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Maxwell Technologies Inc. (NASDAQ:MXWL)

Q3 2008 Earnings Call Transcript

November 3, 2008, 5:00 pm ET

Executives

Mike Sund – VP of Communications and IR

David Schramm – President and CEO

Tim Hart – CFO, VP of Finance, Treasurer, and Secretary

Analysts

Michael Horwitz – Stanford Group

Ted Kundtz – Needham & Co.

Craig Irwin – Merriman Curhan Ford

Richard Baxter – Ardour Capital

Stephen Sanders – Stephens Inc.

Operator

Good day, everyone and welcome to today’s third quarter financial results. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during our question and answer session. It is now my pleasure to turn the call over to Mr. Mike Sund. Please go ahead, sir.

Mike Sund

Thanks, Megan. Good afternoon. In a moment, you will hear from David Schramm, Maxwell's President and CEO and Tim Hart, our Chief Financial Officer.

Before we begin, I need to advise you that the following discussion will include forward-looking statements that are based on management's current expectations and assumptions, which are subject to numerous risks and uncertainties. Actual results could differ materially because of factors such as the company's history of losses and uncertainty about our ability to achieve or maintain profitability or to obtain sufficient capital to meet customer demand or other corporate needs.

Also, recent disruption of global financial markets and reduced availability of credit, development and acceptance of products based on new technologies, demand for original equipment manufacturers products reaching anticipated levels, cost effective manufacturing of new products and the success of outsourced manufacturing, the impact of competitive products and pricing, risks and uncertainties involved in foreign operations, including the impact of currency fluctuations and product liability or warranty claims in excess of our reserves.

For further information regarding risks and uncertainties associated with Maxwell's business, please refer to management's discussion and analysis of financial condition and results of operations in the Risk Factor section of our SEC filings, including our most recent Form 10-Q and our annual report on Form 10-K.

Electronic copies of those filings may be accessed by visiting the investors section of our website at www.maxwell.com and hard copies may be obtained by contacting the company by e-mail or telephone. Some of you are listening to this call via the internet and an archived replay of the call will be available at our website. All information in today's call is as of November 3, 2008. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company's expectations.

It is now my pleasure to introduce David Schramm, Maxwell's President and CEO.

David Schramm

Good afternoon. We are very pleased to report that Maxwell’s revenue of $21.7 million for the third quarter ending September 30, gives us a sixth consecutive quarter of sequential top line growth. As stated in our press release, this growth has come from all three of Maxwell’s product lines, each of which is on pace to post double-digit year over year sales growth.

BOOSTCAP ultracapacitor revenue accounted for $7.6 million of that total, and Q3 was BOOSTCAP’s second consecutive record quarter. This growth was driven mainly by new orders for energy storage solutions for hybrid and electric transit vehicles, electric rail systems, fuel cell lift trucks and wind turbine blade pitch systems. As noted last quarter, increasing sales into the rapidly-growing wind energy market are a direct result of a license we obtained from Enercon, our first and largest wind energy customer, and we are actively pursuing additional wind energy prospects. In this application, ultracapacitors help to increase the consistency and efficiency of wind turbine output and ensure orderly shutdown in the event of high winds that could damage these large, expensive systems.

Increasing global demand for hybrid and electric transit vehicles and more energy-efficient electric rail systems also continue to drive increasing ultracapacitor sales. We now have solid relationships with several leading bus and rail vehicle OEMs and hybrid and electric drive train integrators in North America, Europe, and Asia. And we believe that we have begun to scratch the surface of growth opportunities in heavy transportation, as well as a plethora of applications that are driven by carbon reduction. New European Union regulations are very specific in limiting carbon emissions and we expect this trend to become global.

Ultracapacitors burst power capabilities, long operational life, and demonstrated efficiency in absorbing energy from regenerative braking systems has also opened up opportunities in lifting applications, such as with harbor cranes and fuel-cell powered lift trucks. Here again, ultracapacitor-based solutions help to reduce both fuel consumption and carbon emissions. The continuing theme here is that ultracapacitors can stand alone in certain applications or contribute to the efficiency, performance, longevity, and cost effectiveness of other technologies such as batteries, fuel cells, and renewable energy and other applications. Through our announced relationships with the Johnson Controls-Saft Lithium Ion Battery Joint Venture and the Lishen Battery Company in China, and some as yet unannounced activities with others, we continue to pursue application of our proprietary dry electrode fabrication process to enhance the performance, eliminate the need for environmental recovery of solvent, and reduce the manufacturing cost of lithium ion batteries.

