Plug Power 2017 First Quarter Update Letter
Highlights for First Quarter 2017 and Subsequent Events
- Signed Amazon agreement for multi-site GenKey deployments and technology collaboration; representing approximately $70.0 million in 2017 revenue
- Shipped first commercial ProGen engines for integration into electric vehicle range extenders associated with FedEx program
- Introduced next-generation versions of two Class 2 GenDrive units that will further reduce costs and improve performance and reliability;
- Total GAAP revenues of $15.2 million;
- Completed $65.0 million in new contract bookings;
- GAAP earnings per share loss of $0.13 on a diluted basis;
- Deployed two PPA sites, in line with expectations;
- Confirmed full-year 2017 guidance, including GAAP revenue of $130.0 million, GAAP gross margins within the range of 8% – 12% and total cash used of $25 – $35 million;
Our performance early in 2017 can be characterized as building strong foundational steps to both deliver on our 2017 goals and on our long term strategic vision. The first quarter results were flat with last year, but were in line with our expectations. As we discussed on the business update call in February, we anticipate a ramp up in activity in Q2, and the second half will be the majority of deployments and will represent approximately 65% of our expected revenues. More importantly, recent advancements such as the signing of significant new deals with customers such as Amazon and Carrefour, and continuing the development of new markets and of our core fuel cell and hydrogen product lines, sets the stage for us to achieve our growth and profitability projections for 2017 and beyond.
As innovators, we have recognized the ongoing need to refine and evolve in order to capitalize on the tremendous opportunities that lie ahead. Our recently announced deal with Amazon is not only a strong validation of our business model, especially in an environment without pricing incentives, but is a catalyst in driving inbound interest from new customers and accelerating our sales cycle. This transaction is a major milestone in the execution of our original strategic plan – to penetrate the right first market, scale volume while driving down costs, and leverage this progress as we enter new markets.
While we remain focused on growing in the material handling segment, we are now well positioned to enter substantial new markets that leverage the unparalleled experience we have gained through our work with our growing blue chip customer base. From ground support equipment in Memphis to on-road applications here in the US and in China, we are seeing strong trends that will accelerate these and other important markets in the years to come. China alone represents a significant long-term opportunity for Plug Power to accelerate top line growth, drive profitability and continue to be the market leader in economic, clean and efficient power solutions.
Customer Expansion and Engagement
Our strategic customer agreement with Amazon, valued at up to $600 million, highlights our leadership position in the material handling market. We are confident the transaction will accelerate business with new and existing customers, drive penetration of new applications and markets, and ultimately support our path to profitability. Amazon’s commitment to Plug Power is also a significant milestone for the fuel cell industry as a whole, as it validates the industry’s path to commercially viable solutions. The agreement not only establishes Amazon as an important long-term customer for Plug Power, but given the warrant component of the deal, also makes them an important stakeholder, aligning our interests as we grow the relationship. The transaction encompasses the rollout of our GenKey solution to Amazon’s distribution centers worldwide and the collaboration on new technology platforms for fuel cells. We anticipate that we will recognize approximately $70 million of revenues with Amazon in 2017. This is notable in the fact that the deal was completed in a non-ITC environment, and was structured such that Amazon will finance the transactions themselves.
As we discussed on our recent business update call, we continue to work closely with our largest power purchase agreement (“PPA”) customer on the growth and profitability of our longstanding relationship. One area we seek to improve is the financing terms under which sites are currently structured as PPAs. In amending the terms of the PPA arrangement, our goals are threefold: 1) to make the transactions relevant in the non-ITC environment we expect in 2017 and beyond; 2) to secure lower cost sources of financing; and 3) to make each new site more cash positive to Plug Power in the year of deployment. This customer has been a staunch supporter of Plug Power, and we anticipate a mutually beneficial conclusion to these discussions soon. As a result of these discussions, we deferred financing the two sites delivered in Q1 to get better terms. This deferral had an impact on cash in the quarter of approximately $9 million.
We also have received a follow on order from Carrefour, the world’s second largest retailer, for 80 units to support Phase 2 of their initial rollout of fuel cells to improve productivity and efficiency. Carrefour has over 40 distribution centers in Europe, and we look forward to working with them on a continued program of expansion. Additionally, we have signed a new customer in Norway – our first customer in that country. The pipeline of opportunities continues to build in Europe, and we continue to be encouraged that the value proposition of our GenKey solution resonates with some of the region’s most prevalent companies.
