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

Hello, everyone, and welcome to today's fireside chat with Ocean Power Technologies, ticker OPTT trades on the NYSE:AM. I'm going to host, Shawn Severson, Co-Founder and CEO of Water Tower Research. For those of you not familiar with, just a reminder, WTR focuses on modernizing investor engagement through research-driven communications. All of our research is open access and available for all investors to find on our website at www.watertowerresearch.com, or through any of the research aggregators such as Bloomberg, FactSet, et cetera, if you happen to have a terminal. Today, I'm joined by my colleague and senior analyst, Brian Gordon, and focus today on OPTT, we're happy to have Philipp Stratmann, President and CEO of OPT back with us. Welcome, Philipp.

Welcome, Shawn. Welcome, Brian. It's good to be on with you guys again.

Great. Thanks. Glad to have you back. A lot's happened with the company throughout this calendar year. That's for sure. I know you guys just reported earnings, but I think for investors just getting up to speed for year-to-date -- calendar year-to-date, talk a little bit about the recent company performance and revenue growth that you've been able to put together throughout the year here.

Yes, absolutely. Thanks for the question, Shawn. Over the course of the year, we have continued executing on the strategy we set out and communicated, which is to become an integrated provider of Ocean Intelligence Solutions. They so happen to be sometimes renewable energy powered, sometimes we use traditional fuels in order to extend some of the ranges that we get involved in. And it's all about enabling that permanently forward deployed watching, listening surveillance monitoring stations, then provide information, data and intelligence to autonomous and roaming systems like our vehicles. And as you've seen, quarter-on-quarter, we've continued executing on that growth, stabilizing gross margin and started regional expansions outside of the United States. In addition to that we've maintained that focus that we've always had on our home market. We're a proud U.S. company, we're headquartered here. All of our operations are here, and we proudly support the U.S. Department of Defense and other agencies of the U.S. government in order to enable improved defense and national security postures at home and then for our allies overseas.

It seems that this has been the year of commercialization, too is one way to put it. Been familiar with the company quite a few years, a lot of changes there, a lot of shift in focus. But if you kind of take a step back and look at the company's evolution, growth companies always hit these inflection points with commercialization and kind of based on the bookings and things that you've had this year and some of the announcements, I think it's fair to say that's kind of -- that's been the inflection point in 2024 for you guys?

I would categorize it not necessarily as commercialization but it's truly getting that commercial traction that we've been looking for and that we've seen in our pipeline. I think it's been the year where pipeline has started to convert more into backlog, and we've been able to convert that backlog into revenues. And I think we're going to start seeing more and more and more of that as we move into kind of 2025. And I think that's been very exciting for us. And I think we've done that at the same time as we've really taken a hard look at our cost structure and deliver for our customers and deliver more for our customers than we've ever done before in the company's history but do it with the lowest cost structure we've seen in years.

Thanks. Great clarification, Philipp.

So Philipp, I wanted to follow up on the cost savings that you just alluded to. So you have been able to drive some rather significant reductions in OpEx over the last quarter or two. Could you really dive in and give a little bit more color on what you've been able to do to take down costs like this?

Yes. No. It's -- it's been a lot of effort on the company's behalf. And what we did is we looked at again, and Shawn, you mentioned this just now, and we just talked about it just now, it was like, this is not a company. It's a company that has commercial products. Yes, it has to continue innovating but it doesn't have to go and spend time and money on coming up with entirely new solutions. We have a set of solutions that has a strong pipeline and that is generating good backlog and is helping us drive that revenue growth. So what do you need to deliver that to the customer and then what do you need in order to maintain an innovation cycle that helps you stay at the edge rather than moving into a new edge. So with that came significant headcount reductions that we carried out. We took a very hard look at external third-party expenditures. What's truly needed for us to do what customers want us to do? And I would say part of that has been enabled through increased partnerships with various other institutions or entities where we took a hard look at like what's core, what's noncore and what's the make versus buy for OPT? And what we ended up with is that reduced cost structure. We went through a series of optimizations that got us to where we are. And I think the last quarter earnings really showed that we've taken about 40% of costs compared to the same quarter a year ago are out of the business. And in that quarter, we'd already taken some costs out of the business. So it's just been a continued focus and questioning every single expenditure the company goes through to make sure that we remain focused on what our customers care about. And our customers care about having a problem solved and having access to commercially proven dual use technology like the one that we provide, and they wanted to operate. So we are way more operationally focused entity now than we would have been 2 years or 3.5 years ago when current management came in.

