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Maxwell Technologies Inc. (NASDAQ:MXWL)

Q3 2009 Earnings Call

November 3, 2009 5:00 pm ET

Executives

Mike Sund - VP of IR

David Schramm - President and CEO

Kevin Royal - CFO

Analysts

Steve Sanders - Stephens Incorporated

Jesse Pichel - Piper Jaffray

Walter Nasdeo - Ardour Capital

Ted Kundtz - Needham & Company

Mark Tobin - Roth Capital

Dilip Warrier - Thomas Weisel

Ralph Fong - Robert W. Baird

Operator

Good day, ladies and gentlemen. All sites are now online in a listen-only mode. I'll now turn the program over to our moderator for today Mike Sund, the Vice President of Investor Relations. Please go ahead, sir.

Mike Sund

Good afternoon. In a few moments, you'll hear from David Schramm, Maxwell’s President and CEO; and Kevin Royal, 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 our current expectations and assumptions, which are subject to numerous risks and uncertainties. Actual results may differ materially because of factors such as Maxwell’s history of losses, reduced credit availability, demand for original equipment manufacturers’ products reaching anticipated levels, general economic conditions in the markets served by our products, cost-effective manufacturing, and the success of outsourced assembly, 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 the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections of our SEC filings, including our most recent Form 10-Q and our Annual Report on Form 10-K.

Electronic copies of these filings may be accessed by visiting the Investors section of our website and hard copies may be obtained by contacting the company by mail, 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, 2009. We undertake no duty to update our forward-looking statements to conform the statements to actual results or changes in the company’s expectations.

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

David Schramm

Thank you, Mike, and good afternoon to everybody. We are pleased to report that Maxwell recorded total revenue of $26.1 million for the third quarter ended September 30, that’s up 22% from the $21.7 million reported in the same period a year ago.

Ultracapacitor sales continued to be strong, posting a 38% gain over Q3 ’08. Our more mature microelectronics and high voltage capacitor product lines also were strong with double digit sales growth over last year’s third quarter. That volume increase, along with margin expansion driven by multiple ongoing ultracapacitor cost reduction initiatives enabled us to generate positive cash flow from operations for the second consecutive quarter. Kevin will walk you through the P&L in more detail in a couple of minutes.

Although many other industries continue to struggle and tight credit is delaying or canceling many commercial projects, the primary markets for Maxwell’s products, including public transportation, renewable energy, electric utility, infrastructure, and aerospace continue to be stable and consumer our products. And many applications for our products are getting a boost from U.S. and foreign government in stimulus programs and tougher regulations focusing on reducing CO2 emissions and promoting energy efficiency.

Q3 BOOSTCAP ultracapacitor revenue came in at $10.5 million, 38% higher than the $7.6 million recorded in last year’s second quarter. As many of you’ll recall, we received purchase orders with a total value of about $13.5 million in April from three of China’s largest bus producers for ultracapacitor modules to support recuperative braking systems for about 850 low emission diesel-electric hybrid transit buses.

As we discussed on the last call, industry estimates with a total number of transit buses currently in operation in China at more than 0.5 million. Assuming a 10 year life for those buses, maintaining the current transit buses fleet, China alone would require production of more than 50,000 buses a year. Assuming that 20% of those replacement buses will be hybrids, China will be producing 10,000 or more new hybrid buses every year. Ultracapacitor content in energy storage systems for hybrid buses averages about $15,000 per bus, so the market opportunity in China is very substantial.

As discussed previously, the Chinese government has announced a program to place 1,000 hybrid buses in each of 13 of its largest cities to reduce air pollution. So the 850 buses for which we are currently supplying ultracapacitor modules would appear to be the first of tens of thousands of new hybrids to come. We're also working with many other hybrid transit bus, trolley, and electric rail OEMs in North America and Europe, and there are already more than 1,000 ultracapacitor equipped transit buses in daily operation worldwide, using Maxwell ultracapacitors.

