Polar Power Inc (POLA) 2017 Q4 法說會逐字稿

Good day, everyone. Welcome to the Polar Power Fourth Quarter and Full Year 2017 Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Sir, please go ahead.

Thank you, and good afternoon. I'd like to thank you all for taking time to join us for Polar Power's Fourth Quarter and Full Year 2017 Conference Call. Your hosts today are Mr. Arthur Sams, Chief Executive Officer, as well as Mr. Luis Zavala, the company's Chief Financial Officer, and Mr. Raj Masina, the company's Chief Operating Officer. Arthur and Raj will provide a business update which will cover customer announcements, product updates and operational milestones, while Luis will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4:00 p.m. Eastern and is available today on the company's website, polarpower.com.

Following management's prepared comments, we will open the floor to questions for those of you who are dialing in for today's call. Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks and we also would refer you to the company's website for more supporting industry information.

At this time, I'd like to turn the call over to Arthur Sams. Arthur, the floor is yours.

Thank you, Chris, and welcome, everyone, to Polar's fourth quarter and full year earnings conference call. I'm currently speaking to you from Orlando, Florida and I'm on the floor of a convention that we are currently participating in. So the background may be a little bit noisy, especially in 20 minutes, they'll be breaking down the whole show and it might get a little bit more ruckus around here.

For today's call I will provide a brief summary of Polar's 2017 highlights and then I will turn the call over to Raj who will provide an in-depth summary in each of our core markets. 2017 was a pivotal year for our company as we deployed the capital from our December, 2016 IPO to position Polar Power as a market leader of backup and prime power and solar hybrid systems worldwide. Although the necessary steps taken in 2017 impacted our year-over-year financial performance, we believe the foundation we completed in 2017 has set the stage for substantial revenue growth in 2018 and beyond.

During 2017, we built a strong domestic and international sales staff, obtained new vendor approvals, engaged in field trials, expanded our R&D efforts and introduced new products along with increasing our manufacturing resources.

With respect to the progress made in such a short period of time, at the end of 2016 we only had 1 Tier 1 wireless carrier customer. That drove 95% of our domestic revenues and we were listed with zero overseas carriers. Today we are an approved vendor to the top 4 US wireless carriers and approximately 32 overseas carriers and our largest concentration is now under 30% from our largest wireless customer in 2016.

On the international front, the capital deployed in 2017 across the globe including Singapore, Dubai, Australia, Dominican Republic, Romania and South Africa are starting to show positive signs in 2018 as we are on the cusp of final contract awards in Africa and Southeast Asia, along with field trials in Malaysia and Japan.

In the fourth quarter of 2017, we established a sales and administrative office in Australia to provide a regional footprint that competes with small and local competitors. We anticipate to level the playing field in terms of costs and aftermarket support with a much lower duration in sales cycles while we continue to develop our presence in other regions. While in 2017 it was nascent in terms of revenue contribution from the rest of the world, we view 2018 as the execution year for our international sales deployments and look forward to announcing new wins in the quarters to come.

Outside of our core telecom market we are also seeing macro tailwinds with a new US administration that's accelerating our progress with our core military customers and new discussions with additional branches of the military and federal government. This was further demonstrated in the fourth quarter of 2017 and now in the first quarter 2018 with increased orders from Oshkosh Defense along with our recent process in the US Army's robotic mule program.

We expect the US military and federal government to become a material driver in the new revenue growth in the years to come based on this progress and our participation in several R&D discussions and programs. In all, I've never been more excited about the progress made and the immense opportunities our portfolio of DC power systems currently address. I'll now turn over the Raj to drill down into each market segment of our product address. Raj, it's yours.

Thank you, Arthur. This is Raj. Let's begin with the domestic telecommunications market. For competitive reasons, we will not be able to disclose the exact name of our top 4 wireless carriers. So the domestic telecom market in the US we made strong progress in diversifying our customer base in 2017 as we are now an approved vendor to all the 4 carriers like Arthur was mentioning.

2017 was highlighted with a normalization of our customer concentration and I'm happy to report that as of today we are now under 30% from our largest wireless carrier customer in 2016. As many of you know, the second half of 2017 showed progress with the new Tier 1 wireless carrier customers in both product sales and field testing for the P.O.s that are slated for 2018. The commencement began in the fourth quarter of 2017 after we received a multiunit purchase order for our 15-kilowatt backup DC generators. The initial 57 units were shipped to hurricane affected telecom sites to Puerto Rico because Hurricane Maria lingered over Puerto Rico for 10 days in early to mid-September, caused extensive destruction and a humanitarian crisis in the region. We believe our rapid response and delivery aided in the redevelopment of Puerto Rico's wireless networks and the confidence of our new Tier 1 wireless carrier. Shortly thereafter, we started to see consistent purchase orders from this new customer and while not big, they are still consistent. However, in 2018 we started to see an acceleration of their ordering patterns and most recently in the first quarter of 2018, we signed a 3-year commercial agreement with them and we believe this will allow us to fast track the orders to their sub regions nationally, thus simplifying the ordering process and making our products comparatively more attractive for the regional buyers.

