Orion Energy Systems Inc

NASDAQ:OESX

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Good morning, everyone, and welcome to Orion Energy Systems Fiscal 2025 First Quarter Conference Call. [Operator Instructions]. I will now turn the call over to Bill Jones, Investor Relations, to begin.

[Bill Jones, executive]

Thank you, Alex, and good morning to everyone, and thank you for joining this call. Mike Jenkins, Orion's CEO; and Per Brodin, Orion's CFO, will review the company's Q1 results, its financial position and its fiscal 2025 outlook in their prepared remarks, and then we will open the call to investor questions. Today's conference call is being recorded, and a replay will be posted in the Investors section of Orion's corporate website, orionlighting.com.



As a reminder, remarks and answers to questions that follow include statements, which are forward-looking for the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally include such words as anticipate, believe, expect, project or similar words. Also any statements describing future targets and goals, company plans or its outlook are also forward-looking. Such forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other factors, matters that Orion has described in its press release issued this morning as well as in its filings with the SEC. Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today's date. Reconciliations of certain non-GAAP financial metrics to their closest GAAP measures are also provided in today's press release. Now I'll turn the call over to Orion's CEO, Mr. Mike Jenkins.

[Michael Jenkins, executive]

Thanks, Bill. Good morning, and thank you all for joining our call today. It's been 2 months since our year-end call, and the first quarter was in line with expectations. So I'll keep my comments relatively brief and leave more time for questions. Orion's revenue momentum continued with 13% growth in the first quarter, driven principally by strength in our EV charging system installation business. We expect positive momentum to continue across the company in fiscal '25 as reflected in our full year outlook targeting 10% to 15% revenue growth. The bright spot in Q1 was obviously in our EV charging segment. Recall that fiscal '24 was the first year of ultra operations within Orion.



Having built our teams resources, capabilities and geographic reach last year, our EV installation platform is well positioned to meet the needs of large customers across the country. We saw the benefits of our EV charging investments in Q1 as revenue grew over 200% to $3.8 million. Our EV charging Q1 performance was positively impacted by the activation of construction contracts to install Level 2 and Level 3 charging stations for Eversource Energy's "EV Make Ready" program. We secured over $11 million of contracts for Eversource customers through this program. The projects are slated for completion this fiscal year, contributing to our fiscal '25 growth outlook.



In addition, Voltrek has developed a solid pipeline of larger opportunities that now totals over $45 million. Of course, we've got to convert those opportunities into deals, but we are very encouraged by our business development momentum. Voltrek has deep expertise and a track record of successful EV charging installations over more than a decade. This experience puts us in a very strong position to compete for large national and regional EV infrastructure projects. There is also significant federal funding being made available to drive the needed infrastructure catch-up to properly support the growing base of electrical vehicles.



In LED lighting solutions, we achieved modest growth in Q1 '25 and continue to expect LED lighting segment growth in fiscal '25, supported by major account projects as well as demand from ESCO and distribution partners. Q1 included revenue from our Department of Defense LED retrofit project in Europe, which we completed in the quarter. Orion was brought into this project by a global super ESCO that often utilizes Orion as their lighting partner. Our team did an excellent job on this large and complex project, showcasing our superior project execution capabilities with the added hurdle of working overseas. We are hopeful that our performance could lead to other large projects with this partner in the near future. For the balance of 2025, we expect growth in LED lighting to be driven by a rebound in activity from long-standing automotive customers after limited project activity in fiscal '24.



We also anticipate strong opportunities in the public sector, growth in logistics and warehousing and the initiation of projects in the technology, retail and government sectors that have been in the planning stages for over a year. We also anticipate ongoing LED lighting projects from our largest customer in addition to their utilization of our maintenance services. We are also working to drive continued growth in lighting product sales within our ESCO and electrical contractor distribution channels. These channels have responded well to our expanded line of TritonPro High Bay and Harris exterior fixtures that were specifically developed to meet their needs for high-quality, energy-efficient LED fixtures that are value priced.



