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

Today we have Ocean Power Technologies back with us, ticker OPTT. We have Philipp Stratmann, the CEO, and we're going to address a number of issues today. As a reminder, you can ask questions. You can submit them in the box below. I'll try to get to some. We try to keep these to a max of 30 minutes, just so everybody is on the same page. And as a reminder, the call is also being recorded and will be on demand. You can use the same link to access the on-demand as well, of course, this one that's live. So feel free to send that around or access this fireside chat again at any point. I'd also refer you to the company's web page for disclosures and any forward-looking statements. And with that, I'm going to go ahead and jump in if you're ready, Philipp we got a lot to cover today.

Yes, sounds good. Thanks, Shawn. Good to be on again with you.

Well, so let's start with recent big news and hot topic, the NOAA awards, okay? So let's begin with that kind of a big inflection point for the company, a big event. And maybe for people who haven't familiar didn't see the press release. Could you just run through again the highlights of what it is and then maybe we can dig into a little more details about it.

Yes, absolutely. Yes. No, we were very pleased with the 3 awards we got from NOAA. So we are 1 of 7 awardees for 3 separate IDIQs. IDIQ is our U.S. government contracting vehicle stands for indefinite delivery, indefinite quantity. In the nongovernment commercial world, it's essentially a master services agreement that is set up with the awardees with a ceiling for a preagreed scope or delivery type of service that you will provide at a pre-equity price. So in our case, this is focused on our uncrude [indiscernible] vessels, the WAM-Vs. And the 3 awards combined have a combined ceiling of over $20 million. So they've got a 3-year award duration. So it is now really on us working with NOAA to providing our services that were agreed on these awards into specific parts of NOAA projects that are ongoing over the course of the next 3 years. So yes, we're very excited about it because it materially reduces the commercial negotiations having to take place because we have a de facto MSA with [ cooler orders ] now in place. And it's -- we've got the vehicles to provide the services.

I thought one of the things that was unique as you noted the time -- how quickly this transpired. And one of the things I think I have always been curious about, investors care about is the sales cycle in a business like yours, be it DoD, NOAA, all the different agencies, especially on the government side. This was a bit different. So maybe talk about how this transpired.

Yes. I think in general, we're starting to see a change in the sales cycle overall. It's going from -- we're moving away from first adopters as our customers. In any of these, the vehicles [ under ] are now known as commercially available systems. So there is less of a introductory requirement of highlighting to a customer, here. Here this is what this is, this exists, you might be able to use it. It is now turning into oftentimes customers coming to see us or reaching out to us going, "Hey, I've got this problem. I know you have buoys and vehicles. Let's talk about how they can be used on a specific project. I think that is certainly helpful. Generally speaking, obviously, because you're still putting things out unusual. There's still a is still a sales cycle associated with it. This isn't enterprise software sales where you get a call on a Friday morning and about Friday afternoon, you've agreed to contract. We're still talking a couple of months here, but it is no longer the [ endless ] cycles that may have been a feature of the past when there was 1 or 2 of these systems out there. I think we're on -- we're well above 70% in terms of serial numbers for the vehicles. And we've got buoy orders being built and working on some other larger orders to convert, right?

And what -- in the NOAA example, what is this displacing or replacing, I guess, in terms of previous practices?

It Is really adding to services. I think if you're looking particularly at the U.S. government in general, and I think you've seen there's been a lot of public news about this over the last few weeks, in particular, I think the DoD announced its replicator initiative, which is to get more autonomous technology into the U.S. Navy specifically in certain aspects. And the ever-expanding scope government agencies and departments have, NOAA is a great example. There is no additional budget that is coming NOAA's way, but there's more and more work to be done. And as some of NOAA's existing assets are aging, instead of replacing a ship at a cost of hundreds of millions of dollars, just think what you can get in terms of ocean trips, unmanned and crude vehicles that you can use to do the same thing. So what we're seeing is -- it is now -- it's sort of displacing the traditional way of how this work would have been done, but there is now a broader understanding on the government customer side, but also on the commercial customer side that we're seeing of people really grasping the benefits, these autonomous technologies and zero, low-carbon technologies bring to their operations in terms of cost efficiency, in terms of speed of response, in terms of additional data gathering capabilities and all of that adds to the value proposition.

Let's talk a minute about the quarterly results. I know you just had them, but I would like to hit those for a minute just for investors that maybe didn't listen to the call or get a chance to review it. Some of the highlights would be helpful here.

