Orion Energy Systems (NASDAQ:OESX) Q2 2027 Earnings Call

0:00 Good morning, everyone, and welcome to Orion Energy Systems' fiscal 2027 second quarter conference call. At this time, all participants are in a listen-only mode. In this call, Sally Washlow, Orion's CEO, and Per Brodin, its CFO, will review the company's second quarter results, as well as its fiscal 2027 outlook. Then we will open the call to investors' questions. To ask a question during the session, you will need to press star 11 on your telephone. will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Today's call is being recorded. A replay will be posted in the investor section of the company's website, orionlighting.com. I will now turn the call over to Per Brodin, Orion CFO.

0:49 Thank you, Corey. First, as a reminder, Prepared remarks and answers to questions on this call include statements that are forward looking under the Private Securities Litigation Reform Act of 1995. Forward looking statements generally include words such as anticipate, believe, expect, project, or similar words. Also, any statements describing future objectives or goals, company plans, and 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 and in its SEC filings.

1:41 Except as described therein, Orion disclaims any obligation to update or revise forward-looking statements made as of today. In addition, Reconciliations of certain non-GAAP financial metrics to their nearest GAAP measures are also provided in today's press release. And now I will turn the call over to Orion's CEO, Sally Washlow.

2:08 Thank you, Per. Good morning, everyone, and thank you for being with us today. In the second quarter of fiscal 2027, we delivered growth of 9% year over year. all of Orion's business segments, LED lighting, EV charging, and maintenance recorded expected levels of financial performance in the second quarter and continue on a trajectory to meet our full fiscal year guidance. As a reminder, those expectations which we recently increased are to achieve positive adjusted EBITDA on revenue of between 100 and 102 million, an increase from prior guidance of 95 to 97 million in FY27.

3:04 As we head into the second half of the fiscal year, FY27 shapes up as a continuation of the successful turnaround we began in FY20 26, which came in at $86 million in revenue and $2 million in positive adjusted EBITDA. FY26 represented a return to growth for this company in both revenue and profitability. Orion's unrivaled supply chain and project management capabilities are attributes that I cannot emphasize enough. our resilient supply chain provides a competitive advantage that is consistently cited by Orion's customers.

3:57 Many of our customers come back to Orion asking to expand the work we are doing with them, whether it is expanding the scope of work at a single facility or adding increased opportunities at additional locations. These projects run the gamut, ranging from lighting only to EV infrastructure projects to electrical contracting. Our existing expectations for this fiscal year reflect our confidence in the continuing growth trajectory for the company, along with recent industry research that informs us that we are about to begin a new industrial LED lighting replacement cycle.

4:43 The October cover story of a respected industry publication, Lighting Management and Maintenance, reports that 10% to 20% of America's LED installed base may already be due for replacement. For commercial, industrial, and outdoor applications, the segment that Orion serves, that replacement cycle may be 20% to 30%. Orion's recent announcements serve as early indicators of this replacement cycle. As for FY27 specifically, the quarter included a number of milestones.

5:29 Q2 marked an additional multi-million deployment of our data center lighting solution for one of the world's largest hyperscalers. This followed June's announcement of our first multimillion-dollar deployment for this globally renowned hyperscaler. We believe we are still in the early innings of deploying our cost-saving and energy-efficient solution with this hyperscaler, and there is still growth in this segment, evidenced by our discussions of finalizing additional scope to our already announced wins. Our customizable lighting solution, manufactured right here in Wisconsin, is capable of delivering higher energy efficiency, resiliency, and decarbonization in LED lighting.

6:30 Another announcement, our latest $10 to $15 million engagement with a major nationwide retailer. Our long-time customer made a follow-on commitment to us in the second quarter for a new LED lighting project estimated to represent $10 to $15 million. We believe we will achieve the higher range of this commitment, and we will keep you apprised as we execute this project in Q3 and Q4. This latest scope of work involves retrofitting interior LED lighting and IoT system installations at locations we had not previously retrofitted. This is the most recent in a multi-year sequence of engagements for us with this well-known brand.