In addition, we are engaged with some of the aforementioned battery players, the National Renewable Energy Laboratory, and the Argonne National Laboratory in programs to demonstrate the synergy between batteries and ultracapacitors in integrated energy storage solutions. These solutions take advantage of the BOOSTCAP’s ability to perform over a wide temperature range for millions of charge and discharge cycles that allow for the battery to become smaller and lighter as well as extending the life of the battery.

In a few moments, I will touch briefly on our other two product lines, and comment on Maxwell’s future prospects. Now I am going to break here and ask Tim Hart, our CFO to comment on the Q3 financial results. Tim?

Tim Hart

Thanks, David. I will discuss some of the significant items from our financials for Q3. Starting with a year-over-year revenue comparison, total revenue for Q3 2008 increased from Q3 2007 by about 53%. As David mentioned, this is the sixth consecutive quarter that total revenue has increased. We see strong (inaudible) activity for Q4. However, the recent strengthening of the U.S. dollar relative to the Euro and the Swiss franc makes predicting Q4 revenue somewhat challenging. The revenue was generated during Q3 2008 from foreign operations increased $1.6 million due the increase in foreign exchange rates.

The overall gross margin percentage increased year-over-year to 30% in Q3 2008 compared to 24% in Q3 2007. Sequentially, gross margin percentage increased from 28% in Q2 to 30% in Q3 2008, primarily due to improving BOOSTCAP gross margin in Q3 2008. We continue to take action to further reduce the manufacturing costs for our BOOSTCAP products and expect further cost reductions in future periods.

Operating expenses increased by 48% from Q3 2007 to Q3 of 2008. However, as a percentage of sales, both SG&A and R&D expenses decreased. SG&A as a percentage of sales decreased from 29% in Q3 2007 to 27% in Q3 2008. Research and development also decreased as a percentage of sales from 19% in Q3 2007 to 18% in Q3 2008. Compensation expense for stock options and restricted stock totaled about $885,000 for Q3. The Q3 2008 operating expenses generated from foreign operations increased $285,000 due to the increase in foreign exchange rates.

The company is working very hard to manage and control our operating costs, but actions required for Maxwell to qualify as an automotive supplier have generated significant unbudgeted expenses. Capital expenditures so far in 2008 also are significantly higher than what we had budgeted. Some of this increased spending relates to the requirements of our perspective automotive customers for automation and other process enhancements for BOOSTCAP products, based on their factory audits and our offshore assembly facilities. Other capital expenditures were required to increase capacity and throughput for our high-voltage capacitor products, which are generating record volumes. We expect capital expenditures will be less in future periods than they are during 2008.

In addition, we expect headcount to decrease in Q4 or remain relatively flat in 2009. As we drive to achieve profitability, we will continue to review all operating costs to make sure that we operate as effectively and efficiently as possible.

The net loss from operations of $3.6 million was essentially flat for Q3 2008 compared to the prior year. As we prepare for future automotive orders, we continue to invest in R&D and sales & marketing activities. We continue to put the infrastructure in place now to allow us to secure significant automotive business in the future. Unfortunately, we are incurring costs now for this infrastructure and we will not receive the benefits that other businesses obtain and products are delivered to customers in the future.

Inventories decreased about $0.5 million from Q2 2008 to Q3 2008, primarily from increased customer demand for high-tension products, as well as increased work in process for micro electronic products to be shipped in Q4 and Q1 of 2009.

Fixed assets decreased about $1.4 million quarter over quarter from Q2 to Q3, primarily due to $800,000 of foreign exchange impact from the strengthening of the U.S. dollar and to the timing of equipment purchases. We consumed about $9.4 million during the first nine months of 2008. However, our cash, investments, and restricted cash totaled $21.6 million at September 30. Our usable cash is at about $12 million at September 30, 2008.

