Good morning, welcome to the Orion Energy Systems Fiscal 2023 third quarter conference call. At this time, all participants on the listen-only mode. After prepared remarks, we will conduct a question-and-answer session. Today's conference is being recorded. I would now like to turn the call over to Bill Jones, Investor Relations.
Thank you. Good morning. Mike Jenkins, Orion's CEO, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's CFO, will then review the company's Q3 and year-to-date results, financial position and other matters. We will take investor questions. A replay of the call will be posted to the Investor Relations section of Orion's website at orionlighting.com. Remarks that follow and answers to questions may include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives, goals, and the business outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently expected.
Such risks include, among other matters that the company has described in its press release issued this morning and in its SEC filings. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today's press release and available in the investor relations section of Orion's website. I'll turn the call over to Mike Jenkins. Mike.
Thank you, Bill. Good morning, everyone, and thank you all for joining our call today. As previewed in January, our third quarter results continued to reflect the impact of customer delays in the initiation of several large LED lighting projects. Specifically, the previously announced $4 million+ project for a long-time automotive customer started more slowly than anticipated in Q3, but is now accelerating in Q4, and the start of a $9 million Department of Defense project shifted from third quarter of this year into first quarter of 2024. As mentioned previously, these projects are fully- booked, and we look forward to their full activation and completion. We also saw some softness in our electrical contractor distribution channel, which seems largely due to the softening economic environment. We also experienced a modest decrease in contribution from our energy service company or ESCO channel in the quarter.
The ESCO softness is more related to project timing as longer-term opportunities continue to gain traction in this channel, which is focused on delivering both environmental and energy- efficiency benefits to end customers. We have been working hard with our ESCO partners and have built a strong pipeline of opportunities that should drive significant positive growth in fiscal year 2024. Offsetting these factors was a better than expected contribution from our new EV- charging solutions business and steady growth in our maintenance services business, largely due to the two acquisitions we completed over the past 12 months. We reiterate our fiscal- 2023 revenue guidance for the balance of the year and reconfirmed our outlook for revenue growth of at least 30% in fiscal- 2024.
Our fiscal -2024 outlook reflects a growing array of significant retail, logistics, public sector and automotive projects in our LED- lighting pipeline, as well as strong growth in our EV- charging solutions and electrical- maintenance- services business. We plan to provide more color on our 2024 outlook in early June when we report year-end results. Overall, we are seeing growing interest in our expanded array of products and services that meet rising demand for energy savings, environmental benefits, safety, workplace and efficiency enhancements, and improved customer experiences. We are pleased with the reaction from our customers on our growing value proposition of multiple platforms that help our customers with their energy and carbon- footprint reduction goals.
Leveraging our unique turnkey design, build, install and maintenance solutions, along with industry-leading customer service, we are able to deliver substantial value, particularly to large or regional organizations that manage hundreds and sometimes thousands of locations. These characteristics provide Orion a unique competitive advantage that creates complementary paths to growth, both by expanding the base of customers we serve and the array of solutions we are able to offer. To lead our internal sales efforts, we recently recruited a new Executive Vice President of Sales, Ken Poole, from outside the lighting industry. As we continue to evolve as an organization, we are focused on building greater value for our customers through expanded product and solution offerings, coupled with execution models to best meet their needs.
We have talked about the strategic value that ESCOs bring to Orion, and Ken comes to us from a Super ESCO and understands the world of project business. He is also very familiar with multiple go-to-market models, and his sales management acumen will be an important asset supporting our future growth strategies. While our history has been in lighting, we have expanded into new complementary areas, including electrical- and lighting- maintenance services and electric- vehicle- charging solutions. We believe that our competitive advantage in customer service and turnkey project management complement these new businesses. We know from direct experience that many of our customers have specific interest in one or more of these areas, and therefore they build on our customers for life commitment.