As we highlight in our full-year 2017 guidance section below, we anticipate 25 total sites installed this year, with deployments and revenue recognition more heavily weighed on the second half of the year. We currently anticipate four sites in Q2, 12 sites in Q3 and the balance in Q4, though timing of certain greenfield sites (these are sites where a new building is being constructed) could vary the timing of these numbers slightly. As we saw in Q4 of last year, our capacity for both our in-house assembly and our supply chain, is more than adequate to handle the expected volumes, and continues to be enhanced by product scale and advanced engineering. Virtually 100% of the anticipated GenDrive demand in 2017 will utilize Plug Power stacks, and we continue to refine the designs and vendors for our GenFuel infrastructure to improve our margins. Our operations team has set their focus on hitting margin targets for the year, with a firm grasp on what is necessary to scale production relative to order magnitude.
Capitalizing on Important Long-Term Trends
Plug Power has been at the forefront of providing solutions to businesses to drive improved efficiencies that reduce costs and meet ever- increasing customer expectations. As we think about our core markets in distribution and manufacturing – and then translate that into the full supply and delivery chain – we can clearly see that there are a set of undeniable and interconnected trends driving innovation in these markets while creating new markets we can exploit around the world:
- Electrification: Lower total cost of ownership, simplicity and flexibility of design, and reduced emissions drive the move towards electrification. Many applications leverage batteries, specifically lithium ion, as their energy storage technology, but this comes with inherent limitations that either slow or prevent the electrification of certain platforms and use cases. Fuel cells can provide all of the benefits of electrification with all of the benefits of traditional engines – long run times and range, fast refueling, and appropriate power and energy density.
- Asset Utilization: Higher utilization of critical and expensive assets has an important cost and business model effect for companies and individuals. Some assets like a forklift in a Walmart distribution center run all the time, and can be utilized significantly more during peak times of the year such as around the holidays. Other assets like our personal cars, run as little as 4% of the time. The ability to get more out of a forklift at a DC reduces overall costs, improves return on assets and ultimately provides the customer with a better overall experience (cost, delivery, etc.). The ability to get more out of our car can completely change the business model for companies like GM and Ford, as new models like Uber and Lyft dramatically increase utilization and open the door for new approaches to transportation. Fuel cells play an enabling role by limiting downtime for refueling, providing longer run times, and allowing higher levels of auxiliary devices (safety, communication, sensors, etc.) and automation.
- Autonomy: Autonomous technology for cars has received a great deal of press recently. But, Plug Power has been powering autonomous vehicles for years at manufacturing facilities. For example, GenDrive powers automated guided vehicles today at customers like BMW, which creates benefits that can be realized throughout the value chain, which ultimately results in lower costs and faster delivery to the consumer. Electrification of fleet vehicles – be it delivery trucks or taxis – enables a faster path towards the vision of fully autonomous vehicles. A fuel cell’s reliability, range and ability to enable powerful sensors that measure performance as well as the surroundings can enable a deeper and more complete level of autonomy.
- Data: The ability to harness and effectively leverage all of the data that is created by our multiple engineering, manufacturing, and service system platforms creates substantial opportunities to drive value. For example, Plug Power utilizes its SiteView suite of Internet of Things (IoT) and analysis tools to collect and analyze data from deployed units and systems to find problems before they arise, improving ongoing system reliability, lowering maintenance costs, and providing more valuable operational transparency to our customers. But as we continue to employ ever-smarter intelligence to these robust information platforms, the results will be more rapid iteration of new designs along with the creation of new businesses and business models that will increase value to customers over time.
Each of these forces is driven by the value individuals and businesses place on time, reliability, convenience, predictability, and cost savings. In some cases, it is expected by the consumer as part of their implicit contract with the service provider. In other cases, it is a valuable change from the current state of the art that customers are willing to pay for.
Other trends, specifically those related to reduced emissions, are also driving fuel cell adoption. While we believe there always has to be a strong economic case, we are seeing companies, and countries, start to place increasing value on metrics around environmental responsibility and sustainability. FedEx Express, our partner along with the DOE on fuel cell electric delivery vehicles, recognizes the importance of the trends discussed above not only to reduce costs, but also to find sustainable solutions to ensure their competitive position well into the future. In China, fuel cells have been identified as a critical component in the current five-year central government’s plan to address the short-term goal of reducing emissions in cities and large urban areas, and the long-term goal of finding practical and economically viable solutions that will run on renewable sources of energy.
From concept to creation: Plug Power seeks to evaluate today’s market, while keeping an eye on the future.
We have always been focused on maximizing the long-term value of Plug Power. Investing in the long term takes vision, capital, and meaningful patience to achieve sustainable success. Five years ago, we had a plan – to find a first market where fuel cells could drive significant value to the customer despite commanding a premium price. We found this market in material handling and we have since been rapidly increasing volumes, driving down costs, and gaining unparalleled commercial knowledge into the real-world operation of our systems. The reduction in cost combined with strong improvements in performance and reliability has led to steadily improving financial performance, expanding the size of the first addressable market, and opening up adjacent and new market opportunities. We are seeing this play out with
ProGen, as we have designed our engine to be both flexible and easily adaptable to different applications. The sharing of components allows us to drive down cost and improve performance and reliability. But the clean, simple interface allows for the fast adaptation of this product to various applications and platforms. Our team is working hard every day to take advantage of these opportunities, and to continue to be the technology and market leader.