Heavy transportation applications will continue to keep us very busy in 2010 and beyond. The Obama administration is advancing the former 2020 CAFE Fuel Economy Standards for U.S. automakers forward to 2016. And the European Union is holding firm on its aggressive carbon dioxide emission reduction mandate, which is accelerating the timetable for hybridization of automobiles.

The European Union CO2 emission reduction legislation requires that 65% of new cars produced in Europe emit no more than 130 grams of carbon dioxide per kilometer by 2012. Many cars currently emit from a 160 to 200 grams per kilometers, so European automakers already are beginning to introduce more fuel efficient reduced emission micro and mild hybrid vehicles.

Many feature stop-start systems that turn off the internal combustion engine as the car slows and restarts the engine when the driver touches the accelerator. This repetitive cycling is hard on batteries, so several automakers and the Tier 1 suppliers who develop these systems for them are designing ultracapacitors into next generation models.

As evidenced by our recent supply agreement announced with Continental AG, a few thousand of these new models using Maxwell BOOSTCAP ultracapacitors are scheduled to move into production next year. More than 60 million new cars are produced annually around the world in a normal year. So automotive applications such as stop-start, braking energy recuperation, electrical system stabilization, and engine starting represent very large opportunities for ultracapacitor products.

In the energy storage world, ultracapacitors can be characterized as sprinters, capable of fully charging or discharging in seconds, applying this analogy to batteries, they are like marathon runners with 10 to 20 times ultracapacitor storage capacity with far slower charge and discharge rates. This makes ultracapacitors ideal for absorbing regenerative braking energy as each braking event lasts only a few seconds. In addition, ultracapacitors turnaround the efficiency, that is how much of energy put in comes back out, is above 95%, whereas many batteries are around 80% or lower.

Ultracapacitors also operate reliably and safely in extreme temperatures. Batteries' ability to charge and discharge drops off severely in freezing temperatures, and high temperatures dramatically shorten battery lifetime. And in normal use, ultracapacitors can survive a million plus charge/discharge cycles, whereas battery lifetime is measured in thousands of cycles. The bottom line, ultracapacitors can provide a standalone energy storage solution in partially electric, micro and mild hybrid systems, and can complement any batteries, not just lithium ion, in full electric or plug-in hybrid vehicles.

Back to the present, financing issues have delayed some wind energy projects, but we have added several new wind energy customers over the past couple of years. So, sales for wind turbine blade pitch systems are still running ahead of last year's levels. It is clear over the long-term wind energy has a favorable return on investment versus other renewable generation sources. So we expect wind to be a key driver in ultracapacitor sales going forward.

As indicated by our PC-10 small cell product announcement a couple of weeks ago, BOOSTCAP products have also been designed into a variety of backup power, wireless communication and other industrial applications. You'll be hearing more about power failure protection for solid state drives that are used in enterprise storage applications. In this case, the PC-10's prismatic form factor and small size allow it to be integrated into the drive itself. So that in case of a power failure there is an independent power source to allow for an orderly shutdown without any data loss.

In a few minutes, I will discuss recent developments with our other two product lines and comment on prospects for the balance of the year, but first our Chief Financial Officer, Kevin Royal will provide some additional detail on Q3 financial results. Kevin?

Kevin Royal

Thank you, David. I'm going to spend a few minutes providing some additional analysis on certain areas of our third quarter 2009 financial results. Our revenues were $26.1 million for the third quarter of 2009, up 5% from Q2 2009. This increase was driven by an increase in microelectronics revenue with continued strong sales of our ultracapacitor product line.

Our reported gross profit as a percentage of revenue for the third quarter of 2009 was 38%, compared to 36% in Q2 2009. In the current quarter, without the relatively small positive impact of foreign currency exchange rates, gross profit would still be at 38%. Without the positive impact of the change in exchange rates in Q2, our gross profit would have been 34%. The favorable foreign currency gain included in gross profit was $136,000 in the third quarter 2009 and $377,000 in the second quarter of 2009.

