in greater detail. John will then make some closing remarks and will open it up for questions.

The Company has made a slide presentation available on its website at www.orionlighting.com in the Investor Relations section. Additionally, for anyone who is unable to listen to today’s entire call, an archived version of this call will be available later this evening. Please visit the Investor Relations section of Orion’s corporate website to access the replay.

Before John begins his commentary, I would like to review Orion’s Safe Harbor statement. This call is taking place on February 09, 2016. Remarks that follow, including 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 are generally identified 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, objectives or goals are also forward-looking statements.

These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks 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 these filings, the company disclaims any obligation to update these forward-looking statements, which may not be updated until the company’s next quarterly conference call if at all.

With that, I’ll now turn the call over to John. John?

John Scribante

Thank you, Victoria. Good afternoon, everybody. For the fiscal 2016 third quarter, we reported total revenues of $16.8 million, gross margins of 28.1% and earnings per share that show the fifth quarter of sequential improvement averaging 22% growth.

Importantly these results demonstrate a dramatic improvement in profits generating 23% more gross profit dollars on less revenue than in the prior year period and 62% more gross profit dollars sequentially than our fiscal Q2.

This 1350 basis point year-over-year expansion and almost 1,000 basis point sequentially and gross margin was at the top end of our margin roadmap for the quarter.

We saw continued strength in our LED lighting product sales, which increased 13% sequentially to $12 million for the third quarter and LED product revenue reached 75% of total lighting revenue.

At the same time, backlog reached $7.5 million for the quarter. These achievements clearly illustrate that our profit improvement plan is working and underscores the success of our business transformation.

Concurrently we also generated $2 million in positive free cash flow from operations compared to using $5.1 million in the prior year period and ended Q3 2016 with $17.5 million in the cash up from $13.4 million from last quarter.

So, while revenues were down on a year-over-year basis, they were up sequentially 6.5% and despite revenues being heavily pressured during the period, we made considerably more gross profit dollars than we did during the same period last year.

There are several reasons for our sales results. First and foremost as we've discussed during past earnings calls, our historical florescent seasonal patterns are shifting whereas in the past our December quarter was by far our strongest followed by our March quarter due to industrial yearend's capital spending cycles.

Our sales are becoming more diversified particularly with our LED product line expansion and as such we expect our revenue stream to be less December loaded and show a more gradual build throughout the full fiscal year.

And second, while our sales are diversifying a large portion of our sales are still impacted by our industrial customers and as a result we're seeing the effect of a slowing and highly uncertain industrial sector. This magnified our year-over-year decline as customers push projects out to conserve cash and protect their financial positions at the end of the year.

During fiscal Q3 last year, the Purchasing Managers Index was indicating a very strong and expanding industrial sector while fiscal Q3 this year the Purchasing Managers Index showed an industrial sector contracting at a level not seen since 2009.

As a reminder Orion's industrial customers fund their lighting retrofit projects through discretionary CapEx funds and these projects are easily pushed if their business is stressed. So that said over the past several months we began increasing our pipeline as well as its diversity to mitigate these risks and buffer the short term push-outs during future quarters.

Even with these cyclical pressures, we’ve been able to position the company to deliver more profit on less revenue. When these revenue pressure lift Orion will be in a much stronger place.

As I stated earlier, gross margin expanded 1350 basis points year-over-year and 960 basis points sequentially to 28.1% in line with our margin improvement roadmap that we showed last February.

The improvement was driven primarily by the validation of our Gen2 High Bay product, which delivers over twice the selling price and twice the margin as our current LDR line.

We also benefited during the quarter from improved absorption and lower supply chain costs. Our margins will show further improvement over the long-term with the introduction of our next generation of LDR which is expected to be launched next month.

The outlook for our story remains solid, as evidenced by several major projects being awarded to Orion recently. This demonstrates the strength of our product roadmap, which of course includes the successful launch of our Gen2 LED High-Bay fixtures, the highest performing LED High-Bay fixtures in the marketplace. And we're significantly improving our profitability by achieving the margin targets that we promised.

