Good afternoon and welcome. Thank you for joining this WTR Insights conference session with Ocean Power Technologies. I'm Peter Gastreich, Managing Director of Energy Transition and Sustainable Investing at Water Tower Research. Today, we're joined by Philipp Stratmann, who is CEO of Ocean Power Technologies. Philip, thanks for being here.
No, thanks for having me on, Peter.
As a reminder, Ocean Power Technologies' safe harbor statements are available on the investor tab of their website. This conversation may not be reproduced or transcribed without written approval from Water Tower Research. Please submit any investor questions in the chat. We'll address what we can during the session or in our post-event management series report. Investors wishing to schedule a meeting with Ocean Power may indicate that on the conference portal. With that, let's begin. Philipp, I think it'd be useful for investors who may be new to the story at OPT, if you could walk us through what the company does and the strategy you're executing against right now.
Yeah, absolutely. OPT, at its heart, is a provider of autonomous, persistent, and resident systems that help deliver insights out in the ocean. Those insights can be subsurface type information. They can be surface intelligence gathering. It can be survey work for offshore energy. It can be support for aerial assets. It can be gathering of data around pipelines. Whatever data you have, be that survey-related or whatever data needs you have, we can help you deliver those as we deploy our systems out in the ocean. The benefit of using our type of platforms is that you materially lower your costs, and OPEX in particular, to gather that information that then enables you to act upon it, so you can then make your operation safer and more efficient.
You've talked about the combination of the company's capabilities, maritime drones, floating power and data systems, AI-capable data processing, as creating something that's more than the sum of its parts. What is it about having that full kind of integrated stack that makes the company hard to compete against?
You said it's a combination of them. I think where we are particularly excited about is the fact that, imagine you have a long-term monitoring issue. You don't always need your drone out there to actually do anything, because you really just need the drone to do something when you know you need to do something. How do you know that you need to do something? Well, if you put one of our PowerBuoys out there, that enables you to gather information over a long period of time. That enables you to really identify what problem you might be seeing or what problem you might need to address. You can go and task the maritime drone to go out there, use that information, act upon it, and then go and fix whatever problem you might have had.
Equally, you could have maritime drones operating out in the ocean, but how do they do the data processing? Data processing is pretty power intensive. You could have the drones coming back to where the buoys are, have them exchange the data, let the buoy do the data crunching and the communications efforts, and then on that basis of that operation, either whatever AI-capable modules you've deployed or the human in the loop can then use that information to retask the maritime drone to go out there. What you end up with is a combined system that truly becomes persistent, resident, and autonomous all at the same time by combining these assets. I think that's a pretty exciting place to be. Take, for example, some of the work we've been doing with Naval Postgraduate School on the buoy. That's got an AT&T 5G mast on it.
Now you get into the space of 5G communications at sea. Again, that's not possible without having the stationary node that is out there that can carry that mast. Again, it's the combination of buoy and then enabling other maritime drones, ours, other people's drones, and aerial drones combined, really acts as that kind of force multiplier to enable you to do way more at a much lower price point.
I'd like to sort of step back and take a look more at the broader demand drivers across Defense, Homeland Security, and offshore commercial markets. How would you characterize what's driving these, and how sustainable are the tailwinds across these?
Well, the tailwinds are very sustainable. The demand picture is pretty clear, and I think you can see that in the numbers, obviously, that we publish quarterly. You can see that the growth in our pipeline, which has led to the growth in our backlog, which we're then working hard on converting to revenues. More broadly, if you look at what's driving the demand picture overall is the need to understand more what's happening out in the ocean, whether it's stuff that's happening in the ocean or stuff that's happening on the ocean, or whether it's stuff that's happening to the ocean itself.
We don't understand anywhere near enough about any of these. In order to do this at the scale and pace that we have to do it, you can only get there if you're gonna exponentially increase the number of autonomous systems that are out there to do this constant data gathering and acting on that data. If you're looking at defense, it's pretty clear when you're looking at current world environments that there is a definite need to utilize unmanned autonomous systems to keep shipping lanes safe, clear, free, do mine clearance work at a pace that enables shipping lanes to be reopened, post-conflict type scenarios. If you're looking at the offshore energy industry, you've got to look at whether that's cables or pipelines. You've got to constantly survey and monitor those. That extends again into the defense space.