We continue to see solid growth in quoting and actual sales of these product lines. We also expect LED lighting demand to benefit from state regulations banning the sale of fluorescent fixtures and their replacement tubes. 7 states, including California, have approved such regulations, which begin to go into effect in calendar 2025, with other states expected to follow suit. As the deadlines draw closer, we are starting to see customers increasing their attention in this area and begin to develop plans for compliance. We have also been successful in using the regulatory time line to initiate new customer dialogues and expect to see projects related to these bands begin in the second half of our fiscal '25 and accelerate into fiscal '26 and beyond.



Turning to our Maintenance Services segment. As anticipated, Maintenance Services revenue declined 11% in Q1 '25 to $3.3 million. The top line performance reflects the impact of 3 legacy Stay-Lite customers that chose not to renew long-term contracts following our price increases. The price adjustments were required to return the segment to appropriate levels of profitability following a variety of inflationary factors that have impacted the business over the past 2 years. Importantly, our objective of returning this business to a suitable gross profit is proving successful. Our quarter 125 gross profit percentage increased to a positive 3.8% from a negative 1.4% in the year prior, and we anticipate further strengthening as we progress through 2025.



Given our outlook and Q1 '25 performance, we have reiterated our fiscal '25 revenue growth target of 10% to 15% or total revenue of between $100 million and $104 million. This outlook is based on anticipated robust growth in EV charging station revenue as well as expected revenue growth in LED lighting solutions. We anticipate large national LED lighting projects for customers across a wide range of sectors, including automotive, retail, technology, logistics and distribution, banking and the public sector. We also anticipate growth in our ESCO and agent channels driven by an expanded focus on new high-quality, energy-efficient value-priced LED products. We continue to expect fiscal '25 revenue to be significantly weighted to the second half of the year as it was in fiscal '24 and subject to the timing of larger projects. We also expect to finish fiscal '25 with positive adjusted EBITDA. Let me now pass the call to our CFO, Per Brodin, to provide more details on our financial performance for Q1.

[John Brodin, executive]

Thanks, Mike. Q1 ‘25 revenue rose 13% to $19.9 million. The quarter benefited particularly from the activation of EV charging stations construction activity for customers of Eversource Energy. Our Lighting segment continued to benefit from the completion of an approximately $9 million Department of Defense retrofit project in Europe. $1.9 million of revenue was recognized for this project in Q1 '25. As expected, maintenance segment revenue declined in Q1 '25 due to 3 unprofitable legacy Stay-Lite contracts that did not renew following planned price increases from Orion. Offsetting this impact somewhat was the 3-year preventative lighting maintenance service contract for our largest customer's 2,000 retail locations.



Longer term, we see the potential for growth with other current customers on the maintenance side to mitigate some of the lost revenue from the lapsed unprofitable legacy contracts. Importantly, our actions are turning around the profitability of this business. For the company as a whole, our gross profit percentage or gross margin improved 360 basis points to 21.6% in Q1 '25 versus 18% in Q1 '24, reflecting the benefit of pricing increases and termination of negative margin contracts in our Maintenance segment improvement in LED lighting product margins as well as improved fixed cost absorption due to higher revenues.



In addition, Q1 had a couple of unusual items that negatively impacted margin. First, on the product side and as part of restructuring the maintenance business, we wrote off approximately $200,000 of inventory that could not be used or salvaged. Second, in services, as we wrapped up the Germany project, the final quarter came in at a lower margin rate than other quarters due to the nature of the work [ performed ]. Gross margin on Orion products improved approximately 670 basis points to 33.1% in Q1 from 26.4% in Q1 '24. We saw improvements on both manufactured and sourced products, including new product sales as well as the benefit of improved fixed cost absorption from higher sales. Reflecting steps taken in the maintenance business and our expectation for the business overall, we expect our blended gross margin rate to remain strong in fiscal '25.



Operating expenses declined to $7.7 million from in Q1 '25 from $9.6 million in Q1 '24 due to a lower Voltrek earnout expense accrual of $329,000 versus Q1 of 24 of $1.1 million. The earnout reduction is based on our estimate of expected performance relative to the fiscal '25 earnout target, which is significantly higher than the fiscal '24 target. Other reductions have come from the maintenance business as well as a strong focus on productivity over the past year that has led to cost savings in our base business. We incurred severance costs of $123,000 and structuring costs of $270,000 in Q1 ‘25 related to the right-sizing and realignment of our maintenance segment following the loss of 3 legacy accounts and expect to record another $150,000 to $200,000 to complete these cost management initiatives.



