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

Today we have Phil Stratmann, CEO of Ocean Power Technologies, or OPTT. As you may recall, we had them a few weeks back as an introductory call, very glad to have him back again today. As a reminder, this -- our research as well as this chat and others can be found at watertowerresearch.com, that's www.watertowerresearch.com, all of our webinars and our research is open access. So I'd encourage you to take a look at that. Today, we have an exciting topic. We're going to talk a little bit about the defense industry and security industry as it applies to OPT, some very exciting opportunities there and actually some recent news and a number of things we're going to address today. So I'm going to go ahead and start if you're ready, Philipp.

Yes, it sounds good. Thanks for the introduction.

Good. So my first question is sort of a general one. Just in terms of the overall industry and opportunity in defense and security, you guys have talked a lot about it. You seem pretty excited about it. Let's maybe run through for investors why you feel this way, what the opportunity is and go from there.

Yes, absolutely. And I appreciate the opportunity to kind of explain some of this to you and interested investors. Generally speaking, I think if you're looking at the industry in general, Ocean security is national security. If you look at how the world is developing and where we are seeing areas of conflict arising, a huge amount of that is going on around our oceans. We do believe that our systems are very well suited to long-term maritime domain awareness deployments. And we have very little to no adverse effects on the environment, and we can be deployed very quickly in contested borders. And this is all part of our ongoing shift that we have explained recently during earnings calls and also on our last fireside chat, to our shift towards a model that focuses more on recurring revenues and ongoing market opportunities that we can participate. We see the defense and national security market has been instrumental in that. It's a large market. It enables us to deliver ongoing revenues at the same time as delivering an actual value to our war fighters and our allies are in the ocean. This is obviously the result of the pivot that we've carried out, and we are starting to see the initial benefits. We've continued to grow this as we evolve in and with the market segment.

We're going to discuss this a little bit more, but what's the -- what was the legacy solution or the incumbent solution that you're sort of addressing today? Or is this really just creating new opportunities for security and defense industry because of the ability to do remote power? Just trying to understand how some of these issues were addressed previously.

Absolutely. It's a bit of both. Obviously, the underlying problem statement hasn't materially changed. What has changed is the pace, which was the adversary can go and do work out in the ocean. And we are trying to keep up and ideally accelerate beyond where adversarial powers might be. What we can do by being able to deploy remote systems that will act on a stationary basis. In the case of the buoys, it's very low kind of signatures and/or in the case of the roaming markets with the vessels is act as a force multiplier. And the national security and defense market, it is really -- augment the capabilities of Navy, Coast Guard, allied-type operations, law enforcement, and being able to provide information in part of the ocean on a 24/7 basis, where otherwise, you would have had to deploy a large-scale ship out into that area with all the manpower that comes with it, with all the fuel you need to burn to do that, with all the training you have to provide are very highly skilled sailors in order to carry out those tasks. And we can now be the eyes and ears of our -- of the war fighter out in the ocean to monitor what's going on so we can really pinpoint where a potential manual intervention might be required.

And I think it's important to point out this isn't a science project. In fact, my next question is specifically around some recent events that you attended and displays. But this is something that the military is actively pursuing and defense or other all security departments are addressing. So I think it's important. This is not just an idea for the next 5 years, there's implementation and rollouts today, which I want to spend some time talking about the demonstration for the U.S. Navy and Bahrain. I think that's a critical milestone and certainly talks about commercial viability and development of the application and the technology.

No, I'm glad you brought up the demonstration in Bahrain. We're very ample and proud to support U.S. Navy in those efforts. As you mentioned, yes, we recently finished a several week demonstration for the U.S. Navy's fifth fleet, just based on station out in Bahrain. Core Digital Horizon included, I think it was 15 advanced systems that came from 17 different industry partners, which are showcasing unmanned and artificial intelligence technology to really enhance regional maritime awareness. Maybe a bit of background, Digital Horizon was created to advance the commands effort to integrate new unmanned technologies while also establishing the world's first unmanned surface vessel fleet by the end of next summer. I mean coincided with, I think it was the Manama Dialogues that took place in Bahrain, where in various parts of [indiscernible] representatives of the European Union were present and many representatives allied governments. And the U.S. Fifth Fleet efforts are really focused on improving what U.S. and regional navies are able to see above and below the water. And we contributed some of our systems out in the region. And in fact, some of our systems are still out there sort of gearing up for what's likely to come next. And then, yes, this isn't -- this wasn't just a one-off and done-type effort. This is part of a broader effort with various tasks as having been stood up in the DoD and U.S. Navy particularly to advance the drone and autonomous capabilities for the U.S. Navy, including Coast Guard as well.

And maybe, Phil, can you just give a little example of how it was used? I mean I know we hear about it with the operation was [indiscernible] but give me an example of what it did out there at the best that you can.

