Ocean Power Technologies, Inc. (OPTT) Earnings Call Transcript & Summary

Hello and good afternoon, everyone. My name is Shawn Severson, Co-Founder and President of Water Tower Research and Head of Sustainable Investment Research at WTR. Today, we have Ocean Power Technologies with us and CEO, Philipp Stratmann. This is a new story that we recently picked up coverage. So very excited to start to talk about the company, get it out to our investor network. As a reminder, this is all open-access formats. You can reach -- you can read our research and access this at www.watertowerresearch.com. This event will be available on demand as well. As a reminder, I'll run through the format. We try to keep these a max of half an hour through Q&A. And are you ready -- if you're ready to start, then, Philipp, I'm going to go ahead and jump into the first question.

Yes. Sounds good. Thanks for having us on, Shawn.

So let's start with a little bit of the background. I mean, the company has been around a while. This is a new company and necessarily a new technology, but a lot of changes in implementation strategy, management, so maybe just give us a little background on the transition and then on your background as well and what brought you to the company.

Yes, sure, absolutely. Yes. Thanks, Shawn. Yes, as you said, I mean there's been a lot of change in OPT. The company has got quite a storied history and it's been around for a while. And I think it's really been the last 18 to 24 months where things have materially shifted for us here at OPT. Probably none -- at least, the fact that we tend to refer to ourselves as OPT now. It's no longer about Ocean Power Technologies. It is really all about providing solutions that help energize ocean intelligence. And that can be autonomous, that could be roaming, it can be stationary type efforts. And the way we go about it is by focusing on enabling our customer base to do more out in the ocean with a lower OpEx and CapEx and a lower carbon footprint than they would have done traditionally. And we can do that by utilizing the work that OPT had done in the past and bringing these power platforms into the market and then integrating that with the autonomous solutions that we integrated through the acquisition of Marine Advanced Robotics just over a year ago. I personally am super excited about this. So my -- a background of myself is I grew up in Germany, I'm a naval architect, I spent some time in the military, worked in shipbuilding, moved over to oil and gas. I spent some time in West Africa, left on the Gulf Coast, gone down in Houston for just about a decade. And then joined OPT. What really attracted me to OPT in the first place, was the fact that it had sort of cracked the code on what it takes to put out small self-powering systems out in the ocean that can really deliver energy and clean energy to payloads in part of the ocean where it's otherwise not available. And it just materially changes the way how other solutions and technology can therefore be deployed in it. So that's exciting. It is a step change from -- away from what the company was doing previously. It's really moving away from being a product business that concentrates on power and energy to a business that deploys platforms that can host technology solutions, hardware and software and combinations of hardware and software in the kind of multi-marine domain awareness place, so be that subsea or surface.

So in many ways, it's enabling technology. Obviously, lots of things can be done. Now we have this solution available. A lot of things will be built up around this, I assume, because you do have a way to power, autonomous vehicles, and things like that. So I assume that this is a piece of the puzzle that was critical to opening up that industry.

Yes, absolutely. I think the combination of stationary systems like the buoys that we've got, together with, then, the roaming capabilities that the vehicles introduce and the development of our own proprietary Maritime Domain Awareness Solution, which, if you're thinking about it this way, in layman's terms, it's really no different, like, a ring camera being deployed out in the ocean. If you want to put it into kind of, like, the retail terms. I think that's really being game-changing, is the ability to do what is sort of taken for granted when you're doing it on land and start being able to do it out in the ocean, but being able to do it without needing to send a big boat out there without being to send crew out in harm's way. And all of that has cost and carbon benefits. So yes, we are very excited about this kind of holistic coming together that enables things that, as I said, have been a de facto norm for, like, a decade-plus onshore and start replicating that offshore.

Let's talk a little bit about the technology itself. I think it'd be useful for investors to just have a brief primer and overview on the products and the technology and how it works. And understanding that technology itself has been in development for quite some time. So this is necessarily bleeding-edge technology, let's call it. So it's been developed and matured by OPT. So maybe talk a little bit about what that is and also some of the proprietary nature of this and where you fit in the technology curve here.

