Orion Energy Systems, Inc. F4Q08 (Qtr End 03/31/08) Earnings Call Transcript

May.14.08 | About: Orion Energy (OESX)

Orion Energy Systems, Inc. (NASDAQ:OESX)

F4Q08 Earnings Call

May 14, 2008 5:30 pm ET

Executives

[Eric Burckhardt]

Neal R. Verfuerth - Chief Executive Officer and President

Daniel J. Waibel - Chief Financial Officer

Analysts

Eric Prouty – Canaccord Adams

Jeff Osborne - Thomas Weisel Partners

Jill Mastoloni – Catapult Partners

Sanjay Perry – Walker Smith Capital

Cory Armand - Rice-Voelker

George Gasper - Robert W. Baird

Operator

Welcome to the Orion Energy Systems fourth quarter fiscal year 2008 financial results conference call. (Operator Instructions) I would now like to turn the call over to [Eric Burckhardt].

Eric Burckhardt

Thank you for joining us for Orion Energy Systems fiscal 2008 year-end conference call. On the call today we have Neal Verfuerth, President and CEO, and Dan Waibel, CFO. The format of today’s call will be as follows: Neal will review the highlights of the year and provide background on Orion’s operations and strategies. Dan will then provide financial detail on the full fiscal year and fourth quarter. And Neal will conclude by addressing Orion’s outlook for fiscal 2009. Then we will be happy to take your questions.

Before we begin I will read the Safe Harbor Statement. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because of the contents 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 than expected.

Those risks include, among others, matters that we have described in our press release issued this afternoon and our filings with the Securities and Exchange Commission. We disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise.

Now I would like to turn the call over to Neal.

Neal R. Verfuerth

I would like to welcome everyone to Orion Energy Systems fiscal 2008 year-end conference call. Having completed our fiscal year 2008 and our first full quarter as a public company, we are very pleased to have exceeded the revenue targets we set for ourselves and committed to our investors.

We ended our fiscal year with record results with revenues increasing 67% to $80.7 million. Net income increased by 375% to $4.4 million, and earnings per diluted share increased 280% to $0.19.

These results reflect one core principal, our customers place significant value on Orion’s energy-efficient technologies and expertise and are using our energy management system to both reduce their operating expenses and to respond to their investor, customer, as well as social demands for greener and more sustainable approaches to their business operations.

So while we measure the strength of our business by growth in revenue and EPS, our customers measure our value and how we help them achieve those goals for them as well. We are proud that in the fiscal year 2008 we installed our Phase I technology in over 957 facilities. We have saved these customers over $34 million in annual energy costs while reducing the annual electricity demand by over 450 million kilowatt hours, which is the equivalent energy it would require to power over a half a million homes for a year. Furthermore, we have reduced our customers’ carbon footprint by over 306,000 tons annually.

Also, it deserves mentioning that while the current macro economic environment may be impacting some companies, we feel these forces are not likely to affect Orion. Our focus is on the retrofit market and our solutions allow our customers to save energy and reduce operating costs. Moreover, our financing tools provide customers perfect flexibility. In times of slow growth we find that customers are likely to focus inwardly on operating expenses and operating efficiencies and this plays to our favor.

Before I discuss our accomplishments, I would like to take a moment to revisit Orion’s positioning in the marketplace so people can better understand our business, its underlying value, and most importantly, Orion’s future potential. Our business model is unique to Orion and we believe provides a sustainable competitive advantage. We are a power technology enterprise. Our value proposition to our customers integrates thought leadership, technology, next-generation manufacturing, and a focused, well-trained implementation team.

Our strategy has been to use our Phase 1 technology to acquire customers, establish credibility, and create a beachhead for reoccurring revenue. Looking strictly at the Whiting retrofit opportunity, we estimate this opportunity to be larger than $9 billion. The point is that the HID lighting retrofit market alone presents an enormous opportunity. We believe we have the best products in the market to sell into this opportunity. Our technology has been proven, our technology is patented, and our products serve as a platform, allowing our customers to address their current and future energy-management needs.