And if investors are trying to figure out what the breakeven point would be, is it fair to take your OpEx that you were able to rent last quarter and sort of annualize it? Are there additional cost savings that you're able to drive? Are there any expectations that it might be up from here as you continue to grow in scale and start delivering commercially?

I would say, and I think I mentioned this during our earnings call that we had on Tuesday this week, is we're now in a place where I think we have what we need to continue executing and we can continue executing at this level and add additional revenue levels for quite a while. We do not foresee any unexpected circumstances notwithstanding but any huge increases in OpEx that are going to be required for us to deliver at the scale that is needed to get to the breakeven point put out at the end of calendar year 2025. We have the real estate. We have the people. We have the tools that we need in order to service the places that we need to service. And we have partnerships that enable us to do what we need to do cost effectively in various regions of the world. And I think from an investor perspective, looking at where we are now and presuming that there's -- you can presume there's definitely more headroom that we've got on the revenue side with the current OpEx. Is there going to be a couple of heads that need to be added to do more operations? Potentially, but that will be reflected more on the COGS side, we're growing revenue side than it would be reflected on kind of like general G&A. And let's not forget that we launched -- in the last about months, I think, we launched our service level agreements. So when we have service calls and we bring in people to help the service calls, there's revenue tied against those heads that we need to bring in. So I think we are comfortable in the situation that we're in and how the cost structure is now set up. And I think that's the right way to do it. Is it always comfortable for everybody who's here? No. But frankly, probably it shouldn't be because we're in a high-growth environment. And that means that we are continuing to step up that ladder. And only once we are at a level where there is more needed, would we consider adding any additional cost into the business.

And Philipp, I wanted to talk a little bit about the view of the business. When I look at it from a thesis it's such an enabling technology, right? I mean if you look at what the data and information that you gather becomes the gold mine, you have the enabling technology to put that instrumentation out in a remote location or recharging vehicles, lots of different applications. But if we think about it, and you can't get through an event like this day without asking about AI and imagine it's particularly interesting because look the instrumentation stats, whether it be for defense or whether it be for commercial use, how does that fit in? Does it fit in? And am I thinking of the business correctly as this enabling technology for these large data sets?

Well, I have to say anything, I show the way, [indiscernible]. No, all joking aside, it's -- that's exactly what it is. It's -- we've gone out there. We've put under one umbrella, which we call Merrows, which is our AI capable data integration. What our systems enable to do or enable our customers to do is we can collect the data that they otherwise don't have access to, whether they then use that data to create training models or whether they use that data to run it through existing training models they have, to then task other assets like our vehicles or our buoys again to look in different of the ocean. That's exactly how this is all meant to work. At the moment, a lot of our customers don't have access to that data. We collect that data for them. We can give it to them. We collect it daily. We just launched one of our buoys of -- for those of you familiar with the New York City region of Sandy Hook on the inside of it. For those who are not familiar, that's the main entrance point into New York Harbor. We now have a buoy with a radar AIS camera that is looking towards JFK in the Verrazzano strait, the amount of data that we are collecting there for our own purposes and that we can then use with some of our partners is monumental. It is a rather busy part of the world. But equally, we've obviously been working with the U.S. Navy on Project Overmatch where we are working in collaboration with other entities to help them feed the economy stacks and then collaborate with other autonomous assets. The work that we did with the Fifth Fleet out in Bahrain for Task Force 59 for Digital Horizon and the International Maritime Exercise. They all fit into that category of being, a, a data provider that can help you with your tasking but can also receive talks and transmit tasks to other autonomous assets, either our own or others. So I think we are not an AI company. Neither do we want to be an AI company, I don't really want to build billion-dollar data centers. But what we are is a critical part of that AI infrastructure for that to operate out in the ocean. And I think that's -- we like being in that space, and we have the benefit having commercially available products and solutions that have been proven out in the marine environment that can enable the broader set of people to operate and provide artificial intelligence in an ocean environment.