As we announced in our last call, we launched an equity distribution program during Q3. This program allows Maxwell to offer to sell shares of our common stock from time to time at opportunistic prices. Through this program, we raised a net cash of about $3.6 million during the quarter. We expect our net cash burn for the next three months of 2008 to be about $2 million to $5 million, depending upon whether we raise cash through the equity distribution program, or other sources. Cash usage will be impacted by our results from operations, the timing of certain capital expenditures, and the quarterly $2.8 million principal payment to the holder of the convertible debentures we issued in 2005, outstanding balance, which is now around $16.7 million.

As reported in our filings, we have made principal payments in stock in each of the last three quarters and we can elect to do so again in Q4 of 2008. Obviously, the current global economic conditions are highly volatile and may make any effort to raise capital more difficult and impact the terms and conditions of the trade. Because of the equity distribution program and other options available for us to raise capital during this period of time, which would include also the elimination of the current restrictions on $8 million of restricted cash, ridge financing and/or a private placement of public offering of our common stock and the sale of certain tangible or intangible assets, we believe we will continue to have the ability to raise sufficient capital to fund the operations of the company, even in these really difficult economic times.

Back to you, David.

David Schramm

All right, thanks Tim. Now obviously, we are very encouraged by this sixth consecutive quarter of top line growth, and as noted in our press release today, we expect the unit volumes to continue growing across all three of the product lines in Q4. We have talked mainly about ultracapacitors, so let us spend a couple of minutes on Maxwell's other products.

Our high tension products consist mainly of grading and coupling capacitors and capacitor voltage dividers, large, high-voltage capacitors that are used in the electric utility grid, and other applications involving the transport, distribution, and measurement of high-voltage electrical energy. The technology, materials, and expertise involved in making them, and the applications in which they are used are quite different from ultracapacitors. Our high tension customers are the large prime contractors who build power plants and electric utility infrastructure. Our product enjoys a dominant position in a well-defined niche and our sales tracks spending on utility grids around the world.

A significant portion of our sales the past few years has gone into China, and other developing countries that are industrializing and raising their standard living, resulting in a rapidly growing demand for electrical energy. These products are generating above average sales growth again this year and are on pace to top last year’s record sales.

Our microelectronics products sales also have been doing quite well, thanks in large part to sales momentum established by our single-board computer products, which were introduced in 2005. Our customers are the large satellite and spacecraft prime contractors and our sales track with a number of satellite and spacecraft launchers each year. So microelectronics revenue is program-driven and can vary quite a bit quarter to quarter. The good news here is that the new single board computer product has given us an opportunity to increase the amount of Maxwell content for launch. As reported earlier, we have had some important wins, such as with the Northrop Grumman for the next-generation US weather satellite program and with Astrium in Europe for the European Space Agency’s Gaia science mission. The space market demands and pays a premium price for failure-free performance, so the margins for our microelectronic products are very attractive.

In previous calls, we have been asked about Maxwell's plan to profitability, and our response has been that to cover our overhead and generate positive margins, we need total quarterly revenue in excess of $20 million. We have also stated that the above threshold is very dependent on revenue mix and it also plays a very important role as our high-tension and microelectronic products already are generating very respectable margins, while our ultracapacitor sales are still generating negative margins overall. Why is that? For the past five quarters, since I joined Maxwell, my mantra has been profitable growth, but the fact is that in years past, the company entered into some strategic supply agreements with customers that management believed would be leaders in key markets, and in the interest of what was called market creation extended strategic, which can be read below cost pricing.

This has been discussed and quantified in our regulatory filings, and I can tell you that most, but not all of these obligations the company took on in the name of market creation are now behind us. In some cases, aggressive pricing was based on overly optimistic cost-reduction assumptions. We are continuing to attack cost by redesigning our ultracapacitor products and moving material sourcing and sale and module assembly to low-cost countries. Our strategy remains to keep the intellectual property at Maxwell and to outsource only the assembly.

