Active Power Inc. Q1 2010 Earnings Call Transcript

Apr.23.10 | About: Active Power, (ACPW)

Active Power Inc. (NASDAQ:ACPW)

Q1 2010 Earnings Call

April 23, 2010 11:00 am ET

Executives

Jim Clishem - President & CEO

John Penver - CFO

Analysts

Shawn Lockman - Ardour Capital

Kenda Misrali - SSM Investment

Ben Bloch - Odyssey Partners

Eiad Asbahi - Prescience Investment

Operator

Good morning everyone. Thank you for participating in today’s conference call to discuss Active Power’s financial results for the first quarter ended March 31, 2010. With us today is Mr. Jim Clishem, President and Chief Executive Officer of Active Power and Mr. John Penver, the company’s Chief Financial Officer. Following their remarks, we will open the call for questions.

Before I continue, I would like to take a moment to read the company’s Safe Harbor statement. The company’s management on this call may make forward-looking statements that involve risks and uncertainties including statements relating to Active Power’s current expectations of operating results for the second quarter of 2010, its future operating results and its customers intentions. Any forward-looking statements and all other statements that may be made during this call are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

Factors that could cause the actual results to differ materially from the results predicted include among others; deferral or cancellation of sales commitment as a result of general economical conditions, uncertainty risk related to our international operations, product performance and quality issues. For more information on the risk factors that could cause actual results to differ from these forward-looking statements, please refer to Active Power’s filings with the Securities and Exchange Commission including its annual report on Form 10-K for the ended December 31, 2009 and its current reports on Form 8-K filed since then.

Active Power assumes no obligation to update any forward-looking statements or information which are at effect as of their respective dates. I would now like to remind everyone that this call will be available for replay online until May 7, 2010 via Active Power’s website at www.activepower.com. Again that’s www.activepower.com.

I would now like to turn the call over to the President and Chief Executive Officer of Active Power, Mr. Jim Clishem. Please go ahead sir.

Jim Clishem

Thank you and good morning everyone for joining us today. Earlier today, we issued a press release announcing our first quarter 2010 results. Revenue for the first quarter of 2010 totaled $11.1 million which was the same as the first quarter of 2009, seasonally down from the fourth quarter results of $14 million. A milestone accomplished this quarter was achieving cash flow positive from operations for the first time in our company’s history. This is an important step towards our next objective achieving and sustaining operating profitability.

It’s also worth mentioning here a few positive from the first quarter which includes our gross margin improved to 26% this quarter from 19% in the prior quarter. Revenues from Asia Pacific region were $3.1 million, an increase of 243% compared to the first quarter of 2009 and our repeat customer business made up 65% of the unit’s order. Our OEM channel revenues increased 137% from the fourth quarter of 2009 and our net loss was approximately the same as the previous quarter even though revenue levels were lower.

Before I go further, I would like to turn the call over to our Chief Financial Officer John Penver who will take us through the financial details for the quarter. Then I will come back to discuss some of our operational highlights from the first quarter and then talk about our outlook for the second quarter of 2010. We will then open the call to your questions. So John?

John Penver - Chief Financial Officer

Thank you, Jim. Good morning everyone and thank you for joining us today. As Jim mentioned, revenue for the first quarter was $11.1 million. This was the same as the first quarter of 2009, 21% lower than the $14 million reported in the fourth quarter, reflecting the historical seasonal downturn that we typically experienced in our first calendar quarter. Our direct sales grew by 11% compared to the first quarter of 2009. This was predominantly in our Asian market where we had multiple mobile PowerHouse sales and some large UPS transaction.

In fact our sales in Asia were up 243% compared to the first quarter of 2009. Our OEM sales were down by 39% or $1.9 million compared to the first quarter of 2009 but actually increased by $1.7 million or 137% compared to the prior quarter. Product mix did change from the previous quarter. Our PowerHouse revenues this quarter were 9% of our revenue which compared to 30% of revenue in the prior quarter.