We work to educate our customers on the total cost of ownership of lighting and other energy systems so that they can truly appreciate the substantial long-term ROI advantages and reduction in CO2 emissions provided by Orion's high-quality, energy-efficient products. We have three primary paths to market, which include our ESCO channel with partners who focus on delivering energy efficiency benefits to their customers. ESCOs value the industry-leading energy efficiency and high- quality and reliability of our LED fixtures made with the highest quality components. Second, we serve the electrical contractor channel, providing a range of lighting solutions to meet a variety of needs and price points with a focus on new construction and agricultural markets in their local geographic areas.
We have our national account group that is focused on developing long-term relationships with major national and regional customers across a range of industries and helping them to address their complex lighting, IoT solutions, maintenance, or EV- charging needs. To differentiate ourselves in adding value for these large enterprises, we are developing turnkey capabilities for executing lighting- maintenance and EV- charging solutions from start to finish, all from one centralized Orion point of contact and accountability. True turnkey solutions are highly complex to execute as they involve input and coordination across the entire organization, from initial site audits to design and planning to product development and customization to product manufacturing in our facility in Wisconsin through to shipping and on-site installation and system commissioning in hundreds or even thousands of customer locations. We also offer customers ongoing- lighting and light- electrical maintenance support tailored to their unique needs.
Turning to our new growth opportunity in EV- charging solutions. The electrical vehicle market is a high- growth area with EVs expected to become nearly a quarter of new vehicle sales by 2025 and continue to grow from there. This trend is generating demand for EV- charging stations at stores, businesses, schools, offices, housing complexes, healthcare, and other facilities. The ability to charge your electric vehicle will become an increasingly important component of high- quality customer experience for many and also important to attract and retain employees and visitors. $5 billion in federal and state funding under the National Electric Vehicle Infrastructure, or NEVI Act, has been authorized to support EV adoption and infrastructure over the next five years, and many states are also supporting EVs in addition.
For example, in Massachusetts, the Utility Commission recently approved approximately $400 million in funding over the next four years to support EV-related infrastructure. Other states are reviewing and implementing similar programs in addition to the NEVI funds. Our Voltrek subsidiary is well positioned to benefit from these and other project funding sources. We are currently working to integrate Voltrek solutions into our organization and adding personnel and infrastructure to expand their reach. This includes building out a nationwide group of qualified electrical contractors to execute EV- charging installations or broader- rollouts for larger organizations. We recently announced a significant project providing Level 3 DC fast charge infrastructure for an electric school bus pilot program in Massachusetts. This project is broken into phases, and we announced the commencement of the first phase to support charging systems for 20 buses out of a fleet of a possible 145.
The first phase of this project should provide Orion revenue of approximately $1.5 million. To support our growing base of product and service revenues or service offerings, we launched a new website in December. The objective was to enhance the site's value and ease of use for customers and partners. Initial feedback has been good, and we are already seeing higher- overall website traffic and more targeted lead generation benefits from the overhaul. We encourage all of you to check it out. Before I turn the call over to Per, I wanted to make it clear to our shareholders that despite an anticipated $50 million year-over-year decline in our business from our largest customer and online retailer through the first nine months of fiscal 2023, the balance of Orion's business grew by approximately 9% year-to-date and 5% in quarter three over the prior year periods.
Our EV- charging segment is off to a terrific start in its first quarter, contributing to our results, and our maintenance business remains on pace with our prior growth expectations. This confirms that the investments we are making to diversify and grow our business are working, though we are still in the early stages of integrating the new businesses and building out systems, management, sales and marketing, and cross-selling initiatives. We expect these segments will represent a significant portion of Orion's revenue moving forward in fiscal 2024 and beyond, both with project work as well as a growing base of recurring maintenance revenue.
We look forward to continued progress sourcing significant projects in our national account business, though the timing of these larger projects can be impacted by customer variables or other factors outside of our control. We continue to build out our base of productive ESCO partners and a pipeline of new product sales opportunities, including a few seven- and eight-figure opportunities, some of which we expect to initiate in the first half of fiscal 2024. Reflecting these factors, we are excited about our growth prospects for the next several years. Now I will pass the call to Per Brodin to discuss our financials and specifics of our financial outlook for the balance of fiscal 2023 and 2024. Per?