And as discussed last quarter, we are working on improving logistics and planning to take advantage of lower cost ocean freight to get our product from where they are assembled in Asia to our costumers elsewhere around the world. Although it may not be apparent on the surface of our Q3 financials, we are on pace to improve overall ultracapacitor gross margins by something on the order of 50% this year. However, since margins are still negative, our 50% plus increase in ultracapacitor sales is still generating a loss in absolute dollars. Plans are in place to resolve all remaining historic strategic pricing situations, as well as to realize further significant manufacturing cost reduction. Positive margins on the BOOSTCAP product are a priority to Maxwell Technologies, and has my full attention.

Looking at the demand side of the equation, we continue to believe that penetrating high-volume automotive applications is critical to realizing the full potential of Maxwell's ultracapacitor opportunity. Again, we see the push by EU regulators to enact strict carbon emission standards as a significant enabler for many more BOOSTCAP opportunities. We have announced relationships with leading auto industry players, such as Continental, which includes the former Siemens ADL, Valeo, Alcoa AFL, and Mercedes, and there is more in the works.

That said, what we now know is that pursuing the automotive home run involves an X factor we couldn't completely quantify under the moved into the supplier qualification phase with the automakers and Tier 1 suppliers to the auto industry. For example, there is the new customer service and support office we opened in Munich to serve the European auto industry. There are the ISO TS certifications required of auto suppliers, and the extensive factory audits in China, the US, and Switzerland. Those TS standards and those audits have generated long to-do lists, ranging from additional automation to increased quality management staffing. And all of this investment, most of which shows up as increased operating expense, is in advance of substantial automotive revenue, which isn't going to arrive before late next year at the earliest.

Our work with the battery industry and programs to continuously improve our own technology and products requires increased research and development investments, that we believe will pay out handsomely over the long run. But, create a drag on current financial results. Based on the design ends and purchase orders we have been announcing, that have been driving increasing volume to cover our overhead investments and the significant ongoing margin improvement discussed earlier, we see a realistic path to profitability that we are committed to demonstrating over the next few quarters. That said, we recognize the global economic turmoil and reduced credit availability may affect some of our customers, but we have not experienced any such effects to date.

And on the subject of falling oil prices, which some read as a negative for energy technology stocks such as ours, I would make two observations. First, energy is going to continue to be expensive in absolute terms, and ultracapacitor's ability to improve the efficiency of systems and devices that generate or consume electrical energy will continue to drive demand. Second, and for big – forgive me if I sound repetitious – the global imperative to reduce carbon emissions is already strong and gaining momentum irrespective of energy prices. So innovations such as recuperative braking systems and the auto industry's movement to start/stop systems, both of which are ideal applications for ultracapacitors will also continue to drive demand, no matter where those oil prices go.

It would be a good time now to entertain your questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from the site of Michael Horwitz of Stanford Group. Your line is now open.

Michael Horwitz – Stanford Group

Hi, gentlemen. Can you hear me alright?

David Schramm

Yes, you are breaking up a little bit, Mike, but give it a shot.

Michael Horwitz – Stanford Group

Yes, I am in the car, but what do you think – you mentioned costs, and maybe you were a little aggressive a few years ago on what you could do, by bringing down costs, but what you think the magic number is for ultracapacitors in adoption?

David Schramm

Mike, I'm not sure I got the very last of that question.

Michael Horwitz – Stanford Group

(inaudible).

David Schramm

You will have to try it again, I am afraid.

Mike Sund

Michael, the connection is really bad and we are having a hard time understanding your question.

David Schramm

But let me take a stab at it, Michael, let me assume your question is how much more cost do I have to take out, and the answer is that as the volumes go up, we have got a realistic plan that says we ought to be able to take out at least 20% more cost, and beyond that, we have got some design enhancements. We are not going to start over with the design, but what we are doing is optimizing the parts that go into our assembled system, which also will result in cost reductions.

Mike Sund

I think we lost him.

Operator

And we will take our next question from the site of Craig Irwin from Merriman Curhan Ford. Please go ahead.

David Schramm

Craig? Megan, are you still there?

Operator

I am still here.

David Schramm

I don’t hear Craig.

Operator

I don't either. Looks like we will take our next question from the site of Ted Kundtz of Needham & Co. Your line is now open.

Ted Kundtz – Needham & Co.