And I think there are probably a lot of new investors here but to back up a second, and talk about what you're actually accomplishing. I mean, I don't know if people are necessarily or investors are understanding the tie the need for power, right, remote independent offshore power to generate the technology stacks. But can you just give a brief overview for newer investors of one, what you're solving for; and two what the solution was before, the legacy solution that you're displacing? Or in many cases, there wasn't a solution. But yes, can you expand on that?

Yes, absolutely. So what we're providing is the ability to have essentially a portable generator and a remote controlled system, okay? Fully autonomous nowadays but to try and simplify it down. If you're looking at this the way it is, it's a bit like if you took your remote controlled car and wanted to operate it somewhere where there's no sockets around for you to plug in to recharge your car, because you're trying to -- either you're trying to race it or whatever you're trying to do. And you're trying to do that for like a year in a row, 2 years in a row, 3 years in a row for the sake of argument. Now you think about you do that in the ocean. Well, there's definitely no sockets out in the ocean. You might have access to ocean data if you're operating in that first 1, 2, 3 miles of the coast. But once you're out of that, you're out of cellphone range. You might have some satellite data but order in order to go and transmit via satellite, you need power, where you going to get that power from? So what we provide is buoys that can be deployed anywhere. Water depth isn't really a concern. So you can put them out anywhere and they have material storage in built so you can fuel the payload, and we trickle charge those batteries on a constant basis using wave power, wind and solar. And then we can -- from that, we then power subsea and surface surveillance and monitoring and communication systems. That could be AT&T's 5G node like the one that we're deploying in Monterey Bay for Naval post graduate school. It could be Starlink like we're deploying in lots of places. It could be a long-range Wi-Fi, it could be military tactical communication systems that are up on a point-to-point basis. But then we also put into that our vehicle systems. So the vehicles can be launched from the shore. They can be launched from the boat, they can operate for a day after 3 days, and they can go and then provide additional data gathering wherever they're operating or they can deploy other payloads. That could be aerial drones. We're part of Red Cat's strategic futures initiatives where we've been working on the integration of aerial drones to be deployed further offshore. You could deploy underwater sensors that could be for mine countermeasures. It could be for detecting obstacles where you're trying to build an offshore energy system. It could be going and protect critical infrastructure. And then that next level that we're working on right now, and we demonstrated over the summer is the ability to have the vehicle come alongside the buoy, charge itself up and then do its next task. So it's essentially thinking like you're having full serve driving Teslas without anybody sitting in them that are now having a supercharger that is out in the ocean. That is essentially what we are putting out there. So it's our ability to do fully autonomous ocean data collection and acting on that data and keeping seaways clear, secure and help others maintain freedom of navigation of the seas.

So Philipp, I want to turn our attention a little bit to the pipeline. So on the last quarter, you guys talked about a lot of the new business that you're developing, both in the Middle East and Latin America. I was wondering if, first, could you tell us about some of these new deals that you're having. But then also tell us about like how you're approaching business in these regions more generally.

