Ocean Power Technologies F3Q08 (Qtr End 01/31/08) Earnings Call Transcript

Ocean Power Technologies Inc. (OPTT)

F3Q 08 Earnings Call

March 17, 2008 11:00 am ET

Executives

George Taylor - Chief Executive Officer

Mark Draper - Chief Executive

Charles Dunleavy - Chief financial Officer

Presentation

Operator

Good day everyone and welcome to Ocean Power Technologies third quarter and nine months fiscal 2008 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. Please go ahead sir.

Charles Dunleavy

Thank you. Good morning and welcome to Ocean Power Technologies audio webcast for the fiscal year 2008 third quarter and nine months period ending January 31, 2008.

OPT is today filing its quarterly report on Form 10-Q with the Securities and Exchange Commission. For access to this document you can view it in all of our public filings on the SEC website at sec.gov or you may go to our website www.oceanpowertechnologies.com and click on the Investor Relations tab, then click on SEC filings.

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 of 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 will 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 will now turn the call over to George Taylor, our Chief Executive Officer.

George Taylor

Thank you, Chuck. Good morning and thank you for attending our webcast. I would like to present an overview of the quarter to be followed by commentary regarding our commercialization progress by Mark Draper, Chief Operating Officer and then back to Chuck who will go though the financial results.

We wanted to begin the presentation by showing a picture of OPT’s record-breaking New Jersey PowerBuoy. This buoy, the PB40 has a rated output of 40 kilowatts and is located in the Atlantic Ocean about five miles off coast of Tuckerton, New Jersey.

Today this has completed more than 18 months of ocean deployment surviving a hurricane and several winter storms over that period. It is performed in accord with our expectations and has set what we believe to be a world record for ocean endurance by an offshore wave energy conversion system.

The buoy’s performance is noteworthy in two other important respects. First, it demonstrates how OPT’s ocean tested wave energy systems have become suitable for utility scale applications. Second, it also consolidates OPT’s position as the world’s leading wave power Company. While the industry is attracting new entrants with interesting design concepts, it is important to establish a track record of commercialization and technology that has been tested over the long-term in real life conditions.

Our systems have undergone more than three years of in-ocean testing over the past decade and have been designed to withstand 100 year storm conditions. This provides OPT with a strong and sustainable advantage that will become increasingly evident as the industry matures.

During the third quarter OPT continued to make solid progress with all its commercial projects, spanning four different regions of the world. Our production capability in New Jersey is growing as work on more PowerBuoys moves forward. We have also continued to expand investment in our new technology -- in our technology sales and marketing activity.

OPT was awarded three new patents on its core technology and we added seven new employees. During the quarter Herbert Nock was hired as Vice President of the Business Development and Marketing. Having previously worked at GE Power Systems and FuelCell Energy, Herb has joined OPT as the Company’s commercialization activity is expected to gain further traction. He brings more than 30 years’ experience in the power systems and alternative energy sector.

Our financial performance continues to improve. Revenues more than doubled in the third quarter compared with the same period of last year. The balance sheet is very strong providing a huge competitive edge and our order backlog remained strong amounting to $6.5 million as of January 31, 2008 compared to $5.2 million as of April 30, 2007.

These results were achieved amid growing realization in the power industry and national and the international institutions that wave power has an important role in the renewable mix. This was underlined by the US Energy Act in December 2007 where for the first time the US federal government committed to provide substantial funding for the development of wave power energy systems.

I would now like to turn the presentation over to Mark who will review our commercialization program.

Mark Draper

Thank you, George. Considerable progress has been made in our four major utility grade contracts, namely our ongoing long-term work in Hawaii with the US Navy as well as our contracts in Scotland, Oregon and Spain.

For our Hawaii project, construction work has been completed for a new PowerBuoy to be deployed at the US Marine Corps Base at Oahu. The power take-off and control system has been fully integrated with the buoy. The complete system is undergoing endurance cycle testing prior to shipment to Hawaii and expected to be ready for deployment in 100 feet of water and moor off the coast in the second quarter of calendar year 2008.

