Active Power Inc. Q3 2008 Earnings Call Transcript

| About: Active Power, (ACPW)

Active Power Inc. (NASDAQ:ACPW)

Q3 2008 Earnings Call

October 24, 2008 11:00 am ET


John Penver - CFO and VP Finance

Jim Clishem - CEO and President


Richard Baxter - Ardour Capital

Trey Cobb - Stephens Inc

Stuart Bush - RBC Capital Markets


Welcome to the Active Power third quarter 2008 Earnings Call. All participants are in a listen-only mode until the question and answer session. (Operator Instructions).

Today's conference is being recorded. If you have any objections you may disconnect at this time. Now I would like to introduce Mr. John Penver, Chief Financial Officer. Sir, you may begin.

John Penver

Thank you. And good morning and welcome to Active Power's third quarter 2008 conference call. I'm John Penver, the Chief Financial Officer for Active Power. We issued a press release this morning announcing our third quarter 2008 results. If you don't have a copy of this release it can be found on our website at

Jim Clishem, the President and Chief Executive Officer of Active Power will lead today's call. After Jim's presentation, I will briefly discuss financial details, after which point we will be happy to answer your questions in the Q&A section of the call. Before we begin, let me remind everybody that any forward-looking statements we may make are based on our current views and expectations.

Although, we believe our expectations and views are based on reasonable assumptions, we can give no assurance that will be attained. Factors and risks that could cause our actual results to differ materially from expectations include, but are not limited to the inability to accurately predict revenue and budget for expenses for future periods, fluctuations in revenue and operating results, dependence upon our relationship with Caterpillar, and inability to successfully manage and integrate new direct sales efforts or channel partners, competition, overall economic and market performance and other risk factors as set forward in our most recent SEC filings. Jim?

Jim Clishem

Thanks John. Good morning everyone. I'll first detail some of the business highlights from the quarter and then briefly discuss our financial outlook going forward and then after I conclude, John will discuss some of the financial result.

Revenue for the third quarter was strong coming in at $12.4 million, up 83% from the second quarter of this year and 51% over third quarter of 2007. Our reported gross margin this quarter was 9%. However, this includes an inventory impairment charge that we took against our CoolAir inventory.

Excluding this charge, our gross margin comes in at 21% of sales. This compares to 14% of the prior quarter and 19% in the third quarter of 2007. The decrease in cash and investments during the quarter was $2.4 million against a guidance of $3 to $4 million. $1.4 million funded operating losses and $1 million was utilized for working capital to fulfill orders as our business continues to grow.

We’re pleased this quarter to exceed the high-end of our revenue guidance provided on our last earnings call, which was again in the range of $9 to $12 million. Active Power is evolving into a strong and driving business, and we believe this is reflected in our improving quarterly results.

Our backlog is at an all time high for the corporation and continues to grow. Revenue has increased sharply exceeding our quarterly expectations and margins are steadily and deliberately moving upward. New bookings during the quarter and to date have now exceeded $20 million.

We remain confident that we will achieve quarterly operating income profitability in fourth quarter of this year as previously indicated. Our funnel of opportunities is growing at a respectable pace. And as our core differentiators of efficiency, reliability and economically green, are resonating with the marketplace.

Our sales results are extremely promising, and we are cautiously optimistic about the potential impacts from the global economic environment. This quarter, we recorded our single largest order to-date, with one of the largest global search engine providers in the world, who purchased 12 megawatts of our CleanSource UPS system.

We shared in the second quarter that we expected a strong second half of this year and, indeed, it appears to be upholding according to plan. We believe that performance is being realized, and it is being reflected in our results.

As for our channels of distribution, we hit on all cylinders in the third quarter and experienced growth across all sales channels. Direct sales were 57% of total this quarter, up 50% from the second quarter.

Our domestic and international teams each accounted for approximately 50% of total direct revenue. Our OEM sales represented 43% of total revenue. We are encouraged about the significant increases in sales experienced by our single largest customer Caterpillar, who accounted for 41% of total sales and grew 52% from the prior quarter.

International sales rebounded nicely this quarter as well, and we saw substantial revenue improvements in Northern Europe, particularly from the UK. We also experienced an increase in sales revenues in Latin America and Asia. These are all locations where we've established a direct presence and invested in developing local sales, service, and marketing efforts.

Future quarterly results from these areas will continue to fluctuate depending on the timing and size of orders received and are more unpredictable and dependent upon our continued success in winning large orders.

