Ocean Power Technologies Inc. (NASDAQ:OPTT)
F1Q10 Earnings Call
September 9, 2009; 10:00 am ET
Mark Draper - Chief Executive Officer
Charles Dunleavy - Chief Financial Officer
Good day everyone and welcome to Ocean Power Technologies audio webcast for the first quarter of fiscal year 2010. 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.
Thank you. Good morning and welcome to Ocean Power Technologies audio webcast for the first quarter ended July 31, 2009. Today we issued our first quarter earnings press release and we will be filing our Quarterly Report on Form 10-Q with the Securities and Exchange Commission. Our public filings can be viewed on the SEC website at www.sec.gov, or you may go to our website, www.oceanpowertechnologies.com. I’ll be joined on today’s webcast by Mark Draper, our Chief Executive Officer. Please advance to the next slide, number two.
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 over which the company may have little or no control and 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 to Mark Draper, our Chief Executive Officer.
Moving to slide three; thank you Chuck and thanks to everyone who has joined us for today’s webcast. OPT started fiscal 2010 with strong operational and financial performance, achieving several successes this quarter. Firstly we achieved a gross profit of $0.3 million, compared to a gross loss for the same period last year and our contract order backlog remains strong at $6.4 million, up 70% compared with the prior year’s comparable quarter. Chuck will go through the financials in more detail shortly.
I’d like to take a few minutes to update you on the operational progress made during the quarter. A key milestone was the signing of the commitment agreement for the Wave Hub project in Cornwall, U.K., while also making significant progress of the manufacturing of our next generation PowerBuoy, the 150 kilowatt rated PB 150. We also advanced the construction of our Underwater Substation Pod, which is an important part of the complete solution we are developing for the delivery of full operational waveforms to our customers.
Finally, we strengthened our management team with the appointment of a new Chief Executive of our wholly-owned subsidiary, OPT Limited, based in Warwick, England. OPT also received industry recognition when our Executive Chairman and Founder, Dr. George Taylor was awarded the 2009 Renewable Energy Navigator Award by the foundation for Ocean Renewables. I would now like to discuss further some of these successes.
Turning to slide four; as OPT steps up its commercial activity, it is vital to continually improve our technical capability through the hiring of qualified personnel in the manufacturing, development and engineering functions. As of July 31, 2009, OPT has 59 employees, an increase of 12 employees over the same date last year.
As announced previously, we also strengthened our European leadership team with the appointment of Angus Norman as Chief Executive of Ocean Power Technologies Limited. Angus joined us from EDF Energy, where he held the position of Managing Director of Sustainable Solutions and brings more than a decade of leadership experience in the energy and renewable energy generation sector.
At EDF Energy, one of the UK’s largest energy companies providing power to a quarter of the population, Mr. Norman led the development of a new Sustainable Energy Services business, and had responsibility for its combined heat & power plants and business development team.
Prior to this, he was Managing Director of Generation at EDF Energy, with operational responsibility for its gas and coal powered generation with a 5000 megawatt capacity, as well as the renewable wind power assets. Mr. Norman was also responsible for EDF Energy’s initial investment in 2002 into Marine Current Turbines, a [Cornwall] energy company and was a board director there until 2005.
The strength of OPT’s personnel, as well as the company’s contribution to the wave power industry was recognized by the Foundation for Ocean Renewables, in awarding Dr. George W. Taylor the 2009 Renewable Energy Navigator Award. This prestigious award was presented to Dr. Taylor at the Second Annual Global Marine Renewable Energy Conference held at the Carnegie Institute for Science in Washington DC. The honor was given in recognition of Dr. Taylor’s service in promoting responsible commercialization of marine renewable energy.
Dr. Taylor is recognized as one of the world’s pioneers and leaders in the development and establishment of wave energy technology for his work over the past 25 years. He co-founded Ocean Power Technologies Inc., and under his leadership OPT has become one of the world’s major wave power companies. Our technology is supported by a strong patent portfolio. At the end of the period OPT owned a total of 40 issued US patents, with 16 US patent applications pending.
Turning to slide five, I’ll now discuss our operational progress starting in Europe. This quarter OPT made progress of a number of key projects. Starting with Europe, an important development with the extension of our involvement in the Wave Hub project in South West of England, one of the world’s largest proposed renewable marine energy projects.
During the quarter we signed a Commitment Agreement with the South West Regional Development Agency or SWRDA to advance development of the demonstration Wave Hub power station. The Wave Hub will be built off the coast of Cornwall, England and is expected to generate up to 20 megawatts of renewable energy, with potential scalability up to 50 megawatts.
We are proud to be the first to sign a commitment agreement to support this project to coming into commercial realty. This agreements reaffirm OPT’s involvement over several years as Wave Hub, since it was envisioned in 2005, where we expect to build, install and operate a wave power station, comprised of our patented PowerBuoy systems generating up to 5 megawatts of electricity, equivalent to the energy needs of approximately 1,750 homes annually. The project infrastructure for Wave Hub is expected by SWRDA to become operational in 2010.