We shipped more than 100 units to this client in 2017 and already have orders in hand for several times that quantity, many of which will hit in early to mid-2018. This customer has provided us with a forecast for the full year and we look forward to executing upon that.

In the fourth quarter of 2017 and into the first quarter of 2018, we commenced and completed a 6-month test and evaluation with an additional Tier 1 wireless carrier in the US for a customized economical DC power solution. This solution was built to the customer's specifications and we are currently in the process of negotiating a 3-year national agreement with this customer that extends all the way into 2020. This product is sticker price competitive to traditional legacy DC generators and will not sacrifice Polar Power's target gross margin structure.

Moving over to the international opportunities we have, Africa and Asia are poised to build more than 200,000 sites over the next 3 to 5 years. Telecom customers are looking for reliable and cost-effective solutions to power these sites. We believe we have the right solutions for this market. During 2017, we assembled a strong international sales group calling on major telecom carriers and tower operators. Fulltime Polar sales executives and support were established during this year in Singapore, Dubai, Australia, Romania, South Africa and the Dominican Republic. I'm also happy to announce that we are an approved vendor for these 32 overseas carriers and we are in the process of adding more.

On our last call, we indicated that typical sales cycles for our international customers are 6 to 9 months from product acceptance. We found out that the configuration required for these clients vastly vary and need customization. This meant we have to demonstrate the products after we do the necessary configuration changes in order to meet these price goals and their other technical goals without compromising, again, on our gross margin structure. Due to this, the time that was required to close these contracts have taken longer than anticipated and has increased our R&D spending. Although 2017 was muted in terms of financial performance on the international front, we anticipate purchase order activity from a few select international customers and foresee the beginning of a meaningful backlog in Q1 and Q2 of 2018 as our new international sales hires begin to secure new contracts.

We are currently participating in some large bids in both Asia and Africa and are in advanced negotiations with the three products that we hope will materialize over the next few months.

Also, I'm happy to announce that we have been selected for final contract awards in Namibia and Sri Lanka with 2 large companies and recently also we have completed field trials in Malaysia and Japan with Tier 1 carriers in those regions.

As you may recall, the Australian market opportunity was one of our large revenue drivers back in 2012 and 2013, but due to the immense opportunity in our backyard and bandwidth that we'd need to support that territory, we refocused our efforts back to the US markets. Now that we have the capital we need, we have started to renew our efforts back in Australia. We believe it will be one of the strongest territories for our product portfolio and as Arthur mentioned earlier in the call, we have established a full-fledged sales and administrative presence in Australia to participate in all the local and government tenders that would compete with the small and local competitors there.

Coming to military, we continue to see material progress with orders and new discussions in the military sector. We have substantial sales forecasts with a Fortune 500 leading manufacturer of specialty vehicles and vehicle bodies for military applications. Additionally, we recently completed the testing phase of a lightweight DC power system for the US Army Robotic Mule Project which has received Phase 2 approval. The product will supply power to the Army robotic and autonomous systems to the global military strategy that remotely provides surveillance and transportation over wide areas.

From an R&D front, pre-progress was made enduring 2017 that will continue to solidify Polar Power's absolute technology leadership and drive growth for years to come. During 2017, we have developed a mobile trailer-mounted 10-kilowatt DC generator to address the off-grid military applications, telecom and oil and gas sector applications. We have also introduced a lower cost, Summit Series Hybrid DC power system for off-grid and bad grid applications for international markets. We have also introduced a lower cost compact 15-kilowatt unit to compete with AC generators in the telecom replacement market.

The momentum has continued in 2018 on the product side as we received a prototype order on a project relating to the Federal Emergency Management Agent, FEMA, where we are a subcontractor for national disaster applications and expect purchase orders in the second quarter of 2018. To support the extended ramp in 2018, we expanded our manufacturing infrastructure while simultaneously increasing production staff and midlevel management personnel. We are currently entering into some long-term contracts with vendors for favorable pricing and starting to buy direct from the manufacturers as opposed to distributors to reduce our materiel costs. We have started to bring certain processes in-house, reduce costs and improve the product quality. We are currently preparing a second production shift from next week in order to meet the increasing demands of our clients and look forward to providing further updates on this throughout the course of 2018.

In all, I believe the progress made during 2017 has positioned us for robust growth and has given us a foundation to grow over the next several months and years to come. I will now turn the call over to our Chief Financial Officer, Luis Zavala, for his financial summary. Over to you, Luis.