We do business with over 90 Fortune 500 companies. The reason this is important is companies such as Toyota, Coca-Cola, General Electric do not make decisions on something as critical as lighting or their energy-reduction needs without considering their production operations and undergoing rigorous due diligence and peer comparisons. Our product, sales, and implementation teams repeatedly outperform in peer comparisons.

Most importantly, I believe we built a sales organization that has proven itself in precise and efficient execution. We understand how to successfully penetrate the retrofit market better than any of our competitors. We have 10-year lead in intellectual [pablom] experience. We grew our business 67% this year with nominal increase in headcount. Our sales and marketing expense as a percentage of revenue declined year-over-year. Our sales organization sale methodology and sales practices uniquely positions Orion to capture the unprecedented opportunity that stands before us in the energy-efficiency market.

Today this sales engine is aggressively pursuing the lighting retrofit opportunity, tomorrow the same engine is positioned to introduce other high-value, energy-efficiency and direct removal technologies into the marketplace.

So what does the future hold? Clearly, we will continue to expand our customer base further by pursuing lighting retrofit opportunities, [inaudible] loading and crude. We will further penetrate our existing customer base by working across those corporate facilities we have yet to retrofit. Additionally, we have a growing install base of over 3,655 customer facilities. Our track record of exceeding our customers’ expectations has cemented these relationships. We are uniquely positioned to up-sale into these relationships by offering our Phase 2 intelite wireless controls, as well as our Phase 3 Apollo Light Pipes.

In fiscal year 2009 we are full percent expanding our install base throughout our existing list of customers. In fiscal 2010 we expect increases in Phase 2 and Phase 3 top line sales. For this fiscal year Phase 2 and Phase 3 technologies provide really a competitive advantage when creating and closing new business relationships. Saving money with us is not a one-time proposition. Many of our customers are evaluating our intelite wireless controls and Apollo Light Pipes and we believe they are likely to purchase them in coming years to get incremental savings in energy costs as well as get compliant with their numerous green initiatives.

Moving forward, I would like to highlight a few of our significant accomplishments from the past year. As it relates to customers, we have added 957 facilities this year to bring our total install base to 3,655 facilities. Yet, this represents a small portion of the market for our Phase 1 retrofits. We estimate there are approximately 455,000 facilities with HID fixtures in the U.S. which translates into roughly a $9.6 billion market in the C&I sector.

To date we have retrofitted less than 1% of those facilities with our Phase 1 HIF products. At the end of fiscal 2008 we have installed our Phase 1 technology in less than 10% of the North American facilities of our existing Orion Fortune 500 customers. A key strategy for this year is to further penetrate these customer facilities we have yet to touch.

As mentioned before, we believe our customer relationships will be the future of sales of our intelite wireless controls and Apollo Light Pipe technologies.

Turning to our sales organization, we are pleased with our continuing gains and efficiencies and effectiveness. Our sale is highly competitive and rarely, if ever, are we the incumbent vendor. However, time and time again, in a direct competition our sales people with our technology are better able to demonstrate the superior performance of our product and intelligently discuss energy efficiency with prospective customers. While the other people are out there selling lights, our people are out there offering and delivering energy solutions.

We continue to prove the efficiency and effectiveness of our sales force by deploying advanced technologies and innovative sales management processes that we are developing internally. In fiscal year 2007 we had an average 39 people in our sales and implementation organization. In fiscal 2008 we had 57. Most significantly here is the ratio of revenue to sales people increased from $1.1 million in fiscal 2007 to $1.7 million in fiscal 2008.

Our sales and marketing expense as a percentage of revenue declined from 13.4% in fiscal 2007 to 10.9% in fiscal 2008. Clearly, we are getting fantastic leverage amongst our sales and implementation group. We continue to refine our sales methodologies, sales management processes, and training process and we are actively hiring new sales people. However, we are doing so in an intelligent manner so we do not compromise or sacrifice the efficiencies and effectiveness in the measures I just outlined.

We anticipate growing our sales force by as much as 50% in fiscal 2009 and this is a great economic environment to recruit in, given what’s going on in the rest of the economy. Our people do not need to be specialized engineers, they need to be hard-working, passionate sales people. Our regimented training program and methodologies will give them the skills to be successful. And we’re seeing a ramp-up time to full productivity in under three months being typical.