7:21 Furthermore, we believe this will expand to additional stores, which could equal or be more than our previously announced Project. We've seen adoption of the full spectrum of Orion's products and services typified by our recent announcement of a global automotive leader that is deploying both our LED lighting solutions and our EV charging infrastructure. We will continue to focus on scaling EV charging across a broader customer base and geographic footprint. More than ever, industrial America requires full footprint LED lighting, EV charging, and electrical infrastructure.

8:11 It needs it at scale and at the maximum of efficiency and cost effectiveness. We believe strongly that we will continue to be a provider of choice for AI and IoT-driven electrification to Fortune 100 corporations and other global leaders. With that, let me turn it over to Orion CFO Per Brodin to review our financial performance and outlook.

8:38 PER BRODIN Thank you, Sally. Today we reported fiscal Q2 27 revenue of $21.7 million compared to $19.9 million in Q2 26. LED lighting segment revenue in Q2 27 was 14.9 million compared to 10.7 million in Q2 26. Q2 27 lighting segment revenue performance reflected increased project activity and distribution channel sales partially offset by a decrease in escrow channel sales. Orion's expanded LED lighting project pipeline and efforts to drive growth in the distribution channel are continuing to contribute to improving performance in fiscal 27.

9:30 Lighting achieved a Q2 27 gross margin of 29.1% versus 27.5% in Q2 26. Maintenance segment revenue was $4 million in Q2 27 compared to $4.5 million in Q2 26. We achieved a maintenance segment gross margin of 25.3% in Q2 27 versus 23.7% in Q2 26. EV charging solutions revenue was $2.8 million in Q2 27 compared to $4.8 million in Q2 26, reflecting a year-over-year reduction in project volume.

10:16 EV achieved a gross margin of 31.4% in Q2 27 versus 45.8% in Q2 26. Our overall gross profit margin was 28.7% in Q2-27 versus 31% in Q2-26. The Q2-27 margin decrease was largely driven by a mixed shift within the lighting segment. We expect our margin rate to normalize back to the 30 plus percent neighborhood in Q3 and Q4. Total operating expenses were $7 million in Q2-27 compared to $6.4 million in Q2-26.

11:02 Increases in stock-based compensation in general and administrative expenses along with increased commission expense included in sales and marketing costs were the main drivers of the increase. Reflecting lower gross margin and higher operating expenses, Orion's Q2-27 net loss was 0.8 million or 20 cents per share compared to a net loss of 0.6 million or 17 cents per share in Q2 26. Adjusted EBITDA was positive in Q2 27 and was 0.5 million in Q2 26. As Sally pointed out, this was Orion's eighth consecutive quarter of positive adjusted EBITDA.

11:50 Regarding our outlook, As Sally highlighted, we expect a continued increase in profitable growth in fiscal 27 with positive adjusted EBITDA and revenue between 100 and 102 million. Given the remaining revenue needed to achieve this guidance, we expect both Q3 and Q4 revenue to be relatively even. Any upside mentioned by Sally would occur in Q4. And this concludes our prepared remarks. Operator, would you please commence the question and answer session? Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

12:39 We request that you keep your questions to no more than three. If need be, you can get back in the queue for further questions. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sameer Joshi of HC Wainwright. Sameer, your line is open.

12:59 Hey, good morning, Sally Per. Thanks for taking my questions. Congrats on the updated guidance. That was good to see. So on the hyperscaler winds that you are experiencing, how should we look at these? Are these for unique sites? or are these for a set of sites and what is the strategy going forward or rather the sales cycle going forward where do you expect the same hyperscalers to contract you for additional sites?

13:38 Yeah, thanks for the question. We expect with this hyperscaler and as we've said earlier, how we've won is we first get approved on their campuses to install or to sell our lighting fixtures. We're not doing the installation. And then we win building by building. And each building is seven figures of lighting fixtures alone. So we've won two. And we're in discussions of another building as well that we expect to come shortly. So there's a lot of noise and Data Centers, but with the hyperscaler that we're working with and the locations that we're in, we think that they're going to continue to grow and we're in the early innings with this hyperscaler on the amount of buildings that we'll be able to win with them and then share the solution with others as well.