Thank you, Mike. Fiscal 2023 third quarter revenue was $20.3 million, versus $30.7 million in Q3 2022 and $17.6 million in Q2 2023. Through the first nine months of fiscal 2023, revenue was $55.8 million, versus $102.3 million in the prior year period. As previously discussed, the current year has been largely impacted by the wind-down of the multiyear project with our largest customer, which had an $11 million impact on the third quarter. As Mike mentioned, excluding revenue from our largest customer and a large global online retailer, year-to-date revenue increased 9% over the comparable prior year period, reflecting our success in diversifying the growth drivers of our business.
Our gross profit percentage decreased to 23.6% in Q3 2023, compared to 24.9% in Q3 2022 and 25.3% in Q2 2023. The decrease principally reflects lower absorption of overhead costs on reduced revenue and a higher mix of service revenue, which operates at lower margins. Gross margin for our EV business outperformed the overall average. Third quarter fiscal 2023 operating expenses were $9.4 million versus $6.3 million in the year ago period. The increase was principally because of $1.9 million of acquisition costs and higher general and administrative expenses associated with the inclusion of the Voltrek and Stay-Lite businesses in our results this year. The acquisition costs incurred in Q3 include $1.5 million toward the accrual of the Voltrek earn-out and transaction costs associated with the Voltrek deal closing.
Orion reported a net loss of $24.1 million or $0.75 per share in Q3 2023, compared to net income of $1.1 million or $0.04 per share in Q3 2022, primarily due to our establishing a valuation allowance against the company's deferred tax assets. Orion recorded the valuation allowance because we are now projecting a 36-month cumulative taxable loss through March 31, 2023, which requires the recording of this reserve. This non-cash entry does not impact our ability to offset future taxable income through existing NOLs. However, it will result in effective income tax provision rates that do not reflect statutory rates. Importantly, cash flow from operations was $1.3 million in Q3 2023, reflecting a benefit from the timing of accounts payable and accrued expenses, partially offset by other working capital items.
As of quarter- end, net working capital was $24.5 million, including inventory investments of $19.3 million, which includes finished goods associated with our large automotive project, the addition of Voltrek inventory, and the balance of inventory intended to support product- sales volume increases in the coming quarters. Orion had quarter-end liquidity of $19.4 million, including cash of $8.1 million and $11.3 million of availability on our credit facility. This compares with $23.7 million of liquidity at the end of Q2 2023, prior to the funding of the Voltrek acquisition. As of the close of the third quarter, we had $5 million drawn on our revolving debt facility, the proceeds of which were used to fund the Voltrek acquisition. As you review our 10-Q, you will note that we have begun reporting Voltrek as a separate segment.
Please note that the earnings reflected in that segment data include the allocation of some corporate overhead costs that are not incremental to Orion. The Voltrek business was EBITDA positive excluding those allocations. Turning to our outlook, we expect further sequential revenue growth in Q4 2023, which would result in our strongest revenue quarter of the year. Accordingly, we have reiterated our fiscal 2023 revenue outlook of between $77 million and $80 million. While we expect an overall use of cash in Q4, we believe our cash and liquidity position will remain healthy at year-end, providing us a solid position to support growth initiatives across the business in fiscal 2024. As for M&A, while we continue to develop a pipeline of future opportunities, our near-term focus is on integrating our recent acquisitions, ensuring their success, and investing in internal- growth initiatives.
With that, I'll turn it back to the operator for the Q&A session.
Thank you. If you would like to ask a question, please press star one one on your telephones. We ask that you limit yourself to three questions. One moment while I compile the Q&A roster. Our first question is coming from Eric Stine of Craig-Hallum. Your line is open.
Hi, Mike, Hi, Per.
Hello.
Hey, Eric.
Hello. I think I'm gonna focus on Voltrek here for my three, but, you know, maybe first, could you just provide more color on the build-out there, you know, sales and service, infrastructure, you know, maybe the timing and milestones we should look for? When do you think you will have that in place and have the appropriate market reach that you're looking for?
Great question, Eric. We're actively working on that now, as we're adding to the team as we speak. In our budget for this coming year, we certainly plan to continue that and accelerate that. I would say that we look to be at a different level of capacity, probably somewhere around by certainly the second quarter of our fiscal year, be fully active in cross-selling activities at that time.
