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

Hello, everyone, and thank you for joining us today to this Fireside Chat on Water Tower Research. My name is Shawn Severson, Founding Partner and CEO of Water Tower Research and Head of Sustainable Investing and Energy Transition Research. Today, we are talking with Ocean Power Technologies, ticker OPTT, trades on the NYSE American. And we have with us CEO, Philipp Stratmann, and we're going to be focused today on really about the growth opportunity in the company as we look through the commercialization side as we transition to the next stage of the company. So welcome, Philipp.

Hey Shawn. Good morning. Good to be on. I appreciate you taking the time for the chat today.

Great. And I also want to make sure investors know you can access our research and other reports at fireside chats, podcasts on OPT at our website as well. It is an open access format at www.watertowerresearch. So I'd encourage you to go there, check out the other research and also look for any disclaimers and additional information there. So I'd refer you to that. And I'm going to jump into it if you're ready, Philipp?

Yes. I'm ready Shawn.

So obviously, the company has evolved over the years, moved from even applications and into defense and different uses of the buoys. But one of the things that has been really noticeable to me having followed the company for several years is the move towards commercialization out of an R&D project and really now into getting larger scale deployments and developing the business. And along with that maturity comes the need for some investments and understanding how you're going to service commercial contracts, for example. So I think to start, if you could talk about some of the things that are demonstrating that commercialization to begin with. You had a large number of press releases out and activity lately over the last few months, so things are clearly picking up. But how do you tie those to the commercialization of the projects and the technology and then get into a little about the investments?

No, you're entirely right Shawn. I think the last couple of months have been very exciting at -- and we've been pleased to be able to tell the market about the progress we've made. We obviously went out and made statements last calendar year where we said we substantially completed all of our R&D activities. We had a pretty decent steady drumbeat of vehicle orders and demonstrations we were doing. But I think what you've seen over the past couple of months and the last few weeks, is really an uptick in not just the products and projects and general commercial news we've been putting out, but also the type of customers and the type of solutions we're bringing. You look at a couple of them. It's not a, we're going to do [ AML ] project with somebody. It is a case of, hey, we are going to go and provide X vehicles to a commercial customer in a specific region. I'll talk about regions with you shortly. But it's not new vehicles. It is -- it's our existing 16 WAM-V or it's our existing 22 WAM-V or in some instances, the 8-foot WAM-V and where it's changed is customers aren't going or interested in this vehicle, I'd like to test the vehicle. It is love the vehicle, seen it work in the market. But can you put A, B or C sensor on to it. So it's a real step change from where we were. It is us providing an integrated package because nobody questions the ability anymore in the market, whether these vehicles work. It's a case of -- they expect them to work. They know they work. And what they're looking for us to do now is to provide them with a modified off-the-shelf offering essentially where the vehicle comes off the shelf, but then we modify the sensor packages for their specific application, deliver it to them. We're also now starting to deliver it to them with kind of like spares because they're going to be using it properly as for them a revenue-generating asset. And they're very excited. I think the same thing is also now happening on the buoys. Talked about, A, we're doing some buoy work with various parts of the U.S. government. But I think now the fact that we are selling a buoy with Maritime Domain Awareness solution integrated on to it into the Middle East, I think again that is a step change. It is similar to the vehicle side. It's not a, hey, does this buoy work? And can you provide it to me for a couple of weeks, or a couple of months and I'd like to try it out. It's a case of, okay, I've seen the demos, I know what your software does because I've dialed into the software and myself and members of my team, we've traveled around certain parts of the world and remotely demonstrating the software capabilities from the assets we have deployed here off the coast of New Jersey and New York. And they're also not doubting the buoy capabilities. So we are now at a stage where we are providing is the buoys they can look like this, this or this, here's the vehicles, here's the various software packages. And you will recall, we went out and we said we essentially have this Merrows package under which we grouped all of this. This is what this is. So these are commercial offerings based on existing products and solutions that we have, where it is now modifications to the solution as opposed to modifications in the underlying platform. And I think that's very exciting because that is testament to the fact that the R&D efforts that were done in the past are now yielding results, and you're seeing that uptick in the curve. So that's -- I think that's a very exciting stage of the commercialization.

And one of the things you've done to get there is I know you've made investments in sales, too. I think it's worth talking a little bit about that because, obviously, to touch on what the sales cycle looks like for you, so investors understand how you've gotten to where you are and also the growth path going forward, the investment in sales starting point, obviously, to increase the deployments.