Now let’s review our progress on our strategic priorities for the 2016 fiscal year. First, LED product revenue climbed to 75% of total product revenue -- lighting product revenue, which compares to 55% a year ago and 72% in the second quarter, further validating our florescent to LED transition strategy and conversion rate well ahead of our industry peers.

Some key quarter three wins since our last conference call include an award from a regional East Coast utility from one of our new sales agencies and our very first Gen2 ISON High-Bay sale, an award for LED High-Bay fixtures for a food processing facility of a large publicly traded packaged food company in a highly competitive sale and again utilizing our new High Bay line which outperformed all of our competitors that were competing.

An LED High Bay Award from an Asian automotive manufacturing plant unseating a competitor's product who was already specified for the job. This customer delayed their purchasing decision from another lighting company until they reviewed our new High Bay line.

This auto maker has purchased over 10,000 florescent fixtures from Orion about eight or 10 years ago, illustrating the value of our patented modular upgrade options and the performance value we bring to the table.

We announced an additional VA hospital of $1.58 million just yesterday, a $2.8 million federal research agency announced last week, a $0.5 million LED High Bay retrofit project for an existing High Bay customer, a publicly traded home and professional appliance manufacturer.

And interestingly a Fortune 500 conglomerate who operates a large commercial and industrial Tier 1 lighting division of their own, has retrofitted one of their large U.S. manufacturing plants with the Orion LDR and is now beginning to upgrade their High Bay fixtures with the Orion ISON and APOLLO products rather than using their own company's brand.

It should be noted that the industry leading performance, the ease of installation, customer experience and our five-day ship times were most commonly cited as the reasons given for why Orion is selected for these projects.

And to capture the growing opportunity ahead of us, we've been working diligently to leverage our growing sales and distribution networks and I am happy to report that we're gaining momentum. We've signed 10 large sales agencies recently representing over 120 lighting sales reps, each with significant pipeline of business.

By the end of our fiscal year, we expect to have sales agencies covering nearly all of the U.S. market. We're well positioned to drive continued growth in LED sales and over time as the manufacturing sector strengthens, we expect to be highly successful converting our pipeline into topline growth.

Now let's turn to our second priority, which is innovation. Our recently introduced Gen2 High Bay fixture line is gaining tremendous traction. It is now the highest performing High Bay portfolio in the marketplace delivering as much as 179 lumens per watt meaning that it delivers more light with less energy than any other lighting company in the market.

Many industry experts have asked us how we can deliver such high performance using the same chips and drivers available to everyone else. And the answer lies in our patent portfolio, our supply chain strategy as well as the ingenuity of our R&D team.

Efficiency gap between the ISON Class and our competitor's products has never been wider. While its modular design goes one step beyond all other LED products meaning that as LED technology advances, our customers can simply upgrade the components rather than replacing the entire chassis.

Further we have the industry's fastest ship times to support our customer's needs while minimizing our inventory risk. The success we're realizing with this product line underscores the strength of our innovation and the attractive returns we're seeing on our human and capital investments.

Building on the success of the High Bay launch, we intend to launch our new higher margin LDR one-to-two minute Troffer Retrofit product this March, next month. The massive market acceptance of our LDR product has led us to expand the line to improve margins and functionality.

We're expanding the current APOLLO LDR with a new ISON Class LDR with new functionality never seen in the market and we're introducing a new HARRIS class product designed to drive volume and margin.

We further plan to release a wide range of centers and controls to meet our customer's demand for IoT and PoE as well as newer State Energy Conservation Regulations.

As we look ahead, our development efforts are focused around performance, margin and product differentiation. We have a robust product line in development and are committed to producing state-of-the-art, industry-leading products that will continue to drive market share growth going forward.

Finally, our margin objectives, we've made great progress in expanding our margin profile. With gross margins at 28.1%, this is our fourth quarter in a row generating year-over-year increase in gross margins and the fiscal third quarter, marks the strongest gross margins we've reported in eight quarters.