We also have a vibrant partner network to broaden our market coverage. We are actively educating our existing partners on our unique sales processes and methodologies to make their businesses more successful. We are also recruiting new partners that meet our specified criteria and follow our sales methodologies. Our partners are also assuming key responsibilities on project management and implementation activities on behalf of Orion in their given geographic markets.

In terms of revenue contribution, our partners, which include our VARs and other contractors, consisted of over 25% of our revenue in fiscal 2008 and we anticipate this percentage will increase in fiscal 2009. Growth of our VAR channel is largely attributable to the growth of our partner companies who are experiencing successes selling Orion technology using the Orion way. Some of our top VAR partners grew their businesses over 100% in fiscal 2008, selling our technology and using our prescribed sales methodology.

In addition to the VARs, fiscal 2008 witnessed the first full year of our contractor channel initiative. In fiscal 2008 we transacted business with over 270 contractors across the United States and Canada. Over 90% were on a reoccurring revenue basis with sales ranging from $5,000 to $500,000 for the year. We expect growth in this channel in fiscal 2009 as contractors look to capture growth through retrofit opportunities as new construction continues to decline. We have visibility on over 60,000 electrical contracting companies in our database and we are bullish on this segment of our partner network.

In our manufacturing operations, fiscal year 2008 witnessed major improvements in manufacturing, plant efficiencies and processes. Today we can support $250 million in annual top line revenue and we expect that capacity to easily support $500 million with modest additional capital investment.

We also have what we believe are the shortest lead times in the industry, averaging two weeks. Some of the key initiatives we have completed or totally reconfigured or manufacturing layout to improve throughput, install our new power cone line to address key production bottlenecks, as well as provide more customization options to our customers to further expand our product offerings.

We have an ongoing deployment of our custom inventory software to better manage work in process and finished goods inventory. In fiscal 2009 we installed and are now testing our new roll former which will improve our throughput exponentially.

At this point I would like to turn the call over to Dan to go over our financials in more detail.

Daniel J. Waibel

As Neal mentioned, we reported both strong top and bottom line growth during our fiscal 2008. Our reported revenues for fiscal 2008 were $80.7 million, which represents year-over-year growth of 67%. This growth was primarily driven by solid execution through our organization as well as a strong increase in the number of Phase 1 deployments during the year.

As we said last quarter, our Phase 1 products allow Orion to acquire new customers profitably and expand our install base. The growth we saw during fiscal 2008 clearly demonstrates that this is the right strategy for us going forward.

Additionally, our wireless intelite controls and Apollo Light Pipes give our sales people the edge when going head-to-head with our competitors. These technologies are evidence of Orion’s innovation and ability to provide a total energy efficiency solution.

Our gross margin for the year was 35%. That is up from 32.6% in the comparable prior year. Our gross profit increased $12.5 million to $28.2 million for fiscal 2008 compared to $15.7 million in fiscal 2007. This margin improvement was driven primarily by increased utilization of our manufacturing assets and increased profitability of our value-added services.

G&A expenses for fiscal 2008 were $10.2 million, or 12.6% of revenue versus the prior year of $6.2 million, or 12.8% of revenues. In the third quarter we incurred IPO compensation costs of $742,000 and in the fourth quarter we incurred approximately $800,000 in one-time G&A costs relating to the shareholder lawsuit, stock-based compensation expense and software development cost, which we do not expect to be in our G&A expenses going forward.

Sales and marketing expenses for the year ended March 31, 2008, were $8.8 million, or 10.9% of revenues, compared to $6.5 million, or 13.4% of revenues, in the prior year. This increase was primarily attributable to sales compensation expenses as well as increased marketing expenses for our grass roots marketing campaign.

R&D expenses for fiscal 2008 were $1.8 million, or 2.3% of revenues, up from $1.1 million, or 2.2% of revenues, in fiscal 2007 due to additional investments in ongoing product and service developments, primarily Phase 2 and Phase 3. Income from operations for the year ended March 31, 2008, was $7.4 million, or 9.1% of revenues, versus $2 million, or 4.1%, in the prior year.