Yes. So there are several things we've done. One is obviously we retooled our sales team so that we have the appropriate commercial team for the markets, regions and industries that were going on so as an entity that there's a lot of work with the U.S. government. There's a lot of work in defense and security, and it's important to have the right mix of veterans, U.S. citizens, people with clearance and so on and so forth on your team so that you can deliver on that side. But the other thing that you need and what we did is we built out some demonstration assets. And we've been very clear on the fact that we've demonstrated the capabilities and deployed some of the systems using the capital that we had available and done -- had buoys deployed off the coast of New Jersey. So instead of what that enabled us to do is when a customer says, hey, I'd like to see it. Great, do you want to do this afternoon or you want to do tomorrow morning? It's not longer a case of like 4, 5 years ago, when work was being done with Premier Oil in the North Sea, so like they would like to test it, okay, well then you have to go and prep it and you have to ship it over to the United Kingdom. And you have to install it. You're talking month and month and months of work. We're now -- or we have been in a position where now if somebody wants to see it, we’re not great, we'll dial you into it. We log you into it and we move on with it. And when that is done, it's -- you've seen that frequency of announcements from this change. And that's been largely driven by the fact that we've been able to demonstrate more quickly what we can do and things like us signing the OEM agreement with Teledyne that we went public with enables us to more effectively integrate sensor packages into the solutions, and that's what customers are really looking. They're not looking for the underlying. But they're looking for -- I've got this data problem or I've got this survey problem or I've got this defense and security problem. And by having this integration capability, we're shortening the sales cycle and we're materially increasing the pace at which we are converting opportunities in the pipeline down at the backlog and then subsequently into revenues.

One of the things that's always been interesting about companies like this when I looked at how technology evolves and the adoption curve for something like this is that light bulbs start to go off and other people look at it and say, oh, I can use it for this or I can use it for that. I mean obviously, you start with some core basic uses and instrumentation stacks and the things that you're having. But are you seeing more opportunities coming your way that are designed around, hey, we could use it for this? Let's take a look at that as a potential application.

Yes, we are. We're starting to see more interest, let's say, from the offshore wind industry as an example. We didn't set out to be a company that does particularly a lot of -- we're not mammal tracking experts, let's say, the right whale on the East Coast of the United States. But the work we've done on defense and security and working with underwater sensors and underwater listening, mostly related to things like antisubmarine warfare are directly translatable into listening for whales that are migrating up and down the coast and that you want to protect as you're going to build out offshore energy assets. So we're starting to see inbound interest coming into us as opposed to us being specifically positioned in that market per se. Similar things are happening -- we went out and we said, hey, we obviously did the work in Bahrain with the U.S. Navy's Fifth Fleet and Task Force 59 and Digital Horizon. Then we started looking at, okay, what other assets we've got. So it moved into mine countermeasures and so we did the demonstrations earlier this year around [indiscernible], where we deployed sonar systems behind our 22 in order to work on mine countermeasures. That has then led to kind of discussions that we're having around counter UUV capabilities, Unmanned Underwater Vehicles because the systems we're deploying and the way we are able to deploy them because of our underlying platforms enables us to support kind of micro AUVs in the water, which then becomes the next opportunity. So you're entirely right. It's like the branches on a tree. Once it starts growing, there's a whole myriad of other opportunities that start coming along that we weren't able to capture when it was a buoy and a type of vehicle, whereas now we are showcasing this integration capability exists. We see that acceleration of the demand and the inbound interest.

And then one of the other things you see companies facing as they commercialize the challenges that they face is the sales, how do you sell it, which I think we talked a little bit about already. But then the next logical is, okay, how do you manufacture it? Can you build it? Can you build enough of it? And can you support it in the field? So those are 2 very important parts of the commercialization strategy, especially for smaller companies. How are you addressing those issues?

