Ocean Power Technologies, Inc.
Q1 2009 Earnings Call Transcript

Published: 9 Sep 2008

[Operator:]

Good day, everyone, and welcome to the Ocean Power Technologies audio webcast. Today’s conference is being recorded and webcast. At this time for opening remarks and introductions I would like to turn the call over to the Chief Financial Officer of Ocean Power Technologies, Mr. Charles Dunleavy. Please go ahead, sir.

[Charles Dunleavy:]

Thank you. Good morning and welcome to Ocean Power Technologies audio webcast for the first quarter ended June 30, 2008. Earlier today we issued our first quarter results press release and we will be filing our Form 10-Q with the Securities and Exchange Commission today. For access to our public filings, you can view them on the SEC website at www.sec.gov or you may go to our website, oceanpowertechnologies.com. I will be joined on today’s webcast by Dr. George Taylor, Chief Executive Officer, and Mark Draper, Chief Operating Officer. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. As indicated in the slide, these forward-looking statements are subject to numerous assumptions made by management regarding future circumstances over which the company may have little or no control that involve risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. We refer you to the company’s Form 10-Q and other filings with the Securities and Exchange Commission for a description of these and other risk factors. I will now turn the call over to George Taylor, our Chief Executive Officer.

[George Taylor:]

Thank you, Chuck, and thanks to everyone who has joined us for today’s webcast. Our last webcast was in July when we reported our results for fiscal year ended April 30, 2008. In the short time (inaudible) since then, I’m pleased to tell you that we’ve made enhancements with both our technology and projects for our customers such as the US Navy, PNGC Power in Oregon, Iberdrola in Spain, and the Scottish government. This work along with the June agreement with Griffin Energy, a leading diversified West Australian energy supplier, are encouraging signs that OPT continues to gain traction in the global alternative energy marketplace. I will also say that these operational successes have resulted in our strong revenue growth in the first quarter of fiscal 2009, underscored by a solid balance sheet. But before we discuss the results, Mark Draper and I would like to take a few minutes to review OPT’s business, our strategy, and the progress we have made to date. We expect that this will enable us to capitalize on our worldwide opportunities. For those of you who may be new to our story, OPT is the leading wave power company and is the only pure play public wave power company. I co-founded this company with a vision of generating electric power from ocean waves at costs equal or superior to what can be achieved with fossil fuels. We began operations in 1994 and since then have successfully developed and begun to commercialize the technology. OPT is well positioned to take advantage of the favorable political, regulatory and social environment that exists internationally for renewable energy and to accelerate our growth. For example, both US Presidential candidates are strongly supportive of the development of renewable energy to decrease US dependence of important oil and gas. The energy in ocean waves is predictable, and electricity from wave energy can be produced on a consistent basis at numerous sites, which are conveniently located near major population centers worldwide. We have pioneered the development and commercialization of proprietary systems that generate electricity by harnessing the renewable energy found in ocean waves. This technology will help satisfy the global demand for electric power, which is expected to more than double from 2003 to 2030 according to the Energy Information Administration. We offer two products as part of our PowerBuoy systems line; a utility PowerBuoy system and an autonomous PowerBuoy system. Our technology is based on modular ocean-going buoys, which we have been ocean testing for more than a decade. The rising and falling of the waves moves the float around the buoy like structure capturing mechanical energy that our proprietary technologies then convert into electricity. I’d now like to turn the call over to Mark Draper, our Chief Operating Officer, who will provide you with an update on some of our recent projects and technology and our exciting new offering of an underwater substation pod.