Hello, everyone, and I sure hope you can hear me.

David Schramm

Loud and clear, Ted.

Ted Kundtz – Needham & Co.

Okay, great. A couple of questions for you; one, could you kind of update us on the outlook for the wind area, that seems to be – from what I gather, kind of your nearest term growth opportunity, with automotive kind of – obviously the big gorilla, but coming in much later as you indicated. But could you kind of update us on the wind outlook and who else you might be working with besides the companies you have mentioned so far?

David Schramm

Well, the ones we have announced, Ted, and again, you understand the history that we started the first program with Enercon. Enercon has a patent on applying ultracapacitors for pitch control, and we bought a license that indemnifies our customers from using that system. The first announced relationship is with Lti, which is loosed, and those orders have already been shipped. We are knocking on the doors of every windmill manufacturer, because we do believe if you have an electric pitch control system, the ultracapacitor is a superior way to utilize the energy storage and power those pitch control systems.

Ted Kundtz – Needham & Co.

Okay, could you give us some sort of idea of what you think the growth in that market would be for you next year? I'm not sure what percentage of your ultracap revenue that accounts for; I don't know if you would tell us that.

David Schramm

I think right now I would say it's probably 2x where we are at today, and that may be pretty conservative, but –

Ted Kundtz – Needham & Co.

2x for next year?

David Schramm

Yes, and again, Ted, you are exactly right, there is a lot of uptick that comes out of the wind; there is a lot of momentum right now. The wind people that we have talked to basically tell us that they are sold out for the next two years. So it is a matter of us knocking on that door and getting our ultracap into that pitch control system.

Ted Kundtz – Needham & Co.

Is that a long-lead time ordeal to do that?

David Schramm

Not for us, it is not. No.

Ted Kundtz – Needham & Co.

Not for you, I mean for them.

David Schramm

No I don't believe so, because they have a pitch control system today, and either they are hydraulic, which is about a third of the market, the other two thirds are electric control, and because of this patent that Enercon owned, they only have the choice of batteries. So now they have a choice of putting ultracapacitors in to the system.

Ted Kundtz – Needham & Co.

Okay, terrific. And then one other question, just quickly; you talked about the breakeven being greater than $20 million. Well, you haven't reached that yet, what you think the new breakeven level would be – is it closer to a $25 million?

David Schramm

It is still mixed, Ted, and right now, as I just mentioned, I think it is in sight, and you know, 2009 is the year that we have said we are going to get profitable and we are still on track to do that.

Ted Kundtz – Needham & Co.

Okay, so we expect you to be profitable by the second half of 2009, hopefully. Is that correct?

David Schramm

I said in 2009, yes.

Ted Kundtz – Needham & Co.

Okay, but the revenue run rate associated with that, given your mix issues, the way you have your mix set up now with ultracaps kind of growing more rapidly, and the cost structure coming down in ultracaps, what do you think the number is? Is it something like in the area of $25 million; is that kind of the ballpark number?

David Schramm

You know Ted, at this point, the strategic pricing that we have got less; we are down to a handful of them, if you will. And as we get those taken care of, it gets us to profitability that much quicker. So it is a question of how good we can negotiate and get those contracts turned around.

Ted Kundtz – Needham & Co.

Got it. Okay, thanks a lot.

David Schramm

Surely.

Operator

And our next question comes from the site of Craig Irwin from Merriman Curhan Ford. Your line is now open.

Craig Irwin – Merriman Curhan Ford

Afternoon, gentlemen.

David Schramm

There you are, Craig.

Craig Irwin – Merriman Curhan Ford

Apologies, technical difficulties before. I wanted to ask a question about Lti; first of all, congratulations on that customer contract, looks like a pretty solid customer. I was hoping you might be able to give us a little color around the spread of the 1,000 units that they ordered, whether or not those have already been shipped and whether or not that is the customer that you started shipping in 2Q, and if you're still delivering on that in the fourth quarter.

David Schramm

Yes, that first bunch is already shipped. So, they have got those and there is more to follow.

Craig Irwin – Merriman Curhan Ford

And have you had follow-on orders out of them since then?

David Schramm

I believe we have. I don't have the details in front of me, but they are an ongoing customer.