Wave Hub is short to become a global showcase to wave power technology, which will benefit both the Cornwall region and the U.K. economy as a whole. This commitment from OPT coincides with the U.K. government giving a formal go-ahead to the project, as part of a GBP 100 million investment package and to establish in the South West, England region as the UK’s first low carbon economic area, and a major global centre for the wave power industry; of these funds, GBP 42 million has been earmarked for Wave Hub.
Progress under our contract with the Scottish Government will be discussed as we move to slide six. Much of our current focus is on development of our PB150 PowerBuoy, of which the first one will be deployed of the European Marine Energy Centre or EMEC in the Orkney, Scotland, and is also be expected to be deployed in the future to other sites including Cornwall in the U.K. and Reedsport, Oregon.
Last year we announced the electrical control systems, which is the core of the PB150 system that have been shipped to the U.K. from OPT’s Pennington, New Jersey, manufacturing facility.
This quarter, we achieved two further major manufacturing milestones. Firstly, we completed the mechanical elements of the power take-off system in Warwick, England, a picture which you can see in the slide. Secondly, we award of the steel fabrication contract for the PowerBuoy structure to Isleburn Limited, based in Scotland. The construction, the steel structured for the PB150 is now in progress, while the initial testing is also underway on the power conversion and power take-off sub-assemblies.
Consequently, I’m pleased to report, the OPT remains on track for the PowerBuoys deployed in Scotland in the first half of calendar year 2010, subsequent to completion of buoy manufacturing by the end of this calendar year.
Continuing the technology advancements on slide seven; in Spain, we have also made progress under our contract with Iberdrola for the development of the wave power station, to be built to the side of approximately three miles off the Atlantic coast of Santona. As you know, we tested a 40 kilowatt rated PowerBuoy at this site last year; the current phase of the contract in both building and testing of an Underwater Substation Pod or USP for using the proposed utility-scale wave power station.
During the quarter we made considerable progress with the manufacturer of this pod. This device is expected to be ready for in-water dockside testing in the coming weeks. An underwater substation is vital, but often overlooked device that can be used for any wave or tidal power station with multiple devices, to deliver electricity in the onshore power grid by a signal cable. OPT has created considerable intellectual property with the development of its unique pod, and as a result is attracting interest from industry players responsible application in other wave, offshore wind and tidal projects.
Moving to operational progress of the U.S., on slide eight, we also continue to move ahead on our U.S. projects, most notably under contract with the US Navy. We continue with the upgrading of our 40 kilowatt peak-rated PowerBuoy, under our ongoing program with the US Navy, which it’s wave power station at the Marine Corps Base in Oahu, Hawaii. This device is expected to be redeployed later this year to continue operational testing, with the ultimate goal of connection to the grid, via an existing underwater power transmission cable.
We also advanced our $3 million contract to provide OPT’s autonomous PowerBuoy technology for the US Navy Deep Water Acoustic Detection System for ocean data gathering and Homeland Security. We are continuing to work on an advanced version of the PowerBuoy following the completion of the initial test phase last year.
Finally with support from Pacific Northwest Generating Cooperative or PNGC Power, we have continued to work extensively with interested stakeholders groups at local, county, state and federal agency level, to launch our project in Reedsport, Oregon.
Progress is made on the overall permitting and licensing process, and OPT is now seeking bids from perspective vendors for the fabrication of metal structures in the PowerBuoy to be installed at this site. The Reedsport authorities continue to be very supportive of OPTs involvement, and we continue to work closely with them to win state and federal backing for this project.
With that, I will hand the presentation over to Chuck to discuss this first quarter’s financial results starting on slide nine.
Thank you, Mark. Firstly, as mentioned our contract order backlog remains strong at $6.4 million, an increase of 70% over July 31, 2008, and compares with $7.5 million at the end of the previous quarter. The majority of the current backlog is expected to be recognized as revenue over the remainder of the fiscal year and as primarily attributable to our contracts with the US Navy, US Department of Energy, the Scottish Government, PNGC Power and Iberdrola.
This quarter we also achieved a gross profit of $0.3 million, compared with a gross loss of $0.2 million for the first quarter of fiscal 2009. For the three months ended July 31, 2009, our revenues decreased to $1.3 million, compared to $1.8 million for the same period last year. The decrease in revenues primarily reflects the lower level of billable activity, in connection with work on our wave power project off the coast of Spain, as the current phase of the project nears completion.
Also lower revenues related to OPT’s EMEC project in Scotland were offset by an increase in revenue related to our utility PowerBuoy project in Hawaii, and our autonomous PowerBuoy project, both for the US Navy. Cost of revenues decreased to $1 million for this quarter, compared to $1.9 million in three months ended July 31, 2008. This reduction reflects the lower level of activity on revenue bearing contracts, and the absence of any provision for contract loss as losses as was accrued in the comparable quarter of last year.
