Note:
I have covered Plug Power (NASDAQ:NASDAQ:PLUG) previously, so investors should view this article as an update to my earlier publishings on the company.
As already predicted in my commentary on the company's Q3 results, Plug Power missed its just recently lowered financial targets by a wide margin - again.
In my last article, I already provided evidence that management was intentionally misleading investors as there was no realistic way to arrive at the lowered guidance ranges for 2017.
Picture: Pro-Gen powered electric delivery truck from Chinese collaboration partner Dongfeng Motor Group at a recent trade show in Wuhan, China
As it turned out, I was perfectly right as the company did not even come close to its lowered targets for cash usage from operating and investing activities and consolidated gross margin. In addition, the company also missed its bookings target:
| FY2017 | Original Guidance | Revised Guidance | Preliminary Results |
| Gross Margin | 8-12% | 5-6% | 1% |
| Cash Usage | $25-30 million | $40-45 million | $86 million |
| Bookings | $325 million | $325 million | $285 million |
Management explained the shortfall with much higher than expected expediting costs experienced in conjunction with the Amazon deployments during Q3 as well as inflated service and hydrogen delivery costs.
It will require a deeper look into company's upcoming 10-K to identify all issues behind the very poor margin performance as both the service as well as the fuel segment had actually shown encouraging improvements during Q3. Another setback would be a major disappointment.
The bad news did not stop here for investors as management guided for FY2018 revenues of $155-180 million, a far cry from the $215 million analyst consensus at the time of last week's business update call. Moreover, management does not longer commit to giving out targets for unit shipments and bookings going forward.
The reason behind this move is actually not increased conservatism after the myriad of missed financial projections over the past decade but, most likely, to hide the lack of growth in the company's high-margin core business obviously expected for next year and beyond.
Keep in mind that the company's adjacent business segments (Services, PPA, Fuel) required to facilitate core product sales are growing at a fast clip given the ever increasing number of GenDrive units in the field and customer sites under maintenance and hydrogen delivery contracts. For the first nine months of 2017, this growth rate was above 35%. As 2017 was actually a strong year for unit and site deployment, expect the growth rate for those adjacent business segments in 2018 to increase to at least 40%.
At the low end of the company's FY2018 revenue guidance, the entire projected top-line growth would be contributed by Plug Power's services segments which, on a consolidated basis, are still operating at a meaningful loss.
To achieve the upper end of the revenue guidance, management stated the need to timely close an agreement with a third large, multi-site customer which could provide for an additional 5-6 sites annually. I expect this customer to be Home Depot (HD), which already operates two GenKey sites.
On a more positive note, this transaction will not require the company to issue millions of free warrants to the customer, as it has been the case with Amazon (AMZN) and Wal-Mart (WMT) recently. In addition, Home Depot, just like Amazon, will commit to outright purchases of Plug Power's equipment and services which will benefit the company's cash flows.
The company also abstained from giving guidance for consolidated gross margin and cash usage in 2018. At least, management kept sticking to its mantra-like reiteration of achieving adjusted EBITDAS breakeven in the latter half of the year.
Given the expected similar cash flow trajectory for 2018, the company's liquidity looks pretty tight again. With cash of just $25 million at the end of 2017 and expected large losses for the first half of the new fiscal year, the company will have to rely on working capital improvements and a timely refinancing of its Wal-Mart leases to avoid raising more capital in 2018.
Based on management's preliminary outlook for 2018, investors need to prepare for another disappointing year with very little or even no growth in unit shipments. The lack of growth in product sales will take its toll on results, as a larger revenue contribution from the company's service segments will act as a major drag on consolidated gross margin.
With margins under ongoing pressure, expect substantial cash burn again in 2018 with no clear path for the company to consistent cash generation for the foreseeable future.
That said, Congress just retroactively reinstated the fuel cell investment tax credit ("FTC") which, over time, should provide at least some support for the company's business. While management made clear that there will be no meaningful impact for 2018, they were more optimistic for next year.
Unfortunately, the reinstatement of the FTC will not increase the profitability of existing customer relationships in a meaningful way given that all customers, except for Wal-Mart are outright purchasing their equipment from Plug Power which entitles them to the FTC. As transaction terms with large customers like Amazon are fixed with no clawback provisions, the company's existing customers will reap the windfall profits from the FTC reinstatement.
As for the Wal-Mart leases, the company just recently signed a new Master Lease Agreement with Wells Fargo (WFC) which provides for very favorable refinancing terms but without renegotiation all new and retroactive FTC benefits will be monetized solely by Wells Fargo.
So the company will have to demand its fair share of the new tax benefits from its financing partner, hopefully the existing Master Lease Agreement allows management to renegotiate terms in a timely manner.
With regard to further FTC monetization, the lowest hanging fruits are obviously new customers which have no insight in existing pricing. Unfortunately, this does not hold true for Home Depot.
Looking at the company's new business initiatives, management largely reiterated its previous comments on China regarding concerns around intellectual property protection and the ongoing lack of hydrogen infrastructure. Plug Power has been working with an external advisor for some time now and hopes to select a Chinese partner soon - but only in case the agreement "will allow Plug to be on an equal footing in a partnership and provide long-term IP protection". Suffice to say, Chinese companies are actually looking for quite the opposite "partnership" model as already evidenced by Ballard Power's (BLDP) existing joint venture in China.
Management was also optimistic on the company's nascent delivery truck business given "discussions with some logistic companies that could be really potential upside for the business in the coming years". It should be noted though, that the current small scale FedEx (FDX) pilot project will still go on for another 18 months, so do not expect any material contributions from this opportunity for the foreseeable future.
Bottom line:
Plug Power just turned in another abysmal year and issued disappointing FY2018 guidance which at the lower end implies no growth in the company's high-margin core business. The anticipated unfavorable revenue mix will put additional pressure on the company's consolidated gross margin and cash flows this year. Liquidity will remain very tight again in 2018, potentially requiring another capital raise.
Management, as usual, is trying to obfuscate these issues by not guiding for unit shipments, site deployments, bookings, consolidated gross margin and cash usage anymore.
On a more positive note, the company is close to announcing another multi-site customer which I anticipate to be Home Depot. In contrast to the transactions with Wal-Mart and Amazon, this will be a clean deal with no warrants to be issued and the customer committing to outright equipment purchases.
The recent reinstatement of the FTC should help the company's business over the medium term, but, according to management, the impact on FY2018 will be very limited, if any. Keep in mind that the FTC opportunity largely applies to transactions with entirely new customers.
No real news on the China front - concerns remain around IP protection and the lack of hydrogen infrastructure but management is hopeful to choose a partner that offers a fair deal with long-term perspective for Plug Power rather sooner than later.
Personally, I remain highly skeptical on the Chinese FCEV-market for both 2018 and 2019. Without infrastructure, vehicle sales opportunities will remain very limited for the time being and there are already large capacities for both fuel cell stack and engine manufacturing firmly in place.
Given the anticipated pressures on the company's core North American material handling business in 2018, major China-related management distraction is the very last Plug Power needs right now.
Finally, I continue to be shocked by the amount of hubris and shareholder disregard management has been showing on a regular basis in addition to its obvious inability to accurately forecast the business. Changes at the top management level are long overdue at this point.