Craig Irwin – Merriman Curhan Ford

Excellent. And then this moving over to your commentary around higher operating expenses and CapEx necessary for OEM qualification, can you talk to little bit about the timeline for qualification there, how long is the process and why would you be doing this now, I mean, is this something that would really allow you to recognize revenue in 2009, or is this something that would facilitate something more like 2010 design ends?

David Schramm

You know, Craig, you know my background, I spent quite a few years in the automobile industry, and to get ready to push the switch to go full volume, it takes over a year, and that is why we have been working on it and we continue to work on it. But one thing that happens is, as we go through these audits, the customers and the potential customers keep finding things they would like us to do a little bit differently, so what we are doing is working with the various customers to see if we can get all of their needs under one sheet of paper, if you will, and then to execute. The biggest thing that we have got to learn how to do is to help those customers who are really faced with these carbon emission issues. The European Union right now has a spec that says they have got 160 grams per kilometer, they want to drive that to 120 by 2015, and they want to start now. So, getting ready for that automotive volume is very, very critical, because my sense is, the European rules are just the start for the whole automobile industry worldwide, which says we are going to have to ramp up quicker, not later.

Craig Irwin – Merriman Curhan Ford

Do you think you might be able to quantify roughly what the expenses where in the quarter and just frame out sort of what it might look like for the next couple of quarters?

David Schramm

Yes, let me let Tim take a shot at that.

Tim Hart

Yes, it is kind of hard to put our arms completely around that, but it is probably around $2.5 million of expenses that we would have that can be tied to that infrastructure that we are putting in place.

Craig Irwin – Merriman Curhan Ford

And then, how does that break down CapEx versus operating expenses?

Tim Hart

Most of that would be operating, a lot of the CapEx is really the depreciation that is heading the financial statements, which is a non-cash item, but most of that is going to be operating expense and some of that would be depreciation, which the primary piece of that again is operating expense, not including that.

David Schramm

To give you an example there, Craig, be very impregnated ourselves in China with a manual process and one of a potential customers says, no, they wanted automated. And that is $1 million. But that was the price of entry to get that tick off that audit, and that was $1 million that I had anticipated. So, it is things like that and I think that is going to be the biggest one we are going to have on that list. But that is a good example of what they find in those audits.

Tim Hart

And as I said, this is Tim speaking, earlier, when I was elucidating that our operating loss was about $3.5 million, so you take this out of there and we are pretty close to that sacred goal of achieving profitability if you happen to strip that piece out.

Craig Irwin – Merriman Curhan Ford

Excellent. And if I can change subjects again, say a lot of news flow out of the hybrid bus market, a couple of fairly recent entrants seem to be gaining a little bit attraction and some long-time participants like GE are showing things that the technology centered to the media. I was wondering if you could maybe give us a little more color on the low level of activity you are seeing with your customers in the heavy hybrid market and whether or not you take this is still likely to be one of the more significant barely movers in the transportation market?

David Schramm

Yes, I think it will be, because I think the municipalities are going to have the government backing to get these carbon reductions faster. You know, we have an announced relationship with ISE here in Poway, California. We announced that we are with Vossloh Kiepe in Europe and they are delivering buses to the city of Milan. And we announced a relationship with Golden Dragon in China, and the Chinese market, we see an awful lot of activity right now. I expect – I believe Mike Sund has got the numbers, but the number of buses built in China is about equal to the rest of the world. So it is a huge market. And if you have been to China recently, the air pollution over there is something that has got to be addressed, and hybrid buses is just one of the many little building blocks, if you will. There is a quote I had a while back I shared with the employees and that is that no raindrop ever feel responsible for the flood. So every little bit of carbon emissions that can come out this might be that one that keeps them away from going over the top.

Craig Irwin – Merriman Curhan Ford

Great, congratulations on the continued progress.

David Schramm

Thanks, Craig.

Operator

And we will take our next question from the site of Richard Baxter from Ardour Capital. Your line is now open.

Richard Baxter – Ardour Capital

Thank you very much. I have got a question on some of the order visibility that you have with some of your customers. You had mentioned in some of the high tension market that you still haven't seen any slowdown there in anything, and if you could talk a little bit about sort of how far you see into those markets, everybody is a little different and a lot of them have long lead time, so I was just curious what you are seeing there.