Yes, absolutely. For example, our 223rd variant of the WAM-V participated in one of the exercises that we did whilst they're out there. We did over 48 hours on autonomous excursion capability, traversing from Bahrain and then deploying all the way out into international waters and then returning back to the base. And really showcasing that over a multi-day period, you can operate autonomously in order to deliver payloads, deliver surveillance capability, deliver other robots. It'd be that aerial drones or underwater drones into an area, do the job and come back home without exposing kind of war fighters to any additional risk during those operations. We were very proud of the length that we managed to demonstrate the capability that we have out there. And so outside of that, this comes hot on the yields of all the lessons we have learned from long-term efforts that we've done. I think we've mentioned in the past, we supported over -- I think it was over 1,200 miles of survey being done of West Alaska using one of our 22s at the back end of the last summer season in Alaska and all of these lessons learned have gone into us now being able to deploy over multiple days, delivering a multitude of payloads and doing it fully autonomous out in pretty much all across the world.

And I think that's an interesting point just talking about how the technology has been developed in a commercial state, let's say, right? So you're talking about really being able to execute now on the plan, use them in them. So you're not -- the technology is in place, not having to go out there and invent or modify things dramatically in order to solve for these applications. Is that fair to say?

And that is correct. If you're looking at our technology in terms of the roaming capability, we are the 8 foot, the 16-foot and the 22-foot variant. We have a range of power buoys that we can provide, and we have our maritime domain awareness, software and hardware solution that we can deploy on top of the [ sensor ]. So really, what we are doing nowadays is primarily working on adjusting payload capabilities and tailoring them to this specific payload that Navy or somebody else or DHS wants us to take out into a specific demonstration that I have going on or into a live project in the case of our survey that we might be doing for NOAA or for another civilian infrastructure investment side.

Take a step back, and obviously, we talked about the Navy demonstration, but the bigger picture, security and defense applications. What else are we looking at? I assume homeland defense and Coast Guard. But maybe help us understand a little bit where some of these other operating units could take advantage of this.

Yes, absolutely. I mean, just look at the United States, just as an example, there's thousands of miles of coastline that we have, spanning 2 oceans and the Gulf of Mexico, and plus all the coast line that sits up in Alaska. You then extend that all the way out to the edge of these exclusive economic zone, you're getting into tens of thousands of vials that require monitoring, surveillance, and various other activities, be that to prevent illegal fishery activities, make sure our fisheries are done on a sustainable basis by boats license to operate there, to prevent drug running, prevent illegal activities that occur across the border in general and/or prevent adversaries or monitor adversaries that are trying to traverse into waters where they have no business of being. An example is we recently announced the $0.5 million contract to support a U.S. government agency to demonstrate the ability to start monitoring at the edge or beyond territorial waters in the U.S. which is a system that we're deploying in late spring, early summer of the coast of California. And that's one of many examples of where there is real traction of using the commercially available systems that we have and pushing them out into the ocean to truly now showcase that here's the market fit that we've got, and it works and then expand on that and move it into the next stage of development and deployment.

So I want to take that into a very investor and analyst-oriented question. Let's talk about the economics. What does the economic model look like? And specifically, I'm talking about defense and security applications may be different than some of the other industries and commercial applications as well. But what does that look like when it models through OPT?

No, it's a great question. As I mentioned right at the very beginning, other than, obviously, the strategic fit and the fact that we care deeply about ocean security, we -- from an economic model, it really lends itself to recurring revenue [indiscernible] getting. And that is partially due to the fact that the U.S. government is really shifting fairly heavily as our other government from kind of government-owned, government-operated contracting models to ultimately contract our own contractor. Well, that enables us to do is to provide the vehicles on day rates. But obviously, it's not like a day rate where neither on Tuesday, but I don't need it on Wednesday. These are long-term agreements. But during those agreements, we agree on day rate equivalent that it would be out there for, it means that we provide the service personnel in order to maintain the vehicles, carry out the operations that we do. And obviously, that is a very similar approach that we've taken in some of the civilian markets. So we've mentioned it before, we're actively building out an inventory fleet so we can respond quicker. And from a customer's perspective, and in this case, being -- if you take the U.S. military, for example, it enables them to adopt civilian technologies that exist and are kind of -- so to speak off-the-shelf by now, quicker and get them quicker into the war fighter's hands. Without having to go through the process going, okay, I want to buy x of these. Then I'm going to train my teams up to go and deploy them and so on and so forth. It is a way for government to rapidly integrate commercial technologies and get them into the hands and into the areas of the war fighters where they truly need it. And recurring revenues make our life easier. They're interesting for our investors and they certainly provide a great, stable basis upon which we can build the next level of our inventory for the fleet.

It's interesting. It's like a reverse flow, normally, a lot of new high-end technologies developed and military and worked on and built there for application of purpose. But this time, you got a commercial market that's really enabling military applications, right?