This reflects not only our efforts to drive sales in our higher margin product categories, but also the execution of the strategic initiatives we implemented at the start of the year that includes focusing on our core competencies, enhancing our product design, improving our supply chain agreements and further adopting lean principles throughout our company.

It has been nearly one year since we described our gross margin strategy during our secondary offering and we've already surpassed our promise of a 13% LDR gross margin by delivering 15% to 18% actual gross margins during the two quarters and expect to release more LDR product in March that have approximately 25% gross margins beating the original targets handsomely.

This product launch will not only lift our consolidated gross margins but will also reduce the impact of the product mix issues that we've experienced recently. Ultimately, we expect to realize gross margins, comparable or better to those of our industry peers.

We've permanently eliminated a significant amount of cost out of the business through various overhead reductions, which are reflected in the operating margin improvement we have realized to date.

On a go-forward basis, we intend to capture additional operational improvement as we realize further efficiency and scale benefits.

So in summary, we're executing extremely well against our strategic priorities. Our LED sales penetration is growing. We've delivered four consecutive quarters of significant year-over-year margin expansion and we're moving closer to positive earnings as we continue to launch state-of-the-art breakthrough products.

And while the economic turmoil is beyond our control, we're aggressively building our pipeline to position us well to capitalize on these opportunities now and when the markets ultimately improve.

So with that, I'd like to turn the call over to Bill.

Bill Hull

Thanks, John. As John noted, we reported LED revenue as a percentage of lighting products sales during the quarter of 75%. Our total revenue was down 36%, to $16.8 million compared to $26.1 million in the third quarter of fiscal 2015.

Product revenue decreased 32% year-over-year to $16.1 million, which compares to $23.6 million in the third quarter of fiscal 2015. LED sales were down $700,000 or 6% to $12. This compares to LED sales of $12.7 million or 55% of total lighting product revenue in the comparable period last year.

Service revenue was down $700,000 in the third quarter of fiscal 2016, which compares to $2.5 million in the year ago period. Last year's third quarter service revenue included a significant contribution from a large automotive project. We expect service revenue to increase during the fourth quarter of this year and we reengage this customer and covert backlog.

Total gross margin was 28.1% for the third quarter of fiscal 2016, reflecting a 1350 basis point improvement over 14.6% gross margin reported in the third quarter of fiscal 2015 and a 960 basis points sequential increase.

This improvement resulted in a 23.1% improvement in gross profit dollars, $4.7 million compared to $3.8 million in the prior year period reflecting $900,000 more gross profit or $9.3 million less revenue and that reflects a shift in our mix toward higher margin LED High Bay products as well as the margin expansion initiatives we have implemented over the past several quarters.

Total operating expenses for the three months ended December 31, 2015, decreased $1.8 million or 22% year-over-year to $6.7 million. Year-to-date total operating expenses decreased $2.7 million or 12% from the prior period.

The improvement reflects deductions in compensation expense as a result of lower headcount and discretionary expenses resulting from our February 2015 business improvement initiatives.

We reported a loss, a net loss of $2 million or $0.07 per share in the third quarter of fiscal 2016, which compares to a net loss of $4.7 million or $0.21 in the prior year period.

Total revenue was $49.1 million for the first nine months of fiscal 2016, a decrease of $3.8 million from $52.8 million in the prior year period. Total product sales for the first nine months of fiscal 2016 were $46.9 million, a 3.4% decrease compared to $48.5 million in the prior year period.

Gross margin was 23.2% for the first nine months of fiscal 2016 compared to a negative 7.8% in the prior year period and this period also included the impact of a non-cash impairment charge of approximately $12.1 million. Excluding these charges the gross margin for the prior year period was 15.2%.

We reported a net loss of fiscal 2016 nine months of $9.3 million or $0.34 per share compared to a net loss of $27.4 million or $1.26 per share in the prior year period.