The Company has also made progress on the design, manufacture, and installation of an OPT wave power station consisting of a PB150 PowerBuoy at the European Marine Energy Centre off the Orkney Islands, Scotland. OPT received the contract from the Scottish government for this project in 2007 and generated revenues from this in the third quarter. Certain elements of the power take-off system are already under construction and fabrication of the PB150 steel work is expected to commence in the latter part of 2008.

The Company made important strides to establish its wave power project in Reedsport, Oregon where it has been granted a preliminary permit by the Federal Energy Regulatory Commission for a 50 megawatt wave park at a site two and a half miles off the coast of Reedsport. A $0.5 million contract with PNGC Power for funding towards the first buoy, the PB150 was signed in August 2007. The first phase of the project aims to install an array of PowerBuoy systems generating up to two megawatts.

During the third quarter, OPT continued to move ahead with the process to inform and obtain support from local interest groups, natural resource agencies and other stakeholders. Fabrication of the first PB150 at Reedsport is expected to commence in late 2008.

Work on the first phase of a 1.4 megawatt power station of Iberdrola off the north coast of Spain is moving rapidly in preparation for ocean deployment during the second quarter of calendar year 2008. Assembly and test of the power take-off and control system for a PB40 PowerBuoy was completed in New Jersey and shipped to Spain on schedule. It is now undergoing extended lifecycle testing at our facility in Spain prior to integration with the buoy which was built by a Spanish steel fabricator. The project made a significant contribution to revenues in the third quarter.

The next slide shows the PowerBuoy at the Spanish applied fabrication facility as well as a view of the power take-off and control system being tested in New Jersey prior to shipment to Spain.

OPT has continued to build its existing and new project pipeline. In Cornwall, England the UK government received planning approval during the third quarter for the Wave Hub project and approved funding for the construction of the infrastructure to which the OPT PowerBuoy wave farm will be connected. The local development agency which is responsible for the project is receiving bids for the infrastructure contracts. We continue to be very excited about this high profile project in the UK.

OPT has also generated revenues in the third quarter from its contract with the US Navy to provide an autonomous PowerBuoy system for its deep ocean acoustic data gathering program for Homeland Security. Construction and fitting is now underway on the buoy as is the assembly of the power take-off and control systems. OPT and the US Navy have decided to reuse the same PowerBuoy structure that was tested in Hawaii in June 2007 for this project. This is an initive decision and Hawaii likes the flexibility and modularity of the core PowerBuoy product design.

In France where OPT is partnered with Total and Iberdrola for a proposed wave power project we are in the process of securing a sub-contractor to perform wave data collection.

Further we are confident that our heightened level of business development activity will show results over the near term.

I would now like to hand the presentation back to Chuck who will discuss this period’s financial results.

Charles Dunleavy

Thanks Mark. Revenues increased by 118% in the quarter ended January 31, 2008 to $1.4 million as compared to $0.6 million in the three months ended January 31, 2007. The increase in revenues was primarily attributable to an increase in work in the first phase of construction of the 1.4 megawatt wave power station off the coast of Spain, work on the design, manufacture and installation of a PB150 in Orkney, Scotland and work on our contract with the US Navy to provide our PowerBuoy technology to a program for data gathering in the ocean.

Cost of revenues increased by $1.3 million to $2.0 million in the three months ended January 31, 2008 as compared to $0.7 million in the three months ended January 31, 2007. This increase in cost of revenues primarily reflected the higher level of activity on revenue-bearing contracts as well as the recognition of an additional $366,000 anticipated loss on our project in Spain due to higher expected costs of completion of that project.

Net loss for the three months ended January 31, 2008 was $4 million compared to a net loss of $1.5 million in the quarter ended January, 31, 2007. This increase in net loss was attributable to the increase in gross loss, a 63% planned increase in product development cost primarily reflecting work to increase the power output of the Company’s utility PowerBuoy, a 79% increase in selling, general and administrative costs and a $1 million increase in foreign exchange losses net of a $0.7 million increase in interest income.

The expected increase in SG&A was attributable to higher marketing costs, professional fees and other costs incurred as a result of becoming a public Company in the United States and also due to additional payroll and incentive-based costs related to Company growth. The increase in foreign exchange losses was primarily the result of changes in the value of the British pound versus the US dollar.

