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Ocean Power Technologies’ (OPTT) CEO George Kirby on Q2 2016 Results – Earnings Call Transcript

Ocean Power Technologies, Inc. (NASDAQ: OPTT ) Q2 2016 Earnings Conference Call December 15, 2015 10:00 AM ET Executives Shawn Severson – Blueshirt Group George Kirby – CEO Mark Featherstone – CFO Analysts Operator Good day, ladies and gentlemen and welcome to the Ocean Power Technologies’ Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, today’s conference is being recorded. I would now like to turn this conference call to Shawn Severson with Blueshirt Group. You may begin. Shawn Severson Thank you and good afternoon. Thank you for joining us on OPT’s conference call and webcast to discuss the financial results for the three months ended October 31, 2015. On the call with me today are George Kirby, President and CEO; and Mark Featherstone, Chief Financial Officer. George will provide an update on the Company’s highlights for the quarter, key activities, and strategies, after which Mark will review the financial results for the second quarter. Following our prepared remarks, we will open the call for questions. This call is being webcast on our Web site at www.oceanpowertechnologies.com. It will also be available for replay later today. The replay will stay on the site for on-demand review over the next several months. Yesterday, OPT issued its earnings press release and filed its quarterly report on Form 10-Q with Securities and Exchange Commission. All of our public filings can be viewed on the SEC Web site at sec.gov or you may go to the OPT Web site, www.oceanpowertechnologies.com. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the Company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions made by management regarding the future circumstances over which the Company may have little or no control that involves risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. We refer you to the Company’s Form 10-K and other recent filings with the SEC for a description of these and other risk factors. And now, I would like to turn the call over to George to begin the discussion. George Kirby Thanks, Shawn. Good morning, everyone. Today, I’ll review our business operations and provide an update on key activities and developments in the quarter. Following this, Mark will briefly review our financial results. After which, Mark and I will be available to answer any questions. So, let’s begin. First, we’re excited that the Company is continuing to execute on our objectives and achieving considerable progress on both the commercial and technical fronts. As announced in late October, we redeployed the APB-350 A1 power buoy off the coast in New Jersey and resumed sea trials. We also released select performance data gathered during A1’s initial deployment as well as initial results from the accelerated live testing of this redesigned PowerTakeoff system or PTO. Our goal is to provide reliable, durable, and cost effective offshore autonomous power solutions where current power solutions are either too costly or unavailable. The deployment of A1 was a milestone in our long term strategy to achieve this goal and gives us the opportunity to further develop and validate our APB-350 technology. Consistent with our strategy pivot, we also made considerable progress toward our next generation APB-350 product which we expect will feature an enhanced electrical storage system, a higher efficiency power management system and a user friendly interface providing even more flexibility to end users. I am excited to announce that this next generation buoy has undergone its critical design review and we expect that it will achieve a maturity level through extensive in ocean and factory accelerated life testing that will allow us to proceed with the commercial product launch in 2016. As we’ve mentioned before, we strongly believe that our APB-350 represents a very appealing solution which provides a robust and cost effective alternative to incumbent solutions that utilize batteries, solar, wind, and diesel power for offshore applications. As part of our efforts to demonstrate product reliability and durability, and to accelerate toward product commercialization, the Company initiated accelerated life testing on its redesigned APB-350 PTO in the second quarter. The OPT accelerated life testing process consist of operating PTOs in tandem with accelerated operating profiles. This subjects the PTOs to various load conditions which are encountered in extreme sea states. The test simulates an equivalent three year ocean deployment within a period of six to nine months using PTOs that are identical to those of the Company’s APB-350 A1. We intent to use accelerated life testing results to improve and to validate reliability which we believe is critical to our prospective customers. Furthermore as an important component of our commercialization strategy, OPT formed a technical advisory panel during the second quarter of fiscal year 2016. The panel was formed as part of our efforts to accelerate power buoy commercialization and it plays a critical role in developing and further improving our technology and products. The main objective of the panel is to facilitate the implementation of different power buoy applications coupled with specific market requirements. As we previously communicated to you, the panel consist of select potential customers and users and technical and scientific stakeholders, including Guardline Marine services, DNVGL, as well as represented from two major oil and gas operators, a large oil and gas equipment manufacturer and a leading meteorological and oceanographic sensor manufacturer. The University of Western Australia, Centre for Offshore Foundation Systems, also participates on the panel by providing scientific advice related to marine subsea structures engineering. The panelists are reviewing and providing critical industry feedback on requirements and test protocols in order to increase our speed to market. This long term collaboration is initially focused on the APB-350 but it could also extend to future power buoy designs. Moving forward, we will continue to work closely with