Ocean Power Technologies, Inc. F2Q09 (Qtr End 10/31/08) Earnings Call Transcript

| About: Ocean Power (OPTT)

Ocean Power Technologies, Inc.

F2Q09 Earnings Call

December 10, 2008 10:00 am ET


Charles Dunleavy – Chief Financial Officer

George Taylor – Chief Executive Officer

Mark Drape – Chief Operating Officer


Good day everyone and welcome to Ocean Power Technologies second quarter 2009 audio webcast. Today's conference is being recorded and webcast. At this time for opening remarks I would like to turn the call over to the Chief Financial Officer of Ocean Power Technologies, Mr. Charles Dunleavy.

Charles Dunleavy

Good morning and welcome to Ocean Power Technologies audio web cast for the second quarter ended October 31, 2008. Earlier today we issued our second quarter results press release and we will be filing our Form 10-Q with the Securities and Exchange Commission today. Our public filings can be viewed on the SEC website at sec.gov or you may go to our website, oceanpowertechnologies.com. I'll be joined on today's webcast by Dr. George Taylor, Chief Executive Officer and Mark Draper, Chief Operating Officer.

During the course of this conference call management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. As indicated in the slide, these forward looking statements are subject to numerous assumptions made by management regarding future circumstances or which the company may have little or no control, involve risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.

We refer you to the company's Form 10-Q and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. I'll now turn the call over the George Taylor, our Chief Executive Officer.

George Taylor

Thanks to everyone who's joined us for today's webcast. The second quarter of fiscal 2009 brought a number of important milestones to fruition for OPT. We delivered on key projects to customers such as Iberdrola in Spain and the U.S. Navy. We have also made steady progress in the development of our proprietary technology, in particular our 150 kilowatt rate of PowerBuoy, the PB150.

We believe that achieving these milestones which build on our ten years of technology development and in ocean experience will set the stage to elevate OPT's position in the alternative energy marketplace in the near future.

OPT's PowerBuoy technology continues to attract interest for both utility and autonomous applications. Our backlog as of October 31, 2008 is at a record $8 million, a significant portion of which relates to our next generation technology of PB 150. Our balance sheet also reflects a strong cash position, a very important asset in the current economic environment.

For those of you who may be new to our story, OPT is the leading wave power company and is the only pure play public wave power company. At OPT, we pioneered the development and commercialization of a proprietary systems that generate electricity by harnessing the renewable energy of ocean waves.

Since the energy in ocean waves is predictable, electricity from wave energy can be used on a consistent basis and at numerous sites that are conveniently located near major centers of population and electrical demand worldwide. We offer two products as part of our PowerBuoy systems; a utility PowerBuoy system and an autonomous PowerBuoy system.

Our proprietary technology is based on modular ocean going buoys. The rising and falling of the waves moves the buoy like structure, creating the chemical energy that our technologies then convert into electricity.

Today I'm pleased to share with you a number of market drivers that we believe portend positive trends for our industry and in particular for OPT in the near future. The first is the landmark provision made to the production tax credit which has now been expanded to include wave energy, recently passed by the U.S. Government.

The tax credit is part of the Energy Improvement and Extension Act of 2008 and was signed into law by President George W. Bush on October 3, 2008. Production tax credit provisions which were previously in place served only to benefit other renewable energy sources such as wind and solar.

This new legislation will for the first time, enable owners of wave power projects in the U.S. to receive federal production tax credits, thereby improving the comparative of the economics of wave power as a renewable energy source.

Additionally, we are excited about the mandate of President-Elect Obama's administration to promote renewable energy sources and their expected initiatives to position renewal energy as a commercial source of energy for the country. In the same vein, we believe that the new administration's focus will result in elevating the position of marine renewables which will open more doors for OPT. Of the promised $150 billion multi-year investment in renewables, even a small portion will have a significant impact on OPT.

According to the Energy Information Administration, $1.6 trillion is expected to be spent on new renewable energy generation equipment by the year 2030. This equates to annual overall expenditures of approximately $60 billion.

Meanwhile, the G8 Summit held earlier this year, had set a goal to reduce carbon emissions by 50% by the year 2050. We plan to take advantage of these global drivers of demand for renewable energy as we continue to refine and expand OPT's proprietary technology. In particular it is worth noting that OPT's growth will create new jobs in the depressed steel manufacturing and maritime infrastructure industries.

Overall, we believe that OPT is well positioned to take advantage of the favorable political regulatory and social environment that exists in the U.S. and internationally for renewable energy. These drivers will contribute to our growth in the coming years.