Yes, sure. I mean if you think about it simplistically, it's kind of -- there are kind of 2 or 3 underlying technologies that we utilize in our platforms. The one that probably people that have known OPT for a while are most familiar with is the wave power side of the equation. And essentially what we do, we capture energy that is contained within waves, by putting out buoys out in the ocean. And we've got a generator system that moves up and down as the waves move up and down. And then we go and charge batteries that sit inside from the generator. We then charge batteries that sit inside of the buoys and then use that to power payloads. In the case of our project down in Chile with EGP, we then transfer that energy through an umbilical cable, an extension cord underwater down into a series of subsea sensors. In the case of the project that we did for Premier Oil in the North Sea, we transfer that power into a surveillance system, and that is what we've based our Maritime Domain Awareness Solution. We also developed the hybrid system that we've got, which is really for -- not everywhere has got a huge amount of wave energy. And what that enables us to do is capture wave -- sorry, solar and a little bit of wind energy to do a very similar job in terms of payload, but you can now do it in areas where there's very little activity. And then as I mentioned in our earnings call and as we stated publicly, we received funding from the Department of Energy, which we're very grateful for, to start working on a Mass-on-Spring Wave Energy Converter. And what that will enable us to do is merge the whole shapes that we've got for our buoys and essentially have one common type system for wave power and/or solar and/or wind that you may want to put on top. So you start introducing commonality into the overall platform. And then on the other side, on the roaming side of the equation, we have the WAM-V, which is the vehicles that we've got. They came to us through the acquisition of Marine Advanced Robotics and I think we're on serial number 77 or 78 of those vehicles. So this isn't as you said, yes, they are at the very leading edge of what's going on in the industry. But they are the first of a kind. They're ordered a TRL 9, same as the buoys are. And therefore, they're very, very competent vehicles. The key differentiator on the vehicle side from maybe other USVs that are out in the market is that because we use 2 independent pontoons, we can go and move over the waves as opposed to having to crash through the waves. So if you want to compare us to something on land, we're really the pickup truck of USVs. We have a very stable topside platform upon which we can deploy other systems. And we have deployed underwater robots from it. We've deployed aerial drones from it. We've taken cameras out on it and so on and so forth. And the combination of those technologies is what really is very exciting going forward because when you think about a USV that is electrically powered and has electric drives and you have a buoy that generates its own electrical power, you're not 1 million miles away from then starting to look at opportunities for autonomous charging of the vehicles once you put them out there. And you really start introducing the notion of residency and persistency offshore, which, for people that haven't been in the maritime environment, so it might be surprising, but that's really hard to do when you're out there. We think we've got a unique leading-edge position as we're building that capability up.

So that's a good lead and I wanted to ask about proprietary nature, patents, technology itself. What kind of moat is there around the business and the technology? Maybe touch on the competitive landscape, where you see it or where it might be coming from looking forward?

Yes. I mean we're proud technologists in the way that we've come up with the technologies, but we are also very realistic and appreciate that we can't do technology for technology's sake. We really focus on the applications of our technology and how that helps our customer base advance what they are trying to achieve. So we will patent as and where we see it necessary to maintain a competitive edge, but we will also collaborate, because that's -- the ocean is pretty big, and it takes all sorts of things out there in order to make things work for our customer base. Where we see competition heading, I think the autonomous market and robotics at large, it's a really exciting time. And I think we've seen a lot of effort starting to push, as I mentioned earlier, what's been done on land into the water and start being able to utilize and capitalize on those learnings to kind of drive things forward. They are large vessels. They're small vessels. There are people doing offshore floating winds and then there are small wave-powered buoys like we provide. We like to look for opportunities where we can play and enable others to do things together. For example, take future wind farm development. We can help a wind farm developer do initial survey work in their lease areas. We're using our vehicles. We can then deploy buoys that help monitor the area once that survey is done, so they know what's going on there. And then once the wind turbine is installed, we can go and help them monitor the field together with other subsea robots, our surface vehicles and our buoys and so really help them advance next generation of renewable energy creation. And I think -- the reason why I think that is important is that it shows that we can enable other technologies at a grid scale to come into the market at a lower OpEx and lower risk than would have been done traditionally. And it is a great area for us to work together with other people in the industry. The other -- another example, I think, is worth pointing out is the way we developed our Maritime Domain Awareness solution. It is a combination of edge computing and a government-compliant cloud platform. And we've developed that together with partners. And because there are certain people that have certain expertise in certain areas where it is much more cost-efficient. Same as it is cost-efficient for a wind farm developer to work with us, it is more cost-efficient for us to work with some other partners to help develop our kind of full ground technologies and then bring them to market. The one thing I would say, coming back to your question on IP, is that we take great care to make sure that we always have access rights, and own the foreground IP that gets taken to market. So we're in control of how that solution is put together.