Higher Q1 revenue, improved gross margin and lower operating expenses led to Orion's net loss improving to $3.8 million or $0.12 per share in Q1 '25 to $6.6 million or $0.21 per share in Q1 '24. Cash used in operations was $3 million in Q1 ‘25 improvement from $7.3 million in Q1 '24, reflecting improved operating results and lower working capital requirements. Orion also enhanced its liquidity position through the proceeds of a $3.5 million mortgage in Q1 from a new bank facility at our Manitowoc corporate headquarters, which resulted in cash increasing to $5.7 million at the end of the period and $5.2 million at the beginning of the period. Current assets less current liabilities or net working capital was $17.4 million at the close of Q1 ‘25, up from $16.8 million at March 31, 2024. Orion's financial liquidity was $14 million at June 30, 2024, as compared to $15.3 million at March 31, 2024.



Considering our financial liquidity and growth outlook, we believe we are in a good position to fund each of our businesses and our growth goals for fiscal 2025. And with that, operator, could you please begin the Q&A session?

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Sameer Joshi.

[Sameer Joshi, analyst]

So in the Charging business, I think you mentioned a pipeline of around $45 million. What does this look like? What sector does it come from? And what portion of this is likely to be converted to orders in fiscal 2025 and deliveries against those are expected?

[John Brodin, executive]

The $45 million pipeline that we have for EV is made up of a wide segment of sectors and verticals. There's certainly some municipal business in there. Private companies are in that as well. Obviously, we referenced the Eversource situation, which is a utility in Massachusetts, and they work with private companies as well. So I would say it's a wide grouping. Also included in that is some cross-selling opportunities with Orion's lighting customers. In terms of how much of that pipeline we think is going to be converted this year. As we've said, our budget for EV, essentially our target is $18 million in revenue plus, and we expect that the pipeline that we have right now will deliver on that.

[Sameer Joshi, analyst]

Then just in terms of capacity, are there any supply constraints or any challenges that you're looking at? Or if you are able to convert more than $18 million, do you have enough capacity to say, deliver $25-or-so million?

[John Brodin, executive]

Yes. Well, right now, we do not have any major supply constraints across the business and nor do we anticipate any as we move forward.

[Sameer Joshi, analyst]

Then just a clarification on the adjusted EBITDA exiting fiscal 2025. That will be like the fourth quarter positive adjusted EBITDA. Is that the expectation?

[John Brodin, executive]

The expectation is that for the full fiscal year, based on our revenue outlook, we would expect to be cash flow positive for the year -- I'm sorry, adjusted EBITDA positive.

[Sameer Joshi, analyst]

Then lastly, on the LED business, what kind of responses or like in the 7 states, what kind of reception are you seeing? Like is there increased activity already that you're seeing and expect to convert some of these orders within this fiscal year?

[John Brodin, executive]

Yes. So I think that the 7 states you're referencing are relative to the fluorescent lighting band. We are engaging in dialogue. I would say that a lot of businesses in those states, unfortunately, aren't even aware that this legislation is in place and that the state is approaching. So we've been talking actively to customers. We've been marketing this so that the awareness is growing. We are engaging in dialogues with key customers who have locations in those states to make sure they're ready for that. And again, it's really the ban of sale of fixtures and tubes. So it's not that somebody is going to come into facilities and remove anything or anything along those lines, but it is going to prohibit as their lighting fails from getting replacement products.



So it's better to approach it as a system change. So we are seeing growing interest there, and we are actively working with some of our larger customers to make sure they're ready.

[Operator]

Your next question comes from the line of Eric Stine with Craig-Hallum Capital.

[Unknown Analyst]

This is Luke on for Eric Stein. We've got a couple of questions here. First off, how should we think about maintenance services over the next few quarters? Are you seeing opportunities in the pipeline to offset the loss of the 3 legacy contracts? And if so, when do you think we could start to see some top line recovery?