[Mark Draper:]

Thanks, George. I’d like to start out by discussing some of the progress we have made this quarter on a few of our key projects. But first, I did want to provide a visual on the PowerBuoy activities. On slide four, you see pictures of PowerBuoys at some of our project sites. On the left side is the picture of one of our periodic check-ups of our New Jersey PowerBuoy, which last week commenced its third year of in-ocean operation. On the top right is a picture taken last week of our largest ever PowerBuoy in Santoña, Spain prior to deployment. Below is a photo of our latest PowerBuoy in Hawaii prior to deployment. We continue to work with United States Navy on a unique ocean data gathering system for it deep water acoustic detection system. We won this contract in June 2007. This quarter we continued to make further progress on system fabrication as well as testing of the power take-off and control systems in relation to this project. I’m pleased to say that we are confident that OPT will remain on target for the system to be ready for deployment by the end of this year. The depth of our partnership with Navy is also underscored by another collaborative project, the installation of the 40 kilowatt rated PowerBuoy in Hawaii. The PowerBuoy is ready for deployment and work is on progress to complete the grid connection infrastructure and the mooring system for this PowerBuoy prior to its deployment. Our work with PNGC Power on a 150 kilowatt PowerBuoy near Reedsport, Oregon also continues to move along well. During the first quarter, we made strides in building relationships and working with key Oregon stakeholder groups at the local, county and state levels. As a result, we are advancing in the permitting and licensing process, though with an anticipated target date of 2009 for the PowerBuoy to be ready for deployment in Oregon. The PB150 is the most current of OPT’s PowerBuoy product range, and we hope to use it many of our projects in Scotland, the US, England, Spain, and Australia. In our last quarterly call, we told you that the enhanced 40 kilowatt PowerBuoy under our contract with Iberdrola in Spain was fully fabricated and undergoing final on-land endurance testing. OPT saw even further progress on this front during the first quarter and has installed the mooring and anchoring system in the ocean off of Santoña. On-land endurance testing has also been completed, and the final buoy assembly at the dock-side is nearly complete. The PowerBuoy will be ready for deployment this month. In late July, OPT signed a berth agreement with the European Marine Energy Centre or EMEC in the Orkney Islands, Scotland to deploy a PB150, which we expect to be ready in 2009. As part of this agreement, EMEC also granted OPT the right to deploy additional PowerBuoys and to sell power to the utilities served in the UK national grid up to the 2 megawatt berth capacity limit. Our PB40 systems installed off the coast of New Jersey continues to perform well, having now completed two years of ocean deployment. It has survived a hurricane and several storms, including Hanna this past weekend. This 40 kilowatt rated system is an important demonstration of the ocean tested performance of the core PowerBuoy technology and its reliability, and has set what we believe to be a world record for ocean endurance for an offshore wave energy conversion system. In July we announced our newest product offering, the first utility-grade underwater substation, or pod, for wave power. The pod will serve as the point at which energy generated by multiple PowerBuoys is aggregated and the voltage is increased for efficient transmission to shore and connection to the local power grid. We are very excited about the fact that pod can be utilized not only for OPT’s wave power stations, but also other wave tidal and offshore wind technology, as well as the oil and gas industry. We will seek to establish it [ph] as an industry standard with the prospect of selling it to other companies generating offshore energy. As shown in slide seven, the required switching, monitoring and protection circuits for individual PowerBuoys will also be included in the pod in a modular format. This will facilitate undersea connectability as well as maintenance procedures. OPT continues to make significant progress on the design of the 150 kilowatt rated PowerBuoys. Initial drawings to manufacture of certain sub-systems have been issued to suppliers for manufacturing quotations. OPT is confident the process is still on track for design completion by the end of 2008 and will be built and ready for ocean testing in 2009. Again, for those who are new to the OPT story, I will go into few details on the PB150’s background. The present schedule for development of the 150 kilowatt PowerBuoy reflects management’s decision in 2007 to enhance the system design to allow for survivability in 100-year storm wave conditions and to work with third party engineering group to attain independent certification of the 150 kilowatt PowerBuoy design. In addition, the company believes that the direct transition to the 500 kilowatt from the 150 kilowatt PowerBuoy system will be accelerated by these measures now being undertaken, including completion of design and testing of the control systems that will be used on all size PowerBuoys. We are also pleased that our patent portfolio continues to grow with one new patent issued for our core PowerBuoy technology during the first quarter. OPT now has a total of 38 issued US patents. In addition to this technology progress, OPT achieved other key commercial milestones in the first quarter, as we continued to improve our position in the marketplace. In May we announced a joint development agreement with Griffin Energy, a leading diversified energy supplier in the Western Australia, to explore the development, construction, and operations of the wave power station of the region’s coast. Under the term of the agreement, OPT would provide turnkey power system plus operations and maintenance services. The agreement pays [ph] a way for the potential development of a wave power station with capacity up to 10 megawatts and potential expansion to 100 megawatts. OPT’s relationship with Griffin also gives us enhanced access to this region. In June, George presented an Invited paper to the Energy Ocean 2008 Conference in Galveston, Texas. He provided an update on the development and construction of the patented PowerBuoy system with an in-depth look at our 150 kilowatt PowerBuoy. We ended the first quarter of fiscal year 2009 with a contract order backlog of $3.7 million compared with $5.5 million at the end of fiscal year 2008. I’m very pleased to say that we expect to achieve a new contract from the US Department of Energy very shortly. Further information about this will be in a press release to be issued immediately following our receipt of the contract. I’d now like to turn the call over Chuck Dunleavy, our CFO, for a discussion of our financial results.

