John Penver – Chief Financial Officer
Jim Clishem – Chief Executive officer and President
[Sean Lockman] – Ardour Capital Investments
Stuart Bush – RBC Capital Markets
Active Power Inc. (ACPW) Q2 2009 Earnings Call July 24, 2009 11:00 AM ET
Good day everyone. Welcome to Active Power's second quarter 2009 earnings conference call, with your host, John Penver, Chief financial Officer and Jim Clishem, President and CEO. (Operator Instructions). I would now like to turn the call over to Mr. Penver. Please go ahead, sir.
Good morning everyone, and welcome to Active Power's second quarter 2009 conference call. I'm John Penver, the Chief Financial Officer for Active Power. We issued a press release this morning announcing our second quarter 2009 results. If you don't have a copy of this release it can be found on our website at www.activepower.com.
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 any of your questions in the Q&A section of the call.
Before we begin, let me remind everybody that any forward-looking statements that 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 those expectations include, but are not limited to, an inability to accurately predict revenue and budget for expenses for future periods, fluctuations in revenue and operating results, dependence on our relationship with Caterpillar, an 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 forth in our most recent SEC filings. Jim?
Thanks, John. I'll first detail some of the business highlights from the quarter and our current outlook for the second half of 2009, and then after I conclude John will detail our financial results. Revenues for the quarter were $6.6 million, a 2% decrease from the same period last year. For the first half of 2009, revenue was $17.8 million, a 24% increase compared to the same period in 2008.
Gross margin this quarter was 22%. This compares to 14% recorded in the second quarter of 2008, and 29% achieved in the first quarter of 2009 on higher product volumes. For the quarter, net loss was $3.5 million, or $0.06 per share. This compares to a net loss of $4.4 million or $0.07 per share in the second quarter of 2008, and a loss of $2.4 million or $0.04 a share in the prior quarter. This amounted to a 22% reduction in quarterly net loss compared to the prior year.
Cash and investments increased by $1.2 million during the quarter due to the completion of a $3 million private offering of securities during the period. This compares to a decrease in cash and investments of $3.2 million in the second quarter of 2008, and a decrease of $0.7 million in the first quarter of 2009. Cash and investments as of June 30, 2009, were $11.7 million.
We shipped 55 flywheels to 20 countries this quarter. Our Americas revenues were 77% and international were 23%. Service and spares revenues were $1.4 million for the quarter, an increase of 19% compared to the second quarter of 2008.
We believe our second quarter results came in under guidance do to a slowdown in customer capital spending. As we indicated in our pre-earnings guidance release on July 10th, a number of orders we anticipated closing and shipping during the second quarter have been deferred to later in the year. This was particularly true in our European markets.
This is the first quarter that effects of this global economic environment have specifically been reflected in our results. However, we do see some very encouraging trends for the business overall. I'd like to highlight some of these trends now and take a look at the business ahead.
So even in a challenging sales environment, our sales pipeline continues to grow quarter-over-quarter and is in fact at its highest level in the last two-year period. Actual orders received during the second quarter more than doubled from the level of orders received in the first quarter of 2009.
Our value proposition of efficient, reliable and green resonates now more than ever as clients strive for ways to improve efficiency in their operations without sacrificing reliability, all while reaping economic benefits. The data center market, which is our primary vertical market, remains strong and growing. The health care, education and government markets are also strong vertical markets for us at this time.
The pipeline of sales opportunities and quotes for our containerized continuous parts system known as PowerHouse is growing, and we are very encouraged about the prospects for this product in the marketplace.
We will expand on the success of this innovative solution, having already deployed more than 20 megawatts on the PowerHouse platform globally. The solution is timely, compelling and a technology for a variety of applications, including facility infrastructure expansion, disaster recovery, temporary and critical power needs and event support.
Our relationships with Hewlett-Packard and Sun Microsystems to co-market containerized data center infrastructure continue to show promise with increased proposal and quoting activity as we are investing aggressively in these co-marketing efforts.
As an example, in June, we took our PowerHouse demo on the road to Las Vegas showing – showcasing rather, our containerized system at the HP Technology Forum and Expo alongside the HP POD. We conducted tours of our demo to more than 300 IT professionals from around the world.
In early May, we held a joint webinar with Hewlett-Packard focused on data center and power cooling infrastructure containerization. Speaking to nearly 100 IT and data center professionals, we discussed how PowerHouse and the HP POD can help data center managers rapidly expand capacity in support of critical IT and business operations, while reducing capital and operating expenses as compared to traditional approaches.