panel members to maximize the unique opportunities that this long term collaboration provides to us. We’re excited to continue to work with these highly acknowledged and experienced companies and we look forward to continuing to integrate industry feedback with our day to day operations. Additionally, in the second quarter we announced an agreement with Guardline Environmental to investigate the development of innovative metocean monitoring and maritime security systems together. Under this agreement, we will work closely with Guardline to investigate and then potentially develop, test, and market, advanced integrated solutions for end users in the ocean observing and defense and security markets. We are very excited about working together with Guardline who is a leader within the worldwide environmental services market. We strongly believe that Guardline’s 45 years of experience within environmental, meteorological and oceanic studies and hydrographic and geophysical surveys will leverage our technology to further develop innovative applications and solutions that offer potentially revolutionary improvement to incumbent operational practices. Lastly, given Board of Directors and shareholder approval, OPT completed a reverse stock split at a ratio of one share of newly issued common stock for every 10 shares of issued and outstanding common stock. With the stock split completed, we’re now in compliance with NASDAQ listing requirements, and we believe that there is significant untapped value in the current OPT stock price, which we’re intending to unlock through the commercialization of the APB-350. I’ll now turn it over to Mark who will review our financial results in the quarter. Mark? Mark Featherstone Thanks George and good morning everyone. I will now review results for the second quarter of 2016 before we open up the call for questions. For the three months ended October 31, 2015, OPT reported revenue of $25 million as compared to revenue of $1.7 million for the three months ended October 31, 2014. The decrease in revenues compared with the prior year was primarily related to the decreased billable cost on our project with Mitsui Engineering & Shipbuilding or MES and with our contract with the U.S. Department of Energy. The MES project is currently undergoing a stage-gate review with its project stakeholders. The net loss for the three months ended October 31, 2015 was $3.0 million compared to a net loss of $4.4 million for the three months ended October 31, 2014. The decrease in net loss is primarily due to lower selling, general and administrative expenses including reduced third party consulting, site development and patent amortization costs. During the three months ended October 31, 2015, we recovered product development costs from prior periods under our cost-sharing contract with the European Union for our WavePort project. In addition, the prior year included $0.3 million of gross loss due to a change in estimated project cost related to the MES contract. For the six months ended October 31, 2015, OPT reported revenue of $0.6 million as compared to revenue of $3.3 million for the six months ended October 31, 2014. The decrease in revenue is primarily related to decreased billable work for the DOE, WavePort and MES contracts. The net loss for the six months ended October 31, 2015 was $7.1 million, as compared to a net loss of $7.7 million for the six months ended October 31, 2014. The decrease in the Company’s net loss year-over-year primarily reflects increased estimated project costs associated with our contract with MES in the prior year period as well as reduced legal, third party consulting, site development costs and patent amortization expenses compared with the prior year period. These decreases were partially offset by higher product development costs related to our APB350 and PB40 projects. Turning now to the balance sheet. As of October 31, 2015, total cash, cash equivalents, and marketable securities were $10.4 million, down from $14.2 million as of July 31, 2015. As of October 31, 2015 and July 31, 2015, restricted cash was $0.4 million and $0.5 million, respectively. Net cash used in operating activities was $7 million during the six months ended October 31, 2015 compared to $12.1 million for the six months ended October 31, 2014. The prior year reflects the return of $4.7 million related to an advance payment received from ARENA while the current year reflects costs related to increased deployment activity. As discussed in previous conference calls, we have taken a number of steps over the last several months to reduce our cash burn rate while increasing our technical, operating and business development resources. As such, we continue to project that our operating cash burn in fiscal 2016 will be lower than that in fiscal 2015 despite increased deployment activity in fiscal 2016. We remain confident in our cash position and we expect to have sufficient cash to maintain operations into at least the third quarter — calendar quarter of 2016 and we are currently exploring alternatives to raising additional capital. With that, I’ll turn it back to George before we open up the call for questions. George Kirby Thanks Mark. Before we move on to Q&A, I want to highlight a few compelling reasons to consider OPT. One, we believe we are the technology leader in wave energy conversion for offshore applications. Our technology provides a critical offshore power solution for a number of industries. Our technology focuses on driving down cost, improving reliability and durability, as well as broadening and enabling commercial applications. Also, we currently have been continuing to develop significant intellectual property around our technologies and applications. Two, we’re targeting large addressable markets including offshore oil and gas, ocean based communication and data gathering and security and defense. We’re also garnering what we believe to be significant interest from potential customers to develop power buoy applications, which could lead to solutions demonstrations and market launch. And lastly, we consider our staff to be world class and we have a solid leadership team in place at both the executive management and Board levels. We’re executing multiple power buoy deployments in order to further advance power buoy validation, which we believe will service as a near term market catalyst as we move closer to commercialization. So thank you for your support and time today. And operator, we’re now ready to take questions. Question-and-Answer Session Operator George Kirby Well, thank you all once again for attending today’s call. If you do have any further questions, please don’t hesitate to contact us. Otherwise, we look forward to speaking with you all next quarter. Operator Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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4 Consumer ETFs To Ride On Holiday Optimism

