Revolution Lighting Technologies, Inc. (NASDAQ:RVLT)
Q2 2016 Earnings Conference Call
August 04, 2016 11:00 AM ET
Robert LaPenta - Chairman, President & CEO
James DePalma - Chief Financial Officer, Director
Craig Irwin - Roth Capital Partners
Amit Dayal - Rodman & Renshaw
Good morning and welcome to the Revolution Lighting Technologies Second Quarter 2016 Earnings Conference Call. Please note this event is being recorded. [Operator Instructions]
Before we begin, we would like to advise you that some of the information discussed in this conference will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict and such forward-looking statements are not a guarantee of performance. The company’s actual results could differ materially from those contained in such statements.
Several factors could cause or contribute to these differences. These factors are described in detail in the Risk Factors and other sections of our annual report on Form 10-K and quarterly reports on Form 10-Q which are on file with the SEC. These forward-looking statements speak only as of the date of this call. The company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectations.
Today’s discussion also includes non-GAAP financial measures. We believe these metrics will help investors assess the operating performance of our core business. Please see the press release for a reconciliation of the non-GAAP measures to the most comparable GAAP measure.
After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Robert LaPenta, Chairman, Chief Executive Officer and President. Please go ahead sir.
Thank you very much and good morning everyone and thank you for attending Revolution Lighting second quarter earnings conference call. We are very pleased with our performance during the quarter. We made a lot of progress, organizationally we improved our financial organization, our marketing organization and are particularly excited about the progress we’re seeing in the market for LED lighting. No pun intended, we really believe the revolution has begun.
Norman produced a report, issued a report a couple of days ago and I’d like to just read it, couple of highlights from that report. The report is titled Time & Progress and the headline is the rapid adoption of LEDs in lighting marks one of the fastest technology shifts in human history. The accelerated deployment of light emitting diode bulbs is on track to save U.S. consumers and businesses $20 billion a year in electricity cost within a decade which would lower U.S. CO2 emission by some 100 million metric tons a year. You can multiply those numbers by 5 when you talk about the world.
Another comment, let’s look at some key charges. LED lighting is a miracle and every bit is unheralded by major media as solar, battery and electric vehicle technology. So what we’re looking at here is a revolution, and we‘re looking at a market that is literally about to explode. The current penetration is about 5% and all industry surveys project that, that will grow to 40% to 50% by 2020. So we’re looking at a very, very robust market and we are right in the middle of that exciting opportunity. So quickly for the quarter, we did 43 million, a 58% increase over the same quarter the prior year, that’s 20% pro forma organic growth. We had gross margin of 13.3 million, 33%, the slight drop resulted from a sales mix change, more sales from Energy Source and some sales from TNT. But we expect, gross margin for the year to be in the 32% range.
Adjusted EBITDA was 3.5 million versus 1.1 million and Jim shortly will take you through and give you more color on the numbers. Q3 we issued a forecast of 50 to 52 million, that is showing robust growth from the prior year and we’re looking at EBITDA, adjusted EBITDA of around $5 million. We reaffirmed our guidance for the year between 180 and 190 million, up 40%, 20% pro forma organic growth and we’re looking at EBITDA of between $18 and $20 million with positive cash flow for the second half. So we made a tremendous amount of progress and our second half performance is going to be very impressive.
Couple of highlights for the quarter, I mentioned we acquired TNT, this is a great company located in Massachusetts, they compliment Energy Source perfectly. Energy Source is in Rhode Island, they service the same market but they are servicing primarily large customers. TNT’s expertise is in the small customer base. So there are a lot of synergies, we’re going to have administrative, marketing synergies. Energy Source is going to be able to use some of their resources to get into the small company space and the reverse is true for TNT.
So this is a great acquisition, we’ve paid a reasonable price for it and they already exceeded our expectations from a performance standpoint. We completed a common stock offering of 16.8 million, netting us 15.2 million, that demonstrates the confidence that some of our new shareholders have in our company and its helping us now reposition our shareholder base and bringing quality partners that want to partner with us through the growth and progress of the company over the next couple of years. So we’re working on getting that shareholder base improved and I think that was a great step in the right direction.