Got it. Then maybe a follow-up. I mean, when you, when you think about how Voltrek plays out, how do you see the end- market breaking down? I know your first award or at least the one that you have announced is an Electric School Bus Pilot Program. I also know that, you know, specifically, some of your national account customers really were kind of pushing you to get into this area or very interested in you getting in this area. I mean, do you think this is more on the School Bus side? Do you expect it to be more national accounts? Or how should that play out going forward?
Yeah, another good question. I would say all of the above. Voltrek has got great momentum right now with a lot of municipal work, fleet work, which the bus project is an example really of both, government as well as, fleet. We plan to expand that. As I referenced earlier in terms of the cross-selling, that's really where we get the leverage and the synergy from our existing base of customers. Again, all of them really are considering at this point their strategy for EV moving forward because it is such a large, megatrend in the U.S. right now.
Got it. I guess last one would just be, obviously, you mentioned the significant funding that's out there. You know, just curious steps you're taking, you know, to make sure that you're involved, you know, you're part of that funding, you know, and I don't know if there are steps you're able to take, but if there are, it'd be great to get some color?
Sure, sure. I would say that's part of the infrastructure that we're further building out. I mean, Voltrek has been very strong and understands the processes well to access those types of funds. Certainly, as we look to scale the business, we'll be adding resources in that area as well.
Maybe a little more color for you, Eric. You know, that comment we made about the funding in Massachusetts, you know, was in the backyard of Voltrek, so they're very tied into that piece of it. Then on a federal basis, we're obviously continuing to look at that, as Mike said.
Okay, thank you.
Thanks.
Thanks.
Thank you. One moment while we prepare for the next question. Our next question will be coming from Alex Rygiel of B. Riley. Your line is open.
Thank you. Good morning, gentlemen.
Hey, Alex.
Hey, Alex.
A couple of quick questions here. Any way to quantify the EV- charging station backlog or pipeline or sort of market/bidding opportunities that you see in the intermediate- term?
I'd say nothing specific at this point. I think maybe the best way to think about it, just, you know, for some context, is when we announced the Voltrek deal in October, we said we expected them to do about $3 million-$5 million of revenue in the second half of the year. On today's call, we've said that, you know, they've essentially exceeded our expectations in the third quarter, coming in at about $2.8 million of revenue. You know, we expect them to continue to operate at that level and above. They'll be exiting the year at a nice rate. Given the infrastructure that we're adding, we expect to see significant growth above that in the coming year.
That's excellent. Also as it relates to your ESCO business, any way to kind of frame the size of that business today or what the backlog or pipeline opportunities could look like over the intermediate- term?
As I referenced in the call, we have been working very hard with our ESCO partners and have a number of very large projects in the pipe. Those projects are in the seven- to possibly eight-figure range that will initiate in the first half of next year. In terms of total backlog or total pipe, we don't really share that, but I can tell you that what we're seeing is a growing pipeline on a year-over-year basis with some very large projects.
Very helpful. Thank you very much, gentlemen.
Thank you.
Thank you. If you would like to ask a question, please press star one one on your telephone. Please limit yourself to three questions. If you would like to ask more than three questions, we ask that you re-prompt for Q&A. One moment while we compile the Q&A roster. The next question is coming from Andrew Shapiro of Lawndale. Your line is open.
Hi. Thank you. Several questions. I'll ask my three and get back in line. Regarding your large customer, I think it's Home Depot, but, you know, it goes unmentioned. When does the decline from this customer anniversary, and what are the prospects of a return of some of the business? Were these deferrals of needed improvements and conversions for them? Was it saturation and completion of the roadmap, or was it lost market share to a competitor?
Andrew, I'd say that we are pretty much at the point of an-having anniversaried that project. The project was a discrete project, you know, with multiple components that involved the retrofit of their, you know, the majority of their retail outlets, the indoor lighting for those retail outlets. We've accomplished that, and I think as we've said on previous calls that there are additional projects that we continue to do for them, and we also are doing maintenance work for the company, for that customer. We expect them to be a significant customer in the future. We think that, and have said that they may be in the $20 million- range per year in the next several years. That's a little bit of context to where they are.