This is due to the timing of revenue recognition on a large project and we expect this number will increase again in the second quarter as we shift the number of PowerHouse orders that were in progress.

The total number of flywheel shipment increased in the prior quarter and this helped drive high utilization and manufacturing facility and improved our gross margin. Our first quarter service revenues of $1.7 million were 21% higher than the third quarter of 2009. This was down from those $3 million in the prior quarter, reflecting significantly lower project related revenues which is a function of the timing of the individual orders especially if it continuous power systems and PowerHouse related transaction.

Looking at the revenue from our different channels, the revenues from our OEM channel were 27% of revenue this quarter. This compared to 9% of revenue in the prior quarter and 43% of revenue in the first quarter of 2009.

Revenue from our IT channel was 11% of revenue this quarter compared to 30% of revenue in the prior quarter and both of these amounts will fluctuate quarterly and can quickly be impacted by any significant order from other channel. We expect both of these percentages to be higher in the second quarter of 2010.

Direct sales made by us, our distributors and manufacturers representatives were 63% of sales for the quarter. This compared to 61% of revenue in the prior quarter and 57% of revenue in the first quarter of 2009. This was driven by the strong performance in Asia. Our flywheel based UPS products again contributed the majority of our revenues and represented 73% of revenue this quarter compared to 55% of revenue in the prior quarter. This 73% compares to 85% of revenues in the first quarter of 2009. The Power House sales of $1 million represented a further 9% of revenues for the quarter. The total number of fly wheels we shipped this quarter was 95. This was up from 86 wheels we shipped in the prior quarter and compares to a 119 wheels we shipped in the first quarter of 2009.

Our average selling price this quarter was $85000 for flywheel which was higher than the $80000 we recorded in the first quarter of 2009 and compared to the $90000 of flywheel we had in the prior quarter and it does confirm our ability to generate higher average selling process on direct business. International sales represented 39% of total revenue this quarter compared to 22% in the prior quarter.

This percentage change was a combination from absolute revenue levels and improved performance in the Asian market. And the future quarterly results from international sales will continue to fluctuate depending upon the timing and the size of the orders received and has been little bit more unpredictable and dependent upon our success in winning orders. Our continuous Power Systems and PowerHouse contract tend to be larger in value and this will contribute to volatility on a quarterly basis.

For example, this first quarter we did not deliver any large PowerHouse orders, but we did complete installation services from systems sold in the previous quarter. We are also in the middle of construction of a number of PowerHouse orders that will be recognized as revenue during the second quarter of 2010 especially in Europe.

But the timing and size of orders can quickly have a significant impact on our level of quarterly revenue. They can also significantly affect quarterly cash flows as we have fewer customers often with significantly larger receivable. This customer concentration does increase the [preview] risk for assets and so we continue to improve and refine the payment sense of the sales opportunity as part of our overall working capital management.

As our solutions business grows and the composition of sales will likely change and fluctuate. We have experienced an increase in the third-party system and components that are being packaged and resold to the clients. Thus we anticipated increase in Q2 and Q3 this year in sales of ancillary or third-party equipment based on some we have recently accepted. This local job will increase in top line revenue over the next several quarters.

Even at the past three margins on this third-party equipment I will list what we generate on our own manufactured goods. It does become an important catalyst for professional services and maintenance revenues that do attract foreign margins and in some cases can lead to typically the higher PowerHouse system sales.

Our gross margin this quarter improved by 7% and was 26% compared to 19% we had in the prior quarter. This is down slightly from 29% we had in the first quarter of 2009 and much higher flywheel volumes. The number of wheels sold has historically been a good parameter of our factory efficiency and our gross margin.

And the quality of this metric will diminish overtime as we sell more PowerHouse system, but for now the higher wheels sold compared to the previous quarter with the higher proportion direct sales and higher average selling price resulted in the improved margin performance. Our research and development expenses for the quarter were $0.8 million which was 9% lower than the previous quarter and 24% lower than the first quarter of 2009.

