Orion Q1’23 Analysis: Misses on Revenue and Earnings Expectations, Citing Ongoing Customer Order Delays

Orion Energy Systems (NASDAQ: OESX), a Wisconsin-based provider of energy-efficient LED lighting, controls and IoT systems, released Q1 FY2023 results this week that missed expectations on both revenue and earnings.  Q1 FY2023 revenue declined -51% at $17.9M compared to $35.1M in Q1 FY2022, and net income dropped to a loss of -$2.8M compared to a net income of +$2.5M in Q1 FY2022.

Orion has three paths to the market:

  1. Direct to end users (turnkey design/build/install)
  2. ESCOs
  3. Distribution (sell through agent/distributor channel)

For the third consecutive quarter, Orion’s leadership pointed to customer delays in large LED projects, reconfirming that Orion’s pipeline of opportunities was robust.  In Q3 FY2022 Orion reduced its full fiscal year revenue outlook from $150M to $130M , and then missed the revised number to finish FY2022 at $124M in revenue.  CEO Mike Altschaefl noted more than once during the earnings call that Orion’s revenue growth is in the 25% range “excluding our largest customer” – pointing to a key factor in their challenges over the past few quarters.  Large national account customers are a double-edged sword, bringing bounty in some quarters and leaving massive comparative holes in others.

A CEO transition plan was announced on the same day as Q1 FY2023 results.  CEO Altschaefl cited his decision to step down as a personal one; he will be exiting the CEO role in November 2022, but will remain on the Orion Board of Directors.  Stepping into the CEO role will be Orion’s current EVP and COO Mike Jenkins, who will also join Orion’s Board.  Prior to joining Orion, Jenkins served for eight years as GM-Americas of Bostik, Inc., an industrial adhesive and sealing products provider (2.4B in annual sales).

The CEO transition press release also indicated that Jenkins has significant M&A experience, an important factor based on Orion’s recent acquisition of Stay-Lite, and their plans to do more M&A.  Stay-Lite is a provider of lighting, electrical and maintenance services, with a primary focus on national retail companies.  In this week’s Q1 FY2023 earnings call, CEO Altschaefl confirmed that Orion is reviewing a strong pipeline of M&A  opportunities, focusing on businesses with “significant value, growth potential and synergies with our existing businesses and customer base.”  Orion has around $25M of liquidity and no bank debt outstanding.

Having a US-based manufacturing facility was cited in the Q3 earnings call as a key to Orion’s success in proactively managing supply chain issues, allowing Orion to win business by maintaining their stated lead times of 2 weeks or less, compared to those who are sourcing offshore.  However, the fixed cost of the manufacturing facility brings challenges when volume and revenue dips.  CFO Per Brodin gave some color commentary on the decline in gross profit, 19.8% in Q1 FY2023 versus 29.1% in Q1 FY2022 and 23.8% in Q4 2022.  Volume declines and lower revenue have the impact of less fixed cost absorption at Orion’s Wisconsin manufacturing facility. While direct labor can be flexed, the fixed plant and indirect production labor costs mean lower margins in lower volume/lower revenue quarters.

Looking ahead to Q2 and the second half of FY2023, CEO Altschaefl commented that Orion continues to feel very good about its long-term market position and channels.  He noted the ESCO market was Orion’s fastest growing segment in FY2022 and with their expectations for significant growth again in FY2023, additional sales resources have been dedicated to the ESCO market.  The company updated the revenue outlook for FY2023, expecting Q2 revenue to improve modestly sequentially over Q1 and for the full FY2023 expect a revenue range between $90M and $110M.  Note that even at the high end of that revenue range, it would represent a drop in full year revenue YoY of over 10%.

Go Deeper:

Orion Reports Q1 FY2023: https://investor.oriones.com/news-releases/news-release-details/orion-energy-systems-reports-q1-revenue-179m-reflecting-customer

Orion Announces CEO Transition Plan: https://investor.oriones.com/news-releases/news-release-details/orion-energy-systems-announces-ceo-transition-plan-mike

Orion Q1 Investor Webcast and Call: https://investor.oriones.com/news-releases/news-release-details/led-lighting-and-energy-project-solutions-provider-orion-hosts

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