Well, that's a great lead and my next question is I wanted to spend a little bit of time talking about applications, customers and just call it key target markets, but particularly, in some of the emerging applications as well. So if you look at the range of applications for -- look at the customers, I know we've got commercial and military, but help us -- give us a framework of what we should look for there.

Yes. I mean, loosely speaking, at the high level, it all comes together under Maritime Domain Awareness and understanding the ocean. On a more kind of tactical matter where what it really does entail is it could be survey work that we do using autonomous vehicles. I mean survey work, it could be underwater mapping for the commercial space. It could be doing survey work of the seabed for future wind farm developments. It could be helping the military look for mines and unexploded ordnance to keep shipping lanes free. It could be surface surveillance. Surface surveillance, we've demonstrated that already. We did that for Premier Oil in the North Sea. So that can be for oil and gas clients that are trying to keep fishing vessels or other untoward actors out of their production areas. It could be for the military. You can -- obviously, we announced that we're working with a government agency on demonstrating offshore Maritime Domain Awareness capabilities, and we'll be launching that over the coast of California in March. Looking at border monitoring, reducing the instances of drug smuggling by being a forward-deployed camera base that helps detect bad actors. It can help prevent illegal fisheries by doing a very similar approach, detecting water [ sovereigns ] in the industry known as dark Vessels that are pretending to be something that they are not and therefore, being able to kind of enable other agencies to then go and stop illegal fishing. So we can do work on resource protection. And then I'd say the other part is the overall integration. You've seen some of the pictures that the U.S. Navy's 5th Fleet has posted over the past couple of weeks, it's part of Digital Horizon. Us and other providers in the autonomy space, working together, launching aerial drones, putting together safe communication networks. And all of that is an ability to help the national security industry, the energy industry, and kind of the ocean protection, oceanography, kind of all those industries gain a better understanding of what happens out there. As I said, but if you wanted to really simplify it, it is ocean intelligence.

And I guess, along those lines, it's customizable, right? So you can deploy different types of instrumentation depending on what customers want. So this is -- maybe -- should I think of this as a platform that could -- you could add all kinds of various instrumentation for to solve for customer needs?

Absolutely. So we've got some proprietary solutions that we bring along, but we have done a multitude of sensors. You're looking at the project down in Chile, those are sensors that we have as part of a proprietary system. We will work with any of our customers on any sensor integration as long as it fits within, like, weight and power budgets and the kind of operational envelopes that exist in the part of the ocean where something is meant to be deployed. We'll work on integrating it. We are very flexible. I would go that we're essentially sensor-agnostic, and we can help integrate it into -- same as on the back end. That's on the front end. While in the back end, we will integrate with -- if a customer-specific software platform or technology platform, they're utilizing, we will work with them and making sure that our data feeds go through their system the way they would like to see it and -- so that we can be flexible to their needs.

So I guess coming down to my -- one of my favorite subjects next is reoccurring revenue. And it's a model that's near and dear to many investors' hearts because it is a good model. Obviously, this has been a big strategic initiative for you and ongoing. But can you just talk about what you're doing to secure that and why it's important to you and how the model works inside OPT?

