Reporting a $0.03 loss per share adjusted for non-recurring costs, Ballard Power Systems (BLDP 4.49%) failed to meet analysts' estimates of a $0.02 loss for the third quarter. The company's top line didn't mitigate the disappointment: Ballard missed the consensus estimates there as well, reporting revenue of $21.6 million -- 31% lower than the $31.3 million analysts had expected.
Let's dive in to the earnings report to gain a better understanding of the company's quarterly performance.
Mixed news from China
Although Ballard's failure to meet analysts' revenue estimate is noteworthy, it should be taken with a grain of salt. Analysts are far from perfect in their quarterly predictions, and in any case we prefer to focus on a company's performance from a long-term perspective.
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Of greater note, therefore, is the company's 32% year-over-year decline on the top line. Management largely attributes the lack of sales growth to lower heavy-duty motive product sales -- a 65% decline compared to the same period last year. The main source of this decline was lower fuel cell bus products sales in China related to the Guangdong Synergy-Ballard joint venture. Beyond the recently completed quarter, management anticipates the joint venture will negatively impact the company's 2018 revenue. Whereas management had originally expected to report sales of about $121 million for 2018, it now estimates sales of $90 million to $95 million.
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However, not all of the news out of China in the previous quarter was disappointing. For example, Ballard inked a deal with Weichai Power, a leading automotive manufacturer located in China. In exchange for an equity investment of $163 million, Weichai Power will gain a 19.9% ownership position in Ballard. In addition, Zhongshan Broad-Ocean Motor Co. will invest $20 million, maintaining its 9.9% ownership position in Ballard.
Nothing electrifying about this bottom line
Besides disappointment on the top line, Ballard's investors found reasons to be discouraged at the bottom of the income statement. Due to the reduction in revenue, Ballard suffered from a contraction in its gross profit margin from 32% in Q3 2017 to 30% in the recently completed quarter. The lower sales volume, moreover, contributed to the company reporting negative $4.36 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), representing a dramatic turnaround from the positive $0.82 million it reported during the same period last year.
Ballard's lackluster third-quarter performance represents an extension of disappointing results in 2018. Flirting with profitability last year, Ballard generated EBITDA of positive $0.35 million through the first nine months of 2017; however, the company has reported negative $11.33 million through the same period in 2018. Juxtaposed with the recent results of one of its closest fuel-cell competitors, Plug Power (PLUG 1.88%), Ballard's performance is even more notable. In its Q3 2018 results, Plug reported a company record for EBITDAS (EBITDA and stock-based compensation) of negative $1.6 million. Plug expects the good news to continue in the fourth quarter, forecasting EBITDAS of at least positive $1.6 million.
Something to be charged up about
Ballard's financial results failed to power up investors' enthusiasm in the third quarter, but that's not to say that Q3 was one to forget altogether. In September, Ballard revealed its next-generation liquid-cooled fuel-cell stack, FCgen-LCS, at a convention in Germany. Expecting to launch the product in 2019, management characterizes the fuel-cell stack as something suited for heavy-duty motive applications like buses, commercial trucks, and trains.
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What should pique investors' interest most about this new product offering is the fact that Ballard expects the FCgen-LCS to represent a 40% reduction in total-cost-of-ownership compared to the current generation liquid-cooled fuel cell stack. By increasing the value proposition for customers, Ballard may be driving closer to achieving profitability -- an unheard of feat for publicly traded fuel-cell companies.
By itself the FCgen-LCS may not seem worthy of too much excitement. But taken in concert with the development of the company's 30-watt FCgen-1040 fuel cell stack product, which uses a non-precious-metal catalyst and contains 80% less platinum than a traditional air-cooled fuel cell stack -- significant since platinum contributes 10% to 15% of the cost of a traditional fuel-cell stack -- it seems noteworthy. Perhaps the company is making great enough strides in reducing its fuel-cell solution costs that profitability will become a greater possibility.
The electric takeaway
Unlike Plug Power, which had a third quarter worthy of celebration, Ballard encountered strong adversity in the third quarter, reflected both at the top and the bottom of the income statement. Moving forward, investors should keep an eye on the Guangdong Synergy-Ballard joint venture to see if the company is able to recover some of the revenue it failed to generate in the recently completed quarter. In addition, investors should monitor progress with the FCgen-LCS fuel-cell stack -- it gains favorability in the heavy-duty motive marketplace, Ballard may be on the road to posting profits.