Active Power delivers, as you know, the most space-efficient and energy-efficient UPS system available in the market today. In these challenging economic times, companies are seeking ways to run their mission-critical operations for less.

Active Power's systems enable clients to lower their operating expenses significantly. Couple this with the expandability of our modular system that allows clients to reap the rewards of just in-time capital deployment, compact physical footprint, temperature indifference and the clean green nature of the product, and we have a compelling winning value proposition.

We are also extremely encouraged by the growing funnel of opportunities for our PowerHouse solution. PowerHouse is a modular and containerized continuous power system, offered in four standard power configurations for quick delivery worldwide. We are gaining traction in a marketplace with this new product, which is evidenced by the fact that we have shipped more than 15 megawatts to customers around the world.

Our CleanSource UPS solution lends itself very well to containerization. The system only consumes about one-quarter of its footprint, as compared to conventional battery-based UPS system. With its high mobility and modularity, the system is also rugged and can operate in an environment with wide temperature swings, which is not possible for systems with a sensitive electrochemical composition.

I'll turn my attention for a moment to the CoolAir product line. We have continued to market our first generation CoolAir product and, in fact, during the quarter, received an order for two additional units from a client in Korea. The market continues to express interest in this innovative technology, a battery-free extended runtime DC power solution only, again not a UPS but just a DC power solution only.

The company has continued to refine its plans for the next generation development of this technology, which takes it beyond the DC component product only to a more complete power solution. Because of the low sales volume we've experienced with the CoolAir DC only product, reduced emphasis we've placed on it in favor of attaining profitability and because we believe the commercial opportunities lie in future generations of the product, the company made a decision to take an inventory impairment charge of $1.5 million this quarter. This was recorded in our cost of product revenues in our income statement.

We recently celebrated a significant company milestone this quarter. Our 2000th flywheel came off the manufacturing line. It was shipped to an alternative energy customer of our long-time OEM partner Caterpillar. On September 29th, we held a celebration for our employees and with our customer at our Austin headquarters. We believe that this milestone truly demonstrates the increasing widespread market acceptance of our flywheel technology, but more importantly, puts us in a strong position to compete and win projects against conventional batter UPS suppliers.

With the shipment Active Power has now globally deployed more than 500 megawatts of power protection to consumers with more than 50 million hours of field runtime. This is truly a field-tested and proven technology. While the global economy has been extremely strained, we have not witnessed the impact of this on our sales results at this time nor have we seen a significant decline in our funnels for opportunities. We are still actively stealing market share and gaining clients.

Now with this said, and as is in the nature of our business, since we are involved in the front-end of the client capital buying cycle, we believe that we are in a position to see potential trouble ahead with at least a six- to twelve-month forward-looking view. Our value proposition of energy and space efficiencies and green is resonating, and we believe are even more compelling in tougher economic climate.

What our customers are discovering is that they can reap the economic benefits of our technology without having to sacrifice performance. Our flywheel UPS systems have been proven to be seven times less likely to fail versus the conventional battery-based UPS system. This means we deliver significant increases in reliability while saving customer's money.

Our strategy to weather this economic storm is simple. We will stick to our business fundamentals. We will focus on the benefits we deliver to customers to improve their business operations and remain committed to our goal of growing revenue and profit for Active Power shareholders.

We intend to accomplish this through further building sales distribution, building brand, reducing cost and focusing on innovations that matter to clients. As we mentioned during our previous earnings call, we believe there is a disconnect between our business fundamentals and our stock price. We have remained confident this will correct itself over time, especially as we continue to post positive results.

Not knowing when the stock market may return to more normal levels, I wanted to take this time to communicate our appreciation for the continued support of our shareholders and want to thank you for the confidence you've placed in this management team. For this, we truly are thankful.

John will now discuss some of the financial details of the third quarter and give a brief overview of our near-term outlook. Then, we will move to our question-and-answer period of the call. John?

John Penver

Thank you, Jim. Our revenue for the third quarter was $12.12 million. This was a record level of quarterly revenue for Active Power. Results were up substantially by 83% from the second quarter of 2008 and up by 51%, compared to the third quarter of 2007. On a year-to-date basis, our revenues for 2008 were $26.8 million, which is 14% higher than the $23.4 million we recorded for the same nine-month period in 2007.

We indicated in our prior earning calls that we had experienced a big increase in orders since April of this year, and that this would result in a much stronger second half performance in 2008 for Active Power. This was reflected in our third quarter results, with increases across all revenue types, all channels and all geographies.