Net interest expense for the year was $1.4 million versus $1 million in fiscal 2007. Our fully diluted earnings per share for fiscal 2008 were $0.19 on a weighted average fully diluted share base outstanding of 23.5 million. That compares favorably to $0.05 for the previous year based on a 16.4 million weighted average fully diluted shares outstanding. As of March 31, 2008, we had 26.9 million common shares outstanding. In addition to that we had warrants and options totaling 5.3 million shares.

In our fourth quarter of fiscal 2008 revenues increased 55% to $22.3 million compared to $14.3 million in the same period in the prior year. Gross margin for the fourth quarter was 36.2% versus 32.5% in the same period in 2007. G&A expenses for fiscal 2008 came in at $3.4 million, or 15.4% of revenue, versus the prior year of $1.9 million, or 13.6% of revenues.

Sales and marketing expenses for the quarter ended March 31, 2008, were $2.5 million, or 11.3% of revenues, compared to $1.8 million, or 12.5% of revenues, in the prior year. R&D expenses for the fourth quarter of fiscal 2008 were $498,000, or 2.2% of revenues, compared to $381,000, or 2.7% of revenues.

Income from operations in the fourth quarter was $1.6 million, or 7.2% of revenues, versus $549,000, or 3.8% of revenues, in the fourth quarter of fiscal 2007. Interest expense for the quarter was $118,000 versus $270,000 in the prior quarter.

Our fully diluted earnings per share for the quarter ended March 31, 2008, were $0.05 on a weighted average of fully diluted shares outstanding of 30.1 million shares. That favorably compares to $0.01 in the prior year based on 17 million shares fully diluted outstanding.

Turning to the balance sheet as of March 31, 2008, we had a total of $78.3 million in cash and cash equivalents on hand compared to $285,000 at the end of our fiscal year ended March 31, 2007. As I stated last quarter, the obvious reason for this increase was the completion of our initial public offering of December 2007, which generated $78.6 million of net proceeds for the company. We also received $10.6 million of proceeds from our convertible note issuance in August 2007, which was partially utilized to pay off a revolving credit borrowing.

We used about $1.4 million of cash in fiscal 2008 to fund operations. During the year our continuing investment in receivables and inventory were nearly offset by our cash flow from profitable growth.

We also invested approximately $5 million in capital expenditures, primarily to increase capacity in our plant as well as capabilities. Looking forward to fiscal 2009 we expect to incur approximately $7 million to complete our technology center and approximately $1 million to complete our implementation of our enterprise software solution.

With that I will turn the call back over to Neal to discuss our outlook for fiscal 2009.

Neal R. Verfuerth

I would like to conclude our remarks by discussing our outlook for fiscal 2009. Let me begin by reminding you that we manage business to drive long-term profitable and sustainable growth for Orion and its shareholders. Our business is customer-centric and as a result we look to ship our product as fast as we can to ensure that we continue to build and reinforce with very consistent will provide steady reoccurring revenue.

Historically, if you look at our revenue build across the year, we do about 55%-60% in the second half of the year. In fiscal 2009 we expect this percentage to be somewhat higher, primarily due to two reasons. Although we have good visibility on the revenue [inaudible] of our large customer rollouts in fiscal 2009 we have full confidence that this revenue will be realized this fiscal year and our conversations with these customers indicate that certain high-value projects will be initiated later this year.

As we indicated in our opening remarks, we continue to invest in our sales organization, taking advantage of the opportunities of the retrofit market. As a result, we expect to see the benefits of this initiative in the second half of the year.

We are reaffirming our previously issued statement that we anticipate 50% year-over-year revenue growth in fiscal year 2009.

I would now like to turn the call back to the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Prouty - Canaccord Adams.

Eric Prouty – Canaccord Adams

First of all, there was a little noise during the quarter about potential heavy discounting by you, especially at the end of the quarter. Was there a change in your AFPs or your selling or your discounting that you encountered during the quarter at all?

Neal R. Verfuerth

That was actually a promotion that we did with a special product for our contractor initiative. So that product, outside of our normal product offering and our AFPs and our margins are still going to be well within our target margin for everything else in the product line in that category.

Eric Prouty – Canaccord Adams

And also, any customer [inaudible] during the quarter? Many customers left that you are aware of, etc. of note?