14:47 As far as the products that they want, are you learning of new specifications that may need upgrade to your products, new products being offered to these hyperscalers in particular?

15:03 If you're looking at it from a lens of retrofitting data centers, not anything in our line of sight. This is with new buildings that have already been announced and InFlight in construction of these data centers.

15:25 On the EV sort of WorldTrek and deployment at automakers, how is that sales process? Is it that the EV team gets the lead and they also get a lighting contract or is it the other way around where you're doing a lighting job and then EV gets invited.

15:51 So the good news is it's starting to work both ways. With the Global Automotive Maker, it was a lighting project that we were doing and then they brought the EV team in to help with that solution. in particular, and then we won EV charging at that one site. And quite frankly, we're looking at a couple other sites with them as well. There are some other opportunities where the EV team has been in and looked at their lighting solutions and then are bringing our lighting team in to recommend solutions. So we are seeing more collaboration. and a bit more opportunities in cross-selling between the two segments.

16:40 Understood. Thanks for that. And then just a couple of sort of financial questions. Given that at least the 2Q, fiscal 2Q service revenue was lower should we expect the annual mix of a product versus service to skew even more towards product revenues and a corollary of that is if that happens should we expect gross margins, blended gross margins to be higher, relatively higher?

17:15 I think as we expect the rest of the fiscal year to play out. It likely will skew a little bit more toward product based on the projects that are underway. But I wouldn't call that a markedly significant change. And as I mentioned in my comments, we do expect our margin rate to call it normalized back to 30 plus where it's been most recently because we did have a mix shift change that simply impacted Q2 of this year.

17:55 Understood. Thanks for that. And then last one on accounts payable, I think a quarter or quarter, almost a little over $5 million drop. Was there anything specific that happened there, or is it just timing?

18:16 It's primarily timing. It really goes to the working capital investment we've talked about for some of these more significant projects. Thanks.

18:26 Thanks for taking my questions, and I'll take my other questions offline. Thanks, Samir. One moment for our next question. Our next question comes from the line of Gaoshi Sriharan. Gaoshi, your line is open.

18:44 Good morning. Hope you can all hear me. Yes.

18:52 Yes. How much are you doing with your own crews versus subcontractors, and how have the subcontractor rates moved over the past year?

19:02 So you broke up right when you started your question. Can you repeat it?

19:10 Sure, sure. As the contracting grows, how much are you doing with your own crews versus subcontractors, and how are the subcontractor rates progressing?

19:22 Yeah, we typically outsource our subcontract for all of our installations in the lighting segment. Within maintenance, we do have a few people that are W2 employees that work directly on maintenance projects. But in general, for the big lighting projects, that is all subcontracted work.

19:49 And on the IoT element of the retailer interior projects, does that IoT piece of that retailer project carry any ongoing software or monitoring revenue?

20:02 So we are working with the sensor or the IoT provider. It's not a system that we build, or it's not our software. So we don't have a component of that. And quite frankly, in this system, I don't believe there is any component of it.

20:25 And on the pricing side of the maintenance review, compared with previous contracts,

20:34 If you're referring back to the renewal of the three-year contract, it's pretty similar with some inflationary increases.

20:42 Okay. And I'll just leak in the last one. The purchase order on the interior projects, how are they flowing so far? How does the margin on the interior work compare with kind of your exterior programs?

21:01 I expect them to be in line with the exterior projects. We price those products pretty similarly.

21:10 And the timing, as we've said, is Q3 and Q4.

21:16 Yeah, maybe one thing I'd add since we didn't comment on this. In the 10Q, you will see that our backlog at the end of September sits at about 21.6 or 7 million. all of the firm POs that we've been receiving for the interior project have been received subsequent to September 30th. So those orders have been coming in, but none of them are reflected in that backlog number. So our backlog number as of the end of October is up actually fairly substantially compared to September.