Thank you, Raj. Net sales in 2017 totaled $14.4 million, a decrease of 37% as compared to $22.8 million in 2016. Net total sales of $4 million in Q4 2017 represented a decrease of 45% as comparted to $7.3 million in Q4 2016. The decrease in net sales was primarily a result of a decline in sales of DC power systems to our 2017 largest Tier 1 wireless carrier customer, coupled with a price reduction in DC power systems that took effect in March 2017.

Backlog totaled $1.8 million at December 31, 2017, as compared to $1.5 million at September 30, 2017 and $3.1 million at December 31, 2016. The decrease in backlog at the end of 2017 as compared to the end of 2016 was attributable to a decline in sales of DC power systems to our Tier 1 wireless carrier customers.

Gross profit decreased 52% to $4.8 million in 2017 as compared to $10.2 million in 2016. Gross profit decreased 66% to $1.3 million in Q4 2017 as compared to $3.9 million in Q4 2016. Gross profit as a percentage of net sales declined to 34% in 2017 as compared to 45% in 2016 and gross profit as a percentage of net sales declined to 33% in Q4 2017 as compared to 54% in Q4 2016. The gross profit in Q4 2017 and full year 2017 was negatively affected due to a combination of price reduction of our DC power systems to Tier 1 wireless carrier customers and lower manufacturing overhead absorption resulting from lower shipments. The company has made substantial improvements in its production facility and product line during 2017 and continues to believe that gross profit margin will improve to the 36% to 42% range, particularly as the volume of sales increases.

Operating expenses increased to $5.6 million in 2017 from $2.8 million in 2016, an increase of $2.8 million, of which $1.1 million and $0.9 million are attributable to an increase in investments in R&D and sales. Operating expenses increased to $1.7 million in Q4 2017 from $0.9 million in Q4 2016. The increase in operating expenses in both periods was primarily due to investments in several major R&D projects such as engineering changes and technology upgrades to our DC power systems to meet new customer requirements and the ongoing development of new hybrid power systems for international markets

Net loss in 2017 totaled $0.8 million or negative $0.08 per basic and diluted share in compared to net income of $4.4 million or $0.58 per basic and diluted share in 2016. The decline in EPS is attributable to a combination of higher operating losses, an increase in weighted average shares outstanding from 7,564,629 in 2016 to 10,143,158 shares at the end of 2017. Net loss in Q4 2017 totaled $0.6 million or negative $0.06 per basic and diluted share compared to net income of $1.7 million or $0.22 per basic and diluted share in Q4 2016.

Net cash used by operating activities was $1.6 million in 2017 compared to net cash provided by operating activities of $0.6 million in 2016. Cash at December 31, 2017, totaled $14.2 million as compared to $16.2 million at December 31, 2016. The substantial balances of cash at the comparative periods ended December 31, 2017 and December 31, 2016, resulted from the net proceeds of $17 million from the company's initial public offering in December 2016.

We wrapped up the fourth quarter of 2017 with an addition to our governance team with the appointment of Peter Gross, an executive with over 30 years' experience in uninterruptable power systems supplies and power systems for data centers. Peter Gross was added to our Board of Directors. Peter's experience includes being Vice President of Mission Critical Systems at Blume Energy. He was also managing partner at Hewlett Packard's carbon power and critical facility services. His appointment increases the total number of board members to 4, with 3 members serving independently and we believe his incredible depth of experience working with datacenter power systems will prove invaluable as we begin to commercialize exciting new products in these markets.

In summary, we are pleased that the fourth quarter financial performance improved over the previous 2 quarters per our expectations. We are working on many exciting things behind the scenes to address the opportunities facing us in both domestic and international markets.

With respect to our outlook for 2018, based on the visibility we currently have, we are highly confident our financial performance will demonstrate significant year-over-year improvement. In 2018, we also expect to see tailwinds from the new effective federal tax rate of 21% from 35% as we return to profitability. We look forward to building value for our shareholders.

I will now turn the call back over to Raj. Raj?

Thanks, Luis. To summarize it, 2017 was certainly a necessary year of foundation building in order to support the growth we expect in years to come. We expanded our manufacturing facility, we built our international capabilities and greatly diversified our customer base. We are confident based on our conversations with key customers and partners around the globe that the markets our DC power solutions address are strong and are growing rapidly. Moving into 2018, the 2 developments announced today with our new Tier 1 wireless carriers set the stage for Polar Power to deliver improved financial results in 2018. A strong balance sheet, a conservative cash management strategy, a fortified governance team and product approvals by our key target customers are expected to yield both short term and long-term success. We look forward to sharing more on our developing story at the upcoming annual ROTH conference on March 12 in Dana Point, California.

At this time, I'd like to open the call to questions from our listeners. Operator?

(Operator Instructions) David Savery, Private Investor.

Hi there, gentlemen. Got a question. You are vendor approved with the 4th newest Tier 1 company, has there been any follow-up on that?

