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Active Power, Inc. (NASDAQ:ACPW)

Q2 2010 Earnings Call Transcript

July 27, 2010 5:00 pm ET

Executives

Jim Clishem – President & CEO

John Penver – CFO and VP of Finance

Analysts

Dilip Warrier – Thomas Weisel Partners

Walter Nasdeo – Ardour Capital

Matthew Couth [ph]

Brian Kowalchyk – Patara Capital Management

Operator

Good morning everyone. Thank you for participating in today’s conference call to discuss Active Power’s financial results for the second quarter ended June 30, 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 up 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 third quarter of 2010, its future operating results and its customers current 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 different 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, the deferral or cancellation of sales commitments as a general result of general economic conditions or uncertainties, risks related to our international operations, and 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 in effect as of their respective dates. I would now like to remind everyone that this call will be available for replay via online until August 10, 2010 via Active Power’s website at 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. Sir, please go ahead.

Jim Clishem

Good morning and thank you everyone for joining us today. Earlier today, we issued a press release announcing our second quarter 2010 results. Revenue for the second quarter of 2010 totaled $16 million, an increase of 44% from the first quarter of 2010, and an increase of 142% compared to the second quarter of 2009. The second quarter 2010 revenue is the second highest quarterly revenue achieved in the company’s history. For the six months ended June 30, 2010, our revenues were a record $27.2 million, increasing 53% from the previous year.

As expected, this significant revenue increase drove improvement in margins and reduction in our operating losses. It’s worth mentioning here a few highlights from the quarter. First, a record $24 million in orders received during the quarter. 27% gross margins this quarter compared to 26% in the prior quarter and 22% in the second quarter of 2009.

We also had a 1.5 million net loss compared to a net loss of 3.5 million in the same quarter of 2009, which represents a 57% reduction. 4.8 million in revenues from the EMEA region for this quarter, and it was an increase of 494% compared to the second quarter of 2009. We also had a $2.3 million decrease in cash used in operation, which amounted to 93% reduction compared to the first-half of 2009.

At this time, 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. I will then come back to discuss some of the market trends we are seeing, and how we’re capitalizing on these trends along with our outlook for the third quarter. We will then open the call to your questions. So John?

John Penver

Thank you, Jim. Good morning everyone and thank you for joining us today. As Jim mentioned, our revenue for the second quarter was $16 million. This was a sequential increase of 44% from the first quarter, and an increase of 142% compared to the second quarter of 2009. On a year-to-date basis, our revenue is $27.2 million, which is 53% higher than the $17.8 million we had in the first-half of 2009. This is substantial revenue growth under either measure.

This increase in revenue was predominantly in our American and EMEA market this quarter. We had substantial PowerHouse revenues, particularly in EMEA and very strong UPS sales in North America this quarter. Total EMEA revenues for the first half of $6 million were up substantially from $2.5 million into 2009. Our Americas revenue in the first half was $18 million, which was up 30% compared to 2009, and Asian market revenues were up 108% in the first half compared to the prior year.

Some of these fluctuations are much more pronounced if we actually compare the second quarter of 2010 to the second quarter of 2009, due to the low base of revenue we had in 2009. On a net basis, EMEA revenues increased by 494%, and the Americas revenues increased by 115% on a year-over-year basis compared to the second quarter of 2009.

Looking at revenues by sales channel, we have seen significant growth in our direct business in both EMEA and in the Americas. For the first-half, our direct sales were 61% higher in 2010 compared to 2009. Total direct sales, including sales made through manufacturer’s reps and distributors were 60% of revenue for the second quarter. This compared to 63% of revenue in the first quarter, and 61% of revenue in the second quarter of 2009.

Sales from our IT channel partners continued to grow, and were up 100% compared to the prior year. Now, revenue from the IT Channel was 14% of total revenue for the quarter, compared to 11% of revenue in the first quarter of 2010.

OEM sales on year-to-date basis were flat compared to 2009. However, this is not necessarily a good trend indicator because a lot of the revenue in 2009 from the OEM channel was actually from orders received in 2008 prior to the economic recession. Our actual bookings through the OEM channel has been much stronger in 2010 compared to 2009. In fact, bookings increased by over 200% from 2009 level.

That said, we would expect to achieve significant year-over-year growth from the OEM channel on a full calendar year basis, as those bookings convert to revenue. Now actual OEM revenues in the second quarter were up 39% from the level of revenue received in the first quarter of 2010. OEM sales were 26% of revenue for the quarter, which compares to 27% of revenue in the first quarter, and 39% of revenue in the second quarter of 2009.