This decrease in spending reflects lower project-related development this year and the prior year expense did include higher prototype and development costs for paralleling our MegaWatt class UPS products. Selling and marketing expenses at $3.3 million were 14% higher than the fourth quarter levels primarily due to higher sales headcounts and increased spending on marketing initiatives compared to the fourth quarter, but were in fact 2% lower than the first quarter of 2009 when we had higher revenue level.

In the quarter, our general and administrative expenses of $1.3 million increased by 23% from the prior quarter and was 16% higher than in the first quarter of 2009 primarily reflecting higher professional fees. Our operating loss for the quarter was $2.6 million which was marginally higher than the first quarter of 2009. Our net loss for the quarter at $2.6 million or $0.04 per share compared to a net loss of $2.2 million or $0.03 a share in the fourth quarter of 2009 and a net loss of $2.4 million or $0.04 a share in the first quarter of 2009.

Now for the first time in our company history we achieved $1.1 million in quarterly positive cash flows from operation. Our cash and investments increased during the quarter by the tone of $10.1 million $9 million which was the net proceeds of an equity offering that we completed in February and $1.1 million from ongoing operations. This is an important corporate milestone for us. And our cash and investments on hand at March 31, 2010 had improved to $17.6 million from a $7.5 million we had at December 31, 2009. Our receivables decreased by $4.9 million compared to Q4 2009, which reflects lower revenue and a lower even distribution of revenue over a quarter that allowed us to collect some proceeds prior to quarter-end. And we will be able to use these proceeds to reduce our trade payables by $2.7 million compared to Q4 2009.

Inventory decreased slightly versus last quarter. And which reflects much low finished goods inventory offset by approximately $1.6 million of work in process. That was projected related that we made during Q1 for delivery and revenue in Q2.

Now the level of such work in process will potentially grow and definitely fluctuate more as we grow the PowerHouse and continuous power systems business. And it is driven by the quantity and as far as this assurance that we have in a particular point in time. Because of the potential volatility of such inventory and are allowed into a single receivable balances that make all their balance sheet move materially and quickly. Cash and working capital continue in line of management focus for us during 2010.

And based on our current plans for the remainder of the year, the recent funding, and our experiences we’ve had managing our cash particularly in the last 12 months. We do believe we have adequate cash and investment from hand and available resources of liquidity to continue funding the business throughout this year. Now to improve that overall financial flexibility and to supplement our recent equity offering we’re currently evaluating different credit facilities from our current bank and a number of global financial institution.

This may potentially increase of size and borrowing base of that credit facilities. Our current bank credit facility expires in Q4 of this year. However, we anticipated announcing a new credit facility during Q2. This should provide us some credit flexibility to fund PowerHouse and continues power system orders globally. It will also help us fund much higher levels quarterly revenues for the business.

Our capital expenditures are not significant during the quarter. We have been starting and invested a lot in manufacturing infrastructure and still has production capacity far in case of that current revenue level. I mean, we can substantially increase our production level with that meaning to make an immaterial capital investment. As a result, our capital expenditures will primarily deploy expansion of that sales and service capabilities and now marketing and promotion if it has required.

We reasonably received a notice from the NASDAQ global market. Their stock had not led to $1 minimum bid price rule for 30 consecutive days. NASDAQ has given us 180 days to regain compliance with this rule and we faced the risk of delisting of the company’s share. So we have until September 20, 2010 to regain compliance with this rule. And we’ll continue to monitor this situation.

At this time I would like to remind our share holders of the company of 2010 annual general meeting will be held at the company’s headquarters on May 13 at 1 pm central standard time. Please take this time to complete your proxy cards and vote for the matters under consideration at this meeting. You may do this online or via the regular mail.

And this completes the financial of the portion presentation. I will now turn the call back over to Jim for further comments about the quarter. Thank you.