If you're looking at kind of issues around critical infrastructure protection, you look at the overall efforts around oceanography and understanding fish stock and supporting healthy fishery industries. The more you know what's going on and where it's going on, the better you can then pinpoint your resource type economies to operate. I think that demand picture, the ocean environment in general, is starting to replicate what you and I, quite frankly, probably take for granted every single day that we go to work. You see semi to full self-driving cars on the road all day, every day. If you're trying to sell your house, the survey work will be done by an aerial drone. That's just become part and parcel of how we operate on land. We don't do any of that yet at that scale offshore and in the maritime domain.
I think that sort of awakening and shift is really starting to accelerate. We're seeing it in the numbers, and we are confident that that is a long-term tailwind that's going to continue increasing as the acceptance for autonomous and long-term autonomous, persistent and resident type operations and deployments becomes more and more common.
Earlier this year, you had this landmark $6.5 million DHS contract. Could you update us on where that deployment stands today? This is four buoys, right? How should we think about four buoys in the context of what might be possible in terms of scale? How should investors kind of contextualize this against what's possible, that coastline and overall U.S. coastlines and then overseas?
Yeah. We're very proud and humbled to be able to support the brave men and women of the United States Coast Guard by deploying our systems, in this case, off San Diego, with an initial batch of four buoys to help monitor the U.S.-Mexican water border and keep the homeland secure and safe. Being able to deploy these buoys materially extends the range of intelligence gathering from what, at the moment, it's either shore-based systems, which stop at a certain point because physics takes over and you can no longer look, you can't look beyond the horizon. You're having very large, very expensive manned assets operating out there and have them doing whichever paths they're taking and then interdicting what they see on their paths.
Now, by deploying these systems, it enables Homeland Security and Coast Guard specifically, to now really know where there is an object of interest that they want to go after, so they can be way more targeted and have much broader coverage in terms of interdicting, intercepting, and interrogating objects of interest. It's four buoys initially. I think that's really to prove out that this helps to materially improve operational efficiencies for them. If you think about the size of our coastlines, we're just doing this off San Diego right now. You can start pushing that further out. You can start pushing it along the coastlines. You can then start looking at southern coastlines. You can start looking at the eastern seaboard. We've got, kind of, obviously, territorial waters on our northern shores.
We've got areas of interest all over the world where we have either offshore energy assets or where we have U.S. military deployed, where understanding more what's going out further out in the ocean would be of benefit. That's sort of the broader picture of how this fits into the landscape and why this is so important to deploy and then start operating it for Coast Guard.
Oh, sorry. Go ahead.
Yeah. Some of the status of it. Obviously, we announced we shipped the first system already. The second system is about to arrive in San Diego. The third system sort of leaving, I think, around now. Then, the first buoy is on its way out into the ocean, and should be transmitting data in the kind of immediate near future. The second one will follow shortly thereafter, and then the third one will follow thereafter that, and then the fourth one is going to come a short timeframe later. I think this isn't the kind of project that, hey, we announced it, and then it's going to take years to come to fruition. This is, we announced it, we started finalizing the assets, we shipped them, and we're working on the deployment and the operational get to work aspect of this project.
Well, you've also been very active internationally. Most notably, Nordics and Middle East, but you also have a growing presence in Latin America. Where are you seeing the strongest attraction right now when you look at the international opportunities?
Yeah. We've definitely been working hard on having the appropriate international footprint. You don't want to build out ahead of demand. We've been working closely with our local partners to truly assess the demand picture. As the underlying platforms that we provide are dual-use, so it makes it much easier for us to export them and utilize them overseas. I'd say it is a mix, same as it is in the U.S., but it is a mix between defense and security and traditional offshore maritime operations. I think the Middle East in particular, where we have partnerships in the UAE with companies such as Remah International Group and Unique Group, and neighboring countries, we're seeing a lot of demand interest right now. We've been there for a while now, so we have the setup, and we can respond as and when needed. Similar in Latin America.