21:57 Thank you. Congratulations. I'll take the next offline.

22:01 Thanks. Our next call comes from the line of Luke Persons of Craig Holm Capital Group. Luke, your line is open.

22:10 Hey, good morning. This is Luke. Thanks for taking our questions. So I guess first here on the data center, how have you leveraged your successes with this initial customer and engagements with other potential data center customers? Is your distribution partner continuing to help you

22:32 So our distribution partner with the hyperscaler that we're working with, we do plan to discuss with others within that partner. And then some of our other channels are getting involved as well in terms of how we will supply this product to the market. Direct, we're not in those discussions yet. a lot of it is new construction where a lot of times in lighting the distribution channels is taking the lead on that. So nothing yet. We've been focused on building the right fixture and working with the partners in our distribution channel.

23:22 Got it. That's helpful. And just for our second question, kind of switching gears here. So on the pending refresh cycle with your large retail customer, How should we compare the opportunity here to Orion's initial awards with this customer in terms of magnitude and content per store? Also, can you break down some of the drivers for these potential awards? Would this be like a national decision made by this customer to really kick off the refresh cycle or would it be done more on like a regional or store by store basis?

23:50 So with this particular partner, it's done at the headquarter level on a national level. And then we're working with them on and the various rollouts and segments of their footprint. The one that I noted earlier would be of similar size to the project that we announced or to the higher end of that number.

24:21 And maybe just to clarify, Luke, a little more on that. There are points of time when we get a significant commitment on a project. from this customer, similar to what we announced for the interior project in September. And then they may, beyond that commitment, then issue a store-by-store PO. So just a little bit of a nuance in how the orders roll in and flow into our backlog versus what the commitment is.

24:54 Got it. Thanks for the color there. And I guess just for our last question here on the new roadway product, I mean, can you talk about why you haven't really participated in this market yet up until now and why this product will be able to compete? And also just how do you view the timing and magnitude of the market opportunity for this product?

25:12 Yeah, there was an opportunity in the market where there were some challenges with some of the competitors that were building this product. And so quite frankly brought to us by one of our distribution partners the opportunity for us to participate in this segment. That being said, there's a lot of work that we have to do on our end working with our partners to get it approved for state bids and things like that. So we think there's a long life of this product and we're working on getting it ingrained in the channel so that we can win business.

25:59 Got it. Well, thanks for all the color. I'll turn it over. Thanks, Luke. Thank you very much. As a reminder, to ask a question, you will need to press star one one on your telephone. One moment for our next question. Our next question comes from the line of Bill DeZellum of Teton Capital Market Management. Bill, your line's open.

26:25 Thank you, and that's Tyatin Capital. So, first of all, I'd like to talk about your guidance. If we look at the midpoint of your guidance, revenue guidance, that is, that implies that Q3 and Q4 are both going to be approximately $27 million in revenue. And you all haven't had $27 million in revenues in a quarter. for years. But what's changing leading to that? Because I think you said in the opening remarks you'd anticipate these being reasonably even with potentially upside to Q4. So more detail would be really terrific.

27:11 Yeah, Bill, I think the main thing that we see is the continuation of some projects that are underway and the interior project which we announced in September will have a big influence on the revenue volumes in Q3 and Q4.

27:39 And that upside that Sally referenced I missed exactly what you said there, Sally. Would you circle back to those comments, please?

27:55 Sure. So for the announcement that we made of 10 to 15 million for this project, we're thinking we'll hit the upper end of that range for that project in particular. And we are in discussions to launch another project of similar size. We're working on the timing of that now, which then could provide additional upside in what would be our Q4 if we can hit the timing of all of this.

28:34 That's that's helpful. Congratulations. And and so relative to that higher revenue level that you have not achieved for, again, for years. Is that really just simply project specific or is there something changing structurally improving at Orion?