Revenues increased by 142% in the nine months ended January 31, 2008 to $3.7 million compared to $1.5 million in the nine months ended January 31, 2007. The increase in revenues was primarily attributable to an increase in work on our Hawaii project for the US Navy, the wave power station off the coast of Spain, the PB150 in Orkney, Scotland and our contracts again with the US Navy to provide our autonomous PowerBuoy technology to a program for data gathering in the ocean.

Cost of revenues increased by $2.6 million to $4.7 million in the nine months ended January 31, 2008 as compared to $2.1 million in the nine months ended January 31 ‘07. This increase in cost of revenues primarily reflected the same factors which we discussed in connection with the third quarter results.

Net loss for the nine months ended January 31, 2008 was $8.3 million compared to a net loss of $5.5 million for the nine months ended January 31, 2007. This increase was the result of the increased gross loss, 43% planned increase in product development costs, 71% increase in SG&A, and a $1.1 million decrease in foreign exchange losses net of a $2.8 million increase in interest income. The reason for these increases in product development costs, SG&A and foreign exchange losses are noted above in the respective third quarter periods.

While our planned investment in technology and business development efforts will grow in the next year, management is targeting the achievement of profitability over the next three years.

The Company finished the quarter with continuing strong liquidity. At January 31, 2008, total cash and cash equivalents and the certificates of deposit were $106.1 million compared to $115.9 million at April 30, 2007. Our cash and cash equivalents are highly liquid investments with maturities of three months or less at the date of purchase and consist primarily of US Treasury bills, term deposits at highly rated commercial banks and money market funds with large commercial banks.

Long-term debt of $0.2 million represents amounts due to the State of New Jersey under a non-interest bearing loan which must be repaid no later than January 2012. Stockholders equity and common shares outstanding reflect the receipt of proceeds on April 30, 2007 from the United States initial public offering and listing on the Nasdaq Global Market. The Company raised a net amount of approximately $90 million through the sale of 5 million common shares.

Net cash used in operating activities was $3.2 million for the three months ended January 31, 2008 or 29% more than that in the prior quarter of this fiscal year. This primarily resulted from the increased net loss in foreign exchange losses recognized in the quarter ended January 31, 2008 as compared to the quarter ended October 31, 2007 and also due to a higher level of receivables.

Net cash used in investing activities was $2.2 million for the three months ended January 31, 2008 resulting primarily from investment in production equipment.

Net cash provided by financing activities reflected the receipt of proceeds from exercise of stock options.

Looking at our total cash and cash equivalents at the end of the third quarter compared to the end of the second quarter of this fiscal year, there was a planned increase in the rate of total cash burned. In the third quarter, total cash decreased by $3.6 million compared to a $2.3 million decrease in the second quarter.

Going forward, we expect our cash burn over the balance of this year to be consistent with the third quarter as we continue to develop our PB150 product and invest in business development activities.

Now let me turn the conference back over to George.

George Taylor

I would like to close our webcast by summarizing the highlights of the third quarter ended January 31, 2008.

We made solid progress to fulfill our ongoing contracts in the third quarter resulting in a significant increase in revenues. Our production facilities are operating at a high level of activity and focused on several line shift projects that are nearing ocean deployment.

Order backlog is robust and we continue actively to pursue numerous business development opportunities which we expect to report on in the months ahead. Furthermore, with our strong cash position and careful cash management we have the financial capability to continue to invest in technology development and sales and marketing activities as the global market for wave power gains momentum.

We remain confident that calendar 2008 will be an exciting year for OPT with several buoys scheduled to go into the ocean and other business initiatives coming to fruition. In addition, the strengths and depth of the OPT team will continue to grow. We believe we are all -- we believe we are very well positioned to build on the momentum that has been established this year and to continue to enjoy great success. This all requires a strong and deliberate focus of our resources and we appreciate the continuing support of our shareholders and other stakeholders in our prop.

Thank you for attending and listening to OPT’s earnings presentation today.

Operator

Thank you everyone. That concludes today’s conference and you may now disconnect.

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