There is day to day progress. We are negotiating with the different regions. Remember, each tier carrier has multiple offices or districts throughout the country. So it's a lot of resource to contact each and every regional manager, demonstrating the projects, understanding their requirements, and gaining their confidence. So it's not a wait and see, it's very, very active participation.

So you are -- because I know with the one, the one where you just got the 3-year contract, it was almost 9 months before orders came. The other one has been 6 months. So you do have follow-up then with the fourth one where you haven't really had any orders yet then?

The fourth one may be quiet for a little while. The other 3 are keeping us quite busy and tying up, it's tying us up. They're resource intensive.

Okay. The other question I have is, can you give an update on your 200-kilowatt generator, the one that you're building the prototype for?

Progress on that is moving, not at the rate that we want it to be. Quite simply is that our customers' needs for customization of equipment is a little bit overwhelming. But we do intend to get prototypes of the 200-kilowatt unit out sometime in about 10 to 12 weeks.

Okay, thank you. I'll get back in the queue and let other people ask questions.

(Operator Instructions) Matt Hlavacek, Mike Rowe Cap Club.

Good afternoon, gentlemen, thanks for taking my questions. Would you be able to expand a little bit upon expected shipment timeline for the announced 3-year agreement? And do you have any visibility on -- I know you mentioned order quantities roughly several times the 100-unit orders that you experienced for the Puerto Rico purchases, but I wonder if you might be able to expand upon those points?

We will not be able to give exact numbers because we are not giving guidance on any customer here. But based on what you were told in the call earlier today, the ordering pattern, they have given us a healthy forecast and the ordering patterns the first two months are either in line or have exceeded what they have actually indicated to us. So that being said, we've been shipping every day, every week based on their availability to receive the product. And so either it is in the backlog stage or it is in a ship stage or it is in the forecast stage. That is what is happening with this customer.

Great, thank you. Recognizing that a big portion of the increased expenses over 2017 was relating to R&D and customizing orders for international customers, can you talk a little bit about, having that behind you to some extent, can you talk about the expectations going forward in 2018? Do you expect them to them to trend higher or trend lower?

This is Luis. Regarding R&D, we feel that it's going to be within the range that it is at this moment. We still have, we're still doing quite a bit of work on the 200-kilowatt unit. So once we complete that, then maybe we can see the number starting going down, but right now the numbers that we have shown for Q3 and Q4, I think that's pretty much the range that we're going to be in for the next few quarters. As percentage of gross revenue then, the percentage should go down as our revenues increase.

Great, thank you for that. And then last question, would you be able to kind of expand upon the progression of the international sales pipeline? I know you mentioned a whole host of new potential customers and final awards in Namibia, Sri Lanka. Understanding you're not going to be able to provide guidance, I think on the last call you mentioned a pipeline of around $75 million. Could you maybe update us on where that pipeline stands today and do you have any visibility into the potential size of some of these new awards?

I can take that, this is Raj. These are fairly large programs. The Namibian one that you are talking about is to build complete sites, not just providing power systems, which we are participating in. So the dollar amount at these sites is pretty high. It's a 2 to 3-year project. The one in Sri Lanka is for the 7th largest telecom company in the world and they have operations 15 to 20 countries. So this project is spread around for 3 years. The contract is done for 2 years and it will renew after 2 years. So at this point of time, it would be difficult to assess the exact number. It well exceeds the number that we have given you in the past because just between the 2 of them, it will reach that number, but it's obviously spread into different periods, terms. And so we can't give an exact number on that one, but it's growing.

Understood. But are you able to say with a fair degree of certainty that that is a firm order within Sri Lanka or is there a degree of uncertainty that still has to be realized?

We have signed the contracts and how it works is similar to what we have here in the US where the terms and conditions are set, the prices are set and then you keep on getting continued orders every month, every week. So one month you ship power systems for 30 sites, another month you ship power systems for 15 sites. So it will be a moving target every month. They will be giving a quote, once again, they will be giving a forecast for the next 12 months or 9 months and then based on that forecast, they will be drawing P.O.s on that.

Great, that's very helpful. Thank you, gentlemen, I'll hop back in the queue.

(Operator Instructions). With no other questions at this time, I'd like to turn the conference back to Mr. Sams for any closing remarks.

I can do it. Thanks, everyone, for joining us on our call today. We have many dedicated and hardworking people throughout the country and throughout the company. From our sales, marketing and international business development folks to our engineering team who keep the DC power solutions constantly evolving, send their thanks to all the management and to all of you, we could not do it without you. Lastly, if we were not able to address all of your questions on today's call, feel free to contact us or our investor relations company, MZ Group, who will be happy to answer them. We look forward to speaking with you and meeting with you at some of the conferences coming up. Until then, thank you very much.

That will conclude today's conference. Again, thank you all for joining us.