Neal R. Verfuerth

Not to my knowledge. No customer losses.

Eric Prouty – Canaccord Adams

As you shift the sales model and start bringing in more of these partners, the VARs, the contractors, etc., will that change your gross margin profile as we move forward and there is a heavier mix from those type of people?

Daniel J. Waibel

As I think you are aware, on the gross margin side in our channels our margin is actually somewhat higher by 300 to 400 basis points in our wholesale side of our business so we don’t see any negative impact of that at all. As the business slowly shifts to an indirect or wholesale model.

Eric Prouty – Canaccord Adams

So only a potential positive impact from that?

Daniel J. Waibel

Yes.

Eric Prouty – Canaccord Adams

Going forward what would you anticipate the corporate tax rate to be?

Daniel J. Waibel

You will notice our annual rate came in at 38% for the year and I think that’s a good long-term tax rate.

Eric Prouty – Canaccord Adams

On the gross margin side, another nice improvement during this quarter, even with the little down tick in revenue. Assuming any improvements on the manufacturing side bringing up some of this new equipment, how much further can that gross margin expand from the 32.6% you put in in March?

Daniel J. Waibel

I think it will keep expanding. I can’t give you a specific guidance on it but we’ve been able to, all the levers we’ve been pulling with reconfiguring our manufacturing facility for better efficiencies as well as things we’re doing on the customer side to make sure that we’re getting appropriate value for the services that we’re providing to the customers, I think that trend will continue.

Eric Prouty – Canaccord Adams

On the G&A side, seems like a lot of one-timers during the quarters, so we would expect a decent sequential decrease in G&A come the June quarter?

Daniel J. Waibel

Yes. As I explained in the comments, we incurred about $800,000 during the fourth quarter. Based on my visibility into any thing we needed to change in the way we were doing things, those costs are not going to recur. The only question that may have some impact is any cost relating to the shareholder litigation.

Operator

Your next question comes from Jeff Osborne - Thomas Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

On the $800,000, it’s roughly worth $0.03 in EPS. Can you just talk about what the stock-based compensation was as a part of that? Because that would most likely be a recurring expense going forward. And then we can kind of get a handle on the other one-time events.

Daniel J. Waibel

The stock-based compensation expense, just in looking at it, based upon where the grant occurred, I can see that the expense as we go out into future quarters will decrease some. There are other things that are in that $800,000 relating to legal costs that are not related to the shareholder, there are more what I call compliance costs. They will be going down as well.

Jeff Osborne - Thomas Weisel Partners

Do you have a sense of what stock-base comp was, $300,000 to $400,000 this quarter?

Daniel J. Waibel

I will look that one up and if you come back in the queue I will have an answer for you by line item.

Jeff Osborne - Thomas Weisel Partners

You mentioned last quarter Coke had done about 141 of the 450 to 500 facilities they were looking at. I was just wondering if you could update us where your major customer is, or maybe they’re no longer your top customer, but just an update there would be helpful.

Daniel J. Waibel

CCE, for the fiscal year, ended up at 17% of our total consolidated revenues.

Jeff Osborne - Thomas Weisel Partners

Where are they in terms of facilities that they’ve done. I think you mentioned last quarter you mentioned 141 facilities.

Daniel J. Waibel

We believe that we are about 70% complete with Coca-Cola as it relates to Phase 1. And we have about 110 to 111 facilities left to go with them.

Jeff Osborne - Thomas Weisel Partners

And have they signed up for Phase 2 or the Light Pipe product?

Daniel J. Waibel

Maybe Neal can answer that question better, but I also want to make another point with Coca-Cola. We’re moving into Canada with them and we’re also doing some implementation with what we call Big Coke, or KL.

Neal R. Verfuerth

Yes, we have done some work with CCE as relates to the wireless devices and the Light Pipes and have had ongoing discussions as to how integrating these technologies into their facilities would help with their corporate green initiatives.

Jeff Osborne - Thomas Weisel Partners

Neal, you mentioned something about the roll former was put in place this fiscal year. Is it physically in place now or is that something you will be doing this fiscal year.

Neal R. Verfuerth

No, it’s there and up and running.