Jim Clishem

Thanks John. We believe general business conditions overall are improving for Active Power, our partners and our customers. And from a market perspective, we’re seeing new Data Center built outs and expansions taking place both in the US and abroad. This alliance with the recent study published by our research firm, Campos Research & Analysis, that focuses on Data Center market.

According to the survey, the senior decision makers at large US-based organizations, 83% of all survey has plans to expand our Data Center in the next 12 or 24 months and 70% are planning large projects, up at least 15,000 square feet in size or 2 megawatts or more as highlighted.

The biggest reason for its expansion according to survey results is the need for additional power. The trends we discussed in our last quarterly earnings call, strong the year-over-year increases in direct sales revenues increasing market share and of course, like performed in our competition have continued.

With restructuring of our sales channels at the end of 2009, we dedicated personnel to both support our IT partner sales and our OEM business is yielding early positive results.

We had seen increases in quoting activities in sales pipeline from both of these distribution channels thus far in 2010. We are pleased to see the traditional OEM business improve particularly in Europe where they had not previously had significant UPS sales activities. OEM sales were 27% of revenue up from 9% from the previous quarter. We expect this growth to continue throughout 2010.

Another positive trend is the follow-on business and the repeat orders we’re receiving during the quarter. In fact, 65% of the units ordered in the first quarter were repeat customers. This is a clear reflection of customer confidence in the technology and the realization of the inherent product benefits of efficiency and reliability.

This follow-on business validates the long-term business strategy to grow our direct sales channel as well. Diversifying our sales channel has been an important strategy to reduce dependency on any one partner, any one channel or market or geography. We continue to see increased opportunities for our containerized critical power solution known as PowerHouse. This product line capitalizes on the core benefits of our clean source UPS product. PowerHouse has more backup power into a confined space as part of a continuous power system complete with generator, switch gear and all of the other competitor product offerings we compare very, very favorably.

Delivering a pre-packaged, pre-tested and plug and play solutions to the customers a compelling solution that we expect to drive a lot of revenue growth in 2010. PowerHouse is not just a product for supporting our IT partners with the containerized Data Center products. Although this is a significant market opportunity for us.

In fact Data Center containerization continues to become more mainstream and generally accepted in the industry according to UK based research firm BroadGroup Consulting. In regards to other applications PowerHouse can and has been used in military power utilities for faster recovery and other space constraint environment. In fact more than half of our PowerHouse sales is growing strong in the applications other than containerized Data Center support.

The big advantage of our IT partners that they bring us is of course their own distribution and sales networks in addition to their brand awareness. They are able to bring our products and technology into customer opportunities previously closed to us. And PowerHouse is the enabling technology that allows them to sell containerized solutions to their customers. The pipeline of potential customers from this channel continuous to grow each quarter and we are confident we will see increasing revenues throughout 2010.

Over the course of the last two years we have developed a number of proficiencies around containerization. We are now leveraging this domain knowledge acquired through our PowerHouse development programs by selling containerized infrastructure solutions to one of our strategic IT partners.

We expect these sales to be a significant source of new revenue for the company in 2010. Now looking at the second quarter of 2010, since the beginning of the year we’ve received more than $16 million in orders that are in various stages of processing. These orders are across the board representing diverse geography, partners and product sets. With the momentum we’ve seen recently we anticipate a sequential increase in quarterly revenues. We currently expect second quarter revenue to be between $13 million and $16 million, more than doubled compared to the second quarter of 2009.

Based on projected sales mix this would result in a gross profit margin of between 24 and 29% and at current operating expense level this will result in net earnings per share between breakeven and a loss of $0.03 per share. As this expected performance level as well we believe this dramatically increases the probability to achieve an EBITDA positive quarter in Q2. Per usual, achievement of these results will depend on the realization of expected orders, product and channel mix and of course average selling price.

