Orion Energy Systems Inc

NASDAQ:OESX

Earnings Call Transcript 2025-Q2

[Operator]

Good morning, everyone, and welcome to Orion Energy Systems' Fiscal 2025 Second Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'll now turn the call over to Bill Jones, Investor Relations, to begin.

[Bill Jones, executive]

Thank you, Kathy, and good morning to everyone, and thank you for joining this call. Orion reported its fiscal 2025 second quarter results this morning. And Mike Jenkins, the company's CEO; and Per Brodin, Orion's CFO, will review its Q2 results, financial position, and fiscal 2025 outlook.

Following their prepared remarks, 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 under the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically include words such as anticipate, believe, expect, project, or similar words. Also, any statements describing future objectives and goals, company plans, or its outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially from current expectations. Risks include, among other matters, those 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 such forward-looking statements, which are made only as of today.

Reconciliations of certain non-GAAP financial metrics to their closest GAAP measures are also provided in today's press release.

And now I'll turn the call over to Orion's CEO, Mr. Mike Jenkins.

[Michael Jenkins, executive]

Thanks, Bill, and thank you all for joining us today. Our Q2 results reflect continued strength in our Voltrek EV charging station business and a rebound in our maintenance services business.

However, our LED lighting segment was impacted by customer delays as several projects slipped and are now expected to start in the second half of our fiscal year. Distribution channels, including energy service companies or ESCOs and electrical contractors were also impacted with some timing delays as well as some softness in new construction markets.

Year-over-year comparables for the second quarter were influenced by the completion of a large European retrofit project for a global super ESCO in quarter 1 '25 which commenced in quarter 1 '24 and benefited the year ago period, but not this quarter. Despite customer delays in the start of new retrofit projects, overall, we are seeing robust quoting activity in our LED lighting project business coming from both new and existing customers.

We recently received POs that will start a new and expected multiyear relationship for our products distributor with over 500 locations. Orion will be providing LED lighting products and retrofit turnkey project management services, and we anticipate the total program value to be in excess of $10 million. This project will be spread over several years and expected to begin this quarter. The multiyear full program contract is in the final stages. And once complete, we plan to make further announcements.

Last month, we secured a 5-year $25 million contract to supply LED lighting fixtures for new store construction projects for our largest customer, a major national retailer. This contract extends our existing relationship with this customer, who expects to increase the number of new stores over the next 5 years. We are also seeing a nice rebound in automotive OEM activity this year and expect other projects to commence in this sector in coming quarters.

Despite some recent slowness in our LED lighting distribution channels, we are encouraged by progress of our value-oriented LED lighting product lines such as TritonPro and our new exterior products, which were introduced in quarter 2 of last year. These products were developed to meet the needs of lighting contractors and ESCOs for projects that are more price sensitive and do not require the highest levels of lighting efficiency.

Building on the success of these new offerings, we are investing in the expansion of our value price TritonPro offerings, including recent product launches of Round High Bays or UFOs, Strip Lights and Troffers. TritonPro and our new exterior products released in quarter 2 of last year have generated over $4 million in revenue in fiscal '25 with an open pipeline of over $18 million. We anticipate continued strength and acceleration in this category moving forward, which opens a new era of opportunity for Orion to build our brand and broaden our customer base.

We are also building sales opportunities related to the growing number of states that are banning the sale of fluorescent fixtures and replacement tubes. These bans are intended to eliminate the waste and pollution created from the disposal of fluorescent tubes while also conserving energy through accelerating the conversion to more energy-efficient LED lighting technologies.

Ten states, including California, now have either passed regulations or have proposed legislation for such bans, several of which go into effect beginning of 2025, and many states are expected to follow this trend. We have been in discussions with a number of significant existing and potential customers about their plans for compliance and have identified some meaningful opportunities that we expect to commence in the second half of our fiscal '25. For a list of all state bans current and proposed, please see our website at orionlighting.com.

Turning to our electric vehicle charging station business. We continue to be pleased with our progress in this segment and anticipate continued momentum in the business for the second half of fiscal '25 and the foreseeable future. Voltrek's quarter 2 performance benefited from construction contracts for Eversource Energy customers pursuant to Eversource's EV Make-Ready program.

Our quarter 2 performance also benefited from additional work for Boston Public Schools, building on an earlier school bus pilot project. We are seeing a growing array of both public and private sector organizations that are developing strategies and plans for implementing EV charging programs to support the expanding population of EV or electric vehicles across the U.S.