We named Brian Daley as Senior Vice President of Sales and Marketing. Brian has tremendous industry experience from Creston, Lutron, and LSI Solutions. Now he’s only been us a short time, maybe a month and a half and we’ve already seen very exciting concrete progress from Brian. We expect to have a whole new distribution network in place by the end of August. I can’t stress enough how exciting this is for us and for Brian who have accomplished this with people that he has worked with over the last 5 to 10 years in the space is really incredible. I’ve been talking about this year, the year where we would focus on our distribution and marketing network and this accomplishes a great deal of what we try to accomplish this year. So I think we’re going to start seeing some of the positive results of this in the fourth quarter.
We continued our industry leading progress with schools, that’s led by our Tri-State and now Value is actually participating and booking a lot of school contracts for us. And so the combination between Tri-State and Value, our school revenue is going to be up very dramatic this year and the pipeline continues to increase.
We talked about releasing our Next Generations Control Product Line Sentinel. This is extremely important. We have a leading technology in controls and if you read a lot of the industry technical data, controls are going to become an ever increasing capability in selling and being a leader in the LED space. There is going to be tremendous progress in power over the Ethernet, IoT, the Internet of Things and our Controls technology is going to be important to us and we’re focused on it and we’re very excited about that capability going forward.
So those are some of the highlights, we’re excited about where we are and what our future looks like. I’ll now turn it over to Jim to give you some more color on the numbers.
Thank you Bob, we filed our 10-Q and issued our press release, I think Bob has taken you through some of the highlights. The revenue for the quarter, as Bob noted was up 43.1 versus 27.6, or 58% higher, on a pro forma basis that’s 20% organic growth. The increase reflects strong sales across all of our divisions namely our full turnkey operations, multi-family installations, and retrofit lamps and related products.
As we movethrough the balance of 2016 and beyond, we see continued significant growth due to the following: greater acceptance, as Bob noted of LED products overall, recognition of our high quality products and our customer focus process, our expanding portfolio of products to meet the growing demand of the market and our growth in the market channels as we had distributors, agents ESCos, and sales personnel to address these demands.
Gross margin for the first quarter was 13.3 million or 31%, a revenue due to product mix, we expect our gross margin to be in the 32% range for the year and as Bob noted, we continue to focus on the quality of our products, continuous improvement in operational processes and cost efficiency. Also during the quarter, we increased our R&D expenditures as we made strides in adding key products to our portfolio and further enhancements to our existing product lines. In addition, we invested in market and sales resources to meet the growing market demand for our products.
EBITDA for the quarter was approximately $3.5 million in line with our expectations, we expect that we will achieve adjusted EBITDA on the 10% to 12% range for the full year as our second half revenue continues to grow. Our GAAP loss of $0.06 reflects onetime cost of $0.10 related to our acquisition and other onetime cost associated with right sizing the organization in addition we had charges related to stock based comps, amortization of intangibles and interest expense of $0.11. As a result, EBITDA earnings per share approximated positive $0.19 for the quarter.
The onetime charges in connection with our acquisition and further reductions in operating and office locations as well as associated personnel when occurred, in order to strengthen our company and to better align our organization with our markets. Over the last year, we have transformed our company into a cohesive, disciplined organizational structure determined to meet the significant market demand for our products and related services. In this regard, we continue to fine tune our operations and look for ways to add further efficiencies to our operations and strengthen the overall organization.
Our cash flow from operating activities for the first 6 months was near breakeven, compared to negative 14 million for the first 6 months of 2015. As of June 30, 2016 we have working capital of approximately 36 million and funds available for our credit facility in cash on hand of approximately $10 million.
As I previously noted, we have none operating loss carry forwards and amortizable goodwill and intangible as a more approximately $65 million which will shelter us from federal and state income taxes in the future. Our financial statements reflect zero value for this significant asset. Back to you Bob.