I'd now like to turn the call over to Mark Draper, our Chief Operating Officer who will provide you with an update on some of our projects, progress in technology and other key commercial milestones.

Mark Draper

I'd like to start out by talking about our key achievements this quarter on a few of our key projects. On Slide 6, you see pictures of PowerBuoys at some of our project sites. The first image is of the Autonomous PowerBuoy build for the U.S. Navy's DO Apps, Deep Water Active Detection System program.

The second picture was taken during the deployment of our first commercial PowerBuoy in partnership with Iberdrola in Spain. The third photo is of the PowerBuoy being tested in Hawaii for the U.S. Navy. All of these PowerBuoys were deployed and tested in this last quarter.

During the quarter we tested a unique ocean based PowerBuoy for the United States Navy in connection with its DO Apps program which is well suited for higher end security applications. As part of the first phase of this program, we conducted an ocean test of our Autonomous PowerBuoy system 70 miles off the coast of New Jersey.

We also partnered with the U.S. Navy on another collaborative project for the deployment of a 40 kilowatt rate PowerBuoy in Hawaii. The PowerBuoy which is launched at the Marine Corp Base in Kaneohe Bay in October will be connected to the Oahu power grid to provide power to the grid that serves the base.

In September, we deployed our first commercial PowerBuoy in partnership with Iberdrola, one of the world's largest renewal energy companies at a site approximately three miles off the coast of Santana, Spain. We deployed and commissioned a PB40 rated PowerBuoy which is the first one that is expected to be utility grade OPT wave power station to be built out in a later phase of the project. An OPT [inaudible] system was held with many dignitaries and polities from both Fantanda and Madrid.

Our water specific for the northwest generating cooperative PNG Power on the deployment of a 150 kilowatt PowerBuoy near Reedsport, Oregon also continues to make progress. In the second quarter, we received a $2 million award from the U.S. Department of Energy which will be used to help fund the fabrication, assembly and the factory testing of the first PowerBuoy that will be installed at the Reedsport site.

The system will be a PB 150 PowerBuoy, major portions of which will be fabricated an integrated in Oregon. We have continued to make progress on the permitting and licensing process while working closely with interested stakeholder groups at local, state and federal agency levels.

In other parts of the world, we are working under contract with the Scottish government at the European Marine Energy Center or EMEC in the Orkney Islands, Scotland to deploy a PB 150 PowerBuoy which is expected to be ready for deployment by the end of 2009. In the second quarter, work progressed on building and testing the power conversion and power take off assembly as well as reviewing prospective suppliers for manufacturing the PowerBuoy.

As part of our agreement with EMEC and in addition to funding received from the Scottish government, OPT has the right to sell power to the grid up to the two megawatt capacity limit at favorable marine energy prices which could be up to $0.35 per kilowatt hour.

We have also made advancements on the Wave Hub project that we are working on in conjunction with the South West of England Regional Development Agency, or SWERDA. They recently appointed an engineering contract to manage the construction of the Wave Hub Marine Energy test site and have forecasted that the connections, cabling and grid connection infrastructure for this project will be completed by the end of 2010 calendar year. OPT continues to work with SWERDA and monitor its progress in developing the project site.

As I mentioned in the previous slide, OPT has made good progress on a number of our projects. We deployed and tested three PowerBuoy's this quarter and all three represent major commercial milestones to OPT. Following a deep ocean test in October of one of our Autonomous PowerBuoys, the U.S. Navy awarded a $3 million contract for the second phase under their deep ocean data gathering program.

The PowerBuoy deployed off the coast of Spain in partnership with Iberdrola represents the first commercial PowerBuoy to be deployed by OPT.

And finally, the PowerBuoy launched off the coast of Hawaii in partnership with the U.S. Navy, led to an additional award of $300,000 towards further funding of this program. We are also extremely excited about a $2 million award we received from the U.S. Department of Energy which will assist in furthering our Reedsport, Oregon project. This is the first time the Department of Energy has ever awarded a grant to aid the building of an ocean wave energy system.

As George mentioned earlier, we ended the second quarter of fiscal year 2009 with a record contract order backlog of nearly $8 million compared with $3.7 million at the end of the first quarter of fiscal 2009.

In addition to achievements on a number of contracts during this quarter, OPT continued to work on the design of our 150 kilowatt rated PowerBuoy which comprises a significant portion of that current backlog. The design of the PB 150 structure is currently on track to be completed by the end of this month and the complete system will be ready for testing in 2009.