We believe Voltrek with its national reach and pioneering leadership in the EV charging station business is well positioned to meet the needs of large customers nationwide. Importantly, we are also beginning to realize some of the cross-selling synergies we had envisioned when we acquired Voltrek with EV projects being sourced within our LED lighting customer base as well as lighting projects being developed with EV charging customers.

Voltrek's overall pipeline of project opportunities remain steady at $45 million to $50 million. Meaningful federal stimulus has been appropriated to support EV infrastructure, including $5 billion designated for the National Electric Vehicle Infrastructure Act or NEVI program, along with other federal funding vehicles, which include the charging and fueling infrastructure grant program, which provides an additional $2.5 billion over 5 years.

This program is targeted at states, municipalities, and other local entities to help accelerate charging infrastructure. While there remains a spectrum of opinions about the near-term rate of increase and future market penetration of electric vehicles, we see broad-based interest from public and private entities for charging infrastructure. We are in the charging infrastructure business and whether EV sales achieve the high or low end of the range, vast infrastructure is required to be put in place throughout the U.S. over the next decade.

Turning to our maintenance services business. I am happy to report that this business delivered a better-than-expected revenue performance in quarter 2. Second quarter performance also benefited from pricing discipline, which returned the maintenance business to solid gross margin profitability from a negative margin in the year ago period. This performance was particularly notable because it was accomplished despite the impact of our strategic decision to not seek the renewal of several legacy contracts from our Stay-Lite acquisition, which had become unprofitable due to inflationary impacts.

Entering fiscal '25, we had expected Maintenance segment revenue to decrease $4 million to $5 million, principally due to the nonrenewal of these unprofitable contracts. Given our recent progress in developing additional maintenance revenue from existing customers, we now expect our fiscal '25 decline to be lower than this range.

Importantly, our pricing discipline has enabled us to return this business to profitability with a 2,300 basis point improvement. We expect our margin rate to improve further and normalize in quarter 3. With our smaller, but more profitable go-forward maintenance business, we executed a restructuring of costs by reducing staffing and related items and vacated a leased facility, resulting in roughly $300,000 in restructuring and severance costs in quarter 2.

Moving forward, our plan is to selectively build this business with customers that offers the greatest potential synergies with our lighting and EV segments. From a macro perspective, we are encouraged by factors that we believe provide tailwinds for Orion over the next 5 years. #1, energy prices. While they move up and down, we see more energy needs moving forward than capacity increases that will result in increased focus on energy conservation, such as LED lighting.

#2, climate and ESG. While politicized in some circles, we see many companies, especially public entities, continue with their C-level commitments to reduce carbon. Orion's leading -- industry-leading LED lights reduce energy consumption by up to 60% versus fluorescent lighting and will help our customers achieve these goals.

#3, transportation electrification. Passenger and commercial electrification is a generational change and what is required to enable full potential is charging infrastructure, and this is where Orion plays. #4, state-led fluorescent lighting bans. This is a very exciting and never before-seen accelerator for the LED lighting industry, which will play out over the next 5 years.

And lastly, BAA and BABA. Orion is uniquely positioned to capitalize on the increasing focus of Buy American initiatives at the federal and state levels due to our domestic manufacturing capabilities. We also see the potential for decreasing interest rates to act as a catalyst to accelerate customers' LED and EV charging projects.

While the Fed's recent 50 basis point cut in the federal funds rate was a welcome reversal, we expect it will take time before their planned easing of rates becomes a more meaningful factor in our customers' decision-making, particularly with those customers who are now waiting on further rate reductions. Certainly, a lower rate environment further enhances the business case for our suite of solutions.

We remain excited about our long-term prospects and our revenue growth outlook for fiscal '25 and moving into next year. Our confidence is based on our competitive strength of our diversified platform of products and services that we have developed to help our customers meet their business, environmental, and sustainability goals.

As we previewed last week, we have revised our fiscal '25 revenue growth outlook to an increase of approximately 10% over fiscal '24 from our prior outlook of 10% to 15% growth. As we have outlined, this revision is principally due to the delay of certain LED lighting projects into the second half of fiscal '25. And as a result, we currently expect the balance of our revenue to be weighted more towards our fiscal '25 fourth quarter, and we expect to generate positive adjusted EBITDA in the second half of fiscal '25 and neutral for the full year.

Let me now turn to Per Brodin, our CFO, for some further details and perspective on our financial performance.

[Per Brodin, executive]

Thank you, Mike. Q2 '25 revenue was $19.4 million versus $20.6 million in Q2 '24, principally reflecting the delay of some anticipated LED lighting projects in the recent period, which we now expect to start later this fiscal year.

