Plug Power (NASDAQ: PLUG) is set to release its third-quarter earnings on Nov. 7, and as usual, investors will surely be charged up to see how this leader in fuel-cell solutions fared. It's easy to be overpowered by the many facts and figures, so let's prepare by keying in on three things we can expect management to address in its report.
Earning extra credit
Unlike the solar and wind industries, which rejoiced when Congress passed a spending bill that extended tax credits for solar and wind technologies, the fuel-cell industry has been left out in the cold. According to management, the lack of inclusion was due to an oversight -- an oversight that many members of Congress are intent on remedying.
On the company's second-quarter conference call, Andy Marsh, Plug Power's CEO, reported that he, "along with a broad coalition of industry advocates," has spent many months in Washington "working with Congress to expand the current investment tax credit legislation to include fuel cells." Furthermore, Marsh reported that there is bipartisan support to extend the credits, and it's likely that this goal will be accomplished when Congress returns after the election.
The extension of the investment tax credit is crucial for the fuel-cell industry to thrive, so investors should be focused on any insights that management provides.
An unlikely target -- or two
At the beginning of the year, management identified a target of using less than $20 million in operating cash flow for fiscal 2016. And as recently as the company's Q2 earnings release, management affirmed the target.
Considering the company has reported $15.8 million in negative operating cash flow through the first half of the year, it seems rather brash that management would reiterate this guidance, suggesting that it will use less than $5 million in operating cash flow through the second half of the year.
Doubling down on the aggressive targets, Marsh suggested, "Growth in sales and margin, while being vigilant on keeping administrative costs in check, will enable us to achieve positive cash flows and EBITDAS in the near term."
Marsh should be more circumspect in suggesting that the company will achieve breakeven on an EBITDAS basis. On a conference call in 2013, he suggested the company would achieve breakeven on an EBITDA basis in fiscal 2014. Instead, the company reported an EBITDA loss of $84 million.
One of Plug Power's strengths is its ability to forge relationships with numerous companies across a range of industries. One example is the partnership it has developed with FedEx (NYSE:FDX). One of Plug Power's major initiatives is to provide solutions to the ground support equipment market, and through its relationship with FedEx, it continues to do that.
On the Q2 conference call, Marsh announced that Plug Power has developed a second-generation air fuel cell system, which it intended to launch with FedEx in the third quarter. Moreover, he reported that the company is also "engaged with other potential customers."
Besides commentary on its GSE solutions, investors can look for management to address progress on its range extender program with FedEx; Plug Power expects to test the first units in the fourth quarter. Marsh also stated his belief that larger scale deployments of 500 to 1,000 units could come within the next 12 to 18 months.
Service with a Buckeye smile
Earlier, in October, Plug Power announced the opening of its new service center in Dayton. Ohio. In addition to expanding service capabilities to its Ohio customers -- Wal-Mart, Ace Hardware, Home Depot, and Honda -- the Dayton service center will also provide parts and maintenance for GenDrive fuel cell units in the Midwest region and GenFuel stations throughout the nation.
It's too soon to evaluate the impact the Dayton service center will have on Plug Power's services business; nonetheless, investors should look for management to provide some insight during its presentation.
Whereas the company has reported a 16.7% gross margin on sales of fuel-cell systems and related infrastructure through the first half of fiscal 2016, it has also reported a negative-10.1% gross margin on services performed on fuel-cell systems and related infrastructure.
Perhaps the Dayton service center, which management foresees growing by 50%, will go a long way in driving the company's services business to profitability.
Keying in to new relationships
One of the criticisms of Plug Power's business has been the lack of diversity among its customers. In fiscal 2015, for example, Wal-Mart accounted for 56.7% of total consolidated revenue. Adding the French retailer Carrefour SA, among others, the company has made headway in diversifying its customer base.
Equally important -- if not more -- for Plug Power is selling these new customers on its turnkey solution, GenKey. Once a new customer installs the GenKey system -- committing to a hydrogen-based solution -- that customer is likely to maintain a relationship with Plug Power, thus providing a continuous revenue stream.
In the beginning of the year, management had forecast more than 25 GenKey installs for fiscal 2016, and it reiterated this guidance during the Q2 presentation. Through the first half of the year, however, Plug Power has installed only nine. Presumably, there should be many new installs that management will be reporting for the third quarter.
Management has been generous in providing a forecast for fiscal 2016; however, its generosity may end up doing more harm than good. Should the company fail to achieve its guidance, it would be yet another example of how management's forecasts are nothing more than a boy crying "wolf."