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

Hi. Thank you for joining our fireside chat with Dr. Philipp Stratmann, CEO of Ocean Power Technologies. With that, Welcome, Philipp. It's great to host you on this call. You recently shipped a bunch of devices, a bunch of PowerBuoys. Can you talk about what's happening there? And how it's kind of -- what was the process like that led to the final shipment?

Yes, absolutely. And Kunal good to be on. Yes, it's been a busy couple of weeks for us. And we look forward to continuing that level of activity as we progress and keep on driving the company towards growth. We recently announced shipment of a buoy that's going for an international customer. And that's the follow-on of some previous announcement that we've made of us teaming with an international defense contractor to look at opportunities for persistent ocean intelligence, surveillance and reconnaissance devices. And then we also announced recently that we shipped one of our vehicles that has been equipped with extended over the horizon capabilities to do survey work and other domain awareness activities. And that's moved to the Indo-Pacific region. Again, that's the kind of the progression and follow-on from previous announcements related to that vehicle and that capability that we've been developing. And I think what it shows is that ongoing progression that we've been talking about that move from -- we are working on a capability when we go into teaming and partnering with somebody, then we convert that into sea trialing that capability and then ultimately start shipping. And then what we look forward to in the future is that those shipments in turn, then lead to additional provision of systems and solutions and services that we then provide either to that customer directly or to other customers that operate in that field.

That's great. So before we actually go ahead with the rest of the stuff, just diving deeper into this. In terms of like time line, how do you envisage the time line from like -- so this was the first step -- maybe not the first step, but this was the culmination of a number of different steps. What are the next steps that we should think of? And what could the timeline be?

Yes. So in this case, obviously, these are going to international customers. So there's going to be a month and a bit of shipping. Then when it gets there, you've got customs clearance, we then send one of our team over to do ready and make ready and get the system put back into service for the customer and the region that they're operating in. And then it will operate for a period of time, that could be couple of weeks, could be a couple of months. And then what we've seen in the past is that then usually converts fairly quickly into, hey, I really like this capability and the solution you've given me. I would like to say, for the sake of argument, 2 or 3 more. Right now, but I'm going to take 2 or 3 more and can I take them on a 1-year call off. So we then get them ready for them. We put them in service for them. We provide them and we do it on essentially a bit of a lease or a lease-to-own type provision. But that gives you -- so there's like a quarter or 2 before you get after the initial system is in, before you get to the next stage, and then there's a bit of a delivery time line after that. But what you start seeing is that constant ramping up. You go from a conversation to a demo to a first in service, and then it starts escalating rapidly. And I think where we've seen that timeline shrink is where we have been able to demonstrate that capability through our own test beds, capital we've set aside for inventory and demonstration fleet capabilities on buoys and on vehicles. And then invite customers to go and see those demonstrations of the capabilities and that can sometimes bypass that initial step of like, hey, I would like to trial one. They've seen one, and then it becomes a case of, okay, great I've seen the capability, let me move forward. But obviously, that's a little bit more capital intensive as it requires us to set aside working capital in order to run these demo and test it out ourselves.

Of course, of course. So for somebody that might have been introduced to Ocean Power maybe 3 or 4 years ago prior to you becoming the CEO, you are a very different company now. And it's more intelligence and data rather than the power and the energy itself. So talk about that transformation and what capabilities have you kind of added over a period of time?

Yes. I think it's a great question, and it's -- this is something we are very proud of, of the pivot that we perform from where the company was. We essentially took what was the underlying hardware that the original buoy business that OPT was attempting to scale up had and looked around and said, well, where are actual gaps in the market when it comes to ocean technology and ocean markets? And on the buoy side, we said, well, it's permanent and resident ISR, so intelligence, surveillance and reconnaissance but it is also in a future where USVs and autonomous vehicles, and we've seen this in the aerial are becoming a lot more prevalent. Somehow all these USVs need to communicate with each other, and they need to start having -- they need to recharge. You think about EVs on interstates, EVs wouldn't work if you didn't have charging stations. So we started thinking about the buoy as here's your offshore charging station. It's your offshore refueling station. It's your offshore communication station but if you don't have any USVs, it can also tell you what's going on 24/7 for lengthy periods of time. That then also led us to acquiring the USV capability. That got us into that business. So where OPT is nowadays, it is a provider of resident, persistent and autonomous roaming ocean intelligence platforms that can do subsea monitoring, they can do surface monitoring, they can act as communications notes. They can act in combination with each other, or they can be standard, and they can service the defense and security sector, but they can also service the offshore energy sector with large. And there's obviously a part of that where that falls into the offshore environmental monitoring types, although I would say that's the smallest part of our pipeline. But that's really where we are at now. I think comparatively, OPT is not a company in its form that it is now that we've turned it into that is involved in building offshore wave farms. It is a company that is involved in providing non-grid-connected ocean intelligent solutions so that it can go and deliver data to customers in a format that they care about.

And you touched upon a number of different things, and I definitely want to go into each one of them kind of in different questions. But when you think of defense and when you think of homeland security and that has been in a lot of focus post the War in Ukraine started and the change in administration, can you talk about where you kind of fit in the overall defense, homeland security, kind of a landscape? And what is the differentiation that you bring into the whole process?

