Ocean Power Technologies, Inc.
Q3 2011 Earnings Call Transcript

Published: 14 Mar 2011

[Operator:]

Good day, everyone, and welcome to Ocean Power Technologies Audio Webcast for the Third Quarter of Fiscal Year 2011. [Operator Instructions] At this time, for opening remarks, I would like to turn the call over to the Chief Financial Officer of Ocean Power Technologies, Mr. Brian Posner. Please proceed.

[Brian Posner:]

Thank you. Welcome to Ocean Power Technologies Audio Webcast for the Third Quarter ended January 31, 2011 of our fiscal year ending April 30, 2011. Today, we issued our earnings press release and will file our quarterly report on Form 10-Q with the Securities and Exchange Commission. Our public filings can be viewed on the SEC website at sec.gov, or you may go to our website, oceanpowertechnologies.com. I will be joined on today's webcast by Charles Dunleavy, our Chief Executive Officer. Please advance to Slide 2. 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 and 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-K and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. I'll now turn the call over to Charles Dunleavy.

[Charles Dunleavy:]

Thank you, Brian, and thanks to everyone who has joined us for today's webcast. Brian and I will be available to answer questions following our prepared statements. On Slide 3, I'd like to note some of the highlights of the third quarter of this fiscal year. We continued to make significant progress in developing our core PowerBuoy technology and executing our business strategy. We announced the expansion of our relationship with Mitsui Engineering & Shipbuilding; received independent certification from Lloyd's Register for our PB150 PowerBuoy; and just after the end of the third quarter, announced the completion of the first of our new generation utility PowerBuoy, the PB150. OPT achieved strong top line growth with reported increases of 78% and 73% in revenue for the three and nine months ended January 31, 2011 compared to the respective periods last year. Let me now take you through these developments in more detail. Moving to Slide 4. OPT has identified two application-driven markets for its core PowerBuoy technology

[Brian Posner:]