And in February, we published a joint white paper with Sun Microsystems describing how PowerHouse and the Sun Modular Datacenter can increase speed of deployment while reducing expansion and incremental operating costs by as much as 50%.
Overall, we are pleased to see not only an increase in deal flow, but we have already received orders from our newly developed containerized data center partners for product delivery later this year. Positive engagement with these partners is consistent with our strategic initiatives to build and deepen our distribution channels.
In turn this will enhance Active Power's market penetration and expand our revenues in critical power system deliveries. Based on how these partnerships have developed, PowerHouse has the potential to meaningfully increase revenues levels across all of our major markets over the next several years.
It's also worth noting PowerHouse received silver in Consulting Specifying Engineer Magazine 2009 Product of the Year awards program. We were extremely pleased with this recognition since winners are selected by the magazine's readers, made up mostly of consulting and specifying engineers from across the globe.
Also consistent with our strategic initiative to improve our financial results, we remain diligent in our efforts to reduce product cost and operating expenses, critical elements of our ongoing commercialization strategy. We remain committed to various engineering efforts to reduce our development and manufacturing cost, while at the same time enhancing system power density, paralleling capability and serviceability for the benefit of our customers.
As I mentioned during our call last quarter, gross margin improvements are attributable to the efforts we have had in place to design cost out of our product, reduce cost in our manufacturing operation, and reduce supply chain costs through higher sales volumes.
We've had quite a bit of interest recently from our shareholders about what efforts we have in place to leverage potential stimulus funding opportunities from the Department of Energy, state governments and other sources via the American Recovery and Reinvestment Act.
To tackle this, we've put an internal team in place that is proactively monitoring grant opportunities, and has already kicked off an aggressive outreach campaign. We've been meeting with political influencers to improve Active Power's profile for potential funding opportunities. Most recently, we submitted a research and development proposal for a grant sponsored by the DOE Energy Efficiency and Renewable Energy program.
Our proposed development program will develop a next generation flywheel-based UPS system that would further our power density, electrical efficiency and reliability as compared to conventional UPS technologies, all at a lower cost. This has the potential to significantly increase market share for Active Power by giving us a more cost effective and compelling product.
In summary, we expect to see a continuation of lengthened sales cycles in the customer approval process, resulting in uncertainty around timing of orders. This will limit our revenue visibility in future periods. We also believe customers will continue to remain cautious with capital spending, but we see the situation improving in the second half of the year.
We believe the advantages of our UPS products and our PowerHouse continuous parts solutions will be recognized for their ability to impact the customer's bottom line. This will allow Active Power to continue to gain market share even if the down economy persists.
Looking forward, it is encouraging to see an increase in client proposals and sales quoting activity on many fronts, which indicates that Active Power will be in an even stronger position as credit markets ease and capital spending begins to improve.
Despite external economic forces, we remain focused on increasing sales and margins through our execution strategy of preserving cash, building brand, bundling compelling power solutions and improving our overall internal efficiencies towards the operating profitability.
I want to express our appreciation for the support of our customers, partners, shareholders, and our employees as we prudently work to move the business forward.
John will now discuss financial details from the second quarter and provide a brief overview from our near term outlook. We will then move to a Q&A portion of the call. John?
Thank you, Jim. Okay, let's talk about Q2 results. Our revenue for the second quarter was $6.6 million. This was a decrease of 2% compared to the second quarter of 2008. For the six-month period ended June 30, 2009, our revenue of $17.8 million was 24% higher than the first half of 2008, when we had $14.3 million in revenue.
Our flywheel-based UPS products again contributed the majority of our revenues this quarter and represented 60% of the total revenue. This compares to 75% of the revenue in the second quarter of 2008, and 85% of revenue in the first quarter of 2009.
This quarter, we did have more ancillary revenues. By that, that is revenue from the sale of third party equipment such as generators and switch gear that we repackage and sell to our customers along with our UPS products.
We have seen how little of ancillary revenue fluctuates significantly on a quarterly basis as it's tied to specific customer orders. It fluctuated from $2 million in the fourth quarter of 2008 to $150,000 in the first quarter of 2009 and back up to $800,000 in the second quarter of 2009.
We also had a higher proportion of service and contract revenue this quarter compared to the prior year. In fact, our service revenue was 23% higher in 2009 than the second quarter of 2008. Although at $1.2 million, this was flat with below in the first quarter.
Due to our lower revenue compared to the first quarter, service revenues represent approximately 80% of total revenue. During the quarter we shipped 55 flywheels at an average selling price of $72,000 per flywheel. This was a decrease of 54% in real volume compared to the first quarter of 2009, and a decrease of 11% compared to the second quarter of 2008. This reflected lower number of total transactions we experienced during this period.