Operating expenses excluding variable selling expenses should be fairly consistent with the results recorded during the first quarter. Cash used in operations will therefore be largely driven by our working capital requirement during the quarter. At this point we anticipate our cash balance will decrease by upto $2 million with almost all being used for working capital. We will continue to utilize our banking facility and manage customer and vendor cash flows appropriately to mitigate cash requirements if possible.

On a different and more somber note we were very saddened recently by the passing of one of our valued executives our Vice President of Sales for the Americas Gary Rackow. Gary was a good friend and excellent sales leader and a highly respected member of the engineering community. He helped Active Power build the sales force in the Americas and contributed significantly to our growth and success.

Although Gary leaves behind an excellent sales team in Active Power he will dearly be missed by his family, friends and co-workers. He was a fine individual and it was truly a privilege to have known him and worked with him over the last three years. His shoes will not easily be filled, with that said we are working diligently to hire new sales leader for the Americas. In the interim management of the Americas sales team.

Thank you for being on our call this morning and on behalf of our entire senior management team and our board I would like to express our appreciation for the continued support of our customers, our partners, our employees and our shareholders as we worked to achieve quarterly profitability in 2010. And now at this time John and I will be happy to open the call up for your questions. Operator.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions). Our first question comes from Walter Nasdeo from Ardour Capital. Your line is open.

Shawn Lockman - Ardour Capital

This is Shawn Lockman for Walter. I just wanted to get a little bit more color on gross margins obviously had a very good quarter there. Can you talk a little bit about the mix and how that contributed to the improvement?

John Penver

Certainly the high end number of wheels helped with the utilization of our manufacturing facility. We’d also in the fourth quarter last year scaled back production to help us excess inventory and so that negatively impacted the prior quarter. So it was always going to be a little bit better this quarter. The increase in direct sales also increases the average selling price compared to those periods and that really helps you improve the margin as well and that’s probably the two biggest things that we have in there I would say.

Shawn Lockman - Ardour Capital

If we could talk a little bit about the direct sales. Obviously this is giving you guys a bit of a boost on the ASPs? Can you just talk a little bit more about the cause and effect there between direct sales and your ASP?

Jim Clishem

As you know from last year we grew our direct sales effort for year-over-year by over 20%. It’s a conservative effort of a couple of things, certainly for complex sales adding our own direct sales people. John also mentioned that we would increase a few more sales personal during the quarter in Q1, that really go after these larger project deals which in particular highlight the benefits of the Active Power solution with high efficiency. Direct sales being that it’s focused more on these larger projects, more complex sales garners of the higher level of pricing as well as much stronger attach rate with our service contracts being that is direct.

The other thing that we have seen is I think we have sort of covered it macro economically in the comments here, but there is resurgence that’s going on in the business right now specially with data center built outs, expansions. People running out of space looking for more efficient solution and I think overall the economy worldwide as you saw from our Asia numbers which were also direct sales. We saw some substantial growth in those markets which we have been working on for several months now.

So I think all that combined global sort of come back as well as our focus on direct which includes at the lower level or what we will be call more transactional level are direct sales from manufacturers’ reps and distributors is also gaining some really important traction. So that’s going to continue. Just to contrast those comments, you didn’t ask about it, but we saw a very significant increase in our OEM sales activities with Caterpillar particularly in Europe which was the comment in the script. But generally speaking we believe Cat’s business is returning and that in additional to our IT channel. A new development there on top of our own direct sales. We think all of those cylinders are beginning to hit

Shawn Lockman - Ardour Capital

You are looking at expanding the credit facility, you did the equity rate. Can you give us a little bit more color on any sort of potential financing constraints you are seeing in terms of relation to, I assume mostly your PowerHouse orders, which are a little bit more working capital-intensive. Are any of those orders having to be turned down or delayed as a result of any sort of concerns about financing, or what are you experiencing there?