We are currently working with an independent engineering group to obtain certification of the 150 kilowatt PowerBuoy structural design. We are pleased that our patent portfolio has continued to grow. We won a new U.S. patent issued for our core PowerBuoy technology during the second quarter of fiscal year 2009. OPT currently has a total of 39 issued U.S. patents with extensive patent coverage in other parts of the world.

I'd now like to turn the call over to Charles Dunleavy, our CFO for a discussion of our financial results.

Charles Dunleavy

Revenues decreased by $1 million in the three months ended October 31, 2008 to $.7 million as compared to $1.7 million in the three months ended October 31, 2007. The decrease in revenues was primarily reflective of a lower level of activity in connection with our Spain Wave Power station contract and our project with the U.S. Navy at the Marine Corp base in Oahu, Hawaii, as the current phases of these projects are nearing completion.

The lower revenues also reflected the use of significant resources on the PB 150 product development efforts. Notwithstanding the record level of order backlog, we expect this comparative quarter to quarter revenues trend to continue over the next three quarters as the company concentrates its sources to build up the first two PB 150 PowerBuoys in calendar year 2009.

Cost of revenues decreased by $.6 million to $1.4 million in the three months ended October 31, 2008 as compared to $1.9 million in the prior year's comparable period. This decrease in cost of revenues primarily reflected the lower levels of activity on the Wave Power Station off the coast of Spain and the Hawaii project for the U.S. Navy. The decrease in cost of revenues was partially offset by an increase in cost of revenues related to the Autonomous Power project for the U.S. Navy.

Product development costs increased to $2.3 million in the second quarter of fiscal 2009 as compared to $1.9 million in the second quarter of fiscal 2008. The increase reflects our continued efforts to increase the output and efficiency of our PowerBuoy systems, again particularly, the PB 150 product.

Selling, general and administrative costs increased to $2.4 million in the second quarter of fiscal '09 as compared to $1.4 million in the second quarter of fiscal 2008. This increase is due to higher costs related to company growth and expansion of our sales, marketing and business development capabilities and an increased level of costs related to our being a public company in the United States. We expect our selling, general and administrative costs may continue to increase as we further grow the company and expand our sales operations and our marketing capabilities.

Interest income in the second quarter of fiscal 2009 decreased 62% to $.5 million as compared to $1.3 million in the second quarter of fiscal 2008 due to a decrease in invested cash and lower interest rates. The lower interest rates reflect the company's conservative investment strategy given the current volatility in the global market. In late calendar year 2007, OPT moved the majority of its cash investments to safe U.S. Treasury instruments.

Foreign exchange loss was $1.2 million in the second quarter of fiscal 2009 compared to a gain of $.3 million in fiscal 2008. This $1.5 million change was primarily attributable to the relative change to the value of the British Pound Sterling as compared to the U.S. dollar during the two periods. The resulting net loss for the three months ended October 31, 2008 was $6.1 million compared to a net loss of $1.9 million in the quarter ended October 31, 2007.

For the six months ended October 31, 2008, the company reported revenues of $2.5 million compared to $2.2 million in the six months ended October 31, 2007. The 9% increase primarily reflected higher revenues associated with our Spain Wave Power Station contract and the Autonomous Power Wave project with the U.S. Navy for ocean data gathering.

Cost of revenues increased by $.6 million to $3.3 million in the six months ended October 31, 2008 as compared to $2.7 million in the six months ended October 31, 2007. This increase in cost of revenues primarily reflected the higher level of activity in the Spain project and the Autonomous PowerBuoy for the U.S. Navy.

Operating loss for the six months ended October 31, '08 was $9.8 million compared to $7.6 million in the six months ended October 31, '07. OPT recorded a net loss of $10 million for the six months ended October 31, 2008 compared to a net loss of $4.3 million for the prior years comparable period.

These changes in operating loss and net loss reflect the factors discussed above in connection with the comparative results of the second quarter for fiscal 2009. It is important to note that the operating results for the first half of fiscal '09 are squarely in accord with the company's expectation at the outset of the year.

The company finished the second quarter of fiscal 2009 with a strong cash position. At October 31, 2008 total cash, cash equivalents and investments were $89.6 million compared to $101.1 million at April 30, 2008. Our cash, cash equivalents and investments consist primarily of highly liquid investments including term deposits with large commercial banks and as we noted previously, U.S. Treasury bills and notes.

Net cash used in operating activities was $5.2 million for the second quarter of fiscal year 2009, compared to $4.2 million in the first quarter of 2008. This $1 million change resulted primarily from an increase in net loss of $2.2 million offset by a change in non cash foreign exchange loss of $1.2 million.