[John Brodin, executive]

We have said in terms of guidance for the year that we expect that business to contract $4 million to $5 million. That's offset by some growth on our other business that we've talked about with our largest customer as well as some additional opportunities. In terms of the pipeline, we do have some additional opportunities that are in the pipeline. But we would expect to see any of those potentially come through in the second half of the year.

[Unknown Analyst]

Just one more follow-up here on the EV charging segment. So we've obviously seen a lot of growth there in the past year. We were wondering how much of that growth can be attributed to business with Voltrek's existing customers at the time of the acquisition versus new customers introduced from cross-selling synergies with your LED and maintenance business or just new customers in general?

[John Brodin, executive]

I would say that the cross-selling piece is a growing area. It's still not the majority, but we have a very significant pipeline, which we expect as we continue to move forward to grow that business. The customers that we have our legacy customers through the Voltrek acquisition are, for the most part, growing. And we've added new customers just through that team's efforts on top of that, as well as working with key suppliers and others on opportunities. That may not have come through cross-selling per se, but those are also new opportunities, which have been created in the business. So it's a combination of legacy customers growing, new customers that were coming from the EV team that they're sourcing and a growing base of cross-selling.

[Michael Jenkins, executive]

And maybe just for a little more context, just since the acquisition of Voltrek, they have done business in 29 states as far away as Hawaii. So it is no longer just a Northeast-centric business that certainly is where a lot of their business occurs, but that breadth has certainly expanded over the last 18 to 24 months.

[Operator]

Your next question comes from the line of Chris Sakai with Singular Research.

[Christopher Sakai, analyst]

Could you elaborate on the assumptions underlying that the 10% to 15% top line growth guidance for fiscal 2025, Specifically, what factors are expected to drive the difference between the lower and upper ends of this range?

[John Brodin, executive]

Well, we always go through and look at projects and customers in our pipeline. What is committed to hit, what is likely to hit, et cetera, and make sure that we feel like we've got an adequate amount of contingency built in when we talk about those projects and forecast. So we have a lot of things that I referenced in my comments, larger projects in the technology space, government space, et cetera, which are anticipated to start in the second half of the year. And so clearly, that's built into our guidance, along with other activities. The EV business, as we've mentioned, will grow approximately at least 50% this year from a base of 12% last year to 18% plus this year. So that's all built into the guidance, along with the $4 million to $5 million of contraction on the maintenance side.

[Christopher Sakai, analyst]

Then considering the import tariffs on Chinese electric vehicles and recent results from commentary from companies like Tesla and GM, are you observing any hesitance from clients regarding the EV opportunity?

[John Brodin, executive]

No. Not at this time. It's a question we get asked quite a bit. I think there's clearly some, the EVs in general in the news a lot. We get asked about the political situation and the upcoming elections and what we see as how that potentially could impact it. I mean we really see the EVs are a growing part of our transportation system. What's key for them to be successful where they're at today and growing in the future is infrastructure. And a lot of these projects have been funded and the monies have already been appropriated from the federal level to the states. So we really don't see any impact on the infrastructure regardless of whether EVs, the rate of change slows to some degree or accelerates, I think the need for infrastructure is significant and will be a continuing driver over the next, let's say, 5 to 7 years.

[Christopher Sakai, analyst]

Regarding the price negotiations with legacy maintenance customers, is this issue now resolved? Or is there more to address?

[John Brodin, executive]

No, we basically addressed all the issues that we had in the maintenance business. as referenced in Per's comments, in addition to the top line and the customer situation, we have taken some restructuring actions to right-size that business to make sure that we have the right cost structure in place moving forward as well.

[Operator]

Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

[William Dezellem, analyst]

First of all, you referenced in the release the success that you're having with the value products on the lighting side. When you look at the market, what is the split between value and I don't know if premium is the categorization for the other part of the market. But how does the industry look.

[John Brodin, executive]

Clearly, like in all industries, when you get into kind of a good, better, best situation, the further you go up the pyramid and the further up in pricing, the smaller the pyramid in terms of addressable market, really, the strategy for us getting into this was we did recognize that we were missing a larger potential volume piece that we were currently operating in. And so we launched the TritonPro, particularly to help our ESCO partners and our distribution and agent partners access that market. We're very comfortable that in terms of our progress. We're seeing increased sales and significantly increased [ quoting ] from that. I do believe that most of that has been additive to the business at this point. So we feel pretty good about that. I can't give you a precise answer as to how much more significant that band is, but it is larger from a market size standpoint, we believe, than the one that we've traditionally operated in and is opening up some new avenues for additive sales.

