Earnings Call Transcript - DLTH Q4 2025

Operator, Operator

Good morning, and welcome to the Ocean Power Technologies Fourth Quarter and Full Fiscal Year 2025 Earnings Conference Call. A webcast of this call is available on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after it concludes. On the call today are Dr. Philipp Stratmann, President and Chief Executive Officer, and Bob Powers, Senior Vice President and Chief Financial Officer. Now I am pleased to introduce Bob Powers. Please go ahead.

Robert Powers, CFO

Thank you, and good morning. After the market closed yesterday, we issued our earnings press release and filed our annual report on Form 10-K for the period ended April 30, 2025. Our public filings are available on the SEC website and within the Investor Relations section of the OPT website. During this call, we will make forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These statements are based on assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks, 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. Additional information about these risks and uncertainties can be found in the company's Form 10-K and subsequent filings with the SEC. The company disclaims any obligation or intention to update the forward-looking statements made on this call. Finally, we posted an updated investor presentation on our IR website. Please take a moment to review it as it provides a nice overview of our company and strategy. Now I am pleased to introduce Dr. Philipp Stratmann.

Philipp Stratmann, CEO

Good morning, and thank you for joining us today. Fiscal 2025 was a transformational year for OPT. We delivered real measurable value in a global market undergoing rapid change, and we entered fiscal year '26 positioned to lead in the sustainable data-driven blue economy. Today, I'll walk you through our most important achievements, the momentum they've created, and the opportunities ahead as we execute our strategic growth plan. In fiscal '25, OPT was granted a U.S. Department of Defense Facility Security Clearance at the Secret level, a milestone that significantly expands our eligibility for classified defense work. This clearance not only affirms OPT's compliance with federal security protocols, but also opens the door to high-value multiyear programs where few companies are even allowed to compete. It expands our addressable market and deepens our partnership potential. Let's talk about backlog and visibility. I'm incredibly excited to announce that we entered fiscal '26 with $12.5 million in funded backlog, the highest in our history. This reflects multi-quarter fulfillment of both international defense and commercial contracts and signals strong customer confidence in our solutions and our ability to execute. It is a clear indicator that our strategy is working and that demand is real and growing. Over the past year, we deployed our artificial intelligence capable Merrows and WAM-V platforms across the Middle East, Latin America, and the Indo-Pacific, establishing a meaningful global footprint in allied defense and commercial markets. These deployments validate not just demand, but our readiness to deliver. They demonstrate that our autonomous platforms can operate across maritime, surface, and subsea domains in some of the world's most demanding environments. That's real-world mission relevance, and it sets us apart. We also expanded key partnerships with defense, drone, and subsea leaders, including Red Cat, Teledyne Marine, and regional integrators in the Middle East and Latin America. These partnerships extend our reach, improve integration and distribution, and help reduce customer acquisition costs. They are a force multiplier for OPT, enabling faster scale, broader validation, and deeper market access, especially in regions where local partners accelerate our credibility. OPT's WAM-V platforms were selected to participate in the U.S. Navy's Project Overmatch autonomy exercises, one of the Pentagon's most advanced and future-focused initiatives. Our involvement speaks volumes. It reflects a high-trust relationship with the Navy, confirms our alignment with multi-domain interoperable system goals, and positions OPT for access to future large-scale defense procurement channels. This year's performance reflects the strength of our disciplined operating model. We're executing with a streamlined team and leaner OpEx structure, yet delivering more for our customers, our partners, and our shareholders. By aligning resources with top priorities, we've increased our operating efficiency without compromising our delivery capability or innovation roadmap. This positions us not only to weather volatility but to scale with purpose as demand accelerates. We view this phase of lean execution not as a constraint, but as a foundation. With core systems, processes, and leadership in place, we are prepared to scale responsibly as opportunities mature. We have retooled our go-to-market engine with purpose and position. Under new leadership, our sales organization has been redesigned to drive mission alignment, speed, and scale, not just transactions. We've upskilled the team, deepening their ability to engage on operational needs and procurement realities across defense and maritime domains. At the same time, we've expanded internationally, matching talent to strategic growth corridors in NATO-aligned Latin America and Middle Eastern markets. Complementing this internal transformation is a growing network of region-specific resellers, force multipliers who understand local dynamics and are helping us deliver OPT solutions faster and further than ever before. This is not just a strategic investment. It's already delivering results. We're seeing improved customer engagement, higher win rates, and increasing traction in markets where we previously had limited presence. This go-to-market evolution is a foundational pillar of our growth strategy, enabling us to solve real-world customer missions at scale. We are taking some important steps to reduce our customer acquisition costs. First, as I just mentioned, we have repositioned our commercial team to place greater emphasis on achieving more scalable, repeatable sales. Second, we are expanding our dedicated demonstration fleet to accelerate customer engagement and close new business in less time and with greater efficiency. Finally, we have realigned our operations and development teams to drive best-in-class customer experience through more innovation and enhanced operational execution. In turn, that empowers us to concentrate more on deepening relationships with existing customers and expanding value-added services like training. Our commitment to continuously strengthen our commercial effectiveness and operational agility underscores our professionalism and readiness as a leading provider in autonomous maritime systems. Becoming an AUVSI Trusted Operator marks an important milestone in this evolution. Additionally, I want to highlight a significant milestone that speaks to the discipline and maturity we're building across OPT. Just two weeks ago, we achieved ISO 9001 certification for our quality management system, a globally recognized benchmark for excellence in engineering, manufacturing, and service delivery. This is not just a compliance achievement. It is a reflection of OPT's evolution into a scalable, repeatable, and process-driven provider of maritime solutions. Whether we are deploying a WAM-V for autonomous ISR missions, activating a PowerBuoy for persistent offshore power, or integrating Merrows to enhance maritime domain awareness, we are now doing so under a globally standardized framework of quality and continuous improvement. For our customers, ISO 9001 is often a prerequisite for long-term engagement. It is a signal that we're not just innovative but dependable at scale. In fact, we're already seeing this resonate with procurement teams who have told us that certification materially strengthens our position in upcoming opportunities. Internally, this also reinforces our operational foundation as we expand internationally and engage with increasingly complex supply chains and mission profiles. It's about delivering excellence consistently, which is exactly what the market demands from the next generation of maritime intelligence providers. We believe this certification will meaningfully support our growth strategy while deepening the confidence of our partners, investors, and customers alike. Finally, fiscal year 2025 brought headwinds, particularly in defense, where election-related uncertainty and the pending administration transition delayed procurement activity. Combined with broader macroeconomic volatility, these factors slowed pipeline conversion, resulting in revenue below expectations and a shortfall against our Q4 calendar '25 profitability target. Still, OPT ended fiscal '25 with strong momentum, record backlog, a growing pipeline, and increasing demand across core markets. These results reflect the strength of our positioning and the resilience of our team. We remain confident that fiscal '26 will mark a step function in execution as we advance towards sustained growth, profitability, and long-term value creation. In closing, we have turned the corner. OPT is no longer just about wave energy. We provide full-service maritime domain awareness that is persistent and deployed from platforms that enable multi-asset capabilities. We have become a multi-solution platform company, one that's enabling customers to operate further offshore, stay deployed longer, and lower costs through intelligent autonomy. Our strategy has been simple but disciplined, diversify, scale, and improve margins. We've moved beyond grant-funded R&D into real commercial contracts. We've expanded into defense, energy, and international markets, and we're focused on repeatable, scalable services that drive long-term value. We're not pitching potential; we are executing. Every contract validates our pioneering efforts to develop our model. We are well positioned to meet all challenges in our prosperous horizons and capitalize on the heavy lifting completed to date. The technology has proven and is continuing to accelerate. The customers are buying. With capital in hand, platforms in the water, and a growing global footprint, OPT is no longer proving; it's scaling. Thank you for your continued support. I will now turn it over to Bob, who will walk through our financial performance in more detail.