Thanks Jim. Before I open it up for questions, let me try to preamp one question that I’m sure is probably going to come up. We talked earlier in prior releases about the Navy and I believe that we’re going to be a strong competitor for any future Navy shipbuilding facility and shore facilities and we continue to feel that way. We talked about the fact that we were 99% certified and we expect to get that 1% very soon. We are currently in the process of testing and we expect that within the next 30 to 45 days, we will be 100% certified and able to bid on any future navy shipbuilding facility or other or government opportunity.
So, we’re excited about that. There was a navy RFP released, we were responding to it, we almost had the response completed. The navy then put a delay on that, they felt that they had to clarify some issues and respond to some questions and we expect that to be re-released shortly. But again we don’t have any new information on the status of that RFP.
So, with that I’ll open it up for questions.
Thank you very much sir. Ladies and gentlemen we will now begin the Q&A session. [Operator Instructions]. Our first question is from Craig Irwin of Roth Capital Partners. Please go ahead.
Good morning and thank you for taking my questions.
Thanks Craig. Good morning.
So Bob, second quarter revenues was pretty strong, little bit above the top-end of your guidance range. Can you talk a little bit about what was exceeding your expectations in the quarter, what made you outperform a little bit to allow this strength?
As I mentioned in my opening remarks, we’re seeing a tremendous increase in incoming opportunities. You know over the past couple of years, it was really the reverse. It was knocking on doors, it was educating people, it was getting the LED story out and we believe that, that has now reversed and what’s happening our building owners and facility and managers are now being prompted and are familiar with the capability. The 50% to 60% energy efficiency, the quality of the lighting and the technology advances in the space. So we’re seeing a lot more opportunities come our way and it’s shortening the period of identifying an opportunity and ultimately starting to shift on that opportunity.
So I’d say it’s just the acceleration of the opportunities in the space and really we’re seeing it come from everywhere. It’s an exciting time and we believe that over the next 6 months, you really are going to see the whole space have significant growth.
Thank you for that. Also another area where you were pretty strong in the quarter is the gross margin line, about a 100 basis points ahead of what I was looking for. Can you comment about whether or not this momentum that you’re seeing is driven by utilization product mix, just is it an opportunistic channel bump that we saw and is there potential for similar performance in the back-end of the year?
Well, you know we constantly look at our cost structure, we’re improving our operations, we’re improving our forecasting, we’ve right sized many of our entities and we continue to focus and build on profitability, cash flow and gross margin because I think gross margin is a key indicator for this space. The reason that our gross margin is not a lot higher is TNT and Energy Source have slightly lower gross margins but higher EBITDA percentages and its basically product mix in their businesses.
So there are more components in their sales, there is HVAC, they really are many ESCos in energy efficiencies. So they look and improve the performance of the entire facility. So their net income probably runs 13% to 15%, their EBITDA runs 13% to 15% and their gross margin probably runs 28% to 29%. We think that will improve also as their sales continue to increase and we start to recognize some of the synergies in the TNT, Energy Source combination. So we believe that the gross margin is going to increase, but more importantly our EBITDA percentage is going to increase even better.
Great. And then TNT energy, can you update us on where you stand with the integration there? Is it something that should be fairly straightforward, quick and easy given that you guys have literally done 100s of acquisitions over your careers. And you know should we expect cross selling of the revolution fixtures through both Energy Source and TNT to gain traction in the back half for the year?
You just answered the question, that was correct. I got to tell you, the TNT, Energy Source combination and integration could not be going any better. We’ve hired a CFO who now, has responsibility for both spaces. The marketing organizations are integrated, they are working together, they are pursuing opportunities in each of their spaces. We’ve recently won a key opportunity which I cannot identify. Very, very exciting when we get the approval from the customer to tell you about it, we will but I can tell you both are more participating and it’s a very, very exciting new opportunity. So we’re really excited about Energy Source, TNT, the capability they bring, the synergies they bring and the operating and cash performance they bring.