Despite a weak start, the holiday season gained a firmer footing. This is especially true given the modest retail sales data for November and an improved consumer sentiment data for December. After months of sluggish spending, retail sales rose a modest 0.2% in November, representing the largest increase since July. Meanwhile, consumer confidence improved for the third consecutive month in December, with the preliminary University of Michigan sentiment index reading 91.8, up from 91.3 in November (read: 5 ETFs for Loads of Holiday Shopping Delight ). Solid job additions, slowly rising wages and cheap fuel are providing consumers extra money to spend on a wide range of products including electronics and appliances, clothing, sporting goods and books, and at restaurants and bars. In particular, spending increased 0.8% on clothing, 0.6% on electronics and appliances, and 0.8% at sporting goods and hobby stores. The strong trend is likely to continue for the rest of the holiday shopping season given an improving U.S. economy, a recovering housing market and stepped-up service activities. The National Retail Federation (NYSE: NRF ) expects total holiday sales in November and December (excluding autos, gas and restaurant) to grow at a solid pace of 3.7%. Though this marks a deceleration from last year’s growth rate of 4.1%, it is well above the 10-year average of 2.5%. Investors should note that online sales have superseded brick-and-mortar retail sales this year with mobile shopping playing a crucial role. Online sales are projected to grow 6-8% to $105 billion. ComScore expects online sales to jump 14% year over year to $70.06 billion for the full holiday season (November and December), outpacing the growth of brick-and-mortar retail sales. Given the holiday cheer, investors should cycle into the consumer discretionary space in order to obtain a nice momentum play. While looking at individual companies is certainly an option, a focus on the top-ranked consumer discretionary ETFs could be a less risky way to tap into the same broad trends (see: all the Consumer Discretionary ETFs here ). Top Ranked Consumer Discretionary ETF in Focus We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in this space and are thus expected to outperform in the months to come. While all the top-ranked ETFs are likely to outperform, the following four funds could be good choices. These funds have enjoyed a strong momentum and have potentially superior weighting methodologies that could allow them to continue leading the consumer space in the coming months. PowerShares DWA Consumer Cyclicals Momentum Portfolio ETF (NYSEARCA: PEZ ) This product tracks the DWA Consumer Cyclicals Technical Leaders Index. It holds 38 stocks having positive relative strength (momentum) characteristics, with none holding more than 5.4% of assets. This approach results in a large cap tilt at 43%, followed by 31% in mid caps and the rest in small. About 30% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, textiles apparel and luxury goods, and airlines round off the next three positions with double-digit exposure each. The fund has managed $277.8 million in its asset base while trades in a lower average daily volume of 58,000 shares. It charges 60 bps in annual fees and added about 0.7% over the past one month. First Trust Consumer Discretionary AlphaDEX ETF (NYSEARCA: FXD ) This follows an AlphaDEX methodology and ranks stocks in the consumer space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 129 stocks that are well spread out across each security, with none holding more than 1.7% of assets. About 49% of the portfolio is focused on mid cap securities with specialty retail being the top sector accounting for nearly one-fourth of the portfolio, closely followed by media (15.8%). FXD is one of the popular and liquid ETFs in the consumer discretionary space with AUM of $2.4 billion and average daily volume of 456,000 shares per day. It charges a higher 63 bps in annual fees and gained 0.9% over the past one month. Market Vectors Retail ETF (NYSEARCA: RTH ) This fund provides exposure to the retail segment of the broad consumer space by tracking the Market Vectors US Listed Retail 25 Index. It holds about 26 stocks in its basket with AUM of $147.6 million, while average daily volume is light at around 62,000 shares. Expense ratio came in at 0.35%. It is a large-cap centric fund that is heavily concentrated on the top firm Amazon.com (NASDAQ: AMZN ) with 15.3% share, closely followed by Home Depot (NYSE: HD ) at 8.9%. Sector wise, specialty retail occupies the top position with 29% share, followed by a double-digit allocation each to Internet & catalogue retail, hypermarkets, drug stores, and health care services. The product has added 5.3% over the past month. SPDR S&P Retail ETF (NYSEARCA: XRT ) This product tracks the S&P Retail Select Industry Index, holding 104 securities in its basket. It is widely spread across each component as none of these holds more than 1.47% of total assets. Small-cap stocks dominate about two-thirds of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot with 22.3% share while specialty stores, automotive retail, and Internet retail also have a double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $948.4 million and average daily volume of more than 4.1 million shares. It charges 35 bps in annual fees and gained 2.5% in the past one month. Link to the original post on Zacks.com

25% Allocation To Apple – Too Much Risk?