Jeff Osborne - Thomas Weisel Partners

Dan, could you possibly just share the services and product revenue and gross margin mix, if you have those figures?

Daniel J. Waibel

I do not have them right now, but come back in the queue and hopefully I will have them by then.

Jeff Osborne - Thomas Weisel Partners

There was a lot of chatter about discounting during the quarter so I was just curious if maybe you were more skewed toward services this quarter versus product and what kind of the trends were there. But I think we put that issue to rest.

Operator

Your next question comes from Jill Mastoloni - Catapult Partners.

Jill Mastoloni – Catapult Partners

Can you give a little more clarity on your balance sheet, what your inventories were and what your account receivables were this quarter?

Daniel J. Waibel

I am going to have to come back in the queue with the balance sheet.

Jill Mastoloni – Catapult Partners

Do you believe it’s grown quarter-over-quarter at least?

Daniel J. Waibel

I can give you some color without actually giving you the amounts. On the receivables portfolio, I think we’re carrying about $17 million of receivables and those levels will continue to grow. And I also believe that our inventory levels are probably around $17 million as well.

And the important thing to recognize, for us as a company, is because we’re delivering short lead times as it relates to inventory, we believe it’s very important to keep a fairly healthy dose of what I consider a work in profits in inventory and component inventory. And I believe part of what will happen, because of our plant reconfiguration, the inventory levels will start to come down on a percentage basis of our business.

Jill Mastoloni – Catapult Partners

So you anticipate your days in inventory to be in the 100 plus days, close to 120 days last quarter?

Daniel J. Waibel

Our goal is to have 90 days supply of component inventory on hand, so that roughly matches with what we’re experiencing.

Jill Mastoloni – Catapult Partners

And regarding your 2009 guidance, you stated that typically the second half is 60% but it appears as though this year will be more second half loaded. What would you equate that to? More like 70% to 80%? How can you define that more qualitatively?

Neal R. Verfuerth

We expect the second half of fiscal 2009 to be stronger than historical percentages. Exact percentages I just can’t say at this point. Because we have a lot of visibility with our customers and the opportunities that we’re now bringing to closure are significantly higher in value than they were historically in the company and because of the larger projects and more complexity in the roll out, there’s a lot more time and investment on the front end that goes into the planning process.

Initially we’re making investments in our sales and marketing, which we’re going to start seeing the return on both in the second half by continuing to maximize our off time and efficiency with our existing people, adding more people to the sales force, and making additional advances in building out our partner network.

Jill Mastoloni – Catapult Partners

Can you give color on EPS guidance for the year?

Daniel J. Waibel

It’s not our policy to provide guidance at the EPS level, as a company, just revenue.

Jill Mastoloni – Catapult Partners

Can you give a little color on the lockup? I believe that comes up in about a month. What your strategy there is to address that?

Daniel J. Waibel

Our lockup expires on June 16. I want everybody is a bit unique in that we don’t have one or two principal shareholders looking to potentially sell shares at our lockup expiration. We have more than 500 shareholders that actually helped us build the company.

Both our management and our Board are carefully evaluating what our options are to provide an orderly way for the sale of the stock during the lockup expiration. We haven’t made any decision on that and you will know when we do. We will communicate that.

And also, as a follow up, I will give you specific receivables numbers. They were roughly what I thought. Our receivables were about $17.6 million, reflects the growth of our business. And the continued investment we have with our customers. It’s a very good quality receivables portfolio. And then our inventory is at about $16.7 million, which is roughly what I thought it was, as well.

I am going to answer Jeff’s question, as well, so you don’t have to get back in the queue on that. On 123 our comp expense for Q4 in the line items of our P&L, manufacturing, our cost of sales $54,000; G&A was $287,000; sales and marketing is $108,000; and R&D was $13,000, for a total of $462,000.

Operator

Your next question comes from Sanjay Perry - Walker Smith Capital.

Sanjay Perry – Walker Smith Capital

Just a little more clarity on fiscal 2009. I just wanted to understand the back end a little bit. I guess you are talking to the customers now. Why are these customers going to install before the end of September and what is your level of confidence that that in fact happens.