Now moving to the balance sheet, we ended the quarter with $17.5 million in cash, which compares to $4.8 million as of December 31, 2014. Our working capital was $34.1 million as compared to last December 31, of $21.6.

I’m also pleased to report that we generated $2 million in free cash flow during the fiscal 2016 third quarter and that compares to a use of $5.1 million during the prior year period. This was attributable to enhancements in our working capital management and the improvement in our gross margins.

Now with that, let me turn the call back to John.

John Scribante

Great. Thanks Bill. So even though our sales were impacted by the macroeconomic headwinds we're very pleased with the rest of our third quarter results and the progress with our strategic initiatives resulting in significant gross profit gains.

We delivered improved results in many of our other financial measures as discussed earlier while also generating quite a bit of cash. The incredible reception of our new products we're receiving from our recent launches coupled with our sales pipeline build gives us the confidence that our sales momentum will continue to accelerate.

To review where we stand against our fiscal 2016 guidance let's step through each benchmark quickly; first significant year-over-year revenue growth. Given the manufacturing sector contraction as it accelerated in recent months, we expect revenue to be relatively flat for the fiscal year and making up ground during the fiscal '17. However the slowdown may negatively impact our results further in the fourth, fiscal quarter.

Second significant year-over-year gross margin improvement; we're reaffirming this guidance benchmark and expect to maintain gross margins in the low 20s for the full fiscal year, which is up significantly from our adjusted gross margin of 15.2% last year.

Third, significant improvement in GAAP earnings per share has been achieved and in fact we have seen consistent growth in earnings per share averaging 22% over the last five quarters including one month positive in Q3.

Our back half target of reporting positive earnings per share will be short of our original expectation; however we expect it to continue to trend up into the right.

Fourth to achieving trailing 12 months EBITDA profitability by Q1 fiscal '17, we expect this to trend in the right direction as well but it's dependent on how sustained the slowdown of manufacturing ends up. However, we see upside with our new LDR products ramping up to the school construction season and accelerated sales from our new channel partners.

And fifth to achieve positive cash flow from operations by Q1 fiscal 17 we indeed generated $2 million in positive cash flow from operations to quarters earlier than expected during our fiscal Q3.

So to sum up in spite of the pressures on the sales line, we continue to strengthen the business from a profitability and cash flow perspective yielding a much stronger business structure to benefit as revenues increase.

So what I’m saying is that Orion continues to progress through its business reinvention as a leader in the LED retrofit space and has becoming stronger and stronger each quarter.

Our gross margins, operating income and earnings per share are all up moving up into the right. It is only a matter of time before we breakthrough our expansion and distribution has started out a strong with a growing pipeline beginning to develop and real results starting to materialize.

Increasing our agency and distribution pipeline will diversify our revenues to smooth out our quarters and bring greater consistency in our results. We're taking necessary steps to improve our business today and grow shareholder value.

Despite the short term measures, longer term our outlook remains very bullish we will steadily improve each cornerstone of our business the LED adoption rate, sales penetration, product performance and margins.

With a multibillion dollar market and our business strengthening our efforts to build pipeline expanded distribution model and operate more profitably positions us well to drive shareholder value.

So with that, we thank you for your continued support and we'll be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Steve Dyer from Craig-Hallum. Your line is now open.

Steve Dyer

Good afternoon. So based on last quarter you had reported results about half way through this quarter, half way through the December quarter and it seems like maybe things fell off little bit more dramatically than expected in the back half of the quarter.

Can you give us any color about what you saw and then how that -- do you feel confident looking forward end of March and into the summer?

John Scribante

Sure. So it is not uncommon for us to generate about 50% of our quarter sales in the last month of the quarter and in some cases in the last two weeks of the quarter.

There is a -- discretionary spending drives a lot of the customer buying habits and the capital they use for lighting projects, which are return on investment projects, they tend to wait out the quarter and make sure that other projects don't supersede the lighting project like if a roof collapsed or if some other machine broke down or what have you.