Okay, great. And then one last financial question before I hop back into the queue. So, there is still a fairly significant retail component of your shareholder base out there and they tend to focus heavily on GAAP EPS instead of adjusted EPS. So this means that your quarterly expenses for acquisitions and onetime items ends up having a fairly significant impact on sort of volatility or the GAAP EPS that ends up being reported? Do you have an approximation of the number we should be using for the third and fourth quarter 2016? And are we likely to see a similar run rate in '17?
Yeah, so in the old days when I was practicing public accounting, any cost associated with an acquisition took any consulting fees, legal fees, anything related to the acquisition you could capitalize. Now it has to go, it has to be charged directly to the P&Ls, anytime you’re making an acquisition, I have to charge our P&L. It’s a one shot cost and it’s not going to be recurring. And then, again we continue to add people to the company and organization, what we also look at identifying areas where we can save money. And so as a result of reducing certain operation, is refining the organization that we have, we unfortunately have to lay off people and pay severance and we have cost associated with that. And so it wouldn’t surprise me if as we continue, there is going to be some synergy in terms of the locations and operations of TNT and Energy Source.
So I would expect probably a $1 million of quarters would not be unreasonable, as long as I don’t do an acquisition. If I do an acquisition in the third quarter which I am not anticipating, it could be a lot little higher but I think $1 million of quarter is probably not unreasonable.
Yeah, so you know in that regard, we’re going to exit the year, if you do the math, our revenue in the fourth quarter is going to be somewhere in the $60 million area. That should give us EBITDA in excess of $6 million and with only $1 million of non-recurring, that should yield a pretty good bottom-line EPS numbers. So if you then annualize that and again the fourth quarter is going to be higher than the first half of next year, we’re going to exit the year at well over $200 million run rate and EBITDA of over $20 million.
So if you just step back and say this company 2.5, 3 years ago was $3 to $4 million, losing 15 to 20 million and negative cash flow in the same area. And look at how we’re exiting the year, the focus we have, the operational structure, the financial structure we’ve put in, we’ve come light years from where we’ve been. And I can’t stress enough what I said about Brian Daley and his impact on our distribution network. We approved this plan yesterday. This will be in place by the end of August and I can’t stress enough how impressive and the immediate impact that this new organization of reps and agents and marketing executives is going to have on our company.
So we’re excited about where we are, we’re excited about the space, we’re excited about the future. And again you know when you get to the stock, it hasn’t performed well, we’ve got a long way to go in proving our investor and shareholder base. But by performing that will happen, so we’re not looking at the stock every day, we’re looking at performing and exceeding our forecast and that’s really what we’re going to try and do.
And I think you know, we started this company in effect a little over less than 3 years ago, we acquired 8 to 10 companies and we now have put these companies together where its, that everybody is working together, its focused, we’re better organized, we’re again slowly but surely elimination any duplications in the effort and we brought in a lot of strong people to bring this company so that we can fully take advantage of the market we see growing significantly.
Yeah, and one of the comment, you know Brian has over the past month and a half been to all of our facilities. He has really become familiar with our business, our products and one comment that he made struck me particularly and that was he couldn’t believe how excited, how energetic and how capable our organization is and he couldn’t believe the quality and the focus we have on our products. So his assessment really confirms because it’s from an independent party, that we’re in the right place, heading in the right direction and that’s something that I believe you’re going to see moving forward.
Great, thanks again for that. Congratulations on the strong quarter.
[Operator Instructions] Our next question is from Amit Dayal of Rodman & Renshaw. Please go ahead.
Thank you, good morning guys. Just your comments Bob on the Navy efforts, can we bid on this Navy RFPs before we are certified? Could you provide any clarity on that?
The RFP that’s on the street says yes. And we don’t know when that’s going to be reactivated, we’re hoping soon. We can bid on it, but the way things are looking, we will be certified before an award is made which will improve our chances of being successful and I might add the Cowen Group is doing a phenomenal job of getting us into opening doors in the government, in GSA and in spaces that we frankly would not have been able to get into. So admiral with the coast guard, we’re independent in talking to their facility people. We’re in basis and we’re also taking a look at some of the military operations and opportunities internationally. So the Cowen Group is performing exceedingly well, opening doors and we expect to start seeing some real progress from the groundwork that’s been laid in the very near future.