Yes. No. We've been very cautious expanding internationally. Some of that comes from the fact that I think at OPT, I think we've said this before, somewhere between 20% and 30% of us are veterans, those aren't veterans. And those are our veterans have spent most of the them -- most of us have spent time in offshore oil and gas and worked -- almost all of us have worked all around the globe. So we know what it takes to deliver offshore solutions when you go and expand. So we went through a very carefully orchestrated analysis of where do we want to be internationally. And in any 2 regions stand out really. I mean there's Latin America, it is a huge -- and that's kind of from Mexico all the way down to Brazil. That is a huge ocean area for starters but it also has a mature but still massively growing offshore energy industry and has a whole bunch of security issues. And then on the other side, you have the Middle East. There, you have -- we were in Bahrain for 2 years with the U.S. Navy on Task Force 59. There you have an exceptionally active offshore energy industry. And I don't think there's anywhere else where the overlap between offshore energy and asset security is so intertwined and interwoven given the neighborhood that you have over there. So we recent -- and in order to make it do it properly because a lot of have seen this before, you can sprint yourself too thin, too far. And the only thing worse than getting -- not winning a project. It's winning a project and then delivering for the customer because you're never going to get that back. So we looked at how do we go there? And where do we start? So we've started with the UAE in the Middle East. We've been working with Unique Group on commercial opportunities. We've been working with Remah International Group on defense and security opportunities. We're starting -- we're starting that really from the ground up, demonstrating the commercially available assets and using them to then go, hey, well, it's here, so now we can provide more. And that will ultimately, we think, lead to a footprint expansion that we will see over in that region. Similar for Latin America, we took an approach going right where is the biggest issue right now? I mean, I think one of the big issues is survey work out there. So we've started providing through partners of ours and resellers, vehicles that do actual jobs for our partners and customers, which we think that is the best way for us to be structured rather than us pretending that we can do everything. We're not a survey company. I think, again, we then recently announced that we partnered with SENAI in Brazil and kind of the innovation research institutes over there. For them to look and study how our existing buoys could be integrated in some of the work that they're doing. That's going to lead to additional opportunities going forward. I think this is how we're continuing to stack up the pipeline at the top with new opportunities in new regions. But -- and it means that we are remaining focused on areas where we have an understanding of what goes on in the ground. And that means that we can do it. Coming back to your OpEx question, Brian, we can do it with what we have available as opposed to, oh, I've got this great opportunity, and it's somewhere in this part of the world but we're not there yet. And therefore, my one sales guy that's dealing with Brazil right now who's got 3 promising leads over there, is going to jump on a plane and try and prospect in somewhere else but let go of those opportunities. We are big fans of working on what we have and converting that. And then as I said, once we're at that next level, then add in that next level of capability to pull down the next region. But all the while considering that we don't want to overextend ourselves that our existing supply chain can't keep up.

So I just want to follow up very quickly on that. So when you actually look at that go-to-market and sales cycle, how much of that is driven through like your own sales force versus coming through some of these relationships with these partners that you've established in recent months?

Well, I think it's both. But I think even when it comes through the partners we've established, it still goes via our sales force because we treat these partners of ours. I mean they're additional channels but they don't operate in isolation. We have part of our sales force, part of their KPIs is channel management and partner management. So they are -- they will get credit the more that our channel partners take into market because what we don't want to have is no control over how our things are marketed and utilized. Given the fact that we work on some sensitive projects, we really want to maintain control over who gets our stuff and how they're going to use it. And I think that is the best way to drive the most value out of resellers, partners, whichever way you want to turn them. Just to -- maybe just to add to that, though, Brian, adjacent to that as well, the other reason -- the other thing that we've done, we've worked on selecting partners that actually understand what we do and work with clients at a level where our products are appropriate for their needs. So we're not out there trying to sell to the world's largest oil companies. We're out there working with people that provide survey equipment to another survey entity that provide -- that works maybe for a midsized supplier to a major oil company. And I think because at that level, that is where there's an actual need for our staff and for our solutions. And that is why we are seeing that growth. It is by -- we're not chasing kind of the one-off glory projects. We've built a pipeline of solid projects that we can pull down that are of a size that we can manage, which also means for our investors that we don't need to rely on like when it's either this or nothing. There's a whole bunch of projects that layer up in the pipeline that get us to where we want to be.

We have time for one more question. I want to take here, Philipp, and then I'll turn it over to you for closing remarks. But the business model itself, you have multiple ways to drive revenue, right? You have the outright sale of equipment, you have a reoccurring revenue stream of basically running it and operating it. I assume you have -- are there maintenance contracts for equipment sales as well. If you can break those down, help investors understand the different avenues that you have for revenue streams and maybe the relative attractiveness to you or the strategic value to you as a business?