So they tend to save up their spending until the end and I think what happens this quarter is not only did we have some of those pressures, but just talking to all of our customers, they were just trying to preserve and sacrifice their own calendar year performance results and decided to just push some projects off.

In years past, I've been doing this for about 12 years now. It was not uncommon in December to have many of our large conglomerate companies and Fortune 500 companies call us at the end of the quarter or sometimes even earlier saying, hey, I got $5 million to spend or $1 million to spend or $0.5 million to spend to flush out their budgets.

This is the first time in 12 years that we didn't get a single phone call from any one of these loyal customers that we’ve had in the past and when we reached out to them, many of them just said look, we were just trying to salvage our yearend and push it into next year.

And so there was a fall off mostly because up until - I still even have emails that show promises that we’d get the purchase order. Customer actually said I promise you I'll have this by Christmas and he just never showed up and subsequently we have picked up some of those orders coming into January.

And we also made a decision that we weren’t going to discount to take orders early because ultimately we knew those orders were coming and even if they came in January or February or March, we decided that we would be better off just taking the business that was flowing to us.

We had a strong margin improvement on the business. The internal cash flow was sufficient. So we just didn't get aggressive on discounting. So hope that helps. Was that what you were looking for?

Steve Dyer

Yes, I guess I just -- it sounds like maybe some of those orders have come through, but I am just trying to figure out maybe what gives you the confidence that you can grow again next year and so forth?

Are you hearing -- are things firming up now that we're halfway through kind of this March quarter?

John Scribante

Lighting is not going away and these projects are all very robust from a financial return basis and customers are going to continue to buy lighting. Again it's early to tell what this quarter is going to shape up, but it's -- we've seen some rebound from the last quarter.

Our quoting activity is at an all time high. We just have our new High Bay Gen2, High Bay product was released in October. So it had an impact on the quarter. It really has only been in a marketplace for 60 days during the quarter and difficult to gain a lot of traction.

I think the business that we got on our Gen2 High Bay was where we were able to seize that business from a competitor on deals that were already ready to go. So now this is working through the pipeline and I suspect we'll be fine.

The quoting activity is at an all time high right now. The new customer base that we have been attracting recently through the lighting agency channel has shown a tremendous amount of interest and we’ve picked up some good business there.

So we're optimistic that our quarter will be respectful and then going into next year we’ll be very strong with the margin improvement that we've seen. We can leverage that revenue a lot better with the higher margins. We're in striking distances of 30% and couple of points makes a big difference in our business.

Steve Dyer

So as it relates to market obviously, the margin is really, really good. Is this kind of a decent number to use going forward or a couple of things go your way, those can take a step back more into the mid 20s or how do you think about the progression there?

John Scribante

I'll let Bill answer that a little bit in more detail, but I think we didn't have any outliers in this quarter. This was a pretty routine quarter and I think all the progress that we made in our supply chain and our design outs have gotten us to the margin targets that we projected and quite frankly we hit. And now it's incremental build on that and I think we can continue to sustain these kinds of margins.

Bill Hull

Yes. This is Bill. So we're looking at margins in the low 20s for the full fiscal year. So while we don't expect to have as strong a margins in the fourth quarter as we did in the third quarter, it's trending up.

So we had high mix on Gen2 High Bay, which helped us but some of the business that's coming in, in the fourth quarter might give us a little bit lower margin. We see the trends going in the next year similar on the way out.

John Scribante

Yes. We had a couple of large projects that pushed into this quarter that were lower margin ones that were in our backlog and we'll realize that revenue at a lower margin. So it's got some downward margin pressure, but it's not typical of our go forward.

Steve Dyer

Okay. I will hop back in the queue. Thanks.

Operator

And our next question comes from George Gaspar, private investor. Your line is now open.

George Gaspar

Good afternoon to everyone. My question relates to the backlog that you identified for the quarter being in the $7.5 million range or whatever. And considering - can you identify in the several releases that you have put on new business, how much of that would be represented in that particular backlog? I assume that backlog number that you'd put out was as of the 31 of December, correct?