Yes, of course, I think recurring revenue is vital. And it's one of the reasons why we've been shifting so hard to moving towards the as-a-service model, be that on the power/energy side or the data side. Having spent over a decade in the marine energy and offshore installation industry, that's how pretty much everything works in the main industry, right? So the customers do not want to own the assets. Even governments have started moving from what they used to be called government-owned, government-operated, to government-owned contractor-operated to essentially contractor-owned contracting. And we are actively building out a fleet of assets on the vehicle side and on the buoy side that allows us to respond quicker to when a customer needs it. And instead of saying, hey, you need to spend x hundred thousands of dollars over an asset, it's a case of here's the data. If you need it for 30 days, here's the day rate. We need it for a quarter, here's the day rate, including however we can structure it for you. If you want it for 2 years, we can still do that on day rate, plus we can then start layering in maintenance services and so on and so forth. And once the system comes back, it comes back to us, we can refurb it, we'll maintain it, and then it's ready for the next customer. And it really removes that pain for the customer to kind of going, okay, now I need to own this. Now I need to figure out where to store it and so on and so forth. And we can make sure that we enable, on the one hand, for our shareholders, the recurring revenues, but at the same time, it actually makes it much more easy for our customers to work with us.

So let's talk a little bit about milestones. As we look ahead from an outside perspective, investors, and analysts, looking for milestones and strategic growth initiatives, things that we should be looking for and using to track progress at the company. If you can maybe line up a couple of those that you're looking out over the next 12 to 24 months that sort of demonstrate you're on-target for what you wanted to do?

Yes. I think, obviously, we're excited, as we mentioned on the earnings call, that we're almost at 6x the bookings this time of the year than we were compared to the same time last year. So I think the conversion of that booking into revenues, the addition of additional bookings that will start coming in. We put out a forecast of 9 million bookings for the current fiscal year that we're in at OPT. I think that will be exciting. I'm personally very excited about seeing what else we can start doing and working on with and for the United States Navy as a result of the work that we did for them in Bahrain as part of Digital Horizon. I'm excited about the work that we're doing in demonstrating that next-generation Mass-on-Spring Wave Energy Converter, which we got funding from Department of Energy, because that helps drive that commonality that I mentioned earlier in the platform. So as you start adding those things up, I think you'll start seeing a pipeline that continues to grow and you start seeing a quicker conversion from booking into revenues as we continue to scale up and build out the fleet.

Great. I'm going to take a couple of questions from the audience before I wrap up today. So we do have a few, one was regarding the MDA-S performing relative to military security readiness. I assume you can't answer too much on that, but maybe if you could talk about a little progress support, it would be helpful.

Sure. Yes. We've deployed the MDA to the extent that we can divulge details in various formats now. I think we made it public. We had a version of our MDA-S deployed at ANTX, the Advanced Naval Technology Field Experimentation exercise called Coastal Trident. We had a system out for several months off Point Loma in San Diego. And then we -- that exercise finished with us showcasing the performance of the system at an event called FATHOMWERX in Port Hueneme, where our CDs are stationed. So I think -- and we continue -- like any good software development, it continues to develop. Every time somebody has a good idea for a new user feature, we will go through a sprint and start integrating and developing that new user feature. We're also excited about, going forward, putting the MDA, working it in combination with our roaming assets, so that we can start working on data collection that has additional portals and capabilities to it. I think I would also -- sorry, I would also say that in terms of the raw data that we can collect, and if there are parts of the military, the government or commercial customers that need that data fed through a specific type and into a specific format, we will work with them to get that into that single pane of glass that they might be [ interested in ].

The next question is on the balance sheet. And I want to expand on the question that came in a little bit and really looking at the capital-intensive nature. Is it capital intensive to do the services business, for example, because instead of selling the products or equipment you are using your balance sheet, theoretically, to hold -- to build those products and use them? So maybe just a general question about balance sheet health and cash flow. And then the second part of that question, is that sufficient to really supply and build the services business?