Thank you. And in regards to your comments around you know the inbound interest you’re seeing and that’s helping the sale cycle potentially get shorter. You are at a stage or phase where you are basically moving and only focusing sort of higher deal sizes now and maybe letting go of some of the smaller projects that may not be worth their efforts?
Well, again some of our companies like TNT, they concentrated on the small business space and that’s not a high percentage of our sales. If you look at the announcements that we made during the quarter, you’re looking at opportunities of $3, $4, $5 million and we’re seeing more of these literally every day. There is one opportunity we’re looking at, that our marketing people are excited about, that if we’re successful would be over $16 million for one customer. So when you look at franchises, when you look at hospital network, healthcare networks, franchises, the numbers are very, very impressive and the returns that we offer is so compelling it actually is a no brainer.
I mean we deliver these opportunities, we offer them 50% to 60% reduction in energy cost, higher quality lighting and maintenance that basically becomes non-existing because our products last a 100, 80, 90,000 hours. The CRIs are over close to 90%, the quality of the lighting, everybody now understands the benefits of LED lighting. And I got to tell you, some people say while it’s a one shot, one deal pony, they’re going to retrofit this space.
The technology capability of these electronic components is really impressive and over the next year or two or three, you’re going to see advances where they’re going to have WiFi, they’re going to have security, they’re going to have cameras, way beyond just the occupancy and light controls and there is the internet, the information that’s going to be generated through this LED network, believe me there is going to be a whole next generation of upgrades that probably going to start four or five years from now.
So I got to tell you, I think the space is misunderstood and again like so many things on Wall Street, it isn’t until the explosion incurs that people get excited and start backing the opportunities. But we’re a pure play, we’re focused on it, we know what’s important, we’re going to continue invest in controls in our marketing and we’re excited about the future.
Thank you for that, just maybe one last question from my side. You seem really excited about the change in the marketing and sales organization of the company. Could you give us a bit more specifically what has happened and what you maybe sort of bringing into play in terms of ramping up efforts on that side?
Yeah, what we were lacking was an experienced high quality agent in reps network. We had a sales force that was dealer and distributor focused and a lot of those were entrepreneurs that were in businesses for themselves. They didn’t have the breadth that established agents and reps networks have in this space. So we’re bringing on a network and throughout the United States in the west, in the Midwest, in the East coast, in the South that has great experience and has produced great results in the lighting and related spaces.
So they are anxious to join Revolution, they believe we are at the beginning of where we’re going. And they’re excited to join us, they’ve looked at our products, they looked at our capability and they are all join, literally I am going to tell you that we’re probably going to have 15 to 20 new agents and reps by the end of the month and these are not un-experienced groups that are getting into the space for their first time. So they are bringing customers with them, they’re bringing capability with them and I think you’re really going to see some of this impact in the fourth quarter.
Understood, and are these people on commission or could you give us some details in how they are sort of compensated?
We’re bringing in regional directors that will monitor this network of agents and reps. They are going to be on salary plus commission and we, the agents and reps are going to be on commission basis. So when you look at the impact of this on our expense run rate going forward, from the salary people we’re bringing on its going to have a very, very minor impact. Part of the reduction that you saw in people in the second quarter where we had some non-recurring charges associated with right sizing, that has resulted in low expenses which is basically being rebuild with this new distribution network.
Understood, thank you for that.
Thank you very much.
[Operator Instructions] Gentlemen it appears that we no further questions. Do you have any closing comments?
No, I’d like thank everyone for participating and again I am excited about the second half and we look forward to getting together in the third quarter and demonstrating our continued progress in building a great company in this pace. So thank you very much and we’ll talk again after our third quarter. Thank you and have a good day.
Thank you very much sir. Ladies and gentlemen that concludes this conference. Thank you for joining in, you may now disconnect your lines.
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