We're seeing lots of interest around particularly kind of coastal waters, border protection, but also offshore energy asset security and sort of survey and protection type work. Then we operated as part of the efforts around NATO Task Force X last year in the Baltic Sea, so in the Nordics. That is an area where very congested seaways, lots of infrastructure on the seabed, lots of competing national interests over there. I think we see that as the kind of the next big growth region. We're very cautious about international expansion. We don't want to build ahead of, as I said, ahead of demand. Equally, we want to be able to service these markets appropriately through the right maintenance, repairs, and operation setups, the right partners, and the right trained personnel that need to be present.
For the maritime drone market, we tend to talk, focus lots on defense but commercial is also a very big area for you. For investors who may think about your company primarily in terms of defense contracts, how significant is the commercial side of the market, like offshore energy, infrastructure monitoring, and those other non-defense applications?
It remains a very important segment of our overall pipeline, but it's also of our general go-to-market approach and of our current customer base. I'd say there's a lot of overlap, though, between defense security and offshore energy. Because a lot of the work that we do for offshore energy really falls loosely under the bracket of security. Because if you're monitoring cables and pipelines for any damage to them, you're not only doing it to monitor it for naturally occurring damage, you're also trying to figure out whether any intentional damage has been caused to them. That really sits more on the security side. Then there's marine construction never stops.
Our customers that we work with like utilizing maritime drones because it materially lowers the cost point of doing the necessary offshore inspection and survey work to figure out how their construction can be done, how their construction is coming along, and all those efforts. Again, compare this to the land-based scenario. If you're doing any work anywhere, you're building a new building, you're putting new telegraph poles in, whatever it might be that you're doing, a surveyor will come out, and they turn up with a pickup truck. They do their survey, they spend maybe a day or two there, and they leave again. Well, if you're trying to do the same thing in the ocean, you're going to have to get a big boat with survey equipment, a whole bunch of people on it, and it's going to cost you tens of thousands of dollars per day.
You have to go out there, and it costs you tens of thousands of dollars per day every day it is out there. Well, the alternative is to use maritime drones, which you can deploy easily from any boat ramp that you might have. Take it out there. You operate. It's a couple of thousand dollars. It is a material OPEX saving investment for the customer, which obviously then in turn helps build our revenue base. This is why in order to make it as easy for customers to deploy this, we don't just sell our drones. We will lease them. We will lease them with an operator, and then it essentially becomes robotics as a service.
We run our own schoolhouse here at the facility in California that I'm at this week, where people can go and go through an AUVSI trusted operator course and get a certificate for that to get them comfortable with how to operate USVs. I think all of that is helping to continue to increase the acceptance and willingness for people to adopt USVs, to use the technical term, into their operations, be that defense security or, as you said, commercial.
I'd like to move over to an area that I think investors should be much more focused on and appreciate, which is really your backlog and pipeline. Your backlog has been surging, getting close to $20 million. That's about 6 x your twelve-month trailing revenue. Meanwhile, you have a pipeline which is more than 8 x the size of your backlog, so exceeding $160 million. You've also talked about a growing share of contracts that are being structured as essentially lease-style recurring revenue. In looking at this picture, what gives you the confidence, what can you say to investors about the prospects of this pipeline converting into firm orders? As more of the business shifts to that recurring model, how does that change the company's financial profile over time?
Yeah. I think we've shown that we are capable of converting pipeline to backlog. Obviously backlog is contracted orders. As you pointed out, Peter, the growth of the backlog has been real, and that's come through conversion from that pipeline. There is a flywheel kind of effect here as well. The more the backlog we create, and the more other of our peers generate backlog and deploy systems, the higher the interest and the demand becomes for people. It's a bit like when you look across the fence and see what your neighbor's building in his yard and you want to build the same thing in your yard. It's like, when you're sitting and seeing, "Oh, these guys just did their oil pipeline survey using maritime drones.