The increase in gross profit as a percentage of sales is a result of high margin microelectronics revenues in comparison to the previous quarter, and continuing cost reductions in our ultracapacitor product line. We continue to make improvements in the cost structure of our ultracapacitor products, which will further increase the profitability of these products in the future. These ongoing cost reductions include improvements in design, material costs, increased productivity, and lower labor costs due to outsourcing cell and module assemblies, as well as increases in ultracapacitor production volumes.

Now I'm going to discuss our net loss and the impact of certain non-cash and non-operating items on our reported loss. Most of these items are non-cash. We reported a net loss of $4.6 million for the third quarter of 2009. It’s important to note that there are a number of non-cash and other non-recurring items included in our statement of operations. The most significant items are the non-cash loss on embedded derivatives associated with our convertible debt and the non-cash compensation expense we recorded for stock-option compensation. The loss on embedded derivatives was $2.8 million in Q3, and $3.8 million in Q2 2009. Stock-based compensation was $899,000 in Q3, and $841,000 in Q2 2009.

There are two additional items I’d like to discuss, as these are not normally recurring items; first is executive severance of $482,000, which we incurred during the third quarter. The second item is $365,000 of expense associated with our ongoing review of commissions paid to an outside Chinese sales representative. Excluding the loss on embedded derivatives, stock-based compensation expense, executive severance and the expense associated with our ongoing review of commissions paid to an outside Chinese sales representative, the net loss would have been approximately $130,000 for Q3 compared with $543,000 for Q2, 2009.

Our earnings before interest expense, taxes, depreciation, and amortization or EBITDA for the third quarter decreased from $1.4 million in Q2 to $624,000 in Q3. Adjusting EBITDA to exclude severance cost and the internal review cost, EBITDA for the quarter would have been $1.5 million.

Now I'd like to turn to the balance sheet. We ended the quarter with cash and restricted cash of $38.2 million. This represents a decrease in cash of $1.3 million from Q2 2009. The significant components of our cash activity for the quarter include cash generated from operations of $141,000, capital spending of $1.6 million, and proceeds from our stock plans of $288,000.

There are two items that I’d like to address related to the company’s debt. First, our debt increased during the quarter as a result of the accounting for the embedded derivatives in our convertible debenture. While our balance sheet lists our debt as $20.6 million, the actual underlying amount that we owe is approximately $16.7 million.

In addition, subsequent to quarter end, the holder of our convertible debenture converted approximately $1.5 million of the debenture to the company’s common stock, reducing the amount we owe to approximately $15.2 million. Of the actual $15.2 million debt remaining, $9.7 million relates to the convertible debenture, and the remainder is short-term debt associated with our Switzerland entity.

Before I turn it back over to David, I wanted to make a brief comment about our internal review of payments made to our former independent sales agent in China. Our internal review is progressing but not yet complete and because our review remains in process, we have no results or conclusions to share at this time.

Now, I’ll turn it over to David to discuss other areas of the business.

David Schramm

Great. Thank you, Kevin. So far, I’ve talked mainly about ultracapacitors, so let’s spend a couple of minutes on Maxwell’s other products. Our high tension products consists mainly of grading and coupling capacitors. These large high voltage capacitors are used in the electric utility grid and other applications involving the transport, distribution, and measurement of high voltage electrical energy. Although their names are similar, ultracapacitors and high voltage capacitors are quite different and address entirely different markets.

Our high voltage capacitor customers are the large prime contractors who build power plants and electric utility infrastructure around the world. We estimate that our CONDIS high voltage products have more than a 60% share of a well-defined niche in grid installations. So, our sales are driven by global spending on electric utility infrastructure.

China and other developing countries that are increasing electrical energy generation and distribution to support industrialization and improving standards of living are major consumers of high tension products. So far this year, they are maintaining last year’s record run rate and making significant revenue and margin contributions. The so called smart grid is in the news a lot these days, and modernizing the U.S. grid is sure to be a major focus of stimulus spending and federal energy policy going forward.