Our EMEA business rebounded significantly from the first half of this year. In fact, our EMEA revenue increased by 302% from the prior quarter. Our Americas operation continues to perform well and recorded quarterly growth of 20%, compared to the prior quarter.

Our flywheel-based UPS products again contributed to the majority of our revenues, and represented 58% of our total revenues for the third quarter. This compared to 72% of our revenues in the second quarter. This percentage decrease was due to our efforts to sell more solutions and services to our customers, which is becoming more consistent. This leads to higher total revenue per flywheel shift, enabling us to develop stronger customer relationships and saw profitable services and solutions to our customers for their mission-critical operations.

We move in larger and larger contracts as we sell more systems solutions to customers, and as patents showed in the third quarter where we announced the number of large orders. As our solutions business grows, the composition of our sales has changed and we've experienced an increase in third-party systems and components that are being packaged and resold to clients. This also drives the increase in our top-line revenues.

Even though the pass-through margins on such third-party equipment are less than what we generate on our own manufactured goods, it does become an important catalyst for consulting services and maintenance revenues that attract higher margins. The level of such third-party revenues will fluctuate quarterly, due to the timing of specific customer orders that we have at any point in time. This was illustrated in the current quarter, with such third-party revenues were $2.8 million, up from $500,000 in the second quarter.

As would be expected from such a large increase in quarterly revenues, the total number of flywheels that shipped this quarter also increased significantly by 52%, 62 wheels shipped in the second quarter compared to 94 wheels in the third quarter. This is the second highest volume of quarterly shipments that we've had and represents more than 18 megawatts of equipment.

Our average selling price decreased slightly compared to the second quarter but was still over $77,000 per flywheel. And on a year-to-date basis, a number of flywheels shipped, is 220 compared to 202 wheels in the same period of 2007. During the third quarter, we increased the proportion of our total revenue that was sold through our direct channels to 57% of our total revenues, compared to 50% in the second quarter of 2008. This was accomplished through a 112% increase in our level of direct sales in the third quarter compared to the second.

I should also point out that our largest OEM customer Caterpillar also saw substantial quarterly growth in their third quarter revenues. Our revenues from Caterpillar increased by 52% as compared to the second quarter levels, and caterpillar represented 41% of our revenues in the third quarter.

International sales, overall, represented 56% of our total revenue in this quarter, which was up from 23% in the second quarter. Future quarterly results from these areas will continues to fluctuate depending upon the timing and size of the orders received and are little more unpredictable and dependent upon our success in winning large orders.

The higher volume of wheels sold and the related revenue is key to Active Power becoming profitable. The higher wheel volume this quarter directly led to an improvement in gross margin levels, which also increased by approximately 50% to a level of 21% of sales. This is also an all-time high for Active Power and compares to the 14% we achieved in the second quarter and a 19% we recorded in the third quarter of 2007.

During this quarter, we elected to do take a further impairment charge for excess inventory of our CoolAir DC product after continued poor sales results. This is relative to our current sales expectation for the DC product and our standard inventory policies. So we recorded a charge of $1.5 million or $0:02 cents per share for this item, and after this charge out, as reported gross margin was 9%.

Our research and development expenses for the quarter were $1.2 million, 8% less than the $1.3 million we recorded in the second quarter and 15% lower than the same period of 2007. This primarily reflects lower outside development cost, and slightly lower headcount compared to earlier period. Our selling and marking expenses at $2.8 million were 9% lower than the second quarter levels, but were 15% higher than the same period of 2007.

The increase from 2007 reflects higher variable selling expenses. The decrease from the second quarter '08 is primarily due to lower headcount expenses in our direct sales force. On a year-to-date basis, our selling and marketing expenses are 11% higher in 2008, due mainly to higher variable sales compensation.

Our general and administrative expenses were largely in line with the previous quarter and prior year amount. And on a year-to-date basis, our general administrative expenses have decreased by 43% or $2.8 million from 2007, due to lower professional fees this year. Our reported net loss for the quarter was $4.1 million or $0.07 per share.

This includes the $1.5 million or $0.02 per share for the asset impairment charge I mentioned earlier. This compares to a loss of $4.4 million or $0.07 per share in the second quarter of 2008, and a loss of $3.5 million, or $0.07 per share in the third quarter of 2007.