Additionally, the year-over-year Lighting segment revenue comparison was impacted by a large DoD retrofit project in Europe that benefited the year ago results, but was completed in the first quarter of the current fiscal year. In contrast, our EV charging station segment revenue grew 40% to $4.7 million in Q2 '25 from $3.4 million in Q2 '24. The Q2 '25 performance benefited from construction contracts for customers of Eversource Energy's EV Make-Ready program as well as follow-on orders from a large Boston Public School's pilot school bus project.

Our Maintenance Services segment also grew to $3.8 million in Q2 '25 versus $3.6 million in Q2 '24 as new opportunities more than offset the impact of the lapsed legacy Stay-Lite Lighting contracts.

Looking at the first 6 months of fiscal '25, revenue rose 2.8% to $39.3 million from $38.2 million in the prior year period, also driven by EV segment growth. Overall, our gross profit percentage or gross margin increased 90 basis points to 23.1% in Q2 '25 versus 22.2% in Q2 '24, driven principally by maintenance segment profitability improvements as a result of Orion's pricing discipline.

Gross margin on Orion's maintenance services improved 2,300 basis points compared to the prior year quarter. Reflecting the turnaround in the Maintenance segment margins and our overall growth outlook, we expect Orion's blended gross margin to remain strong in the remainder of fiscal '25. Operating expenses declined to $7.7 million in Q2 '25 from $8.7 million in Q2 '24, principally due to fixed costs and other compensation-related reductions and a $500,000 reduction in the Voltrek earn-out expense accrual versus Q2 '24.

Q2 '25 included $300,000 of combined severance and restructuring expense in the Maintenance segment, reflecting actions to rightsize this business following the roll-off of unprofitable legacy accounts. In total, we have incurred severance and restructuring costs of $700,000 in the first 6 months of fiscal '25. We believe our maintenance services restructuring activity is now substantially complete.

I do want to highlight that outside of our actions in the maintenance business, we have continued to pursue other efficiency and productivity improvements that have contributed to margin and cost benefits in our LED manufacturing and corporate overhead. The improvement in gross profit percentage and lower operating expenses led to Orion's Q2 '25 net loss improvement to $3.6 million or $0.11 per share from $4.4 million or $0.14 per share in Q2 '24.

Cash used in operations was $2.5 million through the first 6 months ended September 30, 2024, though Orion generated positive cash flow from operations in Q2 '25. The year-to-date use of cash is primarily due to our net loss adjusted for noncash expenses and working capital requirements. Orion paid down $1 million on its revolving credit facility in Q2 '25 and cash increased to $5.4 million at September 30 versus $5.2 million at year-end, which includes the benefit of proceeds from a bank mortgage facility secured in Q1 '25.

Also, effective October 30, we extended the maturity of our revolving credit facility with Bank of America from December 2025 to June 2027. Current assets less current liabilities or net working capital was $13.1 million at the close of Q2 '25 versus $16.8 million at March 31, 2024. Orion's financial liquidity was $13.1 million at September 30, 2024, as compared to $15.3 million at March 31, 2024. Considering our growth outlook and financial liquidity, we believe we are in a good position to fund our business and growth goals for fiscal 2025.

Before I turn the call over to the operator, I want to announce that we have two remaining investor conferences this calendar year, and we welcome your participation. We will participate in the Virtual Investor Summit on Thursday, November 21. In addition, we plan to present in person at Singular Research's 19th Annual Best of the Uncovereds Conference in San Francisco on Thursday, December 12. Details for these events will be announced separately and posted to our Investor Relations page.

And with that, let's please start the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum Capital Group.

[Eric Stine, analyst]

So maybe -- so you talked about the 10% year-over-year revenue growth expectation. Can you just talk through a little bit how you see that playing out between the various segments? I mean, obviously, EV charging up. I think you tempered your expectation for maintenance. Is this something where you expect even with the project pushouts that LED, that the lighting is flat, up, down? How should we think about that?

[Michael Jenkins, executive]

Yes. We do expect our LED lighting business to recover in the second half of the year and accelerate, especially into our quarter 4. We do expect our EV business to maintain a similar pace or even slightly above as we head into the second half. And from a maintenance standpoint, we've been very pleased with the revenue recovery that we've seen post restructuring and essentially exiting those several unprofitable contracts. And so we do think that the maintenance business now will come in slightly under the range that we announced as we went into the year of being down $4 million to $5 million. Obviously, though, a much more profitable business and contributing to our bottom line.

[Eric Stine, analyst]

And you did just touch on this, but maybe a little more on it. Is this -- and maybe you said it in the prepared remarks and I missed it, but is this something we should think about results being more skewed to 4Q versus 3Q in light of what you just said?