[Charles Dunleavy:]

Thank you, Mark. Our revenues increased by 222% in the first quarter of fiscal 2009 to $1.8 million as compared to $0.6 million in the first quarter of fiscal 2008. The increase in revenues was primarily attributable to the following factors. Revenues related to our utility PowerBuoy system increased by $0.8 million into our ongoing work on our Hawaii project for the US Navy; the first phase of construction of a 1.39 megawatt wave power station off the coast of Spain; and work on the design, manufacture and installation of a single 150 kilowatt PowerBuoy wave power station in Orkney, Scotland. Revenues related to our autonomous PowerBuoy system increased by $0.04 million resulting from our US Navy in ocean data gathering contract. Cost of revenues increased by $1.1 million to $1.9 million in the first quarter of fiscal 2009 as compared to $0.8 million the prior year’s comparable period. This increase primarily reflected the higher level of activity on revenue bearing contracts. Selling, general and administrative costs increased 28% to $2.6 million in first quarter of fiscal 2009 as compared to $2.0 million in the first quarter of fiscal 2008. This is due to certain costs as a result of becoming a public company in the United States and to our continued focus on revenue growth and expansion of our sales and marketing capabilities. Interest income in the first quarter of fiscal 2009 decreased 62% to $0.5 million as compared to $1.4 million in the first quarter of fiscal 2008 due to a decrease in invested cash and lower interest rates. The lower interest rates are primarily the result of the company’s placement of cash, what we consider to be very low risk investment. Foreign exchange loss was $24,000 in the first quarter of fiscal 2009 compared to a gain of $0.2 million in fiscal 2008, primarily attributable to the relative change in the value of the British pound sterling as compared to the US dollar during these two periods. The company finished the quarter with continued strong liquidity. At July 31, 2008, total cash, cash equivalents, and investments were $96.5 million compared to $101.1 million at April 30, 2008. Our cash equivalents and marketable short-term and long-term cash investments consist primarily of US Treasury bills and term deposits in a money market fund at large commercial banks. Net cash used in operating activities was $4.2 million for the first quarter of fiscal year 2009. This resulting from a net loss of $3.9 million, partially offset by non-cash charges and a decrease in cash from operating assets and liabilities within the period. Net cash used in investing activities was $10.9 million for the first quarter of fiscal year 2009, resulting primarily from a net increase in purchases of securities with maturities longer than 90 days during the period, as well as the investment of $0.2 million in purchases of equipment. Net cash used in financing activities was negligible in the first quarter of fiscal year 2009. Cash used during the prior year’s comparable period was primarily to pay accrued expenses related to our US initial public offering. In fiscal year 2009, we expect our cash burn to be in line with the planned use of proceeds that we outlined during our US IPO and to be approximately 25% greater than that in fiscal year 2008. This is expected to result from our continued investment in our technology as well as our business development activity. Now I’d like to turn the call back over to George for a discussion of OPT’s growth strategy as well as his closing remarks.