Yes. As you can see, we've continued growing top line. We have continued improving gross margin. And we are building our pipeline. So at the same time, as we are converting opportunities that are sitting in the pipeline, converting them to backlog and then backlog to revenue. We are continuing to put additional opportunities in the top of the line. So this is not a one big opportunity type pipeline. This is a multitude of opportunities that sit there and that we are now able to start converting whilst adding on top. What that enables us to do is to continue down the path that we set out and announced 2 years ago of where we're heading in terms of strategy, what meaning providing ocean intelligence systems that use low or zero carbon technologies into the hands of our customers. I think the results highlight the fact that the strategy that we set out to execute is working.

And I guess following on, on that, talking about the overall market demand, what you're seeing because I think there's a lot of convergence of a lot of different, let's call them mega trends here, autonomy, charging, offshore charging and power capabilities, defense borderline or border home security. I mean, yeah tying all these different things. We've got a lot of different signals that we get from the market. What do you see if you were to summarize this up and say, what's the range of things that you expect on the demand side?

We're seeing a material uptick in demand. It's anecdotal evidence is that we can see more [ inbounds sign ] to occur, which we haven't seen before. But there is a multiplication of initiatives with real funding behind that, that are starting to take off, particularly on the DoD side, you're seeing that [indiscernible]of the Navy is very strong in this. You're seeing it in our overseas allies who are expanding their ocean drone capabilities. And I think on the maritime field in general, we are far behind where land-based or aerial based autonomous operations are. I said my children are [ build drone safely. ] But we don't have -- we don't have ocean [drains] available everywhere. And I think that trend is really starting to accelerate. And on the buoy side, what we're seeing is now that the systems are fully commercially available and have been demonstrated in several projects, commercial projects for customers. As I mentioned right at the beginning, that kind of first adopter pressure has gone away and we're starting to see more multi systems. I think that is what we've already said is part of the strategy that we're aiming for. It is moving away from 1s and 2s into well, here is 5 buoys going into ex field to do -- in a -- some form of underwater monitoring, be that vessel traffic or be that [ mammals ] for wind farms. Similar for the vehicles. It is not a vehicle for one project. We've been public about our partnership with Samara. They now got several of our vehicles out using them. Sometimes even in combination [indiscernible]. We just completed another 2 vehicle deployment to Alaska for one of our customers to do survey work during the summer season up there. I think we did 1,300 or 1,400 nautical miles of autonomous survey up there. And it's 2 vehicles working jointly with each other using their autonomy engine. And you just start seeing our customers are really seeing a material change in what CapEx and OpEx they have to lay out in order to achieve what they want to do, which helps them be more competitive, which in turn, increases the demand signal back to us.

So moving to the government side, DoD, Navy, having homeland security, for example. What would you say are the priorities -- not priorities, but the most engaging right now with some of the biggest opportunities there. And then I'd like to address a little bit of the commercial side as well and give you a mention on the survey side, but get into that a bit.

I think as we said in the past, certainly on the DoD and DHS side, it is autonomous surveillance of large parts of the ocean, be that looking for illegal fishing that occurs. That could be illegal fishing that is carried out by individual fisherman in the Gulf of Mexico or it could be a large-scale state actors, like the illegal fishing fleet from China trying to poach fish and pass the oceans that they're not meant to pitch fish. It could be in border crossings, looking for drug smuggling or gun smuggling that occurs. And then the other side that we're seeing on the vehicle side is [indiscernible]. We've been public and the Navy has been public about the work that's been carried out at digital horizon, which is part of the [ fish ] fleet. Then we followed that up at the international maritime exercise, which took place just before the summer this year, which again had a multitude of various admant vehicles participating. And it could be whether you're delivering a communication statement or you might be delivering a mine clearance measure capability. It's really about utilizing the platforms to deploy data collection or other payload deliveries into parts that are very heart of the ocean that are hard to reach otherwise. And if you weren't using drones buoys, you would have to put more [ fighters. ] And I think this is a great way to kind of -- that is certainly how the DoD and DHS and many of our allies are moving along in that same part.

And then commercial side, private sector side.

Government sector side, there is a definite interest in the low and zero carbon aspects of the technologies because it provides direct carbon savings to our customers. It also lowers the operational cost. And I brought out the -- I mentioned the example of the vehicles we have up in the Muscatine. Now that was for a commercial customer working for a government entity. But similarly, the exact same kind of survey can be done for energy customers, be that offshore wind farm developers that want to do surveys of their construction sites before they start construction, using autonomous vehicles materially lowers the cost point and the environmental impact that they generate prior to construction. You can then deploy buoys to do long-term monitoring of the construction areas. So you can keep unwanted traffic out of the construction area. You can shut down construction for the periods that Whales are migrating. So that you're not creating any issues under the endangered species act. So I think we're seeing on the commercial side, a definite interest in multisystems using zero or low carbon technologies that can do long-term monitoring because the solutions we can deploy using our underlying platforms have a meaningful impact to our customers. I mean that is the other part of the turning point that we've seen surely -- is the fact that it is -- and I think we've said this before, it's not about the buoy. It's not about the vehicle. It is about the solutions that they bring and deliver out in the ocean where otherwise, you would have to have a large land asset that emits carbon and that at the same time, costs you way more than the autonomous systems.

