Plug Power's Q4 Results And My Call With Andy And Paul

| About: Plug Power, (PLUG)

Summary

2016 is all about harvesting existing customers and powering the business toward profitability.

Anchors Aweigh: Lowe's and Home Depot will sink into anchor status in 2016.

Plug's business expansion beyond material handling is coming sooner than you think.

Plug Power (NASDAQ:PLUG) delivered impressive revenue growth and gross margin improvements on Thursday, March 10th. Quarterly results met my expectations with revenue coming in above $38m and full year revenue above $103m, which were consistent with my expectations of $38 to $40m for Q4 and annual revenue tipping the scale between $103m and $105m.

Plug's CEO Andy Marsh declined to get into the internal fuel cell stack mix in Q4 or give guidance for 2016 during the Q4 conference call. Marsh's stance to stay away from internal stack mix guidance occurred during the Roth conference as well as my follow-up call with Andy and CFO Paul Middleton.

What I can share is that the writing is on the wall and Plug will look to continue to ship GenDrives with a higher percentage of Plug internal stacks inside. The actual percentage mix between internal Plug stacks and their external provider is anyone's guess.

An improved mix of internal Plug stacks will enhance product gross margins, improve service margins due to improved performance and open the door to adjacent markets in the near and medium term. The deployment of Plug internal stacks in the field also puts Plug in prime position to begin taking advantage of adjacent market opportunities outside of material handling.

Earlier this month I shared my thoughts in an article on Seeking Alpha related to Plug's $30m loan facility. I reviewed the 8-K filing associated with the $30m loan facility and was under the impression that Plug's restricted cash had grown from $48m to $56m based on the filing.

However, after speaking with CFO Paul Middleton he was able to provide some color that restricted cash has not gone up in 2016 and still stands at $48m. The $8m difference in the filing was related to a customer deposit and it has bearing on Plug's restricted cash balance.

Furthermore during my conversation with Paul Middleton and Andy Marsh there was continued emphasis placed behind the idea that restricted cash will not increase over the course of 2016. Cash is king and Plug now has $8m more in the bank available for operations than I had expected previously. The $8m change to my estimate means that Plug is on track to end the year with approximately $50m instead of my prior estimate of $42m.

I also was pleasantly surprised that Plug's estimated operating cash burn of $20m or less for 2016 is inclusive of any investment in hydrogen generation. All-in-all this means that Plug will operate the business and likely make an investment in hydrogen generation without further dipping into the cash well.

Andy and Paul appeared very comfortable with the revenue estimate of $150m in 2016, which excludes $10m of deferred revenue associated with sale-leaseback transactions. I believe the reason behind management's strong belief that revenue will be $150m plus is driven by two factors.

The first factor is that Plug already has visibility toward 70% of the revenue target for 2016 and the second factor is that company's focus in 2016 is harvesting existing relationships and growing the book of business substantially from existing customers.

In terms of year-over-year revenue contributions investors should expect to see strong growth from Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) as the big box retailers expand from one site each to several in 2016. Lowe's has had an opportunity to fully experience fuel cells in the company's material handling operations for over a year and is now ready to take the next step to becoming another anchor customer for Plug Power.

Looking at Plug's bookings target of $275m, nearly 80% of $220m will come from existing customers. New customers will account for approximately 20% or $55m, which is still impressive considering most new customers only sign on for a few locations initially. Additionally, Plug is targeting the top 10 retailers in the US to add to the existing customers with the likes of Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) rounding at the top of the rankings list.

As I stated above the deployment of Plug internal stacks in the field will open the door for adjacent market opportunities outside of forklifts. I pressed management directly with a question whether or not adjacent markets outside of material handling were important to Plug. The answer was a resounding yes, unfortunately management did not provide any more color to me, but they seemed excited about this topic and I expect investors will hear more on this exciting topic in the near future.

Over the last 12 months Plug has continued to show a strong performance with revenue up well over 50% from 2014 with expectations that the company's top line will approach 50% or better in 2016. Plug's continued revenue growth and customer mix has generated substantial interest from potential investors looking to help capitalize Plug's business going forward.

Plug can grow the top line well north of 50% annually over the next several years if the company can find access to liquidity to fund business growth. What I can share is that Plug's continued track record of growth and margin improvement has opened up doors that did not exist a year ago to help finance the expansion of Plug's business. I expect additional announcements in the coming months regarding additional financing that will flow into Plug's operations.

In conclusion, Plug looks to be on track to deliver a profit and generating operational cash flow in Q4 2016. Long-term planning sessions with existing customers puts Plug on track to deliver even better results in 2017 and beyond. Management's vision of delivering $500m of revenue, generating significant cash flows and sustainable profits is more clear and reasonable than it was prior to Plug's Q4 results.

Disclosure: I am/we are long PLUG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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