Q1 Operational Performance and Financial Results
First quarter performance was in-line with our expectations given timing of 2017 planned deployments and consistent with the seasonal trend that we have historically observed. GAAP revenue for the first quarter of 2017 was $15.2 million, compared to $15.3 million in the first quarter of 2016. First quarter 2017 revenue represents 30% year-over-year growth in recurring revenue streams, underlining the evolution of our business model and growing contracted revenue backlog. Recurring revenue growth was offset by a reduction of system deployments year over year, due to the timing of when planned 2017 deployments will be commissioned. First quarter 2017 sales achievements included system deployments at two sites where the customer has a PPA in place.
As noted earlier, we have strong visibility to the 25 sites and 5,600 GenDrive units we anticipate shipping for the full year, with all of the orders in backlog. The sales team is working hard to bring in additional new bookings to enhance 2017 top-line growth and beyond.
Key operating metrics:
- 439 total GenDrive units deployed for the three months ended March 31, 2017, versus 834 units for the three months ended March 31, 2016
- Two PPA sites installed for the three months ended March 31, 2017, versus three PPA sites installed for the three months ended March 31, 2016
- Approximately 12,000 GenDrive units under service or PPA contract at March 31, 2017, versus approximately 9,400 under service or PPA contract at March 31, 2016
- 42 sites under fuel delivery contract at March 31, 2017, versus 25 sites under contract at March 31, 2016
GAAP gross margin for the first quarter of 2017 was negative $4.5 million, or (29.4%) of sales, compared to a GAAP gross margin of $0.2 million, or 1.1% of sales, in the first quarter of 2016. The year-over-year decline in GAAP gross margins is primarily a result of a revenue mix less weighted on product sales and more heavily weighted towards recurring streams which currently have lower margin profiles given they are relatively newer offerings, but are scaling.
Net loss attributable to common shareholders for the first quarter of 2017 was $24.1 million, or $0.13 loss per share on a diluted basis. This compares to a net loss attributable to common shareholders in the first quarter of 2016 of $11.8 million, or $0.07 loss per share on a diluted basis.
Cash and Liquidity: Net cash used in operating activities for the first quarter of 2017 was $23.9 million, compared to a usage of $6.9 million in the first quarter of 2016. As of March 31, 2017, Plug Power had total cash of $65.7 million, including cash and cash equivalents of $11.8 million and restricted cash of $53.9 million. The use of cash in the first quarter is consistent with our full year expectations given timing of 2017 deployments and working capital requirements as well as the timing of financing for the first quarter PPA deployments.
Based on our order activity and backlog, we began work in Q1 on many of the projects that will be delivered in Q2 and Q3. As a result, we utilized cash for working capital to begin building out these orders. In addition, we did not finance the two PPA sites, including approximately 400 GenDrive units, that were delivered in the first quarter, as we are working to improve financing terms for the monetization of these assets, which we anticipate will close in the near term. We have a number of initiatives in process to finance our working capital needs for future orders and we are confident our capital options will enable us to deliver on our growth and cost down initiatives. We anticipate significantly better overall cash performance in the coming quarters given the planned 2017 ramp and cash conversion cycle, ongoing margin enhancements, and our continued focus on containing operating expenses.
During April 2017, the Company received proceeds of $18.4 million upon the exercise of 14.5 million warrants to purchase shares of the Company’s common stock. Also during April 2017, the Company entered into an At Market Issuance Sales Agreement with FBR Capital Markets & Co., as sales agent (“FBR”), pursuant to which the Company may offer and sell, from time to time through FBR, shares of common stock having an aggregate offering price of up to $75.0 million. During April 2017, the Company sold 8.1 million shares of common stock through FBR and raised net proceeds of $18.2 million.
On April 5, 2017, all of the outstanding shares of the Company’s series D redeemable Convertible preferred stock, were converted into an aggregate of 9.5 million shares of the Company’s common stock, at a conversion price of $1.55. The conversion was done at the election of the holder in accordance with the Series D terms. No shares of Series D redeemable convertible preferred stock remain outstanding.
After considering our year-to-date performance and expected results for the remainder of the year, we are reiterating our full-year 2017 guidance metrics. We have good visibility with our current order book and backlog to support our activities for the rest of the year and are focused on further enhancing our performance as the year progresses.
Andrew Marsh, President and CEO Paul Middleton, Chief Financial Officer