Orion Energy Systems, Inc.

Good morning, everyone, and welcome to Orion Energy Systems' fiscal 2027 first 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 first quarter results as well as its fiscal 2027 outlook. Then we will open the call to investor questions. 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.

Thank you, Steven. First, as a reminder, prepared remarks and answers to questions include statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally include words such as anticipate, leave, 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 things, those that Orion has described in its press release issued this morning and in its SEC filings. 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.

Thank you, Per. Good morning, everyone, and thank you for being with us today. I am pleased to report our results for Q1, our seventh consecutive quarter of positive adjusted EBITDA. The first quarter of fiscal 2027 represents an excellent start to the year. In Q1, we delivered on the growth we established in the previous year. Fiscal 2026 was a successful turnaround year for Orion, marking a return to growth in both revenue and profitability. Fiscal 26 came in at $86 million in revenue and $2 million in positive adjusted EBITDA, results that outperformed our guidance. Fiscal 26 was a year in which we put ourselves on a path of profitable growth. And in the current fiscal 2027, we expect to achieve revenue of 95 to 97 million and positive adjusted EBITDA for the full fiscal year. As to Q1 fiscal 2027, year over year, Orion recorded a 32% jump in revenue coming in at $25.7 million. A 15% increase in gross margin coming in at 34.6%, net income of $2 million up from a negative $1.2 million, and adjusted EBITDA of $2.5 million up from $200,000 year over year. Today's earnings report is also further illustration of the improving quality of our sales funnel, the impact of our cost containment initiatives, and the continuous strengthening of our proprietary supply chain. Automotive, retail and public sector engagements continue to show notable strength and continued growth. With customers like public bus fleets, the Orion Voltrek EV charging segment is recognized widely for its ability to complete complex EV charging infrastructure projects. We are focused on scaling this business across a broader customer base and geographic footprint. And we are especially confident about this business with our recent appointment of industry leader Karen Peck to head EV charging infrastructure sales. Furthermore, the hyperscale data center market looks especially attractive now that we have made our initial entry into it. Our customers recognize that we meet them where they are, whether we deliver a product-only solution or provide complete turnkey, full service electrical infrastructure powered by our own products that are designed engineers and made in Manitowoc, Wisconsin. Over the decades, Orion has built a well-earned reputation for quality products, onsite service and an ability to scale no matter how big the customer or project. We have a reputation for unmatched reliability with a proprietary supply chain that includes a Made in America facility enabling us to deliver on time and on budget. And we are widely known for our unsurpassed ability to deliver turnkey installation and services for electrical infrastructure and EV charging stations. Today's Q1 fiscal 27 earnings report is a further validation that Orion is prepared to meet this moment when we have a confluence of three growth drivers in the electrification of industrial America. Number one, the reshoring, refurbishment, and resurgence of U.S. industrial facilities ranging from manufacturing to retailing to government. Number two is the electrification of vehicular fleets of major enterprises in both the private and public sectors, ranging from nationwide logistics to school districts. And number three, the building boom of AI-driven data centers typified by the multimillion-dollar engagement we announced in Q1 with our multipurpose linear lighting fixture designed specifically to integrate quickly and easily into the floor plan of data centers. Today's report also highlights several growth initiatives. Our focus is on expanding opportunities and revenues within new and existing large customers in the automotive, retail, and public sectors, whether by deployment of LED lighting systems, electrical infrastructure, or EV charging infrastructure, our focus on maximizing our service and maintenance to long-term EV charging customers, and our focus on adding capabilities such as data center lighting solutions, battery energy storage systems, electrical contracting, and our recently announced LED roadway lighting products. Delivering efficiency and cost-effective solutions at scale to industrial America at a time of unprecedented need, we believe that Orion is an emerging provider of choice for AI and IoT-driven electrification to Fortune 100 corporations and other global leaders. Orion designs, installs, and maintains LED lighting systems EV charging stations, and the complete footprint electrical infrastructure for some of the largest enterprises in the United States. Whether deployed independently or in a combination with our partners, Orion's discrete, bespoke, and turnkey solutions generate unrivaled ROI to industry facilities requiring the most demanding standards of efficiency, reliability, and compliance. Made in America for its fourth decade, Orion is meeting the moment for an industrial build-out that is reshoring, refurbishing, and reasserting leadership throughout the United States. With that, let me turn to Orion's CFO, Per Brodin, to review our financial performance and outlook.