On a year-to-date basis, our net loss of $13 million or $0.22 per share is an 11% decrease, however, the $14.6 million loss or $0.28 per share we recorded in 2007. The decrease in our cash investments during the quarter was $2.4 million. I would like to highlight that $1.4 million of this amount was funding our ongoing business operations and losses. The remaining funds were used to finance our increasing working capital to fund the growth in operations.

As our business continues to grow rapidly, we have to purchase more inventory for these orders and finance more receivable. To meet this challenge, we drew $1 million down against our revolving line of credit in September, which represents 20% of the facility from our bank. We are hopefully working with our customers to make deposits for periodic payments against orders to improve our cash flow and reduce the investment that we must otherwise make in our working capital.

As we are successful in winning more large orders and particularly solution sales, the timing, the size and payment streams of these orders may have a significant impact on our quarterly cash consumption that may cause the amount used to fluctuate on a quarterly basis. We believe there is now near-term need to raise additional capital and that we can manage our growth requirements for the foreseeable future based on our current projection.

At this point, we have not made any determination regarding the timing or extent of future capital rising, but it's possible we may think to opportunistically raise additional capital at a future date. Our cash and investments on hand at the end of September were $11.8 million.

And our capital expenditures were not significant during the quarter. We’ve historically invested a lot in our manufacturing infrastructure. As a result, we can substantially increase our production levels without needing to make any material capital investments.

We will continue to support expansion of our sales and service capabilities and our marketing efforts as required. The increase in accounts payable primarily reflected the purchasing of $1.6 million of equipment including generators and switch gears in our U.K. operations for specific Powerhouse orders that will be delivered during the fourth quarter.

This is also reflected in increased inventory on hand at September 30. Now briefly turning to our outlook for the fourth quarter. We’ve incurred substantial backlog into this fourth quarter, based on orders we've closed thus far or are expected to close, we expect that fourth quarter revenues will be between $12 and $15 million.

Based on the projected sales mix this would result in a gross margin of approximately 30%. At our current operating expense levels, this would mean that for the first time in Active Power's history we will achieve positive earnings results.

To clarify this point, our operating profit excluding non-cash items of depreciation of stock based compensation will be a positive number. Our GAAP earnings will be a small net loss of between $0.02 and $0.04 per share after accounting for these items. Achieving these results will of course depend upon the realization of the expected orders and a product and channel mix that we anticipate.

Our operating expenses excluding variable selling expenses should be fairly consistent with the results recorded during the third quarter. Our cash requirements will therefore be largely driven by our working capital requirements and not to fund operating losses. At this point, we anticipate using up to $3 million for working capital but we will continue to try to use our banking facility and manage our customer, (managing) the cash flows to say mitigate this consumption.

Before I conclude, I would like to point out that last week NASDAQ announced the temporary suspension of the $1 minimum bid price rule required for the continued lifting of stocks on NASDAQ through January 19, 2009. The effect of this moratorium for Active Power has that this will extend the time required for to us regain compliance with this rule, until May 21, 2009.

At this time, I would like to thank you again for your interest in Active Power and your continued shareholdings through a difficult and extremely volatile capital market. Jim and I will now be glad to answer your questions. So, thank you, we are now ready to take your questions.

Question-and-Answer Session


Thank you. (Operator Instructions). Our first question comes from Richard Baxter of Ardour capital.

Richard Baxter -Ardour Capital

Good morning. I have a question on the auction rate securities, the 825,000. Can you explain a little bit more about the initial bonds you have and what the ratings were?

John Penver

Yeah. Richard, actually just we hold those investments through Smith Barney, and they had announced a redemption program for certain categories of investors that we qualified for. And so indicated they’ve indicated that they will be redeeming out portfolio in the fourth quarter.

But the underlying municipality bonds, I don't have it in front of me. Richard I can get it for you, but I can tell you we’ve had some partial success of liquidating those securities in the market during the quarter, but Smith Barney through this program is just going to make a poll on that to give us how those positioned, so we anticipate that to happen in November.

Richard Baxter -Ardour Capital

Excellent. Thank you.

John Penver



Our next question comes from Trey Cobb of Stephens Inc.

Trey Cobb - Stephens Inc

Good morning.

John Penver

Morning Trey.

Jim Clishem

Morning Trey.

Trey Cobb - Stephens Inc

You guys have announced some nice size orders in recent months, EMEA and elsewhere. Could you talk little bit about what you are seeing in the pipeline in terms of orders according activity both domestically and aborad?