I think that's a great question. Yes. I mean, by its very nature, having a fleet and an inventory is more capital-intensive than it is to kind of just build it as and when it's needed for our customer. However, in terms of scalability, it is also definitely the preferred model to go down. We have a very healthy balance sheet. We have a very healthy cash balance as we stated on our earnings call yesterday and in our earnings release after the market closed on Wednesday this week. And we can build on the inventory that we are looking for at the moment that -- based on what we have on the balance sheet. So that is -- as and when required, we will look at whether there are other opportunities we may want to pursue.

And then I have a question on the R&D spend. And I guess, again, sort of a bigger picture here is where do you think you need to spend still? So when we look at the cash flow and then look at where the spend is going to be, what's left for you to do? Or are we more development stage right now at this point?

I think we're really at the commercial phase for the majority of our offerings, which is -- I think that is starting to be reflected in the bookings pipeline that we've managed to secure. We are continuously looking at opportunities to go and reduce R&D spend and utilize work that we're doing for customers or on specific projects and converting that into ongoing benefits for our broader customer base. And then obviously, as I mentioned before, we are grateful for the support that we've received from the Department of Energy, support the one kind of larger R&D item that we're still developing. But I would say that we're going to start seeing a reduction in programmatic spend and looking at a focus on more true revenue-supporting habits.

So I'll take one last question before I wrap it up. And with regard to collaboration, you had mentioned that working -- looking to work with or are working with other companies, question's regarding any color commentary that you can give on that?

As I mentioned, we -- most of our customers have fairly large problems they're looking to fix. And we wouldn't be the ones that pretend that we can solve all things for all people. We can solve certain aspects that they may need to have resolved, and we will work with others. If that is us working with a larger -- with a company that has a larger U.S. lease, for example, and we provide services for them, we will do that. If that is us providing a buoy that acts as a communications gateway node so that others can operate aerial drones, underwater drones, and surface drones, we will do that. A great example -- for example of this is the Naval Postgraduate School's SLAMR initiative, where it's us, a couple of other kind of vehicle companies, it is AT&T. And it's looking at the ability, for example, for us to use our buoy as the kind of communications mesh network node for others to operate on the ocean and I think that is exactly the kind of collaboration that I think our customers get excited about. It's actually when I speak with my counterparties at some of the companies that we encounter, they're also excited about it. Because by working together, we all managed to go and help each other drive up and get to a larger scale as opposed to nobody getting very much in the first place.

If I can expand on that a bit, too, I mean, you guys are the expert in this, right? This is the domain knowledge that there probably aren't a lot of other solutions or providers that companies would go to. So I assume collaboration becomes critically important because you have a piece of the puzzle that is very much outside the expertise of even these much bigger companies.

Yes. I think we -- as I said earlier, we definitely know our part of the equation very well. I'd like to think certainly that we have a very collaborative approach with the industry. Having grown up in an industry and kind of in the marine space where it is vital for your survival to work well with others, we take that approach to market. We will -- we won't pretend that we know everything and we will try and work around issues that might be encountered and we'll bring our knowledge into expert teams, so we can jointly solve the problems that the customer truly needs to have solved.

We'll wrap it up today, we're almost half an hour. I really appreciate your time today. Looking forward to having you back. We have a lot of additional topics to talk about here, and I'd really love to get in more detail on some of these end markets and applications as well. So hopefully, we can have you back soon to talk about that. And I apologize for any questions we didn't get to today, as we've run out of time from the audience, but thank you for your participation. And Philipp, I'll just turn it over to you for any closing remarks, and then we'll wrap it up for this afternoon.

Thank you, Shawn. It's been great talking to you, and certainly appreciate all the questions that come through. And I think this is an exciting time at OPT. I think being able to provide ocean intelligence and doing so with a clean-powered platform base, I think it is exciting and it's exactly where things need to be heading, and I'm glad to see that this is where the industry is heading. So thanks for having us on and happy holidays.

Great. Same to you Philipp. Thank you. Thank you, everyone, for joining us today.