Our PowerHouse revenues increased this quarter as we expected, and had indicated on our last conference call. PowerHouse revenues were $4.9 million or 30% of our total revenue. This compared to 9% of revenue in the first quarter. The level of PowerHouse revenues will fluctuate due to the timing of these orders and delivery dates. It can take more than a quarter to deliver these products, but this metric of PowerHouse as a percentage of revenue will continue to fluctuate quarterly.

As I said, this quarter we had a number of large PowerHouse orders delivered in EMEA that contributed to this revenue increase. We shipped 99 fly wheels this quarter at an average selling price of $79,000 per wheel. This was marginally more wheels than in the first quarter of 2010, up substantially from the 55 wheels we shipped in the second quarter of 2009 at an average selling price of $72,000 a wheel.

Total UPS revenues were $6.3 million, which was 58% higher than the second quarter of 2009. The large number of wheels sold and the large number of PowerHouse shipments also helped to drive an increase in service revenues, as we recorded higher project related service revenues in connection with the fulfillment and installations of PowerHouse units. Total service revenues of $2.7 million were up 57% from the first quarter, and for the first half our service revenues $4.5 million are up 93% compared to 2009.

Our international sales were 31% of revenue for the second quarter. This compared to 39% of revenue in the first quarter, and 23% of total revenue in the second quarter of 2009. And for the first-half of the year, International sales were 34% of revenue compared to 23% of revenue in the first half of 2009.

Our continuous power systems and PowerHouse contracts tend to be larger in value, and as we have previously communicated, could potentially contribute to more volatility on a quarterly basis depending on the timing and frequency of such orders. For example, this quarter we delivered several large PowerHouse orders, particularly in EMEA. We are currently in the midst of working on a number of PowerHouse and infrastructure orders that will be recognized as revenue during the third quarter of 2010, especially in the US and Asia. The timing and size of these orders can quickly have a significant impact on our level of quarterly revenues.

In addition, these orders can affect our quarterly cash flows due to significantly larger receivables and different payment terms from those customers purchasing a UPS product only. This customer concentration does increase liquidity risk for us, requiring us to continue to improve and refine the payment terms of these sales opportunities as part of their ongoing working capital management.

Gross margin this quarter improved by a further 5% from the 22% we recorded in the second quarter of 2009 on much lower flywheel volumes, and the 27% margin compares to the 26% we had in the first quarter. The number of wheels sold have historically been our primary barometer of factory efficiency and company gross margin.

The use of this metric as a stand-alone indicator will be diluted as we sell more PowerHouse systems and utilize production personnel in this activity. For now though, the higher wheels compared to the prior year with a higher proportion of PowerHouse sales has driven our improved margin performance.

Our research and development expenses for the quarter were $800,000, which was 2% higher than the previous quarter and 20% lower than the second quarter of 2009.

This decrease in spending reflects lower project-related development this year. The prior year expenses included higher prototype and development costs for paralleling MegaWatt class UPS products. Our selling and marketing expenses at $3.5 million were 8% higher than first quarter levels. This was primarily due to higher sales headcount, especially in EMEA, higher variable sales compensation due to the significant increase in revenues, and higher performance based compensation expenses.

General and administrative expenses of $1.4 million increased by 9% from the first quarter, and were up 22% from the second quarter of 2009. This primarily reflects higher professional fees, and higher performance based compensation expenses attributable to the improved financial result. Our operating loss for the quarter was $1.4 million, which compares to $2.6 million in the first quarter and is a 58% reduction from the $3.4 million operating loss in the second quarter of 2009.

The net loss for the quarter was $1.5 million or $0.02 per share. This compares to a net loss of $2.6 million or $0.04 a share in the first quarter of 2010, and a net loss of $3.5 million or $0.06 a share in the second quarter of 2009. On a year-to-date basis, our net loss for 2010 of 4.1 million, or $0.05 a share is a 29% reduction from the $5.8 million net loss of $0.10 a share that we recorded in the first-half of 2009.

The changing cash and investments for the quarter of $1.8 million was largely as we had predicted. This was predominantly because of the increase in receivables, caused by the quarterly revenue increase of 44% and from an increase in inventory, as we support several significant orders for delivery in the third quarter.

The effect of the inventory and receivables were offset by an increase in our trade payables. On a year-to-date basis, the net cash used in operations decreased by 93% to $181,000 compared to the $2.5 million used in the first-half of 2009.

Overall, inventory increased slightly by 540,000 versus last quarter. This reflects much lower finished goods inventory, offset by approximately $1 million of work in process that was project related and purchased during the second quarter for delivery in the third quarter. The increase in trade payables of $3.6 million since the first quarter reflected higher inventory purchases near the end of the quarter, this third quarter revenue.