Robert Powers, CFO

Thanks, Philipp. Let's begin with our financial performance for the year. Fiscal 2025 was a record year for revenue. We generated $5.9 million, a 7% increase over the $5.5 million recognized in the prior year. What makes this growth especially meaningful is that it was achieved alongside a 26% reduction in operating expenses, which I'll cover in more detail shortly. The revenue growth reflects the strength of our strategy, the discipline of our execution, and the growing demand for OPT's autonomous and maritime solutions. One of the biggest drivers was our expansion in Latin America, which made a meaningful contribution to both our FY '25 revenue and the $12.5 million in backlog Philipp referenced. This underscores our focus on diversifying revenue across high-growth international markets, and we believe it sets the stage for future expansion. Looking ahead, scaling revenue remains a key priority as we convert backlog into deliveries and expand into new channels. Our focus remains squarely on delivering consistent performance and long-term value for shareholders. Turning to expenses. Operating expenses for fiscal 2025 totaled $23.4 million, down 27% from the $32.2 million in FY '24. This $8.8 million reduction reflects deliberate organization-wide efforts to optimize headcount, reduce third-party costs, and tighten expense control across all functions. This level of cost discipline, combined with top-line growth shows that we're building a model with meaningful operating leverage, a critical step towards sustainable profitability. As a result, our loss for the year improved by 22% from $27.5 million to $21.5 million. This progress shows we're staying disciplined with spending while still growing the business and meeting our customer commitments. On the balance sheet, as of April 30, 2025, our total cash position, including cash, restricted cash, equivalents, and short-term investments stood at $6.7 million compared to $3.2 million for the close of FY '24. Just after year-end, we further strengthened our liquidity by securing a $10 million unsecured debt financing from an institutional investor. This investment represents a clear market endorsement of OPT's platform, technology roadmap, and long-term value creation strategy. Their participation not only bolsters our capital base, it also equips us to execute on our record backlog, scale up international operations, and pursue near-term profitability with greater confidence. On cash flow, net cash used in operating activities for the year was $18.6 million, an improvement of over 38% compared to the $29.8 million in FY '24. This reduction reflects the impact of our cost management initiatives, but partially offset by final payouts related to bonuses and earn-outs accrued in the prior fiscal year. That concludes our financial update. We're encouraged by the demand signals we're seeing across defense and commercial markets and energized by the progress we've made. As Philipp noted, new initiatives, particularly our strategic partnerships and international deployments position us to capitalize on momentum, expand our customer base, and continue advancing towards scalable recurring growth. As we move into Q1 of FY '26, our focus is on executing backlog deliveries, converting demonstrations into multiyear deals, and maintaining tight expense control. Thank you again for your support.

