If Ormat Technologies' (NYSE:ORA) most recent quarter were an Olympic event, I think the judges would have scored it an eight or nine (except that one generous judge who always gives a 10). The company's results showed decent gains in every category, with one small exception. Also, Ormat started up a new geothermal plant that will help drive even more gains in the near future.
Here's a look at the company's most recent results as well as some of the quarter's highlights that will give investors an idea of what to expect in the coming years.
By the numbers
|Metric||Q1 2017||Q4 2016||Q1 2016|
|Revenue||$189.9 million||$166.5 million||$151.6 million|
|Operating income||$59.9 million||$51.2 million||$50.5 million|
|Net income||$35.3 million||$28.2 million||$29.3 million|
|Earnings per share||$0.70||$0.56||$0.59|
Ormat Technologies is really in a groove lately. Its fourth-quarter results showed steady progress, and this most recent quarter's results was a continuation of that trend. Revenue was up both sequentially and year over year thanks to a significant uptick in product revenue. For Ormat, product revenue is the engineering, manufacturing, and construction of geothermal power facilities for third parties, whereas its electricity segment involves building and owning its suite of geothermal power plans.
Product revenue is a lumpy business depending on completion and payment schedules. This particular quarter was a good one for this business. In fact, Ormat's management had even noted on its previous earnings release that some product revenue for the fourth quarter got pushed into this quarter because of timing issues. The one blemish on this side of the business was that gross margins for its product segment fell slightly related to a geothermal installation in Turkey.
For the electricity segment, things couldn't look much better. Overall power generation increased slightly as it brought on a new geothermal plant on line toward the end of the quarter. What made the difference for this business were lower costs, which drove improved operating margins. Over the past four years, management has focused on reducing operating expenses at its owned facilities. This initiative has led to an increase in gross margins from 29.4% in 2013 to 20.6% in the most recent quarter. These kinds of gains will pay off well as it brings another 200 megawatts (MW) of new capacity on line between now and 2019.
Compared to the fourth quarter, this one was a downright quiet one. It brought the first of three units at the Sarulla Geothermal plant in Indonesia on line, this 117 MW is one of the largest in the world and is Ormat's largest single supplier contract to date. Ormat estimates that all three units at the facility will be operational by 2018.
The other big announcement from the quarter was that Ormat signed a strategic partnership with ORIX Corporation (NYSE:IX). According to the deal, ORIX will take a 22% interest in Ormat and will have the right to nominate three people to an expanded board of directors. In exchange, Ormat will have exclusive rights to develop, own, operate, and provide equipment for any future ORIC geothermal energy projects outside of Japan. ORIX will also provide direct project financing for Ormat's future geothermal and energy storage projects
Also, management maintained its 2017 guidance of $680 million to $700 million in total revenue and adjusted EBITDA of $340 million to $350 million for the full year.
What management had to say
CEO Isaac Angel commented on what he and the management team think the future will look like with this strategic partnership with ORIX.
We see this commercial cooperation agreement as a significant development that will enhance our strategic position, expand our geographic footprint as well as our technological and customer base. ORIX's global reach and reputation in the energy market serves as a further validation of Ormat's comprehensive capabilities and track record to a broader market and provides a platform to accelerate our growth.
What a Fool believes
Ormat seems to be pulling all the right levers right now. Its electricity segment is churning out high operating margins thanks to improved efficiency, which helps to smooth out results from its more lumpy product segment. It also has that 200 MW of new projects slated to start operations by the end of 2019, which will increase the company's overall electricity generation capacity by more than 25%. With better access to capital thanks to this ORIX deal, it should make achieving that growth much easier.
The one concern for investors in the future is the company's foray into the energy storage business. In the fourth quarter, Ormat purchased an energy management and demand response software company with the stated objective of providing energy storage services to solar and wind power installations. This business is uncharted territory for Ormat, and it could be hard to translate its sphere of competency into this new field. If a lot of money is spent on this venture and it turns out to be a dud, then investors aren't going to be happy.