Thank you, Chuck. As noted on Slide 15, our revenues increased approximately 78% for the third quarter fiscal 2011 to $1.5 million, compared to $900,000 for the same period in the prior year. The growth in revenues primarily reflects an increase in revenues from OPT's PB150 PowerBuoy project in Reedsport, Oregon and revenues from OPT's PB500 development program. The growth in these projects was partially offset by a decline in revenue from OPT's utility PowerBuoy project with the U.S. Navy at the Marine Corps Base in Hawaii, and DWADS project also with the Navy as these projects near completion. OPT's contract backlog at January 31, 2011 was $5.8 million compared to $5.7 million at April 30, 2010, and $7.5 million at October 31, 2010. Reported contract backlog at January 31, 2011 excluded two new funding awards totaling $4.8 million from the U.S. Department of Energy for the deployment of one of OPT's PowerBuoys off the coast of Oregon and for the development of OPT's PB500, as the contracts for these two awards had not yet been received by the company. Subsequent to January 31, 2011, one of these contracts for $2.4 million was executed. OPT is in the process of obtaining the contract for the other grant. Gross profit was approximately $70,000 for the quarter as compared to gross profit of approximately $165,000 for the third quarter of the prior year. The decrease was due principally to a decrease in gross profits from our DWADS projects. Our future gross profit will be dependent on the nature of new contracts, our success at increasing sales of our PowerBuoy system and our ability to manage costs incurred on fixed-price commercial contracts Product development costs decreased to $2 million as compared to $3.7 million for the third quarter of the prior year. This decrease is primarily due to a decrease in spending related to our PB150 system in Scotland as construction of this PowerBuoy neared completion. SG&A costs decreased by 26% to $1.9 million compared with $2.6 million for the previous year. This decrease was largely due to lower compensation and recruiting costs. Interest income for the quarter decreased to $148,000 compared with $232,000 for the same period last year. This decrease was largely due to the decline in average yield and in the total cash and marketable securities. OPT recognized a foreign exchange loss of $38,000 for the quarter compared to a foreign exchange gain of $172,000 in the same period in the prior year. The difference was due to the relative change in value of the British pound sterling, euro and Australian dollar as compared to the U.S. dollar during the two periods. During the three months ended January 31, 2011, OPT recognized an income tax benefit of $364,000 in connection with the sale of New Jersey net operating tax losses. Net loss was $3.4 million for the third quarter of the fiscal year ending April 30, 2011 compared to $5.7 million in fiscal 2010. Turning to the nine-month period, our revenues were $4.8 million, a 73% increase compared to revenues of $2.7 million in the nine months ended January 31, 2010. The growth in revenues primarily reflects an increase in revenues from the U.S. Navy under the LEAP program. In addition, there was an increase in revenues from OPT's PB150 PowerBuoy project in Reedsport, Oregon, and the company's PB500 development program. The growth in these projects was partially offset by a decline in revenues from OPT's DWADS project with the U.S. Navy, our project in Spain and our PowerBuoy project with a U.S. Navy at the Marine Corps Base in Hawaii as all these projects neared completion. Gross loss was approximately $56,000 for the current nine-month period as compared to a gross profit of approximately $506,000 for the same period in the prior year. Gross loss for the current nine-month period was negatively impacted by a reduction in revenue of approximately $240,000 due to a change in estimated revenue to be recognized in connection with the completion of the current project in Spain. In addition, gross profit for the nine months ended January 31, 2010 included approximately $400,000 from a favorable reduction in a provision for contract losses. Product development costs increased to $9.7 million as compared to $8.5 million for the first nine months of the prior year. This increase primarily relates to an increase in costs from OPT's PB150 PowerBuoy project in Reedsport. SG&A costs for the nine months decreased by 12% to $6.1 million compared with $6.9 million for the previous year. This was largely due to a decrease in compensation and recruiting expenses. Interest income for the nine months decreased to $547,000 compared with $764,000 for the same period last year. This was primarily due to the decline in total cash and marketable securities. The nine-month comparison of other income reflects $549,000 received by OPT from a settlement of a claim against the supplier of engineering services during the first nine months of the prior fiscal year. OPT recognized a foreign exchange loss of $206,000 for the first nine months of fiscal 2011 compared to a foreign exchange gain of $675,000 for the same period last year. The difference was due to the relative change in the value of the British pound sterling, euro and Australian dollar as compared to the U.S. dollar during the two periods. As previously noted in the quarter-to-quarter analysis, OPT recognized an income tax benefit of $364,000 in connection with the sale of New Jersey net operating tax losses. Net loss was $15.1 million for the first nine months of the fiscal year ending April 30, 2011 compared to $12.9 million in the comparable period of fiscal 2010. Turning to Slide 17. At January 31, 2011, total cash, cash equivalents and investments were $52.8 million. The company's cash equivalents and investments continue to be highly liquid investments consisting primarily of U.S. Treasury notes and term deposits with large commercial banks. We believe the rate of cash outflows will decrease in fiscal 2012, reflecting completion during the current fiscal year of significant milestones associated with the construction of our two PB150 systems for Oregon and Scotland. Now I'll turn the call back to Chuck for a summary of our view on OPT's near-term development.

[Charles Dunleavy:]

