Plug Power: More Rosy Projections Despite The Worst Quarter In Recent History

Aug. 06, 2021 8:33 AM ETPlug Power Inc. (PLUG)AMZN, APD31 Comments
Henrik Alex profile picture
Henrik Alex


  • Plug Power reports record top-line results and raises gross billings projections but long-standing margin issues continued to escalate.
  • Product gross margins were almost cut in half quarter-over-quarter while already challenged service and hydrogen fueling margins deteriorated to new all-time lows.
  • While management attributed some of the underperformance to one-time events like force majeure and transition to a new hydrogen supplier, near-term margin improvement is likely to remain limited.
  • Guidance for at least $150 million in electrolyzer sales next year implies a material growth deceleration for the core material handling business which is in contrast to management's statements on the call.
  • With management hinting at a potential guidance raise on the upcoming symposium in October and analysts likely remaining constructive, I wouldn't be surprised to see the shares trading higher despite the ongoing, abysmal condition of the core business.

Zukunft der Wasserstoffenergie. Wasserstoff-Tankstelle mit LKW, Jet und Stadt im Hintergrund. 3D-Rendering.
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Note: I have covered Plug Power (NASDAQ:PLUG) previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, Plug Power reported its worst quarter since I started coverage of the company back in 2015. While the company reported record top-line results well ahead of consensus estimates and actually raised FY2021 gross billings guidance from $475 million to $500 million, the underlying margin performance defies the century-old concept of economies of scale:

Source: Company SEC-Filing

Even after adjusting for some minor warrant charges, Plug Power reported consolidated gross margin of negative 30.4%, down an eye-watering 1,620 basis points sequentially.

Given the company's abysmal margin performance one needs to ask the question where's the sense in entering into even more GenKey contracts with just a handful of very large material handling customers at terrible terms?

While management claimed $31 million in charges related to elevated hydrogen pricing caused by a number of force majeure events and the termination of its long-standing hydrogen supply agreement with Air Products (APD) as well as $4 million in COVID-related supply chain impact, the company's margin problems appear to go well beyond these one-time issues.

For example, all-important product gross margins were almost cut in half quarter-over-quarter despite the percentage of revenue contribution from the sale of low-margin hydrogen infrastructure staying roughly the same.

In the 10-Q, the company states the "mix of impact of the equipment sold with varying margin profiles, including a higher mix of infrastructure and other new products, and mix of customer profiles with varying pricing structures".

The "mix of customer profiles with varying pricing structures" is actually a new disclosure for Plug Power but given the fact that 78.5% of the company's $91.4 million accounts receivable balance at quarter end was associated with a single customer which presumably is Amazon (AMZN), it is quite obvious that the company's largest customer is benefiting from highly favorable contract terms.

Plug Power also recorded an additional $6.7 million provision for anticipated future losses on service contracts. In layman's terms: The company is subsidizing maintenance contracts for its customers.

In addition, service margins deteriorated to a new all-time low of negative 166.5% after adjusting for some minor warrant impact due to "certain unexpected costs, including varied COVID related issues, certain vendor transition and force majeure issues that impacted hydrogen infrastructure service costs, and scrap charges associated with certain parts".

Apparently, at least some of the $31 million in Q2 hydrogen charges claimed by the company in the shareholder letter were incurred within service costs but on the conference call, management did not correct an analyst wrongly attributing all hydrogen charges to the fueling segment thus arriving at adjusted fuel margins in the mid-teens, which, of course, is wrong.

Management also had the chuzpe to project "break-even to slightly positive service margin run rates materializing early in 2022" which, at least in my opinion, is simply impossible given the subsidy nature of the company's service contracts. Longer term, management is still targeting service margins in the 30% range, a mantra that has been repeated for almost a decade now with things only getting worse.

As a reminder: The company's fueling margins have always been negative simply because of the requirement to subsidize hydrogen and related infrastructure for customers.