Thank you, Sally. Today, we reported Q1 27 revenue of $25.7 million as compared to $19.6 million in Q1-26, an increase of over 30%. LED lighting segment revenue in Q1-27 was $17.7 million compared to $12.9 million in Q1-26. Q1-27 lighting segment revenue performance reflected increased project activity and distribution channel sales partially offset by a decrease in ESCO channel sales. Orion's expanded LED lighting project pipeline and efforts to drive growth in the distribution channel are continuing to contribute to higher expected revenues in fiscal 27. Lighting achieved a Q127 gross margin of 37.8% versus 31.8% in Q126. Maintenance segment revenue was $4.1 million in Q127 up from $4 million in Q126. We achieved a maintenance segment gross margin of 28.3% in Q127 versus 22.4% in Q126. EV charging solutions revenue was $4 million in Q127 compared to $2.7 million in Q126 reflecting relative strength despite sector-wide uncertainty regarding the market environment in the United States. EV achieved a gross margin of 26.9% in Q127 versus 33.8% in Q126. Our overall gross profit margin was 34.6% in Q127 versus 30.1% in Q126. Q127 included a benefit of approximately 130 basis points for the net effect of tariff changes and refunds. We expect our overall gross margin to remain strong throughout fiscal 27, though it will likely vary on a quarter-by-quarter basis due to revenue mix and volume changes. Total operating expenses were 6.8% in Q1, from 6.9 million in Q126. Reductions in compensation costs in general and administrative expenses were mostly offset by increased commission expenses, including in sales and marketing costs. Reflecting stronger gross margin and lower operating expenses, Orion's Q127 net income was $2 million, or 47 cents per diluted share. or $0.48 basic per common share compared to a net loss of $1.2 million or $0.37 per share in Q126. Adjusted EBITDA was positive $2.5 million in Q127 versus $200,000 in Q126. As Sally noted, this was Orion's seventh consecutive quarter of positive adjusted EBITDA. Regarding our outlook, as Sally highlighted, we expect a continued increase in profitable growth in fiscal 27 with positive adjusted EBITDA on revenue between 95 to 97 million. 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. We will ask that you please limit to two questions. At that time, please re-queue. Please stand by while we compile the Q&A roster. Our first question comes from the line of Amit Dayal of HC Wainwright. Your line is now open.

Thank you. Good morning, everyone, and thank you for taking my questions. Congratulations on the win in the AI data center space. Looks like a pretty significant market has opened up for you over there. So in that context, Sally, are you being conservative with the outlook for fiscal 2027 revenues?

Good morning, Amit, and thank you. I don't think we're being overly conservative with our revenue. We're certainly bullish on the year. With entry into the data center, as we announced, we worked with a customer to really build the right solution that we could scale to other customers as well. So I think we're in the pretty early innings of data centers and we have conversations going on with others, but we'll wait till later in the year to provide any further updates.

Okay, thank you. Can you talk about some of the pipeline, I guess, that you are building for that market? What kind of activities are you undertaking? What kind of discussions are you having with potential customers? Just any color on how that sales pipeline is being built up and do you expect to convert some of that pipeline in the next few quarters or will it take a little bit more time for you to start getting more momentum with orders from this space?

Yeah, so particularly in this space, we think a lot of it will come in our next fiscal year in terms of revenue. We are starting to ship product. Oftentimes, how we're winning in this arena is you're winning building by building on a data center campus. And as they grow, we're winning more and more. not going to say we're single sourced as well. Most have mitigated their risk. So we believe that the pipeline will continue to grow as we continue to deliver in that channel.

Just one follow up on that. Should we assume, you know, the deployments at a single data center could be significantly larger or multiples of what a typical deployment for a single facility is usually for you guys?

Yes, buildings often represent seven figures per building.

Okay, understood. I'll step back into you. Thank you so much. Thank you.

Our next question comes from the line of Eric Stein, Craig Holland. Your line is now open.