David Schramm

Yes, Richard. Typically, the customer there is an ABB or Siemens, it would be a very large engineering house that is doing the power plant project and you know the only slowing that they see, if you will, is just general infrastructure building that comes out of China and Russia and India. But at this point, we don't see a massive impact on us.

Richard Baxter – Ardour Capital

Okay, thank you. And what kind of visibility do you see into the automotive with the buses or anything else? I mean, like how long lead times you get on some of those?

David Schramm

I daresay you are looking at a year, just because of design cycles, and that is probably at a minimum.

Richard Baxter – Ardour Capital

Okay, great. Thank you very much.

Mike Sund

We have time I believe for one more question, Megan.

Operator

Okay, and our last question comes from the site of Stephen Sanders from Stephens Inc. Your line is now open.

Stephen Sanders – Stephens Inc.

Good afternoon.

David Schramm

Hi, Stephen.

Stephen Sanders – Stephens Inc.

David, maybe another question on the ultracap gross margin, you have got several initiatives outlined to lower cost there over the next couple of quarters. If you were at a comparable revenue run rate and you had executed on all those initiatives, would that get the ultracap business to positive gross margin?

David Schramm

Yes, it should. Yes, I think we have got enough initiative, Steve, we can see the path, it is not smoke and mirrors, we know what we have to do and now we're just on that road of execute and every day is one day closer. You know, the growing profitable revenue has really been a charge that we have been on, and again, six quarters in a row and the goal of course is to be able to 7, 8, 9, and on. But that is the key to this business. You have got all this up front that has to go in to make sure you have got the systems right, because you can't deliver perfect quality exactly on time to the customer, he won't come back. So we have got to get those systems in place, and those require that cost now, the volume is not that far behind and then we're going to match that cost and revenue and then the revenue is going to outstrip the cost and then we will be right where we want to be.

Stephen Sanders – Stephens Inc.

Okay, and based on what you are seeing in your auto relationships, where do you think your initial traction will be there?

David Schramm

Well, it is in Europe. I mean, that has been our focus. Again, it is working with the Valeo, the Continental, the AFL from the Alcoa Group; that is where it is, that with the big Tier 1s. So we go in the top of the car manufacturers so that they get exposed to the technology, and then we work with the Tier 1s as to how they get integrated into the vehicles. And again, we are seeing a lot of activity because of these European government standards for start/stop systems. You know, a start/stop makes your car operate very similar to a golf cart, that as you come to a stop at the stop light, it will basically turn the engine off so you don't have any carbon emissions, and then start right back up. And the ultracap is a great source for storing that energy, because of the cyclability.

Stephen Sanders – Stephens Inc.

Okay, and then Tim, I think, and maybe I didn't hear this correctly, but I think you implied that CapEx in 2009 would be down significantly, is that correct?

Tim Hart

That is correct. We are expecting it would probably be down 50% from what it was in 2008.

Stephen Sanders – Stephens Inc.

Okay, and then your answer on the auto-related expenses, did you say that that was about $2.5 million a quarter?

Tim Hart

Yes.

Stephen Sanders – Stephens Inc.

Okay, and what does that look like going into 2009, are those expenses permanent?

Tim Hart

Some are permanent, some aren’t, I mean, certain equipment is totally depreciated, it would disappear, but we don't expect that to decrease because we are aggressively going after that market.

Stephen Sanders – Stephens Inc.

Okay, thanks very much.

Mike Sund

Thank you very much everybody for participating. Megan?

Operator

I'm sorry, I did not mean to interrupt you. I was just going to turn the call back over to you, sir.

Mike Sund

Go ahead.

Operator

That was the end of today's Q&A session. I would now like to turn the call back over to Mr. Mike Sund.

Mike Sund

Thank you again for participating, and stay tuned as we make our way through Q4 here. Thanks again. Bye.

Operator

This concludes today's teleconference. You may disconnect at any time. Thank you and have a good day.

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Source: Maxwell Technologies Inc. Q3 2008 Earnings Call Transcript
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