Operator, Operator

Our first question is coming from Glenn Mattson from Ladenburg Thalmann.

Glenn Mattson, Analyst

Congratulations on the impressive growth in your backlog and pipeline. I would like to learn more about the pipeline. Can you provide some insight into how you determine that figure and share some information about the conversion process and the maturity of some of those opportunities? Any additional details would be appreciated.

Philipp Stratmann, CEO

Yes, thank you, Glenn, for being here. Our pipeline consists of actual opportunities where we are currently in discussions with customers. With the restructuring of our commercial team, including the recent addition of Jason Weed as our new Senior Vice President for Commercial, we have positioned the company to enhance and speed up our conversion rate. We are focusing on turning qualified opportunities or those under negotiation into revenue. With the current key appointees in the administration, we are confident in seeing an increase in these conversion rates. As the market starts to recognize the importance of hybrid fleets and unmanned operations in ocean activities, we are eager to be a part of that shift. As we've indicated, these are qualified opportunities that are in negotiation, and we are optimistic about boosting the conversion rate as we progress through the fiscal year.

Glenn Mattson, Analyst

As a follow-up, you've done an excellent job with cost reductions. Can you discuss your capacity and ability to meet demand if it increases more quickly than anticipated?

Philipp Stratmann, CEO

Yes, absolutely. We have our facility in New Jersey, which is just under 60,000 square feet, along with a smaller prototyping facility in the Bay Area in Northern California. Under the guidance of our operational team, we have redesigned parts of our facilities to enable quicker scaling. As you mentioned regarding cost-cutting, we're doing so in a manner that is mindful of working capital, allowing us to convert as needed without overloading on inventory before beginning the conversion.

Operator, Operator

Next question is coming from Peter Gastreich from Water Tower Research.

Peter Gastreich, Analyst

Congratulations to the team on your results and executing your strategy in 2025. It's great to see the meaningful momentum in your backlog and the cost cuts. You seem well positioned to start 2026. I have a couple of questions. One is about the backlog, and the other pertains to the gross margin. Could you discuss the breakdown of the backlog in terms of product type? Any insights you can provide would be helpful.

Philipp Stratmann, CEO

Thanks for being on, Peter. We are pleased with the backlog, as it shows a healthy distribution among buoys, vehicles, and associated services. Additionally, as I mentioned earlier, since becoming an AUVSI Trusted Operator, we are noticing an increase in service revenues from training that are beginning to appear in our backlog and pipeline. This gives us confidence, as our strategy involves delivering autonomous, persistent, and resident ocean intelligence through various solutions including buoys, vehicles, edge-enabled software, and related services for deployment.

Peter Gastreich, Analyst

Okay. I have a question about the gross margin. Over the past year, your gross margin has been declining. Considering your current backlog and how it will eventually impact performance, how should we anticipate the evolution of your gross margin in the future?

Philipp Stratmann, CEO

Yes. I think we're seeing an uptick again where gross margin is going to start heading. Some of that has been related to the fact, as Bob mentioned, we've been working on projects such as Overmatch and others, which have been revenue generating but more focused on larger-scale demonstration efforts. As we transition further into operational use of the systems, we look forward to seeing that corresponding uptick in gross margins, which are driven to some extent by the service revenues that I just mentioned as those, a, they're recurring; and b, they do carry with them a higher gross margin when we start delivering them.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Philipp Stratmann, CEO

Thank you for being a shareholder and for supporting our ongoing growth and execution of our strategy. We look forward to continuing to deliver for you, our customers, and all of our stakeholders. Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.