Plug Power (PLUG 2.49%), a leader in fuel-cell solutions, just released its third quarter earnings. When a company reports its quarterly earnings, management often presents just a sketch of how the company performed. But equally important for investors is the conference call, where management's commentary colors in the sketch, providing the full picture of the company's recent performance.
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By the book
The chances for extension of the investment tax credit (ITC) for fuel cells remain dubious at best; however, Andy Marsh, Plug Power's CEO, contends that the company will achieve its target of $275 million for fiscal 2016. On the conference call, Marsh suggested that "with or without the ITC, we believe we will hit $275 million in bookings for the year." Elaborating on this point, Marsh also reported that "the backlog does not have any cancellations associated with the ITC."
Reporting $100 million in bookings for Q3, Plug Power has secured $170 million year to date. Should it meet its guidance and report $275 million in bookings for the year, the company will have grown bookings from at a compound annual growth rate of 38% from 2013 -- when it reported $75 million in annual bookings -- through 2016.
Although Marsh has often been less than reliable in providing forecasts -- namely regarding profitability -- the bookings guidance for fiscal 2016 seems like an attainable goal.
Expanding margins: molecules and other matters
In the third quarter, Plug Power -- for the first time -- reported a positive gross margin in its service business. Growing from negative-55% in Q3 2015, the service business gross margin was 5.9% for the recently completed quarter. As significant as the improvement was, management suggests that this is just the beginning; its long-term goal is a service business gross margin of 30%.
Affirming guidance for GAAP gross margin to fall between 6% and 10% for fiscal 2016, management remains confident it will expand its gross margin from the 1.8% which it has reported through the first nine months of the year. So if it's not the improving service business, what can it be?
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Management believes that the company's GenDrive units -- its bread and butter -- will "continue making tremendous contributions toward us achieving our gross margin goals for 2016, particularly given the sales ramp anticipated for the fourth quarter."
Looking farther out, management recognizes one element as a driver of margin expansion: hydrogen. On the conference call, Marsh opined on the key to growing its gross margin:
"Our challenge today when I think about margins is more associated with the hydrogen molecule. We've been improving the efficiency of our systems, as well as beginning the process of deploying reformers, as well as which will help us improve the margins on that line, as well as some of the contractual negotiations going on with some of the leading industrial gas companies."
Through the first nine months of fiscal 2016, Plug Power has reported a gross margin of negative-23% for its fuel delivery -- a nominal improvement over the negative 23.3% it reported for the same period last year.
Wouldn't miss this for all the tea in China
Although management paid considerable focus on the conference call to the looming specter hanging over of the fuel-cell industry -- i.e., the uncertain ITC extension -- it also dedicated time to addressing its newest endeavor, China. According to Marsh, China has invested more than $100 billion in the fuel-cell industry and is fully committed to the advancement of hydrogen fuel-cell vehicles. In fact, he states that "China is projected to be the largest mobile fuel-cell market in the world within the next two to three years."
Marsh indicated that the Chinese government is initially focused on spurring adoption in "fuel-cell power fleet vehicles, including regional and private buses and light-duty trucks as well as the hydrogen infrastructure required to make the systems work." This is certainly not Plug Power's specialty -- it serves the stationary-power and material-handling industries. Marsh, however, doesn't see that as impeding his company's success: "[The] China hydrogen fuel cell initiative is a perfect complement to Plug Power's experience, technology, and suite of products. We can enter the market with a technology and cost structure advantage that's not matched by anyone else."
Suggesting that the company is quick to avail itself of this new opportunity, Marsh, who was in China at the time of the earnings release, revealed that he was in discussions with several potential partners.
The takeaway
Although Plug Power deserves credit for reporting a positive gross margin in its service business, it's certainly not time to pop the champagne. Challenging days lie ahead as hopes for the ITC extension grow dimmer and dimmer. However, on the other side of the globe, there's a government clearly committed to encouraging the growth of the fuel-cell industry. It seems reasonable for Plug Power to leap at the opportunity in China, but it raises concerns that the company could spread itself too thin.
Management appears confident that China represents a lucrative opportunity, but longtime followers of Plug Power know that when management appears too earnest, a healthy dose of skepticism is in order.