Neal R. Verfuerth

We’re very confident in that just based on historical data and the conversations that have made these relationships to date. And again, our focus has been more in terms of much larger projects in overall sales dollars and footprint nationally. And again, there’s a higher level of complexity there and with bigger dollars the approval process through an organization is typically longer than what it was.

If you look at our sales last year, an average amount, we were looking at less than $100,000 per sale. And that number is growing significantly.

Sanjay Perry - Walker Smith Capital

We were talking to some people in the industry and I don’t know if this is an issue you are having, but there are some issues around ballasts that are breaking down and I’m wondering if you start to service that line, is it covered under the guarantee, are you giving customers, or how is that accounted for and what do you do about that for ballasts beginning to break?

Daniel J. Waibel

We defer everything as it relates to warranty over to General Electric.

Sanjay Perry - Walker Smith Capital

You’re saying General Electric picks up that warranty cost?

Daniel J. Waibel

They are our primary vendor for most of our ballasts. But essentially all the major manufacturers who we will use, with GE being our primary vendor, they are all the warranty expense for the ballasts for a full five years.

And through the warranty administration work that we do on behalf of our customers, with these OEM components, we haven’t seen any unusual ballast factors. And we’re pretty in tune with it because we had our own ballast problems with OEM components three or four years ago, so we know a problem when we see one. We haven’t seen anything with that.

And I think the important thing is that with what we do is we monitor and really are careful when we put our products into applications to make sure the heat doesn’t compromise the warranty even though it’s passed through from the manufacturer.

Sanjay Perry - Walker Smith Capital

You pre-announced the revenue, which was nice, but can you help us understand the lack of EPS guidance. You give pretty specific guidance around revenue, why the lack of EPS guidance?

You’re a new company, you’ve got out there on the Street covering the stock and obviously you’re looking for more coverage, so it’s hard to value the company on just revenue.

Daniel J. Waibel

The guidance we have given in the past on a more mature business was targeting margins of 18% to 20%, high teens, low twenties.

Sanjay Perry - Walker Smith Capital

I think you said that was probably 2011-2012, correct?

Daniel J. Waibel

It’s when we get, we’re north of $250 million in revenues.

Sanjay Perry - Walker Smith Capital

Are you comfortable with the Street estimates for fiscal 2009 of $0.37?

Daniel J. Waibel

I can’t comment on that.

Sanjay Perry - Walker Smith Capital

How many shares are coming up for lockup?

Daniel J. Waibel

We will have approximately 70% of our total fully diluted shares, common shares outstanding. But I also want to emphasize that, it’s 70% of 26 million shares.

Sanjay Perry - Walker Smith Capital

So about 18 million shares coming up.

Daniel J. Waibel

Just realize that about 30% of our outstanding shares are owned by directors and officers.

Sanjay Perry - Walker Smith Capital

Roadshow or secondary?

Neal R. Verfuerth

We haven’t made definitive plans on that. When we do we’ll let you know.

Sanjay Perry - Walker Smith Capital

In terms of the year, the way it plays out, you’re kind of giving us what you’re fiscal fourth quarter and obviously the big push here. Do we think about the second quarter, the June quarter, being down sequentially and the September quarter being down and we get a big wrap up in December and March? How do we think about those from a modeling standpoint? I know you talked about back half weighted, but on a quarterly basis how do we think about those?

Neal R. Verfuerth

We’re thinking about it on an annual basis. And depending on our historical data and where we see ourselves now, as we see it we’re actually right to plan and are very comfortable with the guidance we’ve given to the 50% top line sales for the year.

Operator

Your next question comes from Cory Armand - Rice-Voelker.

Cory Armand - Rice-Voelker

Obviously the industry is very fragmented as it relates to electrical contractors who may install your products that you could align yourself with on a value-added reseller basis. Are there any big fish out there that you can go after and that you’re in discussions with that could speed that process up?

Neal R. Verfuerth

We have numerous opportunities that we have that we’re considering, various channels, short term and long term. And I don’t think there’s any giant elephant out there that’s really got any dominant position beyond us in this market, to date.

Cory Armand - Rice-Voelker

The other question I had, as it relates to the Light Pipe, how is that going? Are your sales people doing a good job in grasping the concept and are they excited about it? Is it something you’re getting traction with?