Right. Great. Let's move on to growth and more importantly, profitable growth and the path to profitability for the business. It seems like you're starting to hit key commercialization inflection points. And for those investors that aren't familiar, the technology has been refined for several years, obviously, updates and changes and adjustments, but this isn't an R&D project anymore. And so as you started to hit these commercial scales, looking at the backlog, the pipeline, things like that, let's spend a bit of time talking about that and what that means to getting to profitable business and growth.

Yes. And if you've seen at the quarterly results that we put out, you see the increases in the gross profit margin, and that's -- we've been clear about this. We're pushing for more as an as-a-service model. And the more we're seeing as a service, the more the gross profit margin improves. As we move further into converting additional opportunities in the pipeline and putting them down and creating backlog, which we then turn into revenues, you start seeing with multisystem orders how this further accelerate because having a multisystem order enables us to get to the [ economies of ] scale because you're not building a buoy or 2 buoys for a customer. We can now go and place orders for half a dozen or a 10-plus system, which enables our supply chain to become more efficient, which enables us to build up inventory, which enables us to then respond to the customer more quickly. You're asking me about sales cycle earlier. [ about 70 years, eh? ] -- we're seeing the sales cycle shrinking. Having assets available means that I can not only just shrink the sales cycle, but I can then also shrink the time it takes to get from contract to revenues because I can get the assets into the water. Same goes for the vehicles. We've been moving the manufacturing of the standardized vehicles over to New Jersey because we have the space there and we're utilizing that to build up our lease fleet. And then we are doing one-offs and product development work up here in Richmond in California, where we just moved into a new facility that also enables us to demo the systems to the large constituent customer group that exists on the West Coast. So put all those together, and we are seeing an ongoing uptick in backlog, revenues, opportunities and the improvements in the gross profit margin, which then leads us to generating long-term profitable growth.

So if we break it down, I'd say the drivers towards profitability in this, obviously, scale, right? So it's over -- covering fixed overhead -- there's also been an opportunity to take costs out of materials in the supply chain. And then there is the third part of those are the 2 major drivers where profitability...

It's a service component. It's the -- [indiscernible] more assets being out there and more assets going out as -- on as-a-service model.

As a service, got it, yes.

Yes. And that's recurring.

Yes.

And let's take the example of -- and I take one of the buoys. Buoys are good for 10, 15 years. Not every customer wants a month, not 14 years. Their project might only be to -- so having the as-a-service model is we can take the buoys out there. We can monetize the systems over those 2 years. We can then take them back. The customer didn't have to pay not having growth or CapEx, but rather it was OpEx for them from a [ project ] expenditure. We take it back, we can [ refurb ] the system and then we take it back out. So we end up being able to generate cash flow over cash flow from these assets over their lifetime. And scale obviously helps with that. But being as-a-service model, as the higher gross profit margin.

And predictability and cash flows, which investors -- of course, we're in 20 after, and I want to leave some time and take a couple of questions before we wrap it up from the audience. So first question is looking for an update on DHS and DOE ongoing projects, the ones you've already announced? Any updates there?

Yes. I think in the quarterly earnings again on DOE, I mentioned that we continue working on the DOE project. Some of those findings have been taken over into the next-gen buoy system that we've talked about. So that DOE project is ongoing. And then we are continuing working on refining the installation window for when the buoy will be deployed to do the work in the DHS, which will be occurring -- I don't want to give an exact date on it, but it's -- I can see the dates in front of me.

Next question is related to DARPUS. There's -- are PowerBuoys involved in that power beaming project? I'm not familiar with that, but clearly the...

I can't comment on [indiscernible].

I don't think your going to answer that, but I thought I'd try. At least ask.

We work across a range of U.S. government agencies. Where we can, we explain in detail what we're working on. I think what we are trying to avoid. And I think that is important for investors to know is we're not chasing every single R&D opportunity. We're not -- if there is a direct need for a U.S.-made system to fill a gap for our arm forces, we will absolutely work with the U.S. government to do what we think is our moral duty to do. However, our primary focus is on building up revenue stack based on the systems that we have commercially available because we can see the traction from that. I think that is the right approach to take as opposed to looking for the next research [indiscernible] and then next research [indiscernible]. We would much rather work on commercial contracts with government and private entities.