John Penver

We certainly are not having to turn down any orders. Now I think if we had not completed the equity rise and not done a few other things that was the scenario I thought was highly impossible but we have to walk this fine line between seeing these increasing orders coming and the ability to finance them and we did not want to an equity raise too quickly and in this case supplement that with an increased credit facility. But you are correct that if you get a very significant PowerHouse order, whether it’s single customer of multiple transactions quickly, there is a much longer manufacturing cycle time for PowerHouse. It can be 16 to 18 weeks and so there is a much longer period of having to finance working capital and in some situations we are able to get deposits and interim payments from our customers to mitigate the cash flow impacted that. From other sales, from government sales, from patent sales, you know you get special delivery additionally you will need access to more credit to finance that and we think it is the equity rate that we have done and with the Chinese we are trying to make through our credit facility that we had more than enough liquidity to support the quarterly revenue number, $20 million to $25 million or more. Probably as we have now got the financial capability to significantly grow the business from where we are at today.

Operator

(Operator Instructions) Our next question comes from Kenda Misrali from SSM Investment. Your line’s open.

Kenda Misrali - SSM Investment

Can you give me an idea from your data centers, what percentage is from commercial or education or medical to get an idea of where it comes from and what you see the growth is in those areas?

Jim Clishem

Sure, this is Jim. So we would segment the data center market a little differently. There are horizontal market in data centers which means that enterprise customers having their own datacenters and certainly the people that run datacenters for a living like Terremark for example. You have both of those groups in particular are seeing a very strong search in their own requirements that are being asked of them space requirements, power requirements and the like.

We are also seeing the online communities at these datacenters support, such as large search engine companies and some of the application service providers do have a lot of floor space. But in addition to there we are seeing a great deal of what we would call federal business or government related business which allow these data centers again like Terremark and others related to them that have driven a great deal of their expansion.

Now on top of that there are some verticals and we would classify for example which Active Powers very robustly represent it in healthcare. There are a variety of reasons we are seeing a large increase in what we would call HIPPA-related activity for datacenter, data storage capacity requirement, also the hospitals as you’d probably are aware in the US and particular have the requirement to be up and operational with no greater than 10 seconds from the point of outage from the utility, Active Powers solutions, really work well in those also.

On top of that we are seeing a great deal, of what we would call datacenter expansion in software businesses that are online communities and I think you would probably know some of the big names that would be classified under that I think the online community in general is driving a great deal of this current expansion these people are looking for efficiencies and they are getting that through IT expansion which of course drive the main raw material which includes power cooling and fiber optics. So I think we are riding a little bit of that wave also.

Kenda Misrali - SSM Investment

I'm sorry, what percentage did you say from your vertical of medical is revenue and from the online?

Jim Clishem

For this quarter I don’t have that number directly. I will tell you generically it would probably be in the order of maybe 15% of our total business is coming from what we would call medical or medical related. And largely we have a very strong industrial component to our business as well drawn by our OEM channels and then we’ve got this new area which we would have consider IT while which is also growing pretty substantially at the moment too. But medical obviously probably would be about 15% or so for business.

Kenda Misrali - SSM Investment

And when you look to grow with your sales force, do you target other vertical markets, or are you looking at the horizontal markets? Because then if it is broken down, how do you break it down by their requirements?

Jim Clishem

Yes. Its good question. When you look at our direct sales force, those people that are active power employees, these individuals are going after what we would call large complex sales that would be 10, 50, 100,00 square foot data center expansion that would require not just UPS but switch, gear and generators, that sort of thing. Then we have a cure of our distribution channel which focus on what will be more transactional and many of our reps for example have certain practices that are, that they nitch into. So there are medical practices, there are broadcast practices. They sort of attack not to say that are that these are not also large complex sales, but by and large I have to say, a lot of these individual nitches are better served by some of our transactional partners and also some our I.T. partners.

Kenda Misrali - SSM Investment

So it’s not necessarily vertical targeted. You do it by complexity?