Neal R. Verfuerth

Yes. But primarily what it does is it positions us as an energy player and creates sustainable differentiation in our overall product offering and our story to our customers. And we have modeled, really, very little revenue until the fiscal year 2010 for the Light Pipe technology.

Cory Armand - Rice-Voelker

And so for 2010, just order of magnitude, what percentage do you think that could be, of the overall? Is there anything that you could throw out there in terms of your expectation?

Neal R. Verfuerth

We haven’t really gotten into that level of modeling on our product-by-product basis. I really don’t want to comment right now.

We’ve been out there with this device seeding the clouds for future sales recognizing that it takes time to build up a market for this as well as using this time to develop a repeatable sales process. We do want to go forward with this thing. We’ve got to systemize it.

Cory Armand - Rice-Voelker

And would you anticipate that the margins in that would be comparable to the margins the business is achieving right now?

Neal R. Verfuerth

Yes. We have target margins that we look to maintain throughout all product categories, especially, as you might guess with any company, a new product, generally you’re going to have greater margins as you’re going out in the market. So, we don’t see things changing from that being our everyday strategy here.

Cory Armand - Rice-Voelker

Are there a greater proportion of your sales that has the wireless technology bundled into it now? Is that percentage growing? That Phase 2 is integrated with Phase 1?

Neal R. Verfuerth

Really one at a time is what we’re seeing out there. We’ve had some, and we’re getting some good traction out there, but many times we will sit down with a customer and really try to take them through the process and many times, quite frankly, discourage even looking at too much at one time so that it doesn’t slow down the decision making process for Phase 1. The primary objective is to get Phase 1 installed and acquire that customer and that square footage.

Operator

Your next question comes from George Gasper - Robert W. Baird.

George Gasper - Robert W. Baird

Could you talk a little bit about carbon credit sales that were generated from the revenue placements in the past year and how do you see this carbon credit generation as you’re moving forward into the year here and what kind of volume could that represent?

Daniel J. Waibel

I just want to clarify, in February we announced that we had completed our first emissions trade, our CO2 trade on the Chicago Climate Exchange. That was based on reductions that we measured and verified from our energy efficiency solutions.

The best way I could characterize where we’re at with that is we’re really evaluating right now the best measurement verification protocols, as well as the highest quality markets. And by highest quality markets I mean that we want to make sure, since we have the highest quality emission reductions, that we’re getting full value for those in the marketplace. And that we’re permanently changing reductions, are permanently changing the facility and the energy consumption.

And we want to monetize those for both our account in those number of cases where we actually have emissions right, or on our customers’ behalf. And we think as the legislative landscape, and the political landscape, gets more defined, because of our thought leadership, we think we’ll be pretty well positioned to move forward on this opportunity.

George Gasper - Robert W. Baird

And then one question on potential expansion. We heard what you said about what you thought your capacities were. Do you envision a manufacturing facility being established outside of Wisconsin going forward any time soon?

Neal R. Verfuerth

No. We don’t have any plans now or in the foreseeable future to expand our manufacturing. Given where we are geographically, it makes it very efficient to ship any where in the continental U.S. or Canada right here from Manitowoc.

Operator

Your next question is a follow up from Jeff Osborne - Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

One question about the second half. I believe during the quarter you got underwriter certification for a market for the brewery market and beverage industry. Is that something that you’ve received some orders for that maybe you’re rolling out in the back half of the year?

Neal R. Verfuerth

Yes. Absolutely. We’ve gotten the, not only the parallel path, we’ve gotten the UL approvals that we needed and then all the testing as well as had ongoing tests going on in our customer facilities and have done quite well in all their internal testing.

Jeff Osborne - Thomas Weisel Partners

Any customers there that you’re willing to name?

Neal R. Verfuerth

Not until we have the business locked down.

Jeff Osborne - Thomas Weisel Partners

Should we think about that product being a higher margin business, just since it’s somewhat specialized?

Neal R. Verfuerth

It will be within the framework of our target margins as we do with most of our product categories.

Operator

That is all the time we have for questions today. That will conclude our conference.

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