Plug Power (NASDAQ: PLUG) hit a company record of 15% adjusted gross profit margin in its third-quarter earnings report and EBITDAS (earnings before interest, taxes, depreciation, amortization, and stock-based compensation) of negative $1.6 million, representing the closest the company has ever come to breaking even on an EBITDAS basis and charging up investor enthusiasm.
But the figures found in a company's earnings report present only an outline of how it performed in a given quarter. Equally important for investors is the conference call, where management's commentary fills in the details and provides a fuller picture of the company's recent performance.
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The new China?
For several years Plug Power's management has expressed enthusiasm for exploring opportunities in the Chinese market, where it has sought to transcend its core competency and material handling equipment and bring its hydrogen-based solutions to electric vehicles. According to the Q3 conference call, however, the company may be moving in a new direction -- to Western Europe, instead of the Far East. Andy Marsh, Plug Power's president and CEO, responded to a question about infrastructure in Europe by highlighting Germany, stating "I actually think Germany may be as interesting as China because there's government commitment." Specifically, Marsh pointed to the fact that Germany intends to build 400 hydrogen fueling stations by 2023. And speaking to the infrastructure that already exists, Marsh pointed to the fact that "you can actually get in a hydrogen fuel cell car today and drive across Germany."
Marsh didn't completely discount the company's interest in China, though. Leaving the door open to operating in the Asian market, Marsh said, "So we'll make a deal if and when it makes sense to Plug Power, but we continue to engage and continue to understand. We're just not going to do something that doesn't help us grow." Plug Power's not alone in recognizing the available opportunity. Its fuel cell peer Ballard Power Systems announced a major deal with a leading Chinese automotive manufacturer, Weichai Power, over the summer, and expanded its arrangement with another leading Chinese automotive manufacturer, Zhongshan Broad-Ocean Motor Co., Ltd.
Service may serve up a big margin
A negative 2.8% gross profit margin from its service business represented a dramatic improvement over the negative 104% Plug Power reported during the same period last year. On the conference call, management suggested that the margin expansion is poised to continue. The company's vice president and CFO Paul Middleton stated that although there will be "ebbs and flows" in the service business moving forward, the overarching trend is toward profitability. In fact, Middleton stated that he and the rest of management "clearly see a path to get that business to 30% gross margin" thanks to improvement of stack pipe, a reduction in average parts costs, and a lower labor expense.
To put in perspective how significant a role this could play in pushing the company toward profitability, consider its performance over the past nine months. During this period the company reported net revenue of $114.8 million and a gross profit of negative $1.9 million. If Plug Power had achieved a 30% gross profit margin on its service business and everything else had remained the same, the company would have reported a gross profit of $3.82 million.
. . . but not with fuel
While management foresees margin expansion in the service business, it doesn't recognize fuel sales as a way in which the company will drive closer to profitability. Characterizing fuel sales as a "pass-through," Middleton stated that "in the next 12 to 24 months, I expect that to continue to be kind of a breakeven, just maybe slightly positive business." For some context, Plug Power has reported a negative 22% gross margin on its fuel delivered to customers over the past nine months.
Looking farther into the future, however, management believes that there is the ability to expand the margin further. According to Marsh, the increased deployment of the hybrid GenFuel hydrogen station, which combines liquid hydrogen storage with on-site hydrogen generation for sites with long-term commitments, could help reduce the cost of hydrogen, increasing profitability in the line item.
The electric takeaway
True to form, management espoused an auspicious outlook on the company's days ahead. Those familiar with Plug Power, however, know that this is nothing new, and a degree of skepticism is certainly warranted. Moving forward, investors can monitor how well Plug Power fares in achieving margin expansion in its service business, since this could certainly propel the company closer to profitability -- while keeping an eye on progress in the German and Chinese markets.
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