The company's leasing business which Plug Power refers to as Power Purchase Agreements ("PPA") also reported record low margins of negative 140.0%, very much for the same reasons discussed in the service segment which isn't exactly a surprise as a good chunk of the costs associated with the leasing business is related to maintaining the equipment at customer locations. It is important to note that another part of the $31 million in stated hydrogen charges has been incurred in the leasing segment.

Finally, the fueling segment recorded adjusted gross margins of negative 240.8% due to "vendor transition and force majeure events primarily related to hydrogen plant shutdowns that impacted the cost of fuel". The 10-Q also states vendor transition costs of $14.6 million for the quarter.

Selling, general and administrative expenses were another unpleasant surprise increasing more than 50% sequentially, partially due to costs associated with the recent accounting issues. Remember, the company was required to restate financial results after management had been inflating gross margins for years by wrongly allocating very material amounts of cost of goods sold to research and development expenses.

On the conference call, analysts asked the usual softball questions thus providing management another opportunity to deviate from the abysmal condition of the core material handling business by touting the company's ambitious transformation plans like the recent move into electrolyzer production with targeted revenues of at least $150 million next year.

Unfortunately, with an aggregate $750 million in gross billings projected for FY2022, the guidance actually points to rapidly decelerating growth in the company's core material handling business which appears to be in stark contrast to CEO Andy Marsh's statements on the conference call:

Let me just give you a good deal of my increased confidence for next year has to do with the continuous performance of our material handling business, which I think it's probably fair to say. We'll continue to grow with the rates we've seen before.

Given the dismal state of the core business, slower growth isn't necessarily a bad thing but it's hard to believe that the recent foray into electrolyzers will lift consolidated gross margin next year given the ongoing ramp-up of this new business segment and anticipated margin pressures from overcapacities in the market as recently pointed out by competitor NEL ASA.

Investors should also be concerned about Plug Power's plans to sell green hydrogen to customers at the same price like the grey hydrogen sourced from third-party suppliers today. While management expects this move to be margin-accretive, they also admitted that the company is not looking to "maximize the profit opportunity" in this segment.

In reality, Plug Power can't sell hydrogen to key customers at higher prices simply because of prevailing contract terms and the company's heavy dependence on just a few large customers. Plug Power even decided to bear the recent force majeure costs to avoid alienating anchor customers like Walmart and Amazon.

On the call, management hinted to increased long-term guidance likely being provided on the company's upcoming symposium in October but if history is any lesson, growth in the business has only resulted in weaker margins and higher losses for Plug Power thus resulting in apparent diseconomies of scale.

That said, despite negative free cash flow of $140 million for the quarter, the company is still sitting on $4.4 billion in readily available cash and marketable securities, so even when considering elevated capex requirements, liquidity won't be an issue again for the foreseeable future almost regardless of Plug Power's operational performance.

Bottom Line

Despite record top-line results and increased gross billings guidance, Plug Power just reported the worst quarter in recent years as the company's long-standing margin issues continued to escalate.

While management remains confident on its ambitious transformation plans, investors should not expect meaningful short-term progress given the fixed nature of the company's hydrogen supply and service contracts.

With many market participants still betting on the company's rosy projections, investors need to ask themselves the question:

If management hasn't been able to execute with the company mostly focusing on a single domestic market, how likely will the very same management successfully deliver on a complex strategic transformation and international expansion?

Personally, I expect nothing short of disaster going forward but with billions in net cash on the balance sheet and capital markets remaining wide open, the company can easily afford a number of additional missteps.

With the recent restatements behind the company, ample liquidity and management as optimistic as ever, I wouldn't be surprised to see the shares moving higher ahead of an anticipated guidance increase on the company's upcoming symposium in October.

This article was written by

Henrik Alex profile picture
I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.Despite not being a native speaker, I always try to deliver high quality research at no charge to followers and the entire Seeking Alpha community.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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