[Michael Jenkins, executive]

Absolutely. Yes, we do expect a stronger Q4.

[Eric Stine, analyst]

And then -- I mean, I can appreciate, and I know that these are all really customer-directed project pushouts. But is there any way that you internally are looking at this and saying, how can we better anticipate this in our outlook or just in the overall business going forward? Because, I mean, this is a -- it's been kind of a frequent issue you've had with some of your customers.

[Michael Jenkins, executive]

Yes. It's a very challenging thing, Eric. I mean, obviously, we talk about that quite a bit. It's difficult to anticipate when individual customers may push things out because it's related to other projects that they may have as a company, et cetera. The best thing that we can do as a company because we don't necessarily control that is to continue to build our pipeline so that we have more projects and more contingency around that. So when those things do occur, we have enough other pipeline that can overcome it. So that's really our focus. And we're -- as I referenced in my remarks, we're pleased to see the growth in our pipeline with some very exciting new projects in the works.

[Operator]

Our next question comes from the line of Amit Dayal with H.C. Wainwright.

[Amit Dayal, analyst]

Just at a macro level, guys, with respect to the election results, any impact or exposure to the discussed sort of tariff changes that may be implemented?

[Michael Jenkins, executive]

Yes. I mean that's an interesting point. If there were to be further tariffs that were put in place against China or really across the board, any import situation. Certainly, we do get a number, as the entire industry does, components from abroad. At the same time, being a domestic manufacturer, we have a lot of our content, which comes from local and domestic sources as well. So if that would be put in place, I would say that, in general, should be favorable for Orion, particularly in the lighting business relative to our competitors.

[Amit Dayal, analyst]

And then along those lines, right, I mean, we've seen a lot of manufacturing build-out happening here in the U.S. How are you positioned to participate in some of those opportunities? It looks like from the commentary that you may already be involved in at least bidding on some of this onshoring related infrastructure build-out. But can you give us any clarity on what from there is in the pipeline that you are trying to participate in?

[Michael Jenkins, executive]

I'm going to repeat the question back to make sure I have it correctly, Amit. So basically, it's about some of the onshoring investments in terms of new capacity and buildings and those types of things as a result of onshoring and…

[Amit Dayal, analyst]

New manufacturing buildings that are coming up, warehouses that are coming up to support all of this onshoring activity. Just want to understand if you're already participating in some of that or are you positioned to participate in that?

[Michael Jenkins, executive]

Yes. Okay. I understand now. Absolutely, we do. We -- that's -- new builds is a significant part of our distribution business and really our focus there, and that's still a project business through our distribution channel. So that market in general for new builds has been a little soft for everyone due to cost of capital reasons and those types of things. So the onshoring is a counter to some of those trends from cost of capital, but we are very active in that space. And as I referenced in my remarks, TritonPro, which is our new product line launched last year, is doing quite well and is very well positioned for that new build market as well as retrofits.

[Operator]

[Operator Instructions] Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

[William Dezellem, analyst]

A group of questions here. Let me start, if I may, with the restructuring that you did. Would you please walk through in a bit more detail what it was that you did?

[Per Brodin, executive]

Bill, I'd say that there were a couple of primary components within the maintenance division. As part of the lapse of the contracts that did not achieve the kind of pricing levels that we had hoped, we scaled back on the level of our self-perform technician force. So within -- that would have been within COGS that we took out personnel that were self-performing within our maintenance division. Then there were some also supporting people that also supported those contracts, which are also a component of COGS. So that's what that severance related to. There were some G&A costs also taken out, the largest of which was the leased facility that they operated out of, which the $300,000 charge that we incurred in Q2, about half of that was a lease breakage fee to get out of that lease.

[William Dezellem, analyst]

And then -- I'm sorry, Per, go ahead.

[Per Brodin, executive]

Yes, I was just going to clarify one thing. For the Q2 cost of $300,000, all those costs would have been, I'll say, charged to G&A, just if you're considering that from what line those hit.

[William Dezellem, analyst]

And then relative to the comments that you expect a larger weighting of LED in the second half, does that imply that the EV charging is going to be more challenged either because projects are finishing or for some other reason?

[Michael Jenkins, executive]

Hello, Bill, it's Mike. No, that was not what I meant to imply at all. What my comments were meant to say is that we -- we plan to see LED lights grow in the second half. The EV business, we were up 40% in the quarter. We continue to see that level of growth plus in the second half of the year. So LED will continue to be our strongest growth component, but we do expect lighting to grow significantly in the second half as well.