Yes. So there's multiple pockets where we fit into. And I think I would caveat all of this that I'd say, yes, I think from a general public's perspective, I think the war in the Ukraine has really helped amplify to the public that this sort of autonomous warfare is now happening offshore. I would say it's a problem that, I think, within the United States, and within some of our allies, we've known about for a while and we're preparing for a while. There's a reason why U.S. Navy through a fifth fleet used to have Task Force 59 which was operating out of Bahrain was probably almost 3 years ago, and we had several of our vehicles and one of our buoys over there for that first incarnation of those systems. But where we sit is in that overall maritime domain awareness, so what's happening between seabed and -- and in the sky, but not quite space. And I think that's anything that happens out in the ocean and that could be provision of monitoring systems. So think about it like a CCTV station for the ocean. It's essentially a virtual wet wall that you build out if you're using the buoys. You can go out 200 nautical miles from your cost line if you are concerned about national security. And you can tell what's coming across your waterboard whether that is narco-submarines going underwater or whether there's small boats crossing at night in the dark over the water or whether it's small aerial drones, like the efforts and the issues that we saw around the coastline of New Jersey and New York end of last year, aerial drones coming over the shore at night. But then it's also using vehicles to then interrogate those targets that you've identified through your buoys on a more persistent manner. But I think then on the vehicle side, it is then also finding assets that you need to look for on a roaming basis. So it's clearing seaways. It is doing mine detection or unexploded ordinance detection underwater. Big differentiator between our vehicles and others is we're not the fastest. We're not the prettiest. We don't have the longest endurance of everybody out there, but we have really long endurance. We can carry a lot of payloads. We are super stable. So we are essentially we -- we're your pickup truck. So if you want to go and take an aerial drone or a swarm of aerial drones out on an autonomous basis, where we just demonstrated that together with Red Cat out at Sea Air Space in Washington, D.C. We put a landing pad on top of our 22-foot vehicle. We can go out there, we can launch the aerial drones, they can come back down. That's great. We've done other demonstrations in the past where we have towed sonar systems. We did this last year in San Diego and an exercise where we were able to detect micro underwater robots. So you get into that counter AUV world. And then it could be just more mundane. It could just be working in the offshore energy space, doing seabed surveys. But ultimately, where we see this, it is maritime domain awareness on a persistent resident and autonomous basis and the ability to deliver autonomous payloads and give you that hyperlocal picture of what's going on without putting the war fighter or in the commercial space, the operator at risk.

That's very fascinating and very interesting. So you are definitely part of the solution of maybe a much larger and a bigger solution. So when you think of like contracts that come out of the government, whether it is defense or it is homeland security or what have you, how do you kind of fit in, in terms of -- they're probably not going to give you a direct contract with OPTT per se. There could be a much larger contractor that would be involved here. So as you think of your partnerships, who all are you partnering with as far as these government contracts are concerned?

That's a great question, Kunal. And yes, we don't really want to be a prime contractor because with that comes a whole bunch of additional overhead. And then we have to become more platform-agnostic. We like our platforms. I think what we are doing is we partner with the appropriate prime contractors that can secure these -- as you said, larger contracts or programs really that entail a whole bunch of solutions. Some of the solutions could be purely AI focused. Some of it could be underwater bid. Some of it could be large manned assets. But there's oftentimes also a need for some smaller unmanned assets or some forward deployed buoys that help with comms and data communications and so on and so forth. Last year, I think we were public, we were working with -- these are just examples, obviously, we were working with EpiSci on a project for the U.S. Navy I think EpiSci recently were acquired by Applied Intuition. In the past, we were working on some work for DHS, and that was through, I believe, I think, it was through Amentum. Now we've done work with Adams Communications on the work we've been doing with the buoy out in Monterey. And then you look at our partnerships overseas. We recently struck partnerships and agreements with Unique Group on the commercial side. They're based out of the UAE. In order to work with them to develop and deliver our capabilities into the commercial markets. Out in the Middle East, we've got a partnership with Remah International Group, which is a large Emirati-owned defense contractor in Abu Dhabi, and we've been working with them and recently demonstrated our capabilities at NAVDEX in Abu Dhabi, and that is to help us develop a footprint in the region that can help us service the defense and security needs of the UAE specifically, but also the broader Gulf Corporation Council. We've partnered with entities in Latin America, and they vary in sizes depending on who the end customers and what the application is. But generally speaking, we try and position ourselves to be as prime contractor friendly as can be. When there are opportunities on smaller contracts, we will obviously take them directly with the U.S. government. We are -- we've been public in the past. We are directly named on 3 IDIQs for uncrude systems that we have with NOAA. Obviously, they're smaller in value because they are specifically aimed at just one type of system. But yes, that's -- we work with a very large, all the way down to the kind of the specialized contractors that have smaller regionally servicing contracts.