Jim Clishem

Yes, Trey, this is Jim, I’ll be glad to do that. As commented in my portion of the call, we received during the quarter and to date an excess of $20 million in new orders and they are really geographically dispersed. So the channels are working quite well across the globe at the moment to bring in those orders. And they really are sort of split between what we would traditionally call our CleanSource UPS orders and our Powerhouse orders.

As I commented also in this call, we've already delivered more than 15 megawatts of our Powerhouse solutions and are giving a strong interest and uptick just because of the inherent benefit that the Active Power Solution provides, which is very space efficient, of course the energy-efficiency and the ability to operate in pretty rugged condition.

So, I think that we’re going to see that continue through Q4, Q1 and our foreseeable future. So, the order flow is strong and it seems to be balanced pretty well between our Caterpillar channels as well as through our direct sales efforts. So I can't say that one sales channel distribution is stronger than the other at the moment. Although, I will tell you that the Caterpillar channel is fundamentally just the CleanSource UPS and any effort in Powerhouse is being done direct.

Trey Cobb - Stephens Inc

Okay, great. And then I guess a follow on to that. Given the tick up that we are just seeing internationally, I assume sales mix would shift more towards the direct business. How should we think about that mix going into 4Q and then into '09?

Jim Clishem

Yeah. Well, I think last quarter, I would have answered that probably different than what I'm seeing right now. Last quarter, I probably would have answered that we’ll see the predominant growth coming from our direct. There has been some pretty significant investment on the Caterpillar side in the U.S. part of the marketplace in their investment in sales, support, training and engaging their dealers, but most importantly we recently learned that they are making some significant investments in Europe.

And, if you look at the Caterpillar total revenues for both last year and what we expect this year, the lion share of that revenue is coming from North America and very little of it from Europe. My anticipation is you’re going to see Caterpillar grow. They've already grown 200% quite frankly, and we put a press release out about this a few weeks ago. I think you’re going to see in 2009 a very substantial increase in their oversees operations.

And we've structured ourselves and their support for that growth. So I'm very pleased with what I'm seeing Caterpillar do on their investment and their new management team that's focused on it, and I think we’re going to win a great deal more through that channels. And so, it will be interesting. Right now as I commented, 41% came from Caterpillar. I think we are going to see that number potentially around that figure or maybe even go up a little bit in the foreseeable future.

Trey Cobb - Stephens Inc

Okay. That was helpful. And then, I guess with service revenue, it looks like it was about 20% of the total this quarter, up significantly year-over-year, and I guess on a sequential basis. How should we think about that business going forward and any color you can provide there would be helpful?.

John Penver

Trey, it's John. I think payment is 18% of revenue. That service revenue will fluctuate a little bit depending upon the solution sales that we do. We were modeling it out of that 12% to 15% of revenue and growing our install base is improved. But we will get the benefits, if we have a large customer order that’s got a lot of design service installation construction stuff going in it, so that will bump up the services component periodically. I think the number that we’re at now is probably a reasonable approximation at least for the short-term.

Trey Cobb - Stephens Inc

Okay, great. And then last quick question. On the CoolAir write down, was that, did that have any association I guess with the older generation stuff or I think that was partially the reason for the write down in 1Q?

John Penver

Yeah, Trey, it was un-practical on the first of the CoolAir product. We have not yet commercialized the second-generation of it. So it's basically just reflects our current expectations of what we think we can start with the effort that we've been putting into it.

Trey Cobb - Stephens Inc

Okay. Great, thanks, guys.

John Penver

Thank you.

Jim Clishem

You bet.


(Operator Instructions). Our next question comes from Stuart Bush of RBC Capital Markets.

Stuart Bush - RBC Capital Markets

Yeah. Hi, good morning, guys. Good execution on the quarter.

John Penver

Thanks, Stuart.

Stuart Bush - RBC Capital Markets

So this 12 megawatt order for the data center customer is quite an accomplishment. So, that being said there's certainly is an expectation of pronounced reduction in capital spending out there by clients in a lot of industries. Can you walk us through what you're seeing and how you expect that data center build out could be somewhat recessionary proof in that environment and why they would choose to pursue your product and spend the money for additional sites, if you expect some follow on orders from that customer?