[George Taylor:]

Thanks, Chuck. As we wrap up the call, I would like to give you our views on how we will move forward ahead in our commercialization plans through the balance of 2009. First, as you’ve heard from Mark, we’ve made additional progress on the PB150 design in the first quarter, submitting initial drawings to suppliers for price manufacturing quotations. Second, our commitment to our sales and marketing efforts over the next three years in North America, Europe, Australia, and Japan holds firm. These areas represent strong potential markets for our PowerBuoy wave power stations because they combine favorable wave conditions, political and economic stability, large population centers, high levels of industrialization, and significant and increasing electricity requirements. Third, our demonstration wave power stations will allow us to prove the viability of our PowerBuoy systems in selected regions, as they enable customers to experience our technology firsthand and with unfettered access. In addition, demonstration wave power stations will serve as test beds for our operating and maintenance procedures. Fourth, we intend to build on existing commercial relationships by expanding the number and size of projects we have with our current customers. We also plan to enter into new alliances and commercial relationships with other utilities and independent power producers, alliances along the lines of the agreement we signed with Griffin Energy. By leveraging these customer relationships, we believe we can expand OPT’s commercial acceptance across the globe. We also expect to increase revenue streams through our autonomous PowerBuoy systems. These systems are well suited to address specific power generation needs of our customers requiring off-grid electricity generation in remote locations in the open ocean. We will devote substantial resources to continue our development efforts for our PowerBuoy systems and to expand our sales, marketing. and manufacturing programs associated with the commercialization of the PowerBuoy system. In support of this goal, we plan to add employees in fiscal 2009 and 2010. The majority of our new hires will be engineers with varying levels in the areas of expertise, project managers, and manufacturing personnel. This additional staff will help increase and enhance OPT’s capabilities. As a first step in achieving this, we have already formed a Marine Operations Group and will expand our field service capabilities. As I said at the beginning of the call, we are very excited about our achievements in the first quarter and the great strides we have made since the company’s inception. We believe that this has helped OPT achieve a position of prominence in the alternative energy space. OPT’s strengths include a seasoned management team with strong backgrounds in engineering and the international power markets. Our PowerBuoy product has had over a decade of in-ocean experience and has a wide variety of applications in addition to grid connections. These include desalination, homeland security, hydrogen production, remote sensing, oceanography, agriculture, and the offshore oil and gas industry. Since our inception, we have established a global network of strategic partners and international supply chains to commercialize our products and services. As Mark detailed, some of the current partnerships include regional US power supplier, PNGC Power; diversified Australian energy supplier, Griffin Energy; government entities such as the US Navy and the Scottish government; and the international energy conglomerates such as Total and Iberdrola. The power in ocean waves provides a renewable energy resource that is clean, environmentally benign, non-polluting, and is far more predictable than other renewable energy resources. This is an advantage of crucial importance to our customers and grid operators. We believe that wave energy is the best of the renewable options offering the most concentrated form of renewable energy without any fuel, exhaust gases, noise or visual pollution. Additionally, wave energy is based on local resources without the political and economic risks associated with imported fossil fuels. OPT is in the business of harnessing wave energy and commercializing it with our proprietary technology. In addition to these operational advantages, OPT has a strong financial position that we can leverage as we continue expanding our business with listings on the NASDAQ in the US and the AIM market in London. Lloyds of London, one of the most well known insurance companies in the world, has insured the PowerBuoy for a decade. In short, we believe that OPT is a premier company in the alternative energy sector. I would like to thank all of you for attending today’s webcast and for your continued support and interest as we continue to grow Ocean Power Technologies. Thank you.

[Operator:]

And that concludes today’s teleconference. Thank you for your participation. Have a good day.