Hi, Sally. Hi, Per. Good morning. Hello. So just curious, I mean, obviously a pretty positive commercial environment on the demand side. I know last quarter you did provide a backlog number, and I also know that was because you were entering the fiscal year. But curious, you know, whether it's being more specific about backlog or just commentary on where backlog stands, exiting the quarter, you know, the positive order trends that you saw. end of fiscal 26. Presumably, those have continued into the first quarter and what you're seeing here in the second quarter.

As we exited the first quarter, our pipeline was right around 24 million, or I'm sorry, our backlog. As Sally mentioned, the strength of our pipeline We think continues to improve. So we expect to see some significant conversions as we move forward. But that's where we sit today.

Got it. And I know that backlog, you know, at a point in time can be, you know, a lot of timing to that specific number, but that's helpful. Then maybe, so you talked about the guide 95 to 97. I know that at least to this point you've not been including anything from the potential opportunity with Home Depot, the stores where you're doing the outside lighting, but there's that inside opportunity. So just curious where that stands. I know you'd made progress. I think you were the only company that was really in the mix for that. It was more about dialing things in, but maybe where that stands and could that still be fiscal 27 revenue or would that be more fiscal 28?

We're still in play on opportunities like that and quite frankly some others as well. So there's testing that goes on and final product selection, but we're still pretty positive about that opportunity.

Okay, thank you. Thanks.

Thank you.

Our next question comes from a line of Kaoshihan Sriharan of Singular Research. Your line is now open.

Good morning, guys. Can you all hear me? Yes. Nice. Nice product. My first question is on the exterior lighting program, you sized it at 14 to 15 million and it was supposed to be complete by the end of the first half, how much of that ran through Q4 and Q1 and what's left to deliver?

You might be confusing a couple different announcements we had with our, about our largest customer. The 45-ish million opportunity we mentioned with them was a three-year contract for the maintenance services that we provide. that will occur over fiscal years beginning April 1, 2026, so fiscal 27, 28, and 29. And we had also discussed previously an exterior project, which we said was in the $15 million range, most of which has been recognized in Q4 and Q1. So we're pretty much through most of that. And then to the previous Scholar's Questions. You know, we still have an opportunity that we've talked about for an interior project, but we do not have that order yet, but do believe it's progressing and are optimistic that will come through. I'll call it in the relative near term.

Okay. And on the gross margin sustainability, if we exclude the $300,000 of tariff benefit, and as you guys have indicated that services are going to trend towards 50% of revenue as you indicated in your deck. Where does the consolidated gross margin kind of actually settle end of fiscal 27?

You know, we still foresee that it'd settle in the, you know, 30 plus range. But, you know, there are, to your comment and in my script, there was that 130 basis point benefit related to tariffs and previous quarter had some one-time type benefits in it. So I think in the 30% to 32% range is how we're thinking about things at this time.

OK. I know you guys are still maintaining $95 to $97 million and with positive EBITDA. We are already in the positive terrain. What kind of drop should we assume on the roughly 70 million of revenue left in the air? What kind of risks are there?

I'm sorry, did you say risks?

No, what kind of, I suppose, pullback on the EBITDA numbers that will drag it into just the negative territory for the 70 million?

I think it would have to be some type of unexpected performance from a, I mean, assuming we achieve the top line guidance, then there'd have to be something that would happen from a negative basis on gross margin rate that would impact that or some unexpected expense that we don't, operating expense that we don't anticipate. Okay.

And I'll just sneak in one last question. You said in June that the data centers, the distribution typically would be in the low margins. But if we are to look at the capex that is required for these data center roadway volumes to come through, as you hope, At what revenue level does the plan require any kind of investment?

The investment required to support any of these programs would be very minimal and would primarily come through as a component of gross margin because any related asset would be amortized over a period of time, but we don't foresee any significant fixed asset investment needed for either of those programs that you mentioned or at all.

Okay. Thank you, guys. I'll get back to you in the queue. Thanks.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from the line of Bill DeZellum of Titan Capital. Your line is now open.

Great. Thank you. I'm going to break the rules and ask a few more than allotted questions. Cut me off if I go too far. So first of all, relative to the data centers, have the shipments begun to that first data center customer? Where are you at in that delivery process?

Good morning, Bill. They have started, but it is initial product going into the data centers. We don't expect the ramp until later in our fiscal year and then into next year.

That's helpful. Tell us a little bit about the sales lead time to get the lead to close the order.