Our average selling price was also negatively impacted by the specific sale of three 1200KVA UPS products to Caterpillar as we phased out this product.
Our business results were also impacted by the performance of our OEM partner, Caterpillar, where our total revenues from Caterpillar declined by 25%, compared to the second quarter of 2008. For the six-month period of 2009, our total revenues from Caterpillar have actually increased by 9% compared to 2008. But this compares to a 37% increase in our direct sales in this period compared to 2008.
In looking at the geographic mix, the Americas represent the majority of our revenues and were 77% of our revenue in the second quarter. Our total North American sales were down 1% compared to the second quarter of 2008.
Our sales from EMEA, which for us we define as Europe, the Middle East and Africa, were down 11% compared to the second quarter of 2008, and our sales from Asia were 3% higher than in the second quarter of 2008.
On a six-month year-to-date basis, we have seen year-over-year growth of 38% in North America, 65% growth in Asia and a decline of 28% in our EMEA business, highlighting the difficulties we have had in the EMEA market.
Overall, our international revenues this quarter were 23% of the total, compared to 24% in the first quarter and this was the same as the second quarter of 2008. Our future quarterly results from international sales will fluctuate depending upon the timing and the size of the orders received and have been more unpredictable and dependent upon our success in winning larger projects.
During the second quarter, the proportion of total revenue sold through our direct channels was 61%. This compared to 57% in the first quarter of 2009 and 50% in the second quarter of 2008. So our revenues from Caterpillar represented 38% of our total revenue this quarter, compared to 43% in the first quarter of 2009.
The higher percentage of service revenue and higher margins on our ancillary revenues helped improve our gross margin to 22% this quarter, compared to 14% the second quarter of 2008 and to 29% in the first quarter of 2009. The decrease compared to the prior quarter can be attributed to our lower sales volume.
The lower number of wheels sold compared to the prior year and the prior quarter did not have as much as a negative impact on gross margin as one might ordinarily expect though, as our production levels in the quarter were much higher than our sales volume, which was reflected in our increased inventory at the end of June. So our overall utilization of our manufacturing facility was comparable to the first quarter.
We have been able to lower our overall manufacturing costs through our cost management activities as demand has decreased. But it is possible that we will show higher revenues in the next quarter and not as much of an increase in gross profit as we will be scaling back production to use the finished goods inventory. And therefore will have lower production levels, which will result in higher, unabsorbed overhead costs next quarter.
Our research and development expenses for the quarter were $1.1 million, the same as the first quarter of '09 and 19% lower than the second quarter of 2008, and this is mainly due to lower headcount. Our selling and marketing expenses of $2.7 million were 20% lower than our first quarter of 2009 and were 13% lower than the second quarter of 2008. This decrease reflects lower variable compensation costs and lower marketing spending, recognizing that our seasonal marketing spend is typically higher in the first calendar quarter than other periods.
Our general and administrative expenses for the quarter at $1.2 million were the same as the first quarter, pardon me, were 1% lower than the second quarter of 2008. Our reported GAAP net loss for the quarter was $3.5 million or $0.06 a share. This was a 22% improvement from the $4.4 million net loss or $0.07 a share that we recorded in the second quarter of 2008.
On a non-GAAP basis, adjusted EBITDA, which is our net loss excluding depreciation, stock-based compensation and any other one-time non-cash charges, was a loss of $2.6 million or $0.04 per share in the second quarter. This result compares to an adjusted EBITDA loss of $3.6 million or $0.06 a share in the second quarter of 2008 and an EBITDA loss, adjusted EBITDA loss of $1.6 million or $0.03 a share in the first quarter of 2009.
Our cash and investments increased during the quarter by $1.2 million, this net increase was due to the $3 million in proceeds we had from the completion of the sale of securities during the second quarter. Absent this our cash investments group decreased by $1.8 million in the quarter, which compares favorably to the $3.2 million decrease in cash investments we had in the second quarter of 2008.
The majority of the use in cash and investment can be attributed to higher inventory of $1.3 million as we had manufactured production in anticipation of delivery of orders, some of which were delayed beyond the quarter.
We also had a proportionally higher level of receivables relative to our revenue levels due to slow payment patterns from some our larger U.S. customers, all of which have since been resolved, and from an increase in foreign receivables in advance of some new orders for Q3.
Monitoring and controlling our working capital continues to be a management priority to help us manage the growth and expansion of our operation. We have witnessed some customer payment delays but overall we have tried to work with our customers to make more deposits and periodic payments against orders to improve to our cash flows and to reduce the investment we otherwise would be making in our working capital.