Jim Clishem

Sure, Stuart, this is Jim, I’d be glad to address that. We are not seeing any sort of erosion of the demand at this point, but as also commented in my earlier statement, we have the luxury of seeing things sort of ahead of time, at least 6 to 12 months. More to your point of potential downside, if the capital markets continue to really get tight and what that would mean for capital expenditures, one thing I would tell you is that oftentimes as you're aware when companies do start tightening the belt that usually affects people, first.

And automation and using data centers to deliver that automation is going to be, continue to be paramount to improve their operating results in a down economy. And with Active Power's position of being very high reliability and high efficiency UPS saving the money, we think that operating costs will only sort of get highlighted in this down economy for these vendors and these customers of our equipment. And our system will even be more pronounced as (vendor) needing power quality to be the selection of choice.

Secondly data center operators will do it for a business, see their businesses typically grow as enterprises outsource to them in down economies. That was replicated in the early 2000, and I think that will be replicated here as well. The other thing is as you probably know that in a global environment China and India is growing at a pretty fast pace. And they are still industrializing to a large degree.

And I think the investments Active Power has made in these other global markets will help mitigate the risk in balancing things out, should we have either a slowdown in Europe and or the US. And lastly I would tell you that the customers that we are talking to at this point, they do not build data centers and therefore don't expend capital dollars without signed contracts.

So when they come to us, they've already got their revenue, if you will secured and I think that as we press more and more into this sort of data center business, the old days in 2000 where people were building and they will come, that is not in fact the case in the order of the day. They are not building unless they have signed up orders and therefore we are not getting engagement unless they have that secured. So, I don't know if that helped or not, but we’ve not seen any sort of slowdown at this point.

Stuart Bush - RBC Capital Markets

Sure, no that's great. This one big order, was that in the US or was that international and in your discussions with them do you expect that they would potentially expand that relationship with you over next year?

Jim Clishem

Yes. I answered your both your questions, it was a domestic location and indeed we do expect that there will be several follow on orders that would include both domestic and international.

Stuart Bush - RBC Capital Markets

Okay. And, so when you look at your pipeline of total orders out there and you do some what of a sensitivity analysis on it, what do you think the prospects are for you to be able to achieve EBITDA profitability for the whole 2009 period?

Jim Clishem

We are going through right now an assessment of what we think that would look like in '09 internally in the company. I mean, I feel very confident in our statement about Q4 this year. I think for the first time, we will actually hit our operating income break-even point after 16 years.

'09 at this point is looking at a still very significant growth. Our industry is growing at 9% to 12%. We are anticipating a growth in excess of that for 2009, Stuart. So if you believe we can achieve it in Q4 this year, and if you believe that we are stealing share, which we are and we’ll continue to so for the reasons I just mentioned about what makes us different against the competition I would imagine that we would continue not only revenue growth, but be able to contribute to that profitability line as well in '09. But, I'm not prepared to quantify that for you at this point but it's looking still very encouraging to us.

Stuart Bush - RBC Capital Markets

Okay, great. And last question is when you take a look out at all of the pressures in the credit markets and systems, I know you say you haven't seen demands waiver yet and the data center market seems healthy, what is it that gives you the most concern as far as your end markets that would be most susceptible that could give the most volatility to your pipeline?

Jim Clishem

Well, I guess for me, I will let John answer too, if he'd like, but I think for me if, as I mentioned, we are not really engaging unless a customer has got committed dollars in place to go build or expand, as typically the way we get involved. But, if for some reason the underlying capital markets were to pull the rug, if you will out from underneath these people who have previously been given committed capital or increased the cost of that capital in some way that would be my fear that that would happen.

John, I don't know how you would answer that.

John Penver

Yeah. I probably would’ve answered the same way. I think we've been engaging with a lot more larger organizations over the last two years, reflected in the size of the deals that we’re doing. And the concern would be that potentially I would try to reign in capital expenditure or push projects out or delay them. That might cause me some heartache.

We have not seen that yet and as Jim said most of these people are doing it because of their business and so they’re giving that their customers push. They are not speculatively building infrastructure. Occasionally we will see people that are trying to get into the data center market, and I think those kinds of customers, if they don't have funding will probably have troubles over the next 12 months but that’s a really small part of our sales funnel at this point.

Stuart Bush - RBC Capital Markets

Okay, great. Thanks, guys.

John Penver

All right. Thank you, Stuart.


There are no further questions at this time.

Jim Clishem

Okay. All right. Well, given that, thank you all very much for joining us and for the continued interest in our company. We appreciate it. We'll talk to you again next quarter. Thank you.

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