Good time to the next question is you mentioned NOAA wasn't getting any more money or not likely to. And is government -- increases in government budget, important to them purchasing your products?

No. The increases in budget isn't that important to us. I think what is more important is the already agreed shift from certain legacy systems into what is commercially available already and what the future holds in terms of [indiscernible]. So we are not reliant on -- we're not sitting here watching the new stickers going on. Is it going to be a 2% increase in the budget or 3% increase, where the latest negotiations go. For us, it's more a case of -- we know where the demand signals are coming from and we're seeing that they're coming from what we have available. And as we've proven with the work we've done with Department of Defense and [indiscernible] more recently, it can be done within [indiscernible]. So it is really more a case of what we're interested in is how government and where government wants to spend its budget as opposed to us needing to find a way of creating a budget top-up.

And next question is on what level of quarterly sales are necessary for you to reach profitability? Do you guys have a target there? Do you know at a certain level that the business breaks even? Or does it depend on the mix? I assume it depends on the mix and recurring revenue and all of that, but.

Yes. It depends on the mix. And I think as we've shown in the past 2 years, it also depends on -- we will situate ourselves in a way that means that the business has the highest chance of success. And now we've shown that successfully. When we [ rejig ] the entire management team over the past 2 years. And the results are starting to speak for themselves. And we will continue taking -- looking at taking a close look at our costs and making sure that they're in line with where we're seeing bookings and then revenue growth coming.

Next question is regarding capacity. And I think what they're getting at here is you're hitting these commercial inflection points, right? And all of a sudden, no one comes back to you and says, "Hey, we'd like 9 more of those, right? What what happens or what happens inside internally that you can do to accommodate that?

My operations people start sweating -- or joking aside -- I think what -- we have capacity. We have a flexible and regional supply chain. I think in particular, I think that's what matters. That's one thing we're very proud of. For [indiscernible] facility, most of our stuff comes out of the tri-state area. We would buy U.S. steel. We're not reliant on overseas imports for our steel parts. And we are continuously looking at who else we could partner with in order to help with subassembly work and others. But generally speaking, we feel comfortable with where we're at in terms of vehicle output, buoy output and the way we've scaled up operations and manufacturing. At the same time as keeping our head count costs fairly flat. And we've done that by taking a hard look, okay? If we no longer need to do some of the R&D work, that's an opportunity for us to take cost out of the business. And then at the same time, we add some more blue collar labor because we need the output because the output is directly responsible for the revenue [indiscernible].

I'm going to take one last question, we're almost up on the half hour here. The question is regarding recurring revenue and what it is. And I think also why it's profitable, too, they're asking about the profitability of it. So maybe -- maybe the way to position this is just what is recurring revenue? How do you get it? And then why is it so profitable and attractive to the business?

No. So if you're looking at the recurring revenues, it's some of the customer contracts that we have out there, they're saying, "Hey, I need this vehicle for the next 18 months. We don't know that for the next 18 months, here's the agreed day rate that we've put out for the vehicle, is the service rates that we're putting out or the service technicians don't come with the vehicle. So we can start planning our business along those stuff. Same would go for the buoys. Somebody says, "Hey, I've got this 2-year monitoring project in the Mid-Atlantic." okay, fine. So we know for the next 2 years, here is the monthly revenue you need in the [indiscernible] and you can start, truly start forecasting and budgeting on that basis. The reason I said profitable, which is what I mentioned earlier, is because if you're looking over the lifetime of these assets, they sort of pay for themselves multiple times over. They're great cash flow generators once they're put into service and they continue being cash flow generated because you can use them over and over and over again. And that's why we're so excited about the transition we've made against the as a service model.

And so what about the data side of it as well? Maybe address that. I don't know if they are -- investors familiar with that, but data side is also very profitable.

Absolutely. I mean as I said right at the beginning, there's no point having the platforms for the platforms -- is we deploy various sensors that collect data. And then we can take that data and slice and dice it and then monetize that through data as a service subscriptions, either with a single customer or depending on the instances, we might be able to take a subset of that data and monetize that with other customers.

Great. Thanks, Philipp. I'll leave you with some -- if you have any final thoughts, and then we'll wrap it up for today.

Shawn. I appreciate you having us on again. We're really excited about where we are now as a business and where the trajectory is pointing towards. And I think the ability of combining the service offerings that we have and having them as a coherent offering that our customers seem to certainly understand, is really helping grow the business and putting it into a position that we all believe it can be in. And we look forward to continuing to execute against this.

Great. Thank you. Look forward to having you back. Lots of exciting stuff. Thanks, Philipp.

Thank you, Shawn.

Thank you, everybody attending today. Apologize for questions we didn't get to. I know we had several more, but appreciate everyone's participation, and thanks, everyone.