[William Dezellem, analyst]

When you look at the Triton products, what do you see as your competitive differentiation or advantage versus the competing products that are already out there?

[John Brodin, executive]

When we built the TritonPro line, that basically is incorporating a lot of the features and benefits that people expect from Orion. That doesn't mean it's the same product as the Harris, which is a signature product. But in terms of relative to our competition, things like temperature ratings, efficiency, warranty, et cetera, are all at the upper end, which is where Orion plays is whatever price here, essentially we're in, we want to be at the upper end of that in terms of quality, features, reliability, et cetera. So we feel like relative to that new set of competitors and that new set of competitive landscape that we are differentiating.

[William Dezellem, analyst]

I'm going to switch gears entirely here. You mentioned in your opening remarks that you are hopeful that you have more business coming from the ESCO that was involved with the German military base. Is that additional business that you were hopeful for, is it another base or something entirely different? And would you please characterize how you see that unfolding, please?

[John Brodin, executive]

Yes, that is a super ESCO that we've worked for historically. We've done a number of installations and retrofit projects, both domestically and now this large one abroad. We have other opportunities in our pipeline with this super ESCO and are hopeful, optimistic that some of those will convert this year.

[William Dezellem, analyst]

Those other opportunities fall into what type of facility characteristics.

[John Brodin, executive]

So some of the number of those are DoD kind of basis or facilities. Sorry, I just want to clarify Department of Defense.

[William Dezellem, analyst]

And domestic or outside the U.S.?

[John Brodin, executive]

Both. We're working on domestic as well as some international opportunities.

[William Dezellem, analyst]

Then one additional question. You talked about the EV or Voltrek business at $18 million of revenue this year. You have $11 million from the Eversource contract that you anticipate to complete this year. That means you only need $7 million from your $45 million of pipeline that you referenced, that seems very doable, if not potentially quite conservative. Can you provide some additional perspective behind that? And if we're getting ahead of our skis here or whether there is some conservatism.

[John Brodin, executive]

I think certainly that yes, there's a significant pipeline out there. You're right in terms of generally the math and how it works to get to the 18. We feel good about reaching the 18 level, and I think there could be some upside from there. But again, the year is early, and we'll see how these projects unfold, and it's nice to see a growing pipeline.

[William Dezellem, analyst]

Then one additional question tied to that is, as you've pointed out in the release, there's $7.5 billion of government funding for charging stations. The $45 million is not even a rounding air in that. So are you seeing just the number of opportunities exploding or about ready to explode that you all potentially have in your pipeline. How are you thinking about that?

[John Brodin, executive]

A lot of that government funding is for the NEVI, which was the single largest piece of it, the NEVI, which is the National Electric Vehicle Infrastructure, which came out of the Infrastructure Act. The way government money tends to flow, at least federal money is number one slow. And number two, it goes from the Fed to the states, then the states have to go through their process to disperse the monies. And that whole kind of time frame, we're just starting to see some of that funding hit states moving forward. I think this calendar year, second half, in particular, and accelerated into next calendar year as well. So we are participating in quoting some opportunities to gain access to those funds, but it's just really starting right now.

[Operator]

This concludes the Q&A session. I'll now turn the conference back to Mr. Jenkins for the closing remarks.

[Michael Jenkins, executive]

Thank you all again for joining us today. We look forward to updating investors when we report our Q2 results and as we progress through fiscal '25. We also hope to speak with you at an upcoming investor events, including the Sidoti Virtual Conference on Thursday, August 15th, the H.C. Wainwright Global Investment Conference in New York, September 9th through the 11th and the LD Micro Main Event in Los Angeles, October 29th through the 30th. Please contact your conference rep to request a meeting. You may also contact our Investor Relations team with any questions concerning today's call or the schedule a call with management. Contact information is in today's press release. Thanks again, and have a great day.

[Operator]

Thank you. This concludes today's conference call.