I'm sorry, let me repeat. It got a bit broken up. Did you want insight into the sales and how we achieved this win?

No, I'm sorry, Sally. And hopefully the quality here is better. But I was looking for just the the regular sales cycle with with data centers in terms of number of number of months to close a deal.

I hate to answer a question with it can vary, but I will start with that. In terms of this product, we had in the works working with this particular partner and user being the data center for several months, fine tuning the product and making sure it was easy to install. What could we take? and do at our factory here in Wisconsin to make it easier to install as well. So I think that cycle might have been a bit longer because of the product development involved in it. As we go to a wider array of customers, a lot of it's going to depend on their build up schedule as well, which we know can vary. We have the product ready and we can customize it to the data center needs. And we're pretty flexible in that capacity. But I think that most of the revenue ramp, all that being said, will be in the following years this year. So it takes a bit to get them up and running.

That's helpful. And then, Sally, relative to new data centers versus replacement data centers, excuse me, replacement product within the data centers, which do you see as a bigger opportunity? And I guess the spirit of the question is, is the lighting that's in existing data centers outdated enough or enough more efficient that there's a whole other opportunity in the replacement arena.

We see most of the opportunity in the new build-out right now. Many of the data centers are relatively new, so they're not ready for that replacement cycle yet. So most of what we are pursuing is new build-out.

Great. That's helpful. And then I'm going to shift, if I may, to the maintenance side of the business. So the gross margin improvement that you have experienced there, is that structural or was there something special in this quarter?

I would say it's relatively structural. There will always be some variance because you have within the segment on a quarter-to-quarter basis, the mix between product and service does vary. And in that segment, product margins are higher than the service margins themselves. So I would say it's, you know, there was nothing unusual in the quarter other than just probably more, I'll say, continued gains in efficiencies as well as mix impact.

That's helpful, Per, and I know that you have been working for a couple of years now to improve that gross margin. Is there more structural improvement still to come, or are we essentially in the range at this point?

I think we're pretty much in the range. I would consider this quarter a very good quarter for them from a rate standpoint.

Great. And then one additional question relative to maintenance. And this comes from a point of ignorance. So you had really good LED revenue growth. You had good EV charging revenue growth. And then the maintenance revenue was essentially flat, the 4.1 versus 4 million. So the question is, is there a timing issue here where maintenance revenue follows product revenue by whether it be one year or some period of time before you all start seeing some maintenance activity on product that you had sold?

I don't think there's a real and Drew Correlation to be made there. Great.

Thank you for helping clear that up and congratulations on a great quarter. Actually, I'm going to ask one more question, if I may, before I hop off. How would you characterize the typical seasonality of the business at this point?

There's not a lot of seasonality. Some of our businesses get a bit more impacted by weather. If you think snowy days in the Northeast and sub-zero temperatures can encounter some timing shifts of things, which could affect a quarter, but not a lot of seasonality. It's more the projects.

Part of where I'm going with that question is, over the last few years, you have seen revenues ramp over the course of the year, first quarter being close to the lowest quarter and then ramping as the fiscal year moved forward. And relative to your guidance, I guess I'm trying to relate those two factors, which seem a little bit at odds with each other.

Yeah, I think maybe the thing to keep in mind for the recent quarter is, as we had disclosed, we had a significant project that had a pretty fair amount of revenue associated with it, this exterior lighting project we've talked about. So that helped bolster the first quarter. We had other projects that are also helping. So I think that's to Sally's point. There's not necessarily an overall seasonal pattern you can look to. It really depends on the timing of projects when the customers want to complete those projects when they can commence and bring them to completion. So there will always be some variability on a quarter to quarter basis. And I think as we even said on the previous call, we're not expecting that ramp in the current fiscal year that we've seen in previous years.

Great. That is helpful clarification. And once again, congratulations on a terrific quarter.

Thanks, Bill. Thank you. That concludes the question and answer session.

I'll now turn the conference back to Sally Washlow for concluding remarks.

I want to thank everyone again for taking the time to join us today. We look forward to updating investors on our second quarter fiscal 27 call in November. We also 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. I look forward to continuing to update you on our progress. Operator, back to you.

Thank you. This concludes today's conference call.

You may now disconnect.