It's, you know, not that necessarily any work went away, it's that it was a, you know, very defined program to retrofit the indoor lighting in their stores.
Right.
That's been done.
It's kind of a saturation of and completion of the project.
Absolutely.
ongoing relationship
Yep.
Business.
Okay.
Yep.
Second question is on the revenue delays that you refer to. Can you provide a little more context or color on the delays in the DoD and automotive industry projects? Are they the same causes? It sounds like they might not be. What are those causes or what are the big issues in each?
Sure. On the automotive front, it was really around project timing. We work with this automotive company. We work with a lot of their labor, and so it's a jointly scheduled, and those schedules, there were some conflicts in it on their side, and so that caused some delays. It was not related to any macro factors outside of their own dynamics around their labor. On the DoD side, this is a very large, complicated project. We are part of a broader project on this for the Department of Defense, and that overall project has experienced some delays. Again,
Right.
It's just, the dynamics that are unique to that situation.
You're a subcontractor on a, on a, on a bigger project, yeah.
That is correct.
Okay.
That is correct. Yep.
Okay. I don't know if that's completed my three. I do have other questions. I'll back into the queue if you need me to.
Sure. Okay.
Thank you. One moment while we prepare for the next question. The next question is coming from Amit Dayal of H.C. Wainwright. Your line is open.
Thank you. Good morning, guys.
Hey, Amit.
Hey. With respect to Voltrek, you know, now that you've run that business for a few months, Mike, how should we think about, you know, the potential operating leverage? You did mention, you know, you have some synergies and leverage opportunities on the customer side. On the operating side, you know, how should we think about, you know, operating leverage for that business?
Well, I think, you know, clearly, you know, this is an investment year for us. We're investing heavily in the business. We still think it'll be a EBITDA positive business this year. We think we're looking for it to rapidly scale. As we continue to look out in the horizon, we'll start getting more and more operating, you know, fixed cost leverage as we move forward and continue to grow the top line.
Okay. You know, does the EV- charging opportunity now expose you to opportunities in storage, et cetera, as well? Or are you not sort of entering or not looking to enter that, you know, segment?
We're not actively in that segment now. It is definitely a tangential area and could be part of a broader solution. It may, you know, it's something for us to look at as we move forward.
Just last one from me. I, is there any inventory, et cetera, that you guys are sitting on related to the DoD and auto project pushouts?
There is some I mentioned in my remarks, Amit, that there is a fair amount of inventory for the DoD project, the way that project, I'm sorry, the automotive project, that project is underway. The way that project works is that we actually recognize revenue associated with the service over time, but some of the product does not get recognized until later in the project. There is over $1 million of inventory just on the books for that project that hasn't yet been recognized as revenue and cost of sales. That's one piece of it. Another piece I mentioned is there is the Voltrek inventory that was added in the current year.
You will see in the 10-Q where you'll see the opening balance sheet broken out for you in that footnote, the acquisition footnote, that when we acquired Voltrek, they had about $880,000 of inventory. We don't separately disclose the 12/31 balance, but that'll give you at least some context of magnitude for inventory in that business. There's not meaningful inventory on hand for the DoD project at this time.
Okay. Understood. Thank you for that.
Thank you. One moment while we prepare for the next question. We have follow-up questions coming from Andrew Shapiro of Lawndale. Your line is open.
Oh, hi. I didn't know if you had said my name. You cut out. A little follow-up on that DoD question. Your DoD project, is it one of your first as a subcontractor for the DoD? Is there a potential pipeline of additional projects, you know, to come based on whatever theme that is driving this DoD project?
Great, great question, Andrew. Yeah. No, this is not our first project, working for the DoD, and we are working with, what we call a Super ESCO, who has the prime contract, and then we're a sub. We have worked with this Super ESCO on other DoD projects. There are some others that are in the pipe, that we're working with other, Super ESCOs as well. That's really one of our core models of working with the DoD, is working with ESCO partners. Which is...