We are closely monitoring these developments, but it isn’t clear how and when our business will benefit. Any such grid programs will have long lead times, so we don’t expect any dramatic near-term impact on the business.

Sales of our microelectronics products are running modestly ahead of last year. As we’ve noted earlier, our single board computers are designed in proposals for some large pending programs. So if one or more of those go our way, growth could accelerate over the next couple of years. Our customers are the large satellite and spacecraft OEMs in the U.S. and Europe. Thus our micro sales are a function of the number of satellite and spacecraft launches each year.

Product deliveries are program driven, so revenue tends to come in lumps that can vary quarter-to-quarter. Our goal is to increase the value of Maxwell content per launch, and our high value space computers are helping us to do that.

Looking forward as I stated in our press release today, we expect sequential sales growth and additional operating results improvements in the fourth quarter capping a year of very solid progress. Ultracapacitor sales are growing strongly in Q4 after the expected modest seasonal dip in from Q2 to Q3, as a result of the three week annual summer shutdown of our European customers and our Swiss operations.

As I said in the past couple of calls, my personal goal is for Maxwell to be profitable at the operating line by year end and we continue to believe that goal is well within reach. In addition to the significant ultracapacitor cost reductions already reflected in Q2 and Q3 results, the transition of our largest selling D cell ultracapacitor product to offshore assembly in China is progressing well. And yields in the new Lishen facility are coming up nicely.

We have committed to last time builds of the (inaudible) cells currently produced in Switzerland for a couple of customers. So the transition to all Chinese assembly would continue through early next year. Our engineering team continues to refine cell and module designs to further reduce cost and improve manufacturability and quality.

While we are nearing our goal of moving material sourcing, and virtually all ultracapacitor cell and module assembly to low cost countries, I want to emphasize that fabrication of our proprietary ultracapacitor electrode material remains under lock and key inside Maxwell and will not go offshore.

Higher volume, better efficiency, and lower material cost have allowed us to steadily improve gross margin and further improvement is in the works. Although much of the world economy continues to be sluggish, our primary markets have been stable and a number of macro factors continue to work in our favor.

Demand for greener, more efficient and reliable energy storage solutions is driving many new opportunities for ultracapacitors. Although the U.S. auto industry is weak, virtually all of Maxwell’s near-term automotive activity is with European automakers and Tier-1 suppliers. When and if the American car market picks up, that will be upside for us. Government spending and regulation in the U.S., Europe, and Asia are focusing on renewable energy generation as is wind energy and greener public transit in commercial and passenger vehicles.

We were in Washington DC last week further exploring governmental funding opportunities and have already submitted or working on several technology and product development funding proposals. Some of these are on our own and others are with battery and auto industry collaborators.

On the cautionary side, these programs could be a mixed blessing given the red tape that often comes with government contracts. Fortunately, with our recent capital raise and the product sales growth we are generating, we are in control of our financial destiny and have the luxury of being selective.

One area of particular interest is application of our proprietary dry electrode fabrication in lithium ion battery manufacturing. It is a green solvent free process that has shown potential to reduce cost, improve battery performance, and extend operating lifetime. This is driving new activities with battery makers and research entities in addition to our announced relationships with Johns Control-Saft in the U.S. and Lishen Battery in China.

Our work with Argonne and other national laboratories is validating the advantages of integrating ultracapacitors with batteries in hybrid energy storage solutions, and attracting wider interest among transportation industry Tier 1s and OEMs. These solutions take advantage of ultracapacitor's efficiency, rapid charge/discharge capabilities, low temperature performance, and long operating lifetime to extend battery life and enable battery patch to be smaller, lighter and less expensive.