We've also scaled back our production levels to better align with our order flows and expect to see our inventory levels decrease again over the next several quarters. Based on our current plans for 2009 and the experience we have had with managing our cash, particularly over the last 12 months, pardon me, we believe we have adequate cash and investments on hand to continue funding our business through at least mid-2010.
As long as our current business expectations for 2009 are realized, we have more than enough cash resources along with our bank credit facility to operate our business. Our cash and investments on hand at the end of June were $11.7 million.
Our capital expenditures were not significant during the quarter. We anticipate a moderate level of capital expenses in the second half of 2009 as we build some PowerHouse demonstration units to support our sales and marketing efforts in the United States and EMEA. But otherwise, we do not anticipate any major capital expenditures.
There was a decrease in accounts receivable since the prior quarter, reflecting lower quarter end sales and a decrease in revenue from the first quarter. We did have a decrease in accrued expenses since year end and were able to increase our deferred revenues this quarter again reflecting normal project payment patterns and deposits.
So let me turn to our third quarter outlook. Based on the orders we've closed or expect to close shortly, we anticipate our third quarter revenues to be between $7 million and $10 million. We provide this range because our recent history of order timing shows there is a risk transactions could slip into later quarters.
We haven't seen a substantial increase in orders during Q2 compared to Q1 and this pattern has continued into the beginning of our third quarter. Based on the projected sales mix through expected orders, we would expect a gross profit margin between 20% and 26%. And at our current operating levels, this would be an EBITDA loss between $0.02 and $0.04 per share and a GAAP net loss between $0.04 and $0.06 per share.
Achievement of these results will depend upon the realization of expected orders and the product and channel mix we anticipate. Operating expenses excluding variable selling expenses should be fairly consistent, with the results recorded during the second quarter.
Our cash requirements will therefore likely be driven by our working capital management. At this point we anticipate our cash balances will decrease by up to $1 million absent any major changes in working capital. We will continue to try to use our banking facility and manage our customer and vendor cash flows to mitigate cash consumption.
With regard to the listing of our stocks, NASDAQ announced in July an expiration of the temporary suspension of the $1 minimum bid price rule that's required for continued listing of the stock on the NASDAQ market, with effect from August 3, 2009. The impact of this change for Active Power is this now moves the time required for us to regain compliance with the bid rule to December the 2nd, 2009.
We also recently retained an external investment relations firm for the first time to help us increase the marketing and promotion of Active Power and to help us reach a broader section of the investment community. We do appreciate your continued support of Active Power.
At this time Jim and I will now be glad to answer questions that you may have.
Thank you. (Operator Instructions). Our first question comes from Walter Nasdeo – Ardour Capital.
[Sean Lockman] – Ardour Capital
Hi, guys this is [Sean Lockman] for Walter. I was wondering if you could just give us a little bit more color in terms of what you're seeing and maybe in the second half of the year here as far as maybe credit loosening up or customer orders starting to pick up for you guys, just what you're seeing from your customers?
I'll start off there. We're definitely not in the glamorous or flamboyant market that we might have seen a year ago, but we've definitely seen some improvements in credit. Some of our larger customers, particularly in the co-location arena, we've seen throughout the last 12 months a lot of continued interest in our products and our technology.
But people were hampered in their ability to go ahead with ordering, either through credit or through just general uncertainty about where the economy was going. And that was manifested in a longer sales cycle so people were still inquiring, people were still coming in, people were still interested in what we're doing.
Now what we're seeing is as that they're getting a little more confidence in the future of how the economy's going to turn out that they're starting to progress further on, get the approvals, and so we are seeing an increase in our order flow. We're certainly seeing that, the [base market] ahead of the EMEA market, and we still have a lot of significant opportunities that we're developing that, in the past, would have already closed. Jim, you might have a few other comments?
Well, I don't know if I really have much more than that but there is a pent up demand that's sort of been building as people in the past have been fairly cautious. And the other, sort of anecdotal comment, that's important to realize is that a lot of our normal approval processes with our clients, we're seeing decisions getting bounced up from facilities managers to higher level CIO, CFO, CXX sort of approval process. And I think that's the wild card, for me, that prudence that's going to continue even despite the capital markets freeing up capital.
So we're going to take a very conservative approach to that. The good news is we've not seen any cancelled orders for Active Power. And you saw, even in our inventory levels, it looks like buildup with orders that we've received but we were not able to ship during the quarter, and others that we anticipated to receive during the quarter that got stuck in the approval process. So hopefully that gave you a little more color on what we're seeing.