Thank you, Brian. Turning to Slide 18. The Board and management of OPT are committed to the company achieving sustained profitability as soon as possible. We believe we have paths to profitability with each of the two major market areas we mentioned earlier. The first path, with our utility PowerBuoy product, targets a market size of approximately $50 billion per annum. This utility market opportunity is driving our product development investment to increase the power output rating for PowerBuoy to 150kW and further to 500kW. As we stated earlier, we are pleased with the progress that we continue to make with this product. We also have made very strong progress with our Autonomous PowerBuoy contracts. The ability of the PowerBuoys to operate autonomously in remote locations is truly an enabling technology. In addition to Homeland Security, we believe there is strong potential for our systems to be used for offshore oil and gas platforms, aquaculture or fish farming and ocean-based communication and data gathering, such as for tsunami warnings. We estimate this market size to be approximately $10 billion per annum worldwide. It's important to note that the fundamental PowerBuoy technology is the same for both these markets. The difference in the PowerBuoys addressing the two market areas primarily lies in the size and rated power output of the systems. In this slide, we also show how our present projects for PowerBuoy deliveries as well as our ongoing marketing initiatives support progress along both paths to profitability. We believe that either of these paths alone can move us to profitability and positive cash generation from operations. Please turn to the next slide. There are currently several factors driving customer demand for our products. The competitive advantages of our PowerBuoy, including our extensive in-ocean experience, the electronic tuning capability of our buoys to optimize output in changing wave conditions, and the independent environmental assessment plus certifications we received from such parties as Lloyd's and Intertek Testing Services all help differentiate OPT in the marketplace. We have also achieved third-party commercial validation through our relationships with strong partners like the U.S. Navy, U.S. Department of Energy, Iberdrola and Mitsui. Another major factor driving customer demand is the flexibility of our core technology, which is scalable for different power applications as evidenced by the autonomous PowerBuoy. Wave energy is the most concentrated form of renewable energy. It's predictable and can be installed close to population centers with a small footprint. Because of the advantages of wave energy, the macro environment continues to foster growth in our sector. In fact, we see increasing evidence of interest in the wave energy sector on the part of a number of large companies. OPT is working hard on expanding its strategic relationships internationally. Further, there are renewable portfolio standards as well as government-sponsored grants, tax incentives, feed-in tariffs and loan guarantees in many of our target markets. And finally, there continues to be a worldwide concern over climate change and the environment. We see this demonstrated in the media as well as in corporate, institutional and governmental dialogue. We believe these customer demand drivers will contribute greatly to OPT's growth in years to come. Turning to Slide 20. We're very excited about our long-term prospects. We also believe OPT remains on track to achieve the near-term milestones we had set at the beginning of this fiscal year for a number of key projects. Let me give you a quick status report. First, we are ready to conduct in-ocean trials of our first PB150 device off the coast of Scotland as soon as weather conditions permit deployment. We also continue to make progress with our second PB150, which we plan to deploy in the second half of 2011 off the coast of Reedsport, Oregon. In September 2010, we accomplished grid connection of the Hawaii buoy at the Marine Corps base in Oahu. Our autonomous PowerBuoy projects with the U.S. Navy continue to make strong progress. We conducted near-shore ocean trials of our enhanced autonomous PowerBuoy for the DWADS program for deep ocean applications and also completed the design and testing of a new power take-off system under the first stage of the LEAP program. We've added a near-term goal, which is the design, build and ocean testing of a PowerBuoy structure that will house the new power take-off system for the second stage of the LEAP program. As we noted a little bit earlier, deployment of this PowerBuoy for the U.S. Navy is expected to occur in the second half of calendar year 2011. The primary focus of OPT's engineering and development efforts for the utility market area is to continue making improvements to the 150kW PowerBuoy system, which will be our workhorse over the forthcoming years and to facilitate our longer-term transition to the 500kW PowerBuoy. With several key developments due to come to fruition in the near future, along with important steps being taken for the longer term, OPT has the momentum at many levels to accelerate the adoption of our PowerBuoy wave power technology in the years ahead. This concludes our prepared statement for our third quarter review. I'll now turn to the operator to open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Jason Feldman with UBS.

[Daniel Silver:]

Hey guys, this is actually Dan Silver in for Jason. Two quick questions. The first, I wanted to just drill down a little bit about Scotland. And more specifically, how soon do you guys actually expect the PB150 to be in the water? And beyond just being in the water, in terms of actually having it turned on and then getting the feedback, the operational feasibility data, to then go ahead and either speak with potential customers or evaluate the prospects of it, what's the more specific timeline look like?

[Charles Dunleavy:]

Sure. Based on a reading of weather and just having the system already, we have a full staff there right now, all ready to go with the system. But our best estimate is probably the latter part of this month, Dan, maybe first week of April. But we're targeting the last week of this month in terms of the lowering of the system into the water at dockside. At which point, it would then be towed out. Now that whole process of towing it out and commissioning it probably would occur over a two-day period, max. It would then immediately start producing power, to address that other question that you raised, and we would be getting data as soon as it starts producing power in real time. The data will be transmitted ashore, and we'll be monitoring not only power produced, but a great deal of other particular indications of performance of the system as well as the wave environment, wave conditions. What's neat about it is that it's going to have a grid-connection emulator on board. And as we conduct a very broad range of functional and operational testing sequences, we'll be able to test it in full grid-connection mode, even though it's not actually grid connected. We aren't running a cable to shore for the reasons associated with expense. But we'll get a very good read on the power output. And so we would look to report on that as soon as we get some initial data about it. Also, to another point you raised, which I think touches on the interest that the system may have, and certainly what we're seeing is a lot of interest as a result of the press release that we put out about two, three weeks ago on the status of the system, we received quite a few inquiries from the press, as well as some existing and prospective customers. We've had quite a few parties visit the system while it's still on land at dockside. So we think it will continue to gain a lot of traction in the marketplace. It's got to perform, and we will be reporting on the system as the events unfold.

[Daniel Silver:]

That's very helpful and certainly very interesting, about the visits to dockside, that certainly bodes well. And if I can as a somewhat similar question, although slightly unrelated, in terms of Australia and the Australian project, any incremental or additional color or context on the project, the partnership? And how should we think about funding capital levels in relation to the milestones and the expected timeline in that market?