Yes. No, I think it's a great question, Shawn. We've -- obviously, we've got as a service component and which if you want to make it simpler because everybody calls everything as a service nowadays, it's leases. At the very base level, the as a service for a vehicle or a buoy is a lease of the system with the appropriate software licenses with the appropriate monitoring. The next level above that is us providing operators that help you run those systems as and when needed. Then there is sales. We might well have and we do have clients, I just like sit there and you know what, I just want the system. I take it, fine. But even then, there's licenses, there's some monitoring and then there's maintenance. But the maintenance doesn't just exist for things we've sold, there's also long-term leases or take or pay contracts. And then there's a staggering of service level agreements. You could have -- think about it like the way you subscribe to some of your software models. You can have a base service level where we'll tell you everything is fine. And if it's not fine, you can call us. Then there's like mid-levels and then there's like really high levels. And at a really high level, we'll keep some -- we'll keep inventory spare to service you at a given set of hours or days, if something goes wrong and we have people available that can come out there. That comes at a cost to the customer. But for some customers, that is worth it, because they're operating in critical fields where they're like, I can't afford downtime and if something does go down, I want you to hotspot this straight away, and they're willing to pay for that backup facility. So I think -- so you have those 3 levels. I would say the third one, that service level agreement sort of sits across all of them. And then there's the one that we haven't yet tapped into. And that is the as we continue to collect more and more data, at what point are there additional licensing opportunities for the analytics that come off of that data rather than just the raw data stream itself.

And then just for investors that might be new to this, Street tends to have a much higher value on recurring revenue, which is why I asked that question because as the business mix shifts, that clearly had some predictability to your business. I assume Philipp, obviously, that's usually a good contribution margin as well and predictability of cash flow. Is that fair to say in terms of the economic model?

Yes. We like service revenues because the systems last way longer than the typical lease or service contract do. So as we continue to scale, you will see additional free cash flow being generated by the systems because on a cash-on-cash basis, the systems are paid off. Yes, there's some maintenance costs involved. But then you can utilize the system 2, 3, 4x over on other projects. And that free cash flow generation just keeps on going. And I think that's one of the things we're excited about on -- in terms of the service model. Obviously, we do like sales. I know they're one-offs, but the sales help increase the installed base. And the bigger the installed base is, the more opportunities exist for additional service revenues to come on. I think that's how we're looking at layering that stack as we continue the growth. And I think those are those inflection points we beginning to see as the company continues to increase. I mean, Shawn, you've been following us for a while, but if you look at -- look at over the last 3 years, the company has gone from like in the low ones, to the high 2s, to the mid-5s in terms of annual revenues in the fiscal year. And you look at where the last quarter shook out, and we're continuing on that trend. And I think that's encouraging to see that what we've set out to do is working.

Great. Thanks for that, Philipp. I'll turn it over to you for any final comments you'd like to leave, and then we'll wrap it up for today.

No, I appreciate, Brian and Shawn. Thanks for having me on again. I think what is important is the fact that we have commercially available dual-use technology. And now with the meritless activist campaign, the company was faced with behind us, we can truly concentrate and work with our customers without unnecessary distractions and help them solve the problems that they have. And our solutions help them solve those problems today. I think I said this the other day, in a different scenario. But this is a science but it's not fiction. And this is stuff that is here and it's working, and it's generating money. And I appreciate all of our shareholders and the willingness they're showing to support OPT as it's growing itself into what it is now and supporting the journey that we're on to become cash flow positive. So we're pretty excited about what's to come.

Great. Thanks. We have a great conversation today. Thank you, everyone, for joining us. As a reminder, please take a look at www.watertowerresearch.com. You can find additional research there on OPTT as well as additional companies under our coverage list. As a reminder, the views expressed in this fireside chat may not necessarily reflect the views of WTR and are provided for informational purposes only. Fireside chat may not be distributed or reproduced without the written consent of WTR and should not be considered research nor a recommendation. WTR is an investor engagement firm, not a licensed broker, broker dealer, market maker, investment bank, underwriter or investment adviser. Additional disclaimers can be found at www.watertowerresearch.com. Thank you, everyone, for joining us today. Great conversation, and we look forward to having you back Philipp.

Excellent, thanks guys. Happy holidays.

Thank you.