[William Dezellem, analyst]

And then I'm going to ask one question that maybe is a bit unfair, but I'd love your perspective. As you think about these lighting projects that were delayed, why were they not forecasted? And I recognize almost inherently in the question, a delay would imply not forecastable. But I guess, I'm going to toss that out and just to understand your perspective, please.

[Michael Jenkins, executive]

Sure. I'll give you an example. We were working with a large technology company. The projects have been in the works for several years. And they had given us indications as to what their schedule was and when these projects would start. And so we try and be as conservative as we can. And so we take a portion of that. But obviously, we have to recognize when customers say the projects are going to be active. So we wanted to be realistic, but conservative at the same time.

And the reality was that due to some of the internal workings of that company, they were pushed off as a project. And so those are things which are difficult for us to forecast exactly when we can initiate with the company because, obviously, this is one of several CapEx projects they have in the works and has to tie in with the rest of the company's financial performance and those types of things. So we certainly do our best and try and be conservative, but realistic at the same time, and that was the nature of it. That's an example.

[Operator]

Our next question comes from the line of [ Gaucci Siri ] with Singular Research.

[Unknown Analyst]

Just on the project delays going back to -- is that a broader market trend? Or is that particularly sector focused affecting those projects? And how will that -- the cadence for the revenue when those delays do come back? Is that primarily a fiscal '25 event or is that a flow-through into fiscal '26 as well?

[Michael Jenkins, executive]

Yes. So these delays that we've experienced, there's been a variety of individual circumstances. I think there certainly has been some level of macro uncertainty. Now that we've gotten through the elections and those types of things, and we see interest rates falling. As I referenced earlier in my comments, we are incredibly excited about the quoting activity that's going on right now. And I should reference that we had a very strong October in terms of orders, in fact, the strongest month of the year from an order standpoint and on or above kind of what our projections would be to realize our current annual projection. So these delays that occurred, they occurred for a variety of reasons. Some of them will activate in quarter 3, some will activate in quarter 4, and then some of them will carry over into fiscal '26.

[Unknown Analyst]

And on the EV pipeline, I think you guys mentioned it and updated it to $45 million to $50 million. I know last quarter, you mentioned you had a target of around $18 million for the year and highlighted the $11 million for the Eversource contract. I just wanted to get, of that $18 million, is there a potential for exceeding that target? And on the Eversource contract, how much of that $11 million has been recognized as revenue to date?

[Michael Jenkins, executive]

Sure. On the Eversource contract, less than half of it has been realized in the first semester of the year. And then relative to the overall target for EV, we said our budget was $18 million and that we thought we could exceed that. And that's still our projection is that we will exceed the $18 million.

[Unknown Analyst]

On the TritonPro product line, I think you gave us some color. What was the feedback that you received from customers? And I know you probably was part of that was taking some market share. What are the numbers compared to your expectations?

[Michael Jenkins, executive]

The numbers are strong, as I indicated, $4 million year-to-date, over an $18 million pipeline for that product line. So I would say we're exceeding our expectations, and we believe we will for this year. Customer feedback across the board is when we launched this product line, we believe that we were missing a band of the market from a project standpoint. We certainly see that, that there are opportunities that we could not get had we not had this offering. And so some of those customers, we end up selling TritonPro to, which is great. We're happy to do that. Others, ultimately, that's a starting point, and we can trade up to higher-performing products that are in Orion's offering. So overall, very happy with TritonPro.

[Unknown Analyst]

And on the DoD project in Europe, I think if I understand you correctly, that has no further impact on the numbers. And I think you had mentioned that there was a $10 million project that might commence soon. When will that start impacting the revenue line?

[Michael Jenkins, executive]

So you are correct on the DoD project that we referenced that we did in Germany last year. There was no revenue in the quarter for that. And relative to this new opportunity, yes, we do expect -- we have received POs. We expect that to start doing -- performing work for them yet this quarter. And again, that is a turnkey lighting project. We're providing both light products as well as turnkey management services to this client. We are in the final stages of working through an extended multiyear contract for the entire project, which we expect to be completed shortly. And once that's done, we will make further announcements.

[Operator]

This concludes our Q&A session. I'll now turn the call back to Mike Jenkins for concluding remarks.

[Michael Jenkins, executive]

Thank you all for joining us today. We look forward to updating investors as we progress through the balance of fiscal '25 and hope to see or speak with you at upcoming investor conferences. Please contact our Investor Relations team for details of upcoming events, with any questions regarding today's call, or to schedule a meeting. Their contact information is in today's press release. Thanks again.

[Operator]

Thank you. This concludes today's conference call.