John Scribante

Correct. So the recent releases since the 31 would have not been in the backlog.

George Gaspar

The releases for all of January would not be on that backlog. Is that right?

John Scribante

Correct.

George Gaspar

Okay. And is there any target range that you could share with us as how you might see the backlog going into the end of the quarter?

John Scribante

Well, I think of the $7.5 million coming into this quarter, we should see about 40% to 45% of that be realized within the quarter. And then going out of the quarter, it's hard to really predict that. It's such a short term on a lot of these – we’ve either got a long contracts or really short ones.

So many times -- as I've said before, the backlog is sort of a moment in time, but the higher the backlog the better, but I really can't speak to the exact number or even a range of what the backlog will be.

George Gaspar

Okay.

John Scribante

We will carry some of what we brought into the quarter out there and then these recent, so about half of what we brought in will carry out and then the recent announcements is probably a fair amount of that that will be backlog as well.

I think we're starting those projects. The last two we announced, the government projects in March and they are about three-month projects.

George Gaspar

Okay. And then a question continuing on backlog or outlook, the slowdown in the industrial area, can you highlight where you're seeing it the most what particular areas of industrial and is there a possibility that that can turn going into the quarter after the one you're in here now or is -- do you sense that this industrial slowdown is something that maybe with the marketplace for two quarters?

John Scribante

Well, so not being an economist I’m not going to talk too much about my predictions of the industrial sector, but I’ll tell you what my sense is where the greatest pressure have been in our customers that are either heavily commodity driven or have a lot of exports and there is just -- they're harder with lesser spread and they’re not making as much money and so they're pushing off discretionary spend.

The turnaround is I’m -- we’re preparing for it to be a bit sustained only so that we can preserve our cash and keep our margins strong and build our pipeline and then take advantage of any uptick, but as I put a churn out on the website, the manufacturing sector is at a level right now and we've seen since 2009 and while that could turn and go in our favor anytime soon it does provide a heavy amount of pressure on our customers.

Now in the future I also believe that we're going to be less dependent on manufacturing. We’ve mobilized our sales organization into the 64% of the market that we had avoided historically and that’s broad line of optical distribution and the sales agencies that we've been acquiring as customers lately are bringing us into a lag of more diversified customers.

So as we move forward into the next -- and that was an initiative we started back in September, October timeframe and so, our next fiscal year certainly looks very favorable as these agencies come online and we started bringing our products.

I mentioned that we signed on 10 new customers with a 120 street sales people collectively. Each 120 sales people also have about 10 relationships. So we have about 10 distribution relationships.

So we have about 1200 new sales people on the street representing the most efficient lighting product in the world and that penetration into those new markets is bound to turn revenue back towards us the next couple of quarters. So, we're diversifying and building our business in a way that’s becoming much less dependent, it's just not quite there yet and so…

George Gaspar

Okay. And if I could squeeze one additional question to you John on the R&D effort that you’ve got underway now in Chicago how is that progressing and is there anything in the pipeline beyond what you’ve brought through that R&D area that you're looking at coming into the market over the near term I would say.

John Scribante

Sure so on the very short term, we have a significant launch expanding our LDR line next month and that’s just weeks away and that’s a much higher margin LDR product that's going to be in the high 20s, mid to high 20s and it's a high volume product and we're going to be able to lower the selling price to open up more of the market, at the same time make more margin.

So that will drive I think considerable sales. It's also going to have some capabilities that I am not going to announce until the formal announcement, but some capabilities to that product that’s going to be unique that I think will be very sought after.

So there's that. We also have further development on our Gen3 High Bay line and while we're not going to be releasing it anytime soon, it is going through testing and going to be ready on shelf.

So there in the event that any competitor would come close to our performance that we'll be able to better quickly -- we brought back into a strong position again. So our R&D efforts have paid off handsomely for us in terms of margin and innovation and when you have innovation you have pricing power and that strategy has so far been doing very well for us.

George Gaspar

Thank you. That sounds very positive. Appreciate the commentary. Thank you.