Yes. And part of it is being -- we've been public about this is retooling the makeup of the employee base. And we have to do that. You got -- as we're moving into operations, we need more operators. So we are putting more stuff out, we need more assembly technicians. We need maintenance. So that's something that we've worked very hard on. And it's come with a shift in the makeup of head count and adjustments to head count where required. At the same time, we've been very cautious about where we expand. It would be easy for us to kind of spend it every weekend or every week, traveling to different parts of the planet and working on sales opportunities. But you're going to lose sales opportunities more quickly if you don't deliver, then not getting them in the first bit. So we've been very targeted on focusing on North America initially because it's our home market. And then we started expanding into Latin America. And now we start pushing into the Middle East. We take very concerted steps. And in all those areas, we look for the appropriate partners that we can work with that can help us with in-country or in-region deployment, in-country maintenance and services because nobody has got a vehicle in, let's say in the Middle East, it's going to ship it back every time they want some maintenance done back to California or to the East Coast. So you have to find the appropriate partners. So you have to set it up. I think these are critical steps to go through. And in terms of manufacturing and assembly to the other part of your question is we see ourselves as an assembly. We lead the design, and we will do the final assembly. But we're not -- at our core, we're not a manufacturer. And we don't go and build out from scratch every single part or subassembly and is required to put together our systems. We have a very strong Made in America supply chain that we benefit from. And we use that supply chain to procure subassemblies, partially assembled systems that we then do the final work and we do all the integration and factory acceptance testing at our sites and then move it to the customer. I think that keeps us our job. And just on that last point, it is important to know. We've gone through a lot of effort to make sure that we have as fully as a Made in America supply chain as we possibly have given our customers.

And when you're going to the customers or they're coming to you in some cases now, obviously, reoccurring revenue is something that's always at the top of my mind as an investor because we -- and the analysts, we love that. We love reoccurring revenue. And so as you're building out the business and the growth strategy, how are you addressing the equipment sales or maybe not sales, obviously, you're renting the space, reoccurring revenue. Talk about that mix and the strategy? And what if any specific investments you need to support with the reoccurring revenue or service, energy as a service strategy that you're implementing.

Yes. So obviously, we still sell systems to our customer base. And the sales are what get us the foothold in a certain market segment. They're great for kind of rapidly scaling up total quantum revenues that we're going after. And then we went public with the fact that we launched a properly tiered service support system essentially to our customers and an offering to our customers so that they can pick going, hey, here's the kind of support I need. And it goes from -- I just want to be able to call somebody between normal time Pacific or Eastern or wherever I am based to, well, I want to be able to call somebody all the time and it needs to be on the times and the region I'm in to -- I don't just want to be able to call somebody, but I would need -- I need some set of spares to, well, I need spares and I need a train the trainer approach and we need you to come out once or twice a year to train my team on the next set of equipment and tools and processes. And you'll see that with our customers. We now issue frequent field service bulletins. So when we learn something in the field about how something works or where a remedial action needs to be taken, we'll issue that to the customers. So it becomes more of an ongoing service. Obviously, that helps drive that recurring revenue over time. So you're looking at get -- build up the installed base, then provide recurring services on that installed base. And then you're always going to have additional sort of lease customers that don't want some -- don't want to own it. They just know that, hey, for the next 3 years, here's what I need to do during every maintenance and that's great. We'll work on that, too. Obviously, the latter requires a fleet to be available. The services require us to have the available spare parts and doing the servicing requires us to have the people with the right skill sets in the right location. So those are some of the costs that we do have, but I think they are more than compensated for in the way that we're able to convert those into revenues.

So as CEO, when you think about the growth opportunities in front of you, what gives you the most heartburn, I think, or maybe let's call it the bottlenecks that you think of as you grow the business that you really are focusing on to make sure they go smoothly?

I think the big challenge, I think it's a good challenge to have, is the fact that kind of industry in general, Offshore industry in general, is really working up to offshore autonomy and there's a mindset that's shifting and changing that we're seeing. When you're looking at things like the Department of Defense efforts around Replicator, when you're looking at the efforts around kind of what DIU is doing, the Defense Innovation. When you're seeing the great partnerships we've managed to build with Sulmara and some of our other partners. When you're seeing the global expansion that we're looking at Middle East, Latin America, parts of Sub-Saharan Africa, it is being able to maintain the quality of product and have the customers being happy with the systems they have and with minimum downtime, if any. I think that's what's going to be the next challenge. Obviously, we are constantly concerned. I'm constantly concerned about more growth, more revenues and more gross profit and so on and so forth, but we can't take our eye on maintaining quality, safety and overall reliability of what we provide because otherwise, it's going to get challenging delivering the growth in revenues that we've seen recently.

And I'd imagine some of the security and DoD applications, uptime is -- and reliability is very high important if I assume correct?

Well, it's not just reliability and that side, Shawn, it's also -- it's having the right people available, the right qualifications and the right background. Certain projects that we're on, we can't disclose contract returns. We can't disclose the exact counterparty you were dealing with. And that's just something -- I think that's just -- that's part of the nature of the one of the industries that we're in. But we're proud and humble to continue supporting our war fighters and all of our allies who utilize your autonomous systems.