I should probably do the same because if they're doing it, there's probably something to it." That flywheel is generating additional interest in the pipeline, which is the effect you're seeing in the pipeline growth. With the team that we've established and that we continue to cultivate, that then enables us to convert that pipeline into additional backlog and then convert that into revenue. Now what you're going to see is, particularly with things like the Coast Guard contract, that is a COCO, contractor-owned, contractor-operated, in government parlance, contract, which essentially is a lease. For want of a better word from an accounting perspective, it's a lease. But what you're going to see is that, okay, if we're saying it's a 15-month lease, you're going to start getting into more predictable base levels of revenues in our ongoing quarters.
Because if we've got a fixed lease term, once it's deployed, that lease revenue keeps on generating as long as we're operating the assets. To put in a short version of this is, yeah, general demand is increasing the pipeline. The fact that us and others in the industry are deploying drones and we're deploying our buoys is then helping to convert more of that pipeline to even more backlog. As it comes to leases, that starts enabling the layering of recurring revenues over multiple quarters.
Okay, got it. Thank you. Let's move on to your facility-level clearance. Ocean Power holds a facility clearance at your New Jersey headquarters. For investors who may not be familiar with what that means, can you explain what that enables the company to do that it otherwise couldn't? How does that position Ocean Power competitively for classified or sensitive programs?
Yeah. This essentially means that several of OPT staff hold security clearances, which allows us access to classified briefs and allows us to deploy product solutions that fit into those kind of classified and sensitive environments. What that enables us to do, and this is only of importance for U.S. defense and security work, but that enables us to get much more deeply involved in conversations with Navy, Homeland Security, other constituent parts of the federal government, and really help support government's mission in protecting U.S. interests overseas and protecting any U.S. warfighters and forces wherever they operate.
Okay, great. I think we've got time for one more question here, and I'd just like to ask you about your leadership and boards. You really have an impressive leadership team and board with deep expertise in defense, government, and maritime industry. Could you talk about how this bench of talent that you have at the company, and how those networks translate into the company's ability to identify, compete for, and win opportunities that other companies in this space might not necessarily have a seat at the table for?
Yeah. I think we benefit greatly from having a very extraordinary bench of talent at OPT, across all levels of the organization. We can speak our customer's language. Whether that is people with decades of experience in offshore oil and gas who know exactly what the pain points are that happen out there, whether that is retired US Navy submarine captains or people that were commanders of surface warships. It's an understanding of what goes on out there. It is an appreciation of what is needed at the operational side, Navy, Coast Guard to help make the war fighter's life easier, more effective, and more efficient. That in turn then enables us to keep on, again, we're going back to pipeline backlog, and revenues.
Also it enables us to develop products that meet those needs, which then can generate increased demand, which then increases the pipeline size, which then converts to additional backlog, which we can then go and deliver to our customers. I think that holds true in defense and security. It holds true when it comes to offshore energy, and it holds true when we're dealing internationally. We have plenty of our team at OPT who have worked, whether that's in West Africa, whether that's in the Middle East, whether that's in Latin America, whether that is in the Baltic, the North Sea, Southeast Asia, Australasia, all those areas. We have people at OPT that have been there, that have operated there, that have worked there, and it helps us compete in a way that is regionally and customer-focused and appropriate.
Okay, that's great. Philipp, I'm afraid we are running out of time here, but is there anything that we might have missed today or would you like to provide any closing remarks?
I think overall, it is just an exceptionally exciting time in our industry in general, but I think at OPT in particular. The growth in backlog is tangible, is real. The operations team is working every single day, almost every single weekend, to get the products out to our customers, and we keep on increasing the pipeline size. I think it's a very exciting time of where the company is at. With the team we have in place, we are excited about where the future growth is going to take us to and then beyond.
Okay, great. Well, thanks, Philipp. It was great to have you here, and we'll look forward to having you back again soon.
Appreciate it. Thanks, Peter, and I'm glad we got this opportunity.
Okay, fantastic. Thanks to all the investors for joining us .