We expect our cash burn for the remainder of this fiscal year 2009 to be consistent with that experienced in the first six months. This is in line with the planned use of proceeds that we outlined during our U.S. IPO's which includes continuing development efforts for our PowerBuoy systems and the expansion of our sales, marketing and manufacturing programs associated with the commercialization of the PowerBuoy system.

Now, I'll turn the call back over to George for a discussion of OPT's growth strategy and his closing remarks.

George Taylor

I would like to brief review our growth plan and the strategies for the balance of fiscal 2009 and for the coming year. First, as you heard from Mark, we have made significant progress on the PB 150 design including working actively with an independent engineering group to attain certification of this design.

Second, our commitment to our sales and marketing efforts over the next three years on coastal North America, the west coast of Europe, the coast of Australia and the east coast of Japan remains in place.

These areas represent strong potential markets for our PowerBuoy Wave Power stations because they combine favorable wave conditions, political and economic stability, large population centers, high levels of industrialization and significant and increasing renewable energy requirements.

Third, we intend to build on existing commercial relationships and expand the number and size of projects we have with our current customers. We delivered on the strategy in the second quarter by continuing to build on our partnership with the U.S. Navy.

We also plan to enter into new alliances and commercial relationships with other utilities and independent power reducers; alliances along the lines of the agreement we have with Griffon Energy in Australia and Iberdrola in Spain. By leveraging these customer relationships, we believe we can expand OPT's commercial acceptance across the globe.

Fourth, we expect to increase revenue streams through our Autonomous PowerBuoy systems. These systems are also well suited to address specific power generation needs of customers requiring off grid electricity generation in remote locations in the open ocean. These Autonomous systems are proprietary to OPT and provide what our customers see as an enabling technological advantage. They differentiate OPT in the wave technology arena as these systems lend themselves to customization while also offering upward and downward scalability.

Fifth, the recent expansion of the production tax credits to include wave energy as well as our $2 million award from the Department of Energy reflects the U.S. Government's increased interest in wave energy. We expect to take advantage of such initiatives and to deliver energy that compares well to other alternative energy providers.

Finally, we continue to devote substantial resources to support our development efforts for our PowerBuoy systems and to expand our manufacturing and sales and marketing programs associated with the commercialization of the PowerBuoy system.

In support of this goal, we plan to continue to add employees in fiscal 2009 and fiscal 2010. The majority of our new hires have been and will be engineers with varying levels of expertise, project managers and manufacturing and marine operations personnel. This additional staff will help increase and enhance OPT's capabilities. Since April 30, 2008 our work force has increased by 10% to a total of 52 people in the U.S. and the U.K. as of October 31, 2008.

As I said at the beginning of the call, we are very excited about the progress and milestones achieved in the second quarter. We believe that OPT continues to grow its presence in the alternative energy space. Our strengths include a seasoned management team with strong backgrounds in engineering, manufacturing and the international power markets.

Our PowerBuoy product has over a decade of in ocean experience and has a wide variety of applications in addition to grid connections. This includes Homeland Security hydrogen production, remote sensing, desalination, oceanography, agriculture and the offshore oil and gas industry.

Key advantages of our proprietary technology include its electronic tuning capability which allows for power output optimization in changing wave conditions, the independent certification of our grid connection system, the independent environmental assessment which resulted in the finding of no significant impact, and the scalability to achieve large production volumes.

Since our inception, we have established a global network of strategic partners and an international supply chain to aid in the commercialization of our products and services. Some of our parent partnerships include government entities such as the U.S. Navy, and the Scottish government and international energy conglomerates such as Total and Iberdrola.

The power in ocean waves provides a renewable energy resource that is clean, environmentally benign, non polluting and far more predictable than other renewable energy sources. This is an advantage of crucial importance to our customers and grid operators.

Wave energy is the most concentrated form of renewable energy without any fuel, exhaust gases, noise or visual pollution. Additionally, wave energy is dependent only on local resources without the political and economic risks associated with imported fossil fuels.

The U.S. and foreign governments are now more than ever focused on elevating alternative energy options as commercial sources of energy. We look forward to capitalizing on this and offering wave technology that responds to this global demand.

In addition to these operational and regulatory advantages, OPT has a strong financial position that we can leverage as we continue to expand our business. Our past position is an important advantage given the current economy and the weak credit markets.

We also believe that the current market downturn has resulted in an undervaluation of OPT. We think that this could be an opportune time to take advantage of the current valuation of the company. In short, we believe that OPT is a premier company in the alternative energy space.

I would like to thank all of you for attending today's webcast and for your continued support and interest as we work towards position Ocean Power Technologies as a leading player in the world wide energy marketplace.

Question-and-Answer Session

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!