Okay. Go on. I'm sorry. I didn't mean to cut you off.
Yeah, I was just gonna clarify. We do occasionally and have historically done some work direct. We do have the ability to work direct on government contracts. Some we do direct, some we do as a sub. Yeah, we have a GSA.
Okay. Some questions around the Voltrek acquisition and of forecasts, supplementing what others have asked here. You have a bunch of costs that are in this quarter's results that you've called out to be part of the having acquired Voltrek. Of the cost that you have there that you called out, about how much or what's the range in dollar value of those expenses in the quarter that you would consider one- time related to the acquisition rather than an incremental, you know, ramp-up that are our ongoing expenses?
I'd say the high-level way to think about the items we put in the acquisition-related cost line are things that we don't believe are part or related to the ongoing operations of Voltrek. It's either part of closing the deal, which is the majority of the costs incurred away from the earn-out accrual in this third quarter. So the parts, you know, anything that relates to their ongoing operations would not be included in that line, but would be related to closing the transaction, accruing the earn-out or, you know, some integration costs, which are not a big portion of that. Just to clarify one thing, for the audience on the earn-out, the $1.5 million we accrued in the third quarter.
You know, if their performance continues at the level it is, we would expect to record an additional $1.5 million accrual in the fourth quarter of our fiscal year. Then the expectation would be that that would be paid sometime mid- to- late summer.
Okay. To be clear then, it sounds like the whole line item that you've broken out and called acquisition costs, those are all one-timers.
I would say yes with the caveat that some accountants would argue about the definition of one- time.
Okay. All right. On that earn-out, is the maximum earn-out $3 million?
Within this current fiscal year, correct.
Okay. How many additional years is there an earn-out measurement and subsequent payments?
It's a three-year earn-out. This would be year one and ending at the end of our fiscal year for the 1st year. As I've indicated, I believe if we continue on the pace we're on, we believe that will be earned.
Uh-huh.
The second year is, again, the next fiscal year, and then there's a third year, in what will be our fiscal 2026. I'm sorry. Fiscal 2025.
How, and how much is the maximum to pay in each of those, the next two years?
There's three years current year, $3.5 million in the second year, and $4 million in the third year. There's also a cumulative kicker at the end of the third year, under which you could earn an additional $4 million, up to an additional $4 million.
Okay. The test for paying these, is it based on revenues, EBITDA, EBIT? What's the metric?
It's an EBITDA metric.
Okay. You're adding a bunch of people to build out the sales and service infrastructure required to extend Voltrek reach across the U.S. from its current focus in the Northeast, as your quote is. This people hire, is this primarily internal and fixed cost or outsourced and variable?
Well, it's a combination of both. You know, we execute the model through independent contractors in terms of site installation, but the internal resources are really on the project management side, the sourcing of opportunities and then the project management side of the business.
Okay. Are all of those costs then allocable towards the Voltrek side of the house and built into then the measurement of the EBITDA?
That is correct.
Okay, excellent. The other costs, that are referred to here, are these like one-time investment costs or most of them ongoing and fixed costs?
I'm sorry, I didn't quite follow that question. Could you repeat that?
I think in the text of your press release and in your script, you refer to people and other costs. The other costs that are being incurred to build things out and the infrastructure out, are they, you know, one-time shots maybe capitalized, or are they ongoing and fixed costs?
Yeah. This is predominantly adding staff and people to do the work that I just spoke about on the sourcing and the project management side. The infrastructures, any infrastructure expense is relatively minimal.
Okay, great. Thank you. I'll back out.
Okay, thank you.
That concludes today's Q&A session. At this time, I would like to turn the call back to Mike Jenkins for closing remarks.
Great. Thank you, operator. As many of you know, today marks my first time with this call as CEO. I certainly look forward to meeting and engaging with all of you and our other stakeholders in the coming months and quarters as we execute our growth plan. If you have any questions or comments in the interim or would like to schedule a call with management, please contact our IR team, whose information is included on today's press release. Thank you all again for joining us today, and we look forward to talking to you soon.
This concludes today's conference call. Thank you all for joining, and enjoy the rest of your day.