Summary Apple remains my largest position at 25.9%. The portfolio risk factor is not necessarily increased with position size. Reflect your knowledge or confidence in a company with your position size. After releasing the details of my Young and Cautious portfolio , one of the most frequently presented criticisms is of the very high allocation to Apple (NASDAQ: AAPL ). My current allocation is just north of 25%. Company Current p/e Current yield Annual dividends ($) Portfolio weighting (%) Apple 13 1.75 110.2 25.9 Aberdeen Asset Management ( OTCPK:ABDNF ) 10.53 5.21 130 9.6 Bank of America (NYSE: BAC ) 13.07 1.13 5.8 2 Coca-Cola (NYSE: KO ) 27.47 3.08 36.96 5 DaVita HealthCare (NYSE: DVA ) 33.16 0 0 11.6 General Motors (NYSE: GM ) 13.24 4 72 7.5 Gilead Sciences (NASDAQ: GILD ) 9.78 1.61 46.44 11.9 McDonald’s (NYSE: MCD ) 24.64 3.12 27.2 3.7 Rolls Royce ( OTCPK:RYCEY ) 8.28 4.18 62.42 7.5 Transocean (NYSE: RIG ) n/a 4 100.8 11 Wells Fargo (NYSE: WFC ) 13.51 2.7 27 4 Note: Average Yield = 2.6% The following comments sum up the main criticisms of the portfolio, which can be found in Young and Cautious – One month on and First Portfolio review – Young and Cautious , respectively. (click to enlarge) (click to enlarge) Although I respect the views of many commentators and contributors, I do not accept that the best strategy for an active investor is to just divide your capital equally among a list of companies that you think might perform well, regardless of their individual valuations and business circumstances. I will set out below why a higher allocation in a common stock does not necessarily lead to higher overall risk for your portfolio, and specifically, why I have allocated such a large percentage to Apple. Risk Risk can be split up into systematic risk and company specific risk, or non-systematic risk. However, for the purposes of this article, only company-specific risk will be analyzed. When talking solely about stocks, it is undeniable that non-systemic risk can be mitigated through splitting your capital among a variety of common stocks. This leads many investors to argue that the best way to reduce risk is to evenly distribute your capital over all your holdings. For example, 10 stocks with 10% weighting, or 20 stocks with 5% weighting. Many writers disagree on the ‘perfect number’ that provides the best risk/reward scenario for an active investor. Arguments generally range from 10 at the low end, to around 40 at the high end of the scale. Anything higher than this leads to a significant amount of money spent through transaction costs, which will impact significantly depending on how frequently positions are bought and sold. A higher number of stocks in a portfolio would most likely warrant the need to just take on a more passive approach through using a cheap index fund, such as provided by Vanguard. The risk that is not mentioned when talking about diversification Apart from individual company risk and systematic risk, one of the most prominent risks inherent in over-diversification is yourself. Your knowledge and time has to be spread over a higher number of companies, undeniably leading to the risk of gaps in your knowledge. This could be not having enough time to go through each company’s quarterly reports and individual valuations. This inefficient manner of investing has the potential to lead to sub-par returns. In addressing this view, investment icon Warren Buffett has stated: Once you decide that you are in the business of evaluating businesses, diversification is a terrible mistake to a certain degree. His reasoning is based on the idea of the mistake of omission in investing: Big opportunities in life have to be seized … Doing it on a small scale is almost as big a mistake as not doing it at all. This is not a scarcely held belief of prominent investors around the world. Below you see how frequently a large position plays a role in those investors’ portfolios: Warren Buffett Wells Fargo 19% Kraft Heinz (NASDAQ: KHC ) 18% David Einhorn Apple 20.5% Carl Icahn Icahn Enterprises (NASDAQ: IEP ) 27.5% Apple 21% Bill Ackman Valeant Pharmaceuticals (NYSE: VRX ) 25% Air Products & Chemicals (NYSE: APD ) 18.8% Chase Coleman Netflix (NASDAQ: NFLX ) 22.9% Amazon (NASDAQ: AMZN ) 20.1% Although not all of the companies have performed well over the past year, most notably Valeant Pharmaceuticals, most of them have. This high allocation in a company would classify as a ‘conviction buy’, exemplifying each investor’s confidence in these respective companies. It is what separates them from the rest of the market, allowing them the opportunity to beat the market returns. Know your strengths Every investor has their own strengths. This is down to the fact that whatever their profession is, or if they have a strong passion for something, they will generally have a deeper knowledge of it. This gives them an advantage over the general public and can give them the edge when it comes to putting their capital to work. This can be reflected