Jim Clishem

We do more about what we would call transactional sales which are pushing more UPS boxes versus systems sales which are more of what we classify continuous power systems. That’s where we would sell more higher-end solutions that would include switch, gear, UPS, generators and it would come in two forms. Either Power House or those same components built within traditional bricks and motor building. But that was more of what you would call in complex sales that are directly usually focusing on.

Kenda Misrali - SSM Investment

And when you do measurements for your own, I'm just new to the story here. When you do measurements for your own market penetration, do you look at the verticals like where we are in terms of the medical, the insurance, the banks, or is really just the big PowerHouses and where you are this year versus last year?

Jim Clishem

No. we actually do look at the vertical. We produce marketing collateral materials including white papers that focus on those vertical. We know that those are important bulk for our own efforts as well as our partner efforts. And we do look at that. we classify those sales, all those verticals internally in the company as well. But as you probably you’ll imagine that direct sales can be an expensive proposition and you probably don’t want our direct sales team members focused on what we would call lower inner transactional, those are better suited for big bars and manufacture, rep, distributors or those that have a built in distribution channel already in place like the Caterpillar channel that we have or some of the I.T. strategic partner channels where our cost of sales would be lower as a result and those markets that they served across the board.

But we would manage them with a single customer like CAT or like say an I.T. partner versus our own efforts where we do in fact look to see adding a lot of sales going into these different verticals. So yes, we do monitor that but again segment it more complex versus not complex sales when we deploy our own people in the field.

Operator

Our next question comes Ben Bloch from Odyssey Partners. Your line is open.

Ben Bloch - Odyssey Partners

You mentioned the 16 million orders. I was kind of hoping for how that trended throughout the quarter. Did it accelerate at the end? And then also, maybe you could talk about your visibility and what your second-quarter orders might look like? How is quoting activity on a sequential basis?

Jim Clishem

We did accelerate on the orders from the beginning of the year to this point in time. And some of that carry over from budgets expiring at the end of the calendar quarter as you are aware. So we did see a non-linear sort of growth of those orders. We also in this current quarter that we are in looking forward we are seeing very strong quoting activity across channels that isn't just our direct to sales force as I mentioned in the commentary earlier. We kind of filled the channels to both domestically and internationally. The increase their quoting activity and also have done some merchandizing on their own parts to offer incentives when their customers can find solutions of our UPS along with their generators. I know that probably sounds like a given or an obvious thing to do, but getting the machine in place to actually put those merchandizing programs in place was very helpful. We have seen that, health accelerate some of their penetration. And I would say the attach rate as know, our PowerHouses with these IP data center partners. PowerHouse is a intrigual interval component of the total solution when you look at it container IP infrastructure as well. And we have seen some pretty good attach rate between selling an IP data center versus PowerHouse. And I think our modeling we've assumed and maybe for your modeling as well as you would assume maybe at 70% or 80% attach rate there. So those orders both in PowerHouse have to increase. John made the comment during the call that the cycle time of PowerHouse orders can in fact exceed a particular quarter. And so you’ll see them sort of sometimes stretched across quarter boundaries and I think we made the comment that we have seen nice surge in the PowerHouse of quarter is coming also as part of this Q2. And also some of our infrastructure services that we provide both to our sales and our IT partners we’re going to see some pretty nice surge, and that's been going on during our Q2 which is what has got us pretty bullish about Q2 at the moment.

Ben Bloch - Odyssey Partners

I mean do you think it is probably fair to say then you can maintain over one book-to-bill then on into Q2 or after that?

John Penver

This public pipeline has gotten very healthy, Jim made a comment too but I’ll throw in that a number of our large customers who have bought our products are coming back for future opportunities with us. And so what is the right term here but basically you have to repeat and recur.

Jim Clishem

Repeat and recurring business from a number of our large customers that is in number of that is a number of those opportunities in our pipeline that I think get us pretty positive revenues are growing and look like they will continue that way.

Ben Bloch - Odyssey Partners

When you talked about just now on the 70% to 80% of tax rate and that applies to the HP catalogue business as well??