Product development costs decreased to $1.4 million as compared to $1.7 million for the first quarter of the prior year; however, we expect our product development cost to increase during the remainder of the year, as we continue to focus on increasing the output and efficiency of our PowerBuoy systems.
Selling, general and administrative costs decreased to $2.2 million for the quarter, compared with $2.6 million for the first quarter of fiscal 2009. This was primarily attributable to reduce consulting expenses related to marketing efforts and a reduction in our share based compensation expense.
Our loss from operations and also net loss decreased to $3.2 million and $2.1 million receptively, which reflects the increase in gross profit and decreases in selling, general and administrative costs and product development expenditures. In addition, we recognized a foreign exchange gain of $0.4 million compared with a loss for the same period the prior year.
We also recognize other income of $0.5 million this quarter in settlement of a claim against the supplier of the engineering services. However, these favorable increases were offset in-part by a decrease in interest income in the first quarter fiscal 2010 to $0.3 million from $0.5 million for the same period last year. This primarily reflected lower interest rates, as well as lower cash balances.
Moving to slide 10, you can see that OPT finished the quarter with total cash, cash equivalents in marketable securities of just under $80 million, representing a cash burn of approximately $2 million for the quarter. The company’s balance sheet remains strong and its cash, cash equivalents and marketable securities are highly liquid investments, consisting primarily of term deposits with large commercial banks and U.S. Treasury bills and notes.
Moving on to the financial summary of cash flows on slide 11. Net cash used in operating activities was $2.5 million for the first quarter of fiscal year 2010, as compared to $4.2 million for the prior year. The change was primarily the result of decreased net loss recorded for the current quarter. Net cash used in investing activities was $5.3 million for the quarter, compared with $10.9 million for the first quarter of fiscal 2009, reflecting the net change in maturities and purchases of marketable securities.
We are very pleased to report a decrease in the rate of cash burns reported this quarter, and as compared to both the prior year’s first quarter and the immediately preceding quarter ended April 30, 2009.
Over the next three quarters, we expect a continue development efforts for our PowerBuoy systems, on our sales, marketing and manufacturing programs associated with the commercialization of the PowerBuoy system. However, in the full fiscal year 2010, we expect our total year’s cash burn to be less than that experienced in the prior fiscal year ended April, 2009. As we look beyond the current fiscal year 2010, we’re driving to significantly reduce our cash burn, while continuing to advance the technology.
Now I’ll turn the call back over to Mark for a summary of our view and the company’s future development, and that of the wave power industry, beginning with slide 12.
Thanks Chuck. Looking forward to the future, we believe the fundamental drive, as the Wave Power and Clean Energy continue to strengthen due to the high cost of fossil fuels, climate change initiatives of both Grass Roots and government levels and the need for greater energy security. While wave power has not yet reached commercial scales complete with more developed forms of renewable energy with wind and solar, the forecasted economics remain highly promising.
We believe that the energy cost per kilowatt hour from OPT’s PowerBuoy technology, will be competitive with that of solar and wind as we build volume production to 400 OPT PowerBuoys per year. The availability of additional incentives makes wave power a more attractive part of the renewable energy mix, while avoiding some of those major planning issues that surround other renewables.
OPT is at the forefront of making wave power an economic reality, and much of our current effort is directed at developing large scale robust devices, that have been ocean tested, so that commercial side waveforms can become a real volume proposition for energy consumers.
Concluding on slide 13, our growth strategy remains focused on creating long term sustainable shareholder value. We will continue to pursue several key elements of our execution strategy, which were intended to reduce cash needs and increase return on equity.
These include a fundamental mission to sell turn key power stations and O&M contracts, while also increasing our revenue streams from the sale of autonomous PowerBuoy systems. In both the instances we will concentrate on building the smart part of the OPT’s technology, while outsourcing functions such as the fabrication of the steel structure, as we’re doing for the PB150.
The current focus of OPT’s engineering development efforts is continuing to making improvements with the 150 kilowatt PowerBuoy system, to facilitate our future transition to the even larger 500 kilowatt PowerBuoy. This includes increasing the power output of maintainability of the 150 kilowatt PowerBuoy system, and exploring design and construction techniques that are expected to enable our large systems to be built, deployed and maintained at a significantly reduced cost.
We also hope to improve economics by growing production volumes, as well as maximizing customer funding of technology development costs. We remain committed to our active sales and marketing efforts, primarily developed economies. These areas represent strong potential markets for our PowerBuoy wave power stations, because they combine favorable wave conditions, political and economics stability, large population centers, high levels of industrialization and significant and increasing electricity requirements, with cash programs to incentives the adoption of wave energy.
We will also continue to build on our existing commercial relationships and expand the number and size of projects we have with our current customers. Finally the progress that anticipates in both our product and business development programs comes against a favorable macroeconomic backdrop, and improving industry fundamentals.
With that, I would like to thank you all for attending today’s webcast and for your continued support and interest as we work towards making Ocean Power Technologies a leading player in the worldwide energy marketplace.
Thank you everyone. That concludes today’s webcast. You may now disconnect.
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