If you turn to the potential volatility of such inventory and related payables balances that may cause that balance sheet to move quickly and materially, cash and working capital management will remain a focus for management for 2010. We are currently finalizing a new credit facility with our bank that will afford us credit borrowing ability against our receivables, including certain foreign receivables, our inventory and even purchase orders.

This credit facility will allow us to respond to and finance large orders, without the need to raise additional equity or to dilute our cash reserves. This financial flexibility this gives us should support significantly higher quarterly revenue levels, about $25 million a quarter, without us needing additional funding.

Based on our current plans for the remainder of the year, our recent equity funding, this new credit facility, and experiences we have had with managing cash, particularly in the last 12 months, we believe we will have adequate cash and investments on hand and available sources of liquidity to continue funding the business. Our capital expenditures were not significant during the quarter. We historically invested a lot in manufacturing infrastructure, with production capacity far in excess of our current revenue level; we can substantially increase production levels, without needing to make any material capital investments.

As a result, the capital expenditures we make will primarily support expansion of the sales and service capabilities, and our marketing and promotional efforts as required. Our stock has recently been trading about the minimum bid price level of $1 per share required for the continued listing of our stock on the NASDAQ global market. However, NASDAQ requires our stock to close above $1 for 10 consecutive business days in order to regain compliance with NASDAQ’s listing standards.

NASDAQ has given us 180 days or until September 20, 2010 to regain compliance with this rule or face the risk of the delisting of our stock. It is possible, however to obtain a further 180 day extension to regain compliance if we do not comply before this deadline. Based on this and our current share price levels, we do not believe there is any imminent risk of delisting of our shares. I would also like to add that Stifel Nicolaus and Noble Financial Group through their alternative energy groups, both recently initiated financial analyst coverage on Active Power’s stock.

Along with Ardour Capital, our existing research analyst, we believe this will help generate more visibility for Active Power and for our stock.

This completes the financial portion of the presentation, so I will now turn the call back to Jim for some further comments. Thank you.

Jim Clishem

Thanks John. In looking at some of the macro economic trends, business conditions continued to improve particularly within the datacenter as organizations move ahead with capital infrastructure projects. As a positive indicator, server sales have substantially increased according to a July 20 article on the Wall Street Journal. The addition of more server equipment requires two critical items most relevant to our products and solutions, which are of course space and power.

With business and IT demands constantly evolving, CIOs and datacenter operators are looking for ways to save space, reduce energy consumption and cut costs. Active Power is well suited to help these organizations solve these types of infrastructure challenges. In fact, more and more large colocation facilities and enterprise datacenter operators are choosing not to deploy conventional UPS systems simply due to their energy inefficiencies, large footprint and reliability issues.

We realized significant success this past quarter in selling into these types of facilities as these organizations understand that one of the ways to reduce energy cost is by deploying highly efficient UPS systems like Active Power’s. Also wide floor space or the datacenter room space in a very large datacenter comes at a premium. With Active Power’s space efficient UPS technology, operators can preserve this valuable space for revenue generating racks and server equipment.

Active Power’s ability to provide the same amount of critical backup power in as little of one fourth of the space versus a conventional system makes our UPS solutions pay more compelling alternative. In terms of success with colocation and large enterprise facilities, we continue to receive repeat orders from one of the world’s largest colocation providers. We are also receiving repeat multimillion dollar orders from one of the world’s leading Internet search engine providers as well, per our announcement on June 22 of this year.

This particular customer, search engine provider, has ordered approximately 38 million of critical backup power in less than three years time. This repeat business confirms customer confidence in our solutions, as well as the performance and tangible benefits realized by these clients to the operation of these types of systems.

Industry analyst group, Gartner, believes power and cooling requirements will dramatically increase over the next two years due to high density infrastructure deployments. We believe we can capitalize on these market trends as benefits inherent in our products and solutions, which are of course high energy efficiency, small footprint, high reliability and of course our green attributes, all of these directly address the industry’s most common pain point, which include growing server density, expanding datacenter floor space, power and cooling inefficiencies, requirements to reduce operating cost, and an increase in volume and the overall cost of energy.

What is Active Power doing to leverage these trends and help propel the business forward to achieve and sustain operating profitability. We are leveraging our core capabilities and the commercialization strategy that we put in place just more than four years ago. The four components of this commercialization strategy include building brand, diversifying and expanding sales distribution, creating and focusing on innovative solutions, and of course building for less.

So let us talk about each of these just for a moment. In terms of brand, we remain focused on generating awareness to support our global sales team. For example, we exhibited or had a presence at 20 trade and industry events this quarter alone, with nine of these events being held overseas. In late June, we brought our 40-foot continuous PowerHouse system onsite to the Turner Logistics