[Sean Lockman] – Ardour Capital
Thank you. One other quick question is we look at sort of your – the price for your flywheels at $72,000, I believe it was $80,000 in 1Q, are you seeing any sort of – or getting any sort of visibility in terms of how that price might be rebounding soon? Or can you shed some light on what you're just seeing in terms of pricing?
The total average did come in at $72,000. That was negatively impacted by one particular large transaction. We had two different product platforms and we chose to phase out one of those product platforms, our 1200KVA platform. And so as we were phasing out that product we had one last order that went to Caterpillar, for a customer on the West Coast, a government customer. And if you excluded the effect of that transaction, our average selling price would have been closer to the $80,000 benchmark that we typically would see.
So it was kind of an aberration this period. We've actually seen our pricing hold up very well with the business that we've had, it's just that the number of transactions that we've closed has been lower. So we haven't seen the slowdown causing a degradation of pricing generally.
And John, this is Jim, just to add to that in our pipeline, both for the current quarter we're in and even two or three quarters out, we're seeing that ASP average selling price maintaining at that $80,000 or above. So I do think this was an aberration of us getting rid of some old inventory of a product platform that we announced over a year ago that we were going to phase out.
Our next question is from Stuart Bush – RBC Capital Markets.
Stuart Bush – RBC Capital Markets
I'm trying to get some clarity on your confidence level in the guidance range. We saw some delayed orders this quarter, but capital spending has been under pressure for a couple of quarters so you guys just – I guess it just started to impact you now. And I'm trying to understand, at the low end of your guidance range, how much of that have you talked to customers and already have, feel confident that it's already secured in your backlog?
The low end of our range, I'm extremely confident with. In fact we've added some additional conservative estimates on that range for the possibility – and we know nothing today – but just to be double sure that if there were any cancellations and we know of nothing – I just want to be clear – I don't know of any and none of our guys do, of any possible cancellations. But during the period, if anything were to occur, we wanted to make sure that low guidance still looked strong. So we feel very confident in that lower end of the range that we've given as our guidance for the Q3.
And I think the other dynamic that's at work here is there's some real economies of scale for our company as we build backlog. And so I think given this uncertainty, both in order confirmations and delays in getting approvals and so forth that we will continue to take the stance over the next few quarters of erring more on the side of building backlog than being speculative. And that will actually give us more and better economies of scale within our factory as we build that backlog for future deliveries, if that makes sense.
And I think we're going to take that stance here over the next couple of quarters until we get confirmation that things really have eased up as they are beginning to look like they are, but to answer to your question, long response, is that the bottom of the guidance we feel very confident in and hope that we'll see something even stronger than that as the results come out for Q3.
Stuart Bush – RBC Capital Markets
Okay, I was hoping you could give additional color on the dynamics going on in the data center market. You guys had a big order from Internet Search Customer. Do you have active RFP's out with them for follow on orders there or do you have anything already booked into backlog? What's the color there?
Yes, we do. We have quite a bit of that particular client of incremental business that we believe will come to Active Power for the remainder of this year, and there's several locations, which I can't disclose, with that particular customer that we're already heavily engaged with.
The other area that you're going to see some additional growth, and I mentioned it in my comments here this morning, is the PowerHouse is really taking off to a large degree and it's our incremental sales distribution partners, Sun and HP in particular, where that's resonating a great deal. And don't forget that the business model, the traditional way that you guys build your models with the UPS only, is you start mixing in the PowerHouse, you get an amplification of revenues from that. So a dollar of UPS can be as much as $3.00 to $5.00 in total solutions sales cost.
So this is where we made a conscious effort to move by increasing distribution channels but also through our solution selling and the incremental sales expense to Active Power is extremely attractive by going through these distribution partners and, as I mentioned, we've already received some orders that will be delivered this year through those partners and I expect that's going to continue throughout this year and into next.
So as you think about your model, Stuart, and you can talk to John in more detail maybe after this call, you might want to think about not all revenue dollars are certainly created equal. And when we quote opportunities here you're going to see larger – there'll be a propensity for the ASP to want to go up higher because of the bundling effect.
The service revenues will begin and continue as they have been for over two years now. The service revenues will accelerate further as well and the margins on those will improve through the bundling and convenience factor of the PowerHouse solution. So we can probably talk with you maybe a little more in detail off line about how to think about your model on a going forward basis.
(Operator Instructions). It appears we have no other questions in queue at this time.
Okay. Well thank you all very much for attending the call this morning and join us for our – and your continued interest in Active Power. We'll speak to you again next quarter. Thanks so much.
That concludes today's conference. Thank you for your participation. You may now disconnect.
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