John Scribante

Thanks George.

Operator

And our next question comes from Craig Irwin from Roth Capital Partners. Your line is now open.

Craig Irwin

Thank you for taking my questions.

John Scribante

Good afternoon, Craig.

Craig Irwin

So when we look to start right back to the IPO seasonality in the fourth quarter means that there is typically about 18% sequential decline there have been years where the fourth quarter has been sequentially up, but can you tell us what you feel about the fourth quarter revenue run rate versus historic, versus the seasonal average.

John Scribante

Sure, so going back to the IPO we really had one product for one market and that was our High Bay product for the industrial market and because of that it became very sensitive to the yearend budget flushing and then the reloads of the capital in Q4.

As we now have really a three tier or three different product lines, the industrial High Bay in conjunction with the commercial product line, which is commercial office space, schools, institutional, hospitals which is the LDR and then small exterior product line, those products are now more diversified in their seasonality.

We're seeing a lot of purchases leading up to -- for schools, for the spring break timeframe when they cut over in spring break. We see that building for the June shutdown for schools. Hospitals tend to spend money whenever they get it and so that's throughout the year type of a sale.

So, it's just as the product line diversifies our customer range diversifies and is becoming less dependent on the season. And then one other thing is as we’re moving our product thorough the more traditional lighting sales channels, we’re also getting more new construction projects, which is also less seasonal and more summer weighted or just, year-round weighted.

Craig Irwin

So if you could clarify that or maybe give a more directional answer, last year in the fourth quarter you actually declined by about 18% in your LED fixtures revenue.

We all know that that’s what we want to see grow and that linear fluorescent was the reason that you were down 26% there sequentially. Do you expect LED revenue to be up sequentially in your fourth quarter of fiscal '16 and how would you expect this to progress versus historic?

John Scribante

Well, so without providing specific details directionally that would be our expectation that we would see more LED sales in this fourth quarter.

Craig Irwin

Okay. Great. That’s really helpful. So then with the new lower revenue run rate that we seem to be tracking at, it stands as an outlier that SG&A was a little bit higher in the third quarter.

Can you talk about whether or not there were any onetime items in there and how SG&A is likely to track over the next couple of quarters and if there are any specific opportunities to reduce cost in there, looking what the fresh opportunity after restructuring you've done in the last year?

John Scribante

Yeah, we didn’t have any one time charges were several quarters around for long time and didn’t have any in Q3 the uptick in SG&A I think probably had something to do with our ability to not any insight on average some sales commissions in a few maybe other.

Bill Hull

Yes, that pretty much covers that. You look at $6.5 million to $7 million run rate per quarter with the whole OpEx, SG&A, R&D, that's about where we're running. There aren’t any one-off charges in there for the quarter.

We did a class reduction effort back in February and we're maintaining that. If you look at year-over-year, you'll see that decrease, but we think we're in a good place right now where we can continue to grow the business.

Craig Irwin

Okay. And do you see any opportunities to reduce SG&A spending in '17?

John Scribante

I think where we are to build what we need to build I think we're in pretty good shape. Not to say that there won't be opportunities that we'll take advantage of going forward.

Bill Hull

It's something we always look at. We're always keeping an eye on cost and make sure we're efficient as possible, but we just went through that exercise a year ago and had some pretty significant experiences.

John Scribante

I think what we're going to see, well I know we're going to see is more leverage in the sales as we penetrate the traditional lighting channel more heavily, we will be able to gain more leverage on our SG&A expense through that.

Bill Hull

That's right. That's going to require less SG&A per dollar generated.

Craig Irwin

Great. Thank you for taking my questions.

John Scribante

Thank you, Craig.

Operator

And I am showing no further questions. I would like to turn the call back over to John Scribante for any further remarks.

John Scribante

Okay. Well great, well thank you very much for your continued confidence in our business. We thank you for being a shareholder and we're committed to increasing shareholder returns. So we look forward to talking to you again in 90 days. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone, have a great day.

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