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RVLT: A Maturing Sales Channel Should Accelerate Second Half Growth

05/03/2017
By Lisa Thompson

NASDAQ:RVLT

Revolution (NASDAQ:RVLT) reported revenues for Q1 2017 in line with its guidance at $30.6 million versus $27.6 million in 2016, showing growth of 11%. Gross margins were 33%, versus a similar 32.8% a year ago despite the decline in unit prices year over year. In addition to the higher sales, margins were helped by an increase in the percent of higher margin products, especially flat panels.

Taking out one-time costs, expenses rose 31% to $12.5 million on an 11% increase in revenues. Additional spending went to hiring in sales as well as setting up and ramping the company’s new Simi Valley facility that is a consolidation of four other faculties throughout the US. The investment in sales staff should result in acceleration in sales growth in the last two quarters of the year. Simi Valley not only streamlines operations by reducing redundancy, it qualifies Revolution product for “Buy American” programs that require at least 50% of a product manufacturing be in the US. At quarter end the company actually had a backlog here of 100,000 units and is working feverishly to meet demand.

Interest expense of $802,000 was higher than the $563,000 in Q1 2016. The company does not pay taxes and still has a $60 million tax loss carry forward. Taking out one-time expenses and stock-based compensation, non-GAAP net loss was $3.2 million versus a loss of $1.0 million a year ago. Adjusted EBITDA in the quarter was a loss of $0.4 million versus a positive $0.8 million in 2015. This resulted in a non-GAAP EPS loss of $0.15 versus a loss of $0.06 in 2015.

Despite tepid reported results, the company is reporting that all of its businesses in all of its end-user markets are showing record activity. Visibility is higher than ever and the company sees the maturing sales channel bring more and more deals in. At quarter end the company over 60 new sales organizations on board comprised of 250-300 individuals salespeople.

The Buy American effort is gaining traction as expected and the company is receiving orders and opportunities to bid from not only federal agencies and military but municipalities, prisons and companies who have requested American products in their bid specifications. These products are at similar margins as the rest of the company and the facility is investing in automating equipment to increase margins further. Fortunately the company sees fewer competitors able to bid on these opportunities. In March the company announced the award of a contract for an LED retrofit of The Battleship New Jersey Museum & Memorial. The retrofit includes the installation of Revolution Lighting’s high performance Buy American Act (BAA) compliant LED tubes throughout the historic battleship that will reduce lighting energy use by more than 72%.

Recently the company won the LED portion of a $287 million contract bid with Honeywell for energy efficiency improvements at Tinker Air Force base, the largest in Air Force history. Hopefully the company will be successful with more joint bidding in the future. Revolution also plans to announce contract with an Army base it just recently received. 

Another area of upside is the company’s new qualification with the Navy. It is beginning to see opportunities as clears the last hurdles in the process and is beginning to bid jobs. Any winning of business here is not factored into estimates. Adding to the visibility of Revolution in the marine market, in March, Revolution established a philanthropic partnership with Mercy Ships, a global charity with hospital ships that provide free lifesaving surgeries. Throughout 2017, as a portion of its sales to CLIA members, the Company will donate its high efficiency LED lighting products to Mercy Ships, for the Africa Mercy, the world’s largest civilian hospital ship.


INVESTMENT THESIS

➢ Revolution Lighting Technology is a pure play in the LED lighting products and services. Unlike competitors, it has no legacy fluorescent lighting sales to cannibalize and does not compete in the consumer market.

➢ Revolution is exhibiting operating leverage that is beginning to deliver accelerating earnings. This means the company could go from $0.29 per share in earnings this past year to $0.43 in 2017 and $0.75 in 2018.

➢ Replacing incandescent and fluorescent lighting with LED fixtures and/or lamps typically produces measurably significant payback for customers. 

➢ The company is a consolidation play in an extremely fragmented market. It has brought together product companies, distributors, and turnkey solution providers who cross-pollinate and complement each other.

➢ The company just received the ability to bid Navy contracts and there is upside to revenue estimates as no wins are assumed in current forecasts. 

➢ The company grew 33% in 2016. We predict sales growth of 16% to $200 million in sales in 2017 and fully diluted adjusted non-GAAP EPS of $0.43 versus $0.29 in 2016. Adjusted EBITDA in 2017 should be about $20 million or 10%. In 2018, adjusted non-GAAP EPS could reach $0.75.

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