Plug power q1 takeaways – company finally delivers a beat and raise quarter – plug power, inc. (nasdaq plug) seeking alpha electricity was invented in what year

While in Q1/2017 more than 90% of product shipments went to Walmart, things changed dramatically in Q1/2018 as shipments to the retail giant were insignificant while outright sales to other customers (mostly Amazon (NASDAQ: AMZN)) increased considerably.

I already suspected little or even no growth in the core product business after the company issued initial FY2018 guidance substantially below expectations, but I didn’t exactly expect the company’s GenDrive shipments to decline year over year. But as long as outright sales transactions with other customers are becoming a larger part of the business relative to Walmart leases, the company will continue to show strong revenue growth on the surface. While the obvious lack of growth in the core product business remains disappointing, this isn’t exactly new news. Moreover, with the US fuel cell investment tax credit recently being reinstated on a retroactive basis and a potential market entry in China, product sales should pick back up next year.

Product gross margin was up materially over the prior year but isn’t exactly comparable given the above-discussed changes in customer mix and the large number of outright sales transactions. Investors should also take a look at last year’s second quarter product margin of 24.8% despite overall revenues being more than 20% lower compared to Q1/2018.

Plug Power’s service margins suffered a slight setback in Q1 and dipped back into negative territory after having improved for four quarters in a row. On the call, management admitted openly to the issue and pointed to overtime compensation as major factor behind the weaker than expected segment performance.

Margins in this segment showed some improvement from a very weak Q4 and were up slightly over the prior year. While the margins in the PPA segment look particularly ugly on the surface, a good chunk of the losses is caused by the requirement to depreciate the assets leased to Walmart which is a non-cash expense. With an ever-growing fleet of units leased to Walmart, depreciation expense will move up even further going forward.

But the clear highlight in Q1 was the further improvement in the company’s hydrogen delivery business with margins up for three quarters in a row now and break-even levels coming in sight. In its 10-Q, Plug Power attributes the ongoing progress to "improvements in efficiencies from changes in system design". With a year-over-year growth rate of almost 60%, further progress in this segment will be crucial for the company’s bottom line results. Liquidity and Cash Flow Discussion

While the amount of cash used in operating and investing activities showed some year-over-year improvement, the company still used more than $28 million in cash, requiring Plug Power to turn to the capital markets once again. This time, the company managed to place a $100 million, 5.5% convertible bond with certain accredited investors but used a sizeable part of the proceeds for the purchase of derivatives (a capped call and a prepaid stock forward contract) in order to limit potential dilution and allow bondholders to hedge their positions.

At the end of Q1, unrestricted cash amounted to $46.7 million which should be sufficient to carry the company through FY2018. While Q2 might still see substantial cash outflows, the second half of the year should show material improvement. Ongoing Inventory Issues

Inventories have increased meaningfully since the company experienced serious supply chain issues in conjunction with last year’s botched ramp-up of Amazon deployments. On the Q4 conference call, management promised to reduce the amount of inventory by at least 30% over the course of FY2018, but Q1 showed very little progress as inventories were down just slightly quarter-over-quarter and up materially year-over-year.

At the time of the company’s business update call in early February, management hinted to an upcoming announcement of a third anchor customer and the need to timely secure this new mega-deal to achieve the upper end of FY2018 revenue projections. But after being asked by an analyst on the call, management stated:

It’s still in the works and it’s always difficult with some of these large customers as you work through their systems. I can remember – I can tell you with both Walmart and Amazon I thought I had the deals closed six to nine months before they actually were announced and we’re going through the same path.

While the company expects a Q3 site deployment with this customer even without a broader agreement in place, the delay in securing a multi-site agreement with this large customer, which I still anticipate to be Home Depot ( HD), should limit the company’s ability to achieve or even outperform the high end of its full-year revenue guidance even with a much better than expected first quarter already under its belt. China

The company continues to evaluate a couple of potential partners with the assistance of Barclays with a decision on entering the Chinese market now pushed out to year end. The delay should not come as a surprise to investors given the ongoing lack of hydrogen infrastructure in the country. I have covered the Chinese market in more detail in a recent series of articles on peer Ballard Power ( BLDP).

As stated before, I am not optimistic about Plug Power‘s ability to execute a satisfactory JV agreement as the company’s criteria seem diametrically opposed to the intent of potential Chinese partners which are mostly looking for technology transfer instead of getting trapped in a " long-term partnership" with a foreign company that also commands " protective governance rights".

While Plug Power recently celebrated the deployment of the first unit to FedEx ( FDX), the project seems to be well behind schedule. Back on the Q2/2017 conference call, CEO Andy Marsh already stated that " (…) we will have 20 of the FedEx trucks deployed in the fourth quarter. (…) ", but neither truck manufacturer Workhorse Group ( WKHS) nor Plug Power have provided a schedule for the deployment of the remaining 19 units so far.

As evidenced by the positive reaction in the company’s share price, it doesn’t take a particularly strong quarter to impress the Street. In fact, it’s all about adequately managing expectations which, at least so far, has been a total disaster at Plug Power.

As always, Q1/2018 left much to be desired with the core product business down meaningfully year-over-year, a setback in service margins, still elevated inventory levels and ongoing major cash usage from operating and investing activities. In fact, the company’s operating loss was even higher than in Q1/2017.

While the in-depth analysis of Plug Power’s Q1/2018 results was somewhat sobering, the company’s brand-new ability to significantly exceed its own projections on both the top- and bottom-line caused investors to bid up the shares by almost 20% over the past three sessions as the major outperformance also lends a good chunk of credibility to the company’s very strong Q2 guidance.

Personally, I was surprised by the initially muted reaction in the stock price and took the chance to initiate a trading position in the shares which I am still holding at the time of this writing. Keep in mind that I didn’t purchase the shares for investment purposes and currently plan to dispose of the position over the course of the next couple of sessions.