28:59 I think that, I mean, structurally there are things improving and some of our distribution channels are starting to grow as we mentioned. We've refocused on our distribution, our ESCO channels. We're seeing increased activity from those channels as well, where we're confident that we're going to hit our guidance. And we think that there's potentially more to go there. But we are definitely seeing increased project work as well. But the product-only side of our business, we're seeing strength.

29:43 Great, thank you. And then, Per, you put a tantalizing comment out there that your October backlog was significantly higher than the number reported in the 10Q. What was the October backlog?

30:05 Sorry, Bill, but we're not going to get in the habit of disclosing interim backlog, but wanted to at least give you a flavor for where we are relative to the previous quarter end.

30:19 I was simply giving you the opportunity, Per. Appreciate it. One additional question then, please. Relative to the automaker that chose to procure both lighting and EV charging, you you gave some general comments about that, but would you please describe how that customer chose to procure both from you all and essentially how you go about that cross-selling in the future?

31:00 Sure, so it's a long-standing customer of ours and we do work at several of their sites and we were in there discussing the lighting project with them and they shared the need for EV as well. And we quickly brought in our experts on the EV side to help them come up with the right solution for this location. And then, you know, you wrap that around with the decades of work that we've done with this customer on the lighting side. and our execution and delivery of these projects and then pair it with our EV segment that also has decades of experience as well that they were confident to award us additional work in EV and help us manage it all where, you know, in the past, maybe we hadn't been emphasizing our other solutions enough, but it's certainly front and center that we will be sharing all of our solutions even with long-time lighting customers.

32:16 And using that customer as an example, is it the same procurement team or do they then, does the customer then bring in a separate team for that effort? How does that tend to work? And really the spirit of the question is lighting and EV charging seem pretty desperate other than that they both have electricity involved.

32:40 Yeah, so to answer that question with it varies because it does vary. With this particular customer, this was the decision maker, but within other customers, EV charging could be managed by even whoever runs their fleets as well as a customer might be electrifying their fleet. So then it's our job to stay wired within the customer and ask who we're working with, whether it's on the lighting side, who does EV, who leads that effort within your organization and get internal referrals within those customers as well. So it can work that way or it can work through other industry contacts that we have as well. But it is not always the same thing.

33:36 Thank you for that perspective and looking forward to the next couple quarters.

33:41 Thank you. Thank you. One moment for our next question. Our next question comes from the line of Steve Rudd of Blackwall. Steve, your line is open.

33:52 Thanks. I just need a little clarification on the back half. On the math that Bill shared with us, the Second half, we would expect revenues of 27 and 27 million respectively for third and fourth quarter. However, I thought earlier, Paris, you mentioned that the third quarter would be flat on the revenue side, but up by about four percentage points are on margin. Can you address that conflict on the flat compared to Q2, which is about 22 million versus just the basic math from Q3 and Q4 being $27 million apiece.

34:35 So the math I was trying to give was that Q3 and Q4 would be relatively flat to each other. So the math that Bill did is appropriate. So it'd be in the 26 neighborhood per quarter. At the low end of our range, Bill gave the midpoint. And so the high end of the range would be a little bit higher than that. and then at those levels and with the shift of projects normalizing, that's why we expect the increase in margin in addition to better absorption because of those revenue levels.

35:17 Okay. Well, that's dramatically better and I appreciate it. Thank you very much.

35:22 You bet. Thank you. This concludes our question and answer session. I will now turn the call Back to Sally Washlow for concluding remarks.

35:32 I thank everyone again for taking the time to join us today. We look forward to updating investors on our third quarter FY27 call in February. We look forward to meeting with many of you, whether in person or virtually, between now and then. We will be presenting at a number of conferences, so please watch for our forthcoming announcements regarding scheduling. Please also reach out to our investor relations team to set up a meeting or for any other information. Their contact information is at the bottom of today's press release. Many thanks again for your interest in Orion, and I look forward to continuing to update you on our progress.

36:17 Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.