Now bringing it all down to what -- investors definitely care about the market potential and the growth prospects and what have you, but they also care about profitability. And one of the things that you had talked about few months ago, was that you would be profitable by the end of calendar 2025, I want to understand, given all the changes that are happening and probably changes that are happening on an everyday basis, maybe even hourly basis on policies and what have you. How are you thinking about profitability? And what kind of revenue run rate do you need to kind of get there?

Yes. And I think there's a couple of points on that to highlight. I mean, you said it yourself, Kunal. I mean I think we're living in some fairly unprecedented times in terms of volatility and changes to policies that may or may not affect us and changes to procurement approaches. And market is going up, market is going down. But I think the one thing what we control and what we are priding ourselves on is that we are good operators. Everybody at OPT understands the environment that we operate, and we made massive strides last year in materially reducing operating expenses at OPT and that's a permanent change we've embedded. That wasn't a temporary blip. We worked hard to embed that and remove some of those costs that the company was carrying. On top of that, we've really worked on increasing our bookings and backlog. And we've continued as you've seen over the past 3 years -- 2.5, 3 years, we've really continued that pathway of increasing revenues. And when you look at our Investor Relations deck, you can see that progression and how that's been moving forward. I think when you look at our pipeline, I think we've managed to build a pipeline with our commercial team that's been hovering around that $80 million to $90-ish million mark. We just talked about how long it takes to convert some of these efforts. And then if you look at that pipeline, if you risk adjust it, if we were to add nothing to it, it's probably good for something between call it, $3 million to $6 million a quarter. If we convert -- depending on which risk adjustments you look at and how long certain projects take, but that's sort of where the pipeline sits. And we're confident that, that pipeline has continued scaling above that. So there's obviously going to be additional revenue upside on a quarterly basis that comes into that. But I think that puts you into that realm of being at or near cash flow positive. So I think we are confident that the scaling that we are seeing is going to lead to the positive cash flow and profitability that we've been laying out based on the pipeline backlog, demand signals that we're seeing and all the other efforts that are going on.

That is great. One last thing, and I couldn't let you go before asking you this, is valuation. And you've -- again, I mean, in all our conversations, time and again, you've talked about how you are valued at a discount to peers and potential competitors and everybody else in the space. Talk about valuation, talk about the -- who you are thinking of as comps? And why do you think there is such a disconnect between your valuation and their valuation?

I think, obviously, I can't tell you what the capital markets think, it's...

Of course, nobody knows.

I do not have that crystal ball. And if I did, I wouldn't share it. But I think what is fair to say is that there is a huge influx on private, particularly venture capital money into our space. You can call it broadly defense tech, but particularly on the maritime defense tech side, there is billions of dollars that just in the last 4-plus months have flown into this space or being pledged into this space. The administration, I think, rightly so, is talking about revitalizing the Maritime industrial base, then give this. All the focus is in our space. Having said that, in the public comp side, you either have the very large established and sometimes century's old ship building companies in other spaces, most of the new upstarts high valuations. These are high valuations, obviously, based on venture capital marks, they sit in the private spaces. And I think the difference there that as far as we can tell or we can see is obviously we go out every quarter and lay it all out for everybody to see how our pipeline is scaling, how our costs are going on and so on and so forth. Well, in the venture side, I think some of that capital that is going in, they're not looking for the quarterly results. They're going, okay, I funded you to the tune of $50 million or $100 million, that gives you a valuation of $500 million. And obviously, I will keep on monitoring what -- how you're progressing but then the next round that these guys are looking to raise isn't for another 15 or 18 months or sometimes 24 months. So that gives them all that time in the background to keep on building up then showcase where things are going. And I think -- some of those multipliers on the valuation side in the private space are more akin to your traditional, call it, X or anything as a service multipliers then where we sit in the public space, I think we're still being judged or marked against what is more the kind of traditional industrial space. And I think that's where some of the discrepancy comes in, whereas we're really more alike to the defense tech -- maritime defense stack that sits on the venture side. But I think the public markets perceive us sitting more in that kind of industrial space on the more traditional side. And I think that's part of the discrepancy. But the benefit of us being public is we have solid governance structures, and we obviously audited all the time. There's nothing to hide. Everybody can see everything that we're doing all the time. And we're proud to kind of build in that space.

That's great. We are over time, way over time, but this was such an interesting conversation that it had to flow over time. One of the things that I kind of took away especially from the last answer that you just gave is, hey, this is something that you're building for the long term. And people in the venture space kind of see the long-term possibility, and that is what they're investing against. And so the near-term distraction of like next year's multiples or whatever is like something very, very short term. And that should resolve itself over time as you keep delivering. And as visibility into the business kind of increases, you should be able to get proper valuation.

No, we look forward to it. And we're going to keep on doing what we know how to do. That is to get solid solutions that make the ocean safer, make our nation safer, protect the war fighter and enable us to step up to kind of work in the ocean security space at a scale that starts becoming very material.

Great. On that note, Philipp, thank you so much. Folks on the call, I apologize, this went longer than what we had kind of originally thought. If you have any questions, please e-mail me or reach out otherwise to any of us on the call, and we will respond to your questions. Have a good day. Thank you so much, Philipp. Have a great day.

Thank you, Kunal. Great to see you.