John Penver

Yeah, the IT channel partners. Yes that’s right. So if they are successful with that particular market and as Data Center containerization accelerates that’s going to be very good catalyst for revenue growth for Active Power.

Jim Clishem

Yeah, and then to give you just a little more color on why that is true. When you think about why a customer would want expansion of their own IT services, their own IT infrastructure, it’s because they’ve run out of space or they needed for portability but let’s take the case where they run out of space. When they run out of space, they have also run out of infrastructure such as power with that so you can pretty quickly imagine that if they run out of space and they need to go out with a container. They often times need to have and we believe that’s about 70% to 80% they are going to have to have that power expansion and cooling expansion with it. So they’re so tightly coupled they can’t really separate them.

Ben Bloch - Odyssey Partners

Is that opening up any opportunities just for UPS replacement of the battery banks that are down there?

Jim Clishem

Yes, in fact we have an example of telecom customers, which we cannot its name, that’s bought several PowerHouses actually through our IT channel partner who also brought IT containerization who now have comeback and another program within their company of just replacing outdated UPS systems and what they really like since they got introduced to it was our high efficiency saving them utility costs as well as our space efficiency from now they’re looking at the just to see a UPS for other deployment throughout the domestic US and so we have to remind everyone on the call that by looking at these IT channel partners in particular not only did we see that the containerization opportunity but forming needs of these type bonds between these, our companies and theirs open the doors for several other very innate and understandable opportunities just for regular UPS box shifting. So we think that’s a real positive.

Operator

Our next question comes from Eiad Asbahi of Prescience Investment, your line is open.

Eiad Asbahi - Prescience Investment

I just want to congratulate you on continuing to execute. And I am wondering if you could give us some more visibility as to what Asia Pacific markets these sales are going into.

Jim Clishem

We’re seeing these particular sales were done sort of in the Malaysia Kuala Lumpur area also in China. Some of those sales are represented by China PowerHouse sales that were delivered. Some more traditional continuous Power System sales which included our UPS, gensets and switch gears. So, we are seeing a mix of both PowerHouse and traditional implementations, but they are running across the board but for example, in Korea we have some new strong distributors in Korea although their economy is still recovering, we are not seeing as much activity there.

We are seeing an increase in quoting activity in Japan though for example. Some of that has been driven recently by exchange, but I would say a majority of what both for Q1 and what we are seeing in our pipeline would be more characterized by probably China and some in Malaysia and the surrounding areas.

Eiad Asbahi - Prescience Investment

Can you give us a little bit more transparency as to how your plans to expand further into these markets?

Jim Clishem

You may or may not be aware; a few quarters ago we hired a country manager based out of Beijing. We have service person; we had application engineering support for that team in China and throughout Asia. But on top of that we are looking to make some expansion to that team here by adding a few more sales resources, big country. But in addition to that we have already got two really good partners signed up again in China, which is very much the way they like to do business, certainly opening doors for us.

As you can tell we are operators, on the comment of execution John, (inaudible) the rest of the executive team. We don’t want to get ourselves too far ahead but this is a good calculated risk based on what we just saw by Q1 performance to start putting some more resources there. But we are going to leverage partners. On top of that Caterpillar as well as IT channel partners are also big in China. We are going to leverage that through alternative channels which we have already seeing increased quoting activity there.

So I think on both direct and on indirect we have a pretty good strategy in place for China and there is a lot of upside but we don’t want to get too far ahead of ourselves in terms of putting too much expense ahead of opportunity, but it’s time to put a few more resources and we are prepared to do that.

Operator

Thank you. (Operator Instructions). It appears we have no other questions in queue at this time.

Jim Clishem

Okay, great. Well, thank you so much. I want to thank everyone for joining us on the call today and we certainly appreciate your continuous support and look forward to speaking to you again next quarter. Thanks again.

Operator

That concludes today’s conference. Thank you for your participation. You may now disconnect.

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