in your portfolio. For example being a student has its perks. Many trends over what is popular originate from this age group. This could be said with regards to Apple, Facebook (NASDAQ: FB ) and Nike (NYSE: NKE ). What is popular with this age group has a tendency to spread to other age groups to create the norm. Looking back at Facebook, I grew up alongside the likes of Bebo, MSN Messenger and MySpace. My age group saw a shift from these social networking sites to Facebook, because we were causing the shift. Examples such as this give investors of certain age groups, professions, or hobbies that advantage in the market. This is one of the reasons why I am still so bullish on Apple. Regardless of what some financial news websites publish about Apple losing it’s ‘shine’ or ‘cool factor’, it is evident that Apple still has the backing of its supporters. It only takes a trip to any university library to see the momentous number of Apple products being used by students, who are in effect the future. For example, the Mac lineup has been of great popularity. Many students are making use of their university discounts and either upgrading from the previous model or other brand laptops. Growing up, these students will see Apple as the norm and are more likely to continue using their products. On the contrary, there are many areas where my knowledge lacks. This could come down to being young, lack of interest in the subject matter, or just plain ignorance. This is absolutely fine. It just means I don’t invest in these areas. If I invested in these areas for the sole reason of ‘achieving diversification’, I would be opening myself up to a great deal of risk. This is just not necessary. When opportunities are present, grab them by the horns The second part of investing in your strengths is investing at the right price. There are many companies I see doing well. Nike and Starbucks (NASDAQ: SBUX ) are both companies I want to own, just not at these prices. There is too much optimism built into the stocks. On the other hand, Apple is a company I understand well. I have a strong insight into how my generation sees their products and services over their competitors, and most importantly, the valuation is cheap. Valuation The company stands at a huge discount to the overall market. Apple’s trailing P/E ratio stands at just under 13 while the forward P/E is 11. This represents a 41% discount to the current ratio of the wider market, currently standing at 22. Apple is priced for a deceleration in earnings, while it is posting ever-growing earnings. The last earnings report showed EPS growth of 38% over the previous year, with guidance showing further record earnings for the near future. An earnings growth that surpasses the wider market. In addition to this, I believe Apple has in recent years been paving the way to become a future dividend champion. It is managing to consecutively increase dividend payments to shareholders year over year, while maintaining a low payout ratio. Currently, the dividends to shareholders represent only 21% of total earnings. This gives the company a great deal of room to increase payments several years from now. On top of this, Apple stated in April of this year that the share repurchase program would be increased to $140 billion. What are my risks? Having over a quarter of my capital in one stock does mean that if the share price drops significantly, this will drag down the portfolio significantly. Bill Ackman has recently been a victim of this, as Valeant has dropped like a rock after allegations of price gouging surfaced. This has led to him suffering a severe loss of capital and significant underperformance to the market. To compare this to Apple would be unfair. Apple has many factors that give it a large margin of safety to prevent this. First of all, almost a third of the entire market capitalization is made up of cash and equivalents, and this continues to grow. This allows Apple to raise cheap cash in corporate bonds to facilitate large share repurchases. Secondly, Apple’s great P/E discount to the wider market and higher growth rate provides a safety buffer, as it is already priced for no growth. The only time I will reduce this high allocation is if either of two things happen: Earnings begin to fall, or the share price rises resulting in a P/E ratio similar to the wider market. Conclusion Everyone has their strengths in investing. This means having a high allocation of your capital in one company will carry different risks depending on who owns that particular company. When you have the opportunity to own a good company trading at a cheap valuation that you have a deep understanding of, allocate more capital to this to increase your chances of outperforming the rest of the market. Thank you for reading. If you have enjoyed reading this article, or want to follow the progress of the ‘Young and Cautious’ portfolio please hit ‘follow’ at the top of the page. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.