[Charles Dunleavy:]

Well, certainly, at the very outset of that entire project, which we're seeking to develop in concert with Leighton Contractors, it started off very strongly, having been the beneficiary of a large grant from the Commonwealth Government that we talked about in the prepared text for this call. And Leighton formed a special-purpose company in the Commonwealth of Australia, and it was specifically that entity that got or received the award from the Commonwealth. Leighton is responsible for bringing in the financing for this project. And so, to one part of your question, which was with respect to just progress being made on that, they are working through their project finance group, which is based in Sydney, and have spent quite a bit of time focusing on the marketplace. And they have been typically very successful over quite a few years in infrastructure projects and raising the funding for that, on straight project finance deals. Certainly, our system carries with it a different risk profile than bridges and roads and highways as you might expect. It's also a new technology, let alone one that's based on in-ocean performance. So I think that difference in the risk profile associated with it, which is something that we point very quickly to the history of our systems, and we think that there's a lot of mitigators to that risk profile that I mentioned, which is different in the marketplace for infrastructure projects. So to date, we've received some interesting inquiries. We have some visits scheduled with Leighton, and along this regard, in order to try to bring the actual financing to a greater stage of finality. But the closing on this is still a ways off. As you know, it's a tough market out there in general for a lot of renewable energy companies to raise money. But the partners that OPT has had in the past to develop our technology, the survivability of our systems, as well as the more recent certification of our PB150 design, are all areas which we think go a long way to reducing what would otherwise be perceived as greater risk in the project finance sectors. So it's moving along. I'd have to say very candidly slower than we'd like and certainly, that Leighton would like. But we do see some interesting opportunities.

[Operator:]

Our next question comes from the line of Robert Littlehale with JPMorgan.

[Robert Littlehale:]

I have sort of a general question, but it's relating to customer demand. And the question centers on renewable energy credits. And the question specifically is on emission trading systems. And various markets around the world, obviously, have been set up to provide financial incentives to invest in renewables and disincentives to continue to admit greenhouse gases. And the question is basically your thoughts on the maturation of these various markets. Are they coming along the way you had hoped? Or just sort of give us a general sense of your thoughts on these subjects?

[Charles Dunleavy:]

Sure, Bob. First of all, the answer varies by the areas of the world in which you might the seeking to develop a project. We see very active renewable obligation certificates. In the U.K., they call them ROCs, Renewable Obligation Certificates. In Australia, RECs, Renewable Energy Certificates, or green tags and carbon credits more prominently in the United States. I would say that in the European context, the market for carbon credit trading or green tag trading is probably among the most developed. It had been a very liquid market facilitated especially by ease of accessing data about the various traders and owners of positions. It's interesting, I was just reading over the weekend an article about a very serious disruption to the European market for carbon credits, which was caused by a number of hackers who were going in and actually stealing some positions, some carbon credit positions held by certain firms. As a result of that, they're tightening up right now, very considerably, the access to data about that. So I think the market will come back. Right now, it's taken a hit. But this is a very recent development and something that's quite grave. But the market administrators and regulators are right on top of it. I think they'll overcome that and that Europe will regain a very strong position with respect to carbon trading markets. And that certainly helps us in our efforts in Europe, and I think, around the world, where you do have markets such as that, which is more mature. As I said a little bit earlier, I think there has been market trading activity in the U.S. but not as robust as one might find in Europe. Also in Australia, another very important target market for us which I talked about a little bit earlier with Dan, that there is a lot of active trading going on there. And in fact, that's one of the reasons why Woodside Energy invested money in OPT a number of years ago and also did a deal with us, which involved OPT's sale. This is back in around 2002, so it's one of the first actual hard money deals done with respect to the forward selling of any carbon credits. We sold a call to Woodside at that time with respect to any kind of carbon credits that we would generate over the years, 2008 to 2012. So we, as a company, have participated very early on with the market even though in the early 2000s, it was also a very young market at the time. So it varies by area of the world. Certainly, the market is growing and expanding and getting, I think, a lot more traction. It is an important part of our customers' consideration of our systems and other companies in the renewable energy sector.

[Operator:]

[Operator Instructions] Thank you very much. That concludes our questioning period.

[Charles Dunleavy:]

With that, I'd like to thank you for attending today's webcast and for your continued support and interest. We certainly look forward to give you another update after the completion of our fiscal year.

[Operator:]

Thank you, everyone. That concludes today's webcast. You may now disconnect, and everyone have a great day.