In conclusion, we’re entering the home stretch of what has been a year of very solid progress for Maxwell. Sales growth in the face of challenging economic conditions, margin expansion that has allowed us to begin generating cash from operations, a strong balance sheet, and expanding opportunities everywhere we look. We see no reason why the growth rate established this year cannot be sustained and with the long awaited automotive applications coming into the picture, the longer term outlook for accelerating growth is truly exciting.

We’ll now entertain any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). It looks we’ll first go to the side of Steve Sanders from Stephens Incorporated. Please go ahead.

Steve Sanders - Stephens Incorporated

Just first a question on the China buses, just any incremental information since the last call in terms of timeline on the 1,000 buses in the 13 cities, or your market share, or visibility on other orders, just any additional color would be helpful?

David Schramm

Yes. What we’ve done there, Steve is the three bus companies we announced represents about 850 buses, and we believe that’s part of this 13,000, so we see an awful lot of upside yet. We are talking and knocking on doors of other bus manufacturers, and we find there is really a plethora of bus manufacturers in China. So we're getting ourselves introduced into many of them. We’ve got prototypes out for testing with other bus companies, and we expect a lot of follow-on orders to come out of this.

Steve Sanders - Stephens Incorporated

Okay. Okay. That’s helpful. And then this is something that I haven’t heard you talk about for a while, but I think one of the initiatives is to increase the cell voltage, good for you, good for your customers, is there anything new on that?

David Schramm

It’s a work in progress. The engineers in our R&D facility are working very hard on this, and everyday is one day closer to where we're very, very comfortable that we’re going to be able to do something there.

Steve Sanders - Stephens Incorporated

Okay. And then two more, I'll ask them together. First, Kevin, if you have a breakout of the micro and the high tension revenues that would be helpful? And then second, maybe a bigger picture question, you guys have obviously had a lot of success with the pitch systems in wind, as you think about incremental renewable opportunities, are there significant opportunities you're seeing with solar array, pitch systems, or some of the burst applications that could fit in to these large scale grid storage projects that we’re hearing a lot about, just anything incremental on kind of the grid storage or the renewable that you see as good opportunities in maybe '10 and '11?

Kevin Royal

Yes. Real quick, Steve, related to your question in breaking out the revenues between microelectronics and high tension, we don't do that historically on a quarterly basis, but on an annual basis we do provide that detail. And I’ll turn it over to David for the remainder of that question.

David Schramm

Yes, Steve, I forgot the gist of that; we’re pretty excited also about where we fit into this whole smart grid. We’ve been working with people that do smart meters for quite a few years and we see that opportunity growing relative to using ultracap in the grid with PV cells, we believe we offer a potential solution as to how they can do some of the smoothing that they've got to do.

So again, it’s a whole another opportunity for us as a customer. And I think what’s been very, very helpful is by having this growth in China for transit buses, and then having the announcement finally of working with Continental and going into production with an automotive, it’s really starting to help us legitimatize this technology as something that is viable in the commercial markets, and again I think the grid system might be the next major play for us.

Operator

Next we’ll go to the side of Jesse Pichel from Piper Jaffray. Please go ahead.

Jesse Pichel - Piper Jaffray

Just on housekeeping items, can you explain the SG&A, up $2 million sequentially, and what your outlook is for SG&A into 2010, I think, you explained about $850,000 of it, but is there stock comp in that as well?

Kevin Royal

Sure. Yes, in SG&A, there's a few items. There is a stock compensation of about $0.5 million, so it's something I didn’t talk about, but about $0.5 million of transaction loss included in there, which may or may not recur. There was some executive severance, which I did talk about of about $0.5 million, and then finally there is the cost associated with the internal review of Chinese commissions. So those are really the main components. When you curve out most of the one-time items in SG&A, what you would see is that we're relatively flat with the Q2 amounts of little over $0.5 million.

And I mentioned $0.5 million on stock comp that was actually for the quarter about $700,000 included in SG&A. And moving forward, we’ll continue to be in that range of $5 million to $5.5 million in the SG&A line, and part of that depends on the volume and the mix of products and the related commissions.

Jesse Pichel - Piper Jaffray

The wind business was a large percentage of the revenue in ‘08, and I'm wondering if that business, if you could characterize that business given the financing constraints and the transmission constraints around the industry, which I guess as far as the transmission constraints help your other business, but could you comment on what wind is as a percentage of the business?

Mike Sund

Hi, Jesse, it's Mike Sund. What we said as you recall wrapping up last year is that wind accounted for about half of our ultracapacitor last year, and then we said it’s up on an absolute basis this year, but it’s declining as a percent of total revenue, partly because transit bus applications are gaining so rapidly. So, you're right, I mean, everyone knows that financing constraints have slowed down some projects, but the good news is that we have more customers than we had a year ago. So, what we can say to you is that again wind revenue was up as on an absolute basis, but isn’t as dominant a single source of revenue before, not because it's shrinking, but because other things might be growing faster this year.

Jesse Pichel - Piper Jaffray

Understood. And my last question is, it seems like most of the U.S. stimulus funding for storage has been deployed, is that a correct assessment? And is Maxwell partnered with any of the direct beneficiaries of the stimulus funding, because I don’t see Maxwell on that list, and wondering if you could comment on why you weren’t on the list and what your outlook is to get some of that stimulus funding in partnerships with some of the recipients?

David Schramm

Jesse, we still have got quite a few proposals in for consideration. We were just there this last week, and we visited with several Congressmen’s offices. We visited with the DOE, so we have made some in roads there to try to get some help as to how do you get these through the system. The truth is there is more money left to be given out than has already been given out. And again, I'm trying to think it's more than 12 different proposals that we are in with various different battery companies, universities, and laboratories to get some research grant, to take this technology to the next level. So, we don’t think that game is over with yet, it’s just time for the next round.

Operator

Next we’ll go to the side of Walter Nasdeo from Ardour Capital. Please go ahead.

Walter Nasdeo - Ardour Capital

Hi. I guess, if I could just for my own clarification here, the Chinese bus market seems to be in most near term solid revenue producing market with a lot of upside, after that what would you kind of classify as your next near term area of focus with some of the stuff that you're working on?

David Schramm

Yes. It’s a good question. What I'd you Walter is the beauty of the Chinese bus contracts is they are using our standard componentry in a standard module configuration, so the engineering on the component level is very minimal. The module engineering is very minimal, so it’s really the applications of the customer. And you're exactly right, that’s going to grow we believe for several more years.

Right behind that is a start/stop system that we announced with Continental, and we see a lot of growth in that whole start/stop market itself. And again, the EU regulation comes into play in 2012. We have a moderate amount of business in 2010, and then it ramps up significantly in ‘11 and then full production will be in 2012. So that probably is the next major play that we see that’s got just huge volumes associated with it. And I don’t want to belittle the wind market. There was an article in the journal just this last week that the Chinese are going to put a big wind farm into Texas, and we are talking with every wind maker and every pitch control system maker, so we intend to get product into Texas one way or the other.

Walter Nasdeo - Ardour Capital

Okay. And then just briefly, if I can, you made the comment again about your goal of getting to breakeven at the operating line by the end of the year. It looks like, you lost about $1.7 million, the emphasis there is by increasing revenue dramatically and letting the kind of expenses flow or is there something in there that we can look to be hacked down dramatically below the revenue line to get to knockoff another $2 million or so?

David Schramm

Yeah, to quote Deion Sanders, we're going to do both. That is the revenue has got to go up and the expenses have to come down. And again, I’ve got to tell you the engineers at Maxwell have just done an outstanding job of driving cost out of our product and there is more to come.

We are very confident that we’re going to see the revenue growth to continue, and I’m very confident that the engineers are going to find me another dollar here, another dollar there to take out of the product cost. So we’re going to do both. So I think, we’re on track, and I think my personal goal is one we’re going to talk in about three months.

Operator

Next we’ll go to the side of Ted Kundtz from Needham & Company. Please go ahead.

Ted Kundtz - Needham & Company

David, a question for you, could you just clarify a little bit on the bus order, the 850 buses that you're scheduled, is that by the end of this year and how far are you through that contract?

David Schramm

We’re shipping everyday, Ted, and we’ll have that done by the end of the year. That’s all. That was $13.5 million of modules to be delivered in 2009, the one order from three customers.

Ted Kundtz - Needham & Company

Great. Could you say how much you are through that at the end of the quarter?

David Schramm

It will be done by the end of this quarter –

Ted Kundtz - Needham & Company

Well, I know that. Yes, I'm just wondering, how much is in the fourth quarter?

David Schramm

Ted, I can tell you that we are shipping on a daily basis, so it’s a matter of just getting that completed.

Ted Kundtz - Needham & Company

Okay. And when would you expect some follow-on business to be announced from them, do you have a sense of a time table?

David Schramm

Well, Ted, as you know, we spend more time getting press releases than we do getting purchases orders, and that’s always been an issue in this business. So as I get a customer to agree that we can do the press release, we’ll get that right out, but we are not letting any grass grow under our feet and pursuing more bus business, and I do expect more follow-on orders from the customers we currently have.

Ted Kundtz - Needham & Company

Can you give us any sense of how competitive that business is, that follow-on business, how many players are in there pitching to supply the ultracaps?

David Schramm

At this juncture, we haven’t seen a whole lot, but again as this business grows this is going to look pretty lucrative to a whole lot of people, so we would expect to have some competition, but I’ve got to tell you right now frankly, we just haven’t seen a lot.

Ted Kundtz - Needham & Company

Okay. That’s good. Just switching gears a little bit, yes, you mentioned the single board computer, potential large contracts there, they have been in the works for a while, I know, and we're hoping to see something I guess earlier in the year. Could you kind of update us a little bit on where those – I think, there was two orders that were potentially out there?

David Schramm

Yes, there was two, Ted. One has been stopped, that was a TSAT. TSAT was U.S. government and President Obama decided to pull that, so that program is dead. The other is the (inaudible) program out of Europe, and that one, it’s an ongoing program. They just haven’t made the final decision. And again, I agree with you, this is a test of patience as to how long you wait for the decision, but it’s going to be worth waiting for when the order finally shows up.

Ted Kundtz - Needham & Company

So you think that's alive and well at this point?

David Schramm

Well, we were hoping to announce that about a year ago. So it’s a month-by-month, and I would dare say that the people at microelectronics are working feverishly on this thing to do everything the customer wants, to make sure we get all the data they want to have, so that we can get this thing kicked-off and into production. I would hope we get something next year, but we just don’t know yet.

Ted Kundtz - Needham & Company

Right. Okay. Terrific. And just going back, Kevin, just back on the SG&A question for a minute, you mentioned the 5.5, 5, 5.5 target, is that excludes stock comp or is that everything but the one-time items you're talking about, stock comp should be in there, I guess?

Kevin Royal

No, the $5.5 million would exclude the stock comp.

Ted Kundtz - Needham & Company

Okay. Because the stock comp is kind of a quarterly expense as well?

Kevin Royal

Certainly it is, but on an operational basis just to give you an idea of what we are spending on the operational aspects right about $5.5 million. If you want to add the comp to that then you would add about $800,000, so then you're up around $6.3 million.

Ted Kundtz - Needham & Company

Per quarter?

Kevin Royal

Per quarter, yes.

Ted Kundtz - Needham & Company

Right, okay. And your stated goal of reaching the operating breakeven, was that including or excluding the stock comp?

Kevin Royal

That would be excluding the stock comp.

Operator

Next we'll go to the side of Mark Tobin from Roth Capital. Please go ahead.

Mark Tobin - Roth Capital

Hi. Good afternoon. Kind of along the same lines as the bus contract, the InterCon contract, the legacy one, what’s the status of that as far as timing of running through that contract and delivering on it?

David Schramm

Yes, that contract Mark if you remember, it’s designated in pieces, not in time. So we are shipping against that, and it’s hundreds of thousands of pieces, and that contract started around 3 million pieces. So right now, it looks like we'll have that purchase order totally filled sometime next year. At the same time, we're working with the customer on getting him transitioned to the new D cell.

Mark Tobin - Roth Capital

Okay. And as far as gross margins go, certainly it sounded like there was a higher mix of microelectronics during the quarter. Within ultracapacitors, can you give us an idea of the sequential improvement in gross margins, or some sort of metric that kind of gives us a feel for the magnitude of that improvement within the ultracap line?

Kevin Royal

Yes, so if you look at the gross profit overall, we went from 36 to 38%, and 1.2% of that increase was driven by improvement in our ultracapacitor product line. So that’s the overall gross profit.

Operator

Our next question comes from the side of the Dilip Warrier from Thomas Weisel. Please go ahead.

Dilip Warrier - Thomas Weisel

Good evening and congratulations on the Continental order. Mike has been very helpful in trying to understand what the implications for that contract are in 2010. I was just wondering in 2011 and beyond, if there was some sort of visibility that Continental is sharing with you or is there some sort of purchase order or something of that? And then, the second part of the question is, if this is an exclusive relationship?

Mike Sund

Dilip, it's Mike Sund. I'll try to comment on that. As we've said, we don’t have any. We're a couple steps removed from the end consumer of these, but the Tier 1 supplier has told us we need to prepare for an increase of up to 10x the volume of year one. And this is typical for the auto industry.

The automakers like to get a few thousand vehicles out just to get comfortable that everything is operating as planned, but as David talked about the urgency that the Europeans automakers feel to get themselves inside that 130 grams per kilometer is driving this. And so we have every reason to believe that there will be a very strong ramp in the second year after that kind of shake down year, which is next year.

David Schramm

If I can add to that we have seen information as to what the European Union is doing in order to enforce this, and what they’ve done is very aggressive and that is that the first gram you're over the 130, it's €5 per vehicle, after the fourth gram, it goes to €95 per vehicle. So if you want to put the current 160 gram CO2 per kilometer in the market today against that standard, roughly you’re looking at €3,000, and in today's exchange rate, that’s $4,500.

So they’ve got some real incentive to get that CO2 emission down. And start/stop right now from what we’ve been told is the easiest thing to do with today’s internal combustion engine.

Operator

Lastly, we’ll go to the side of Ralph Fong from Robert W. Baird. Please go ahead.

Ralph Fong - Robert W. Baird

Can you talk a little bit about your solid state drive application, how should we think about the market size and when would you expect revenue from that business?

Mike Sund

Ralph, it's Mike Sund. We are shipping into that application now, and we are working with some of our customers to bring this to an announceable state, so I would just say to you that you can expect more details on that in the fairly near future. We do think that this has the potential to produce very substantial sales next year in the millions of units, these are small units you understand, these are the PC-10s, so it’s a few dollars per cell. But it’s a very substantial opportunity next year, and it is contributing to revenue in the current quarter.

David Schramm

Ralph, one other thing to follow-up up on that. I'm going to be proud of the engineers here. They have figured out how to take our proprietary electrode and to put it into that package, so now we’ve got a smaller form factor with better performance and it obviously gives us more margin opportunity because we’re using our internally produced electrodes, that used to be a purchased electrode because again this product has been around here a while, and it was a purchased electrode. So now it’s got the real stuff in it.

Ralph Fong - Robert W. Baird

I see. Great. Thank you for taking my question.

David Schramm

Well, thank you very much everybody. It’s quarter to three here in California, so the rest of us here, we got to go to work on your behalf, and see what we can do to make this even a better call next quarter. Thank you very much for your attention.

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Source: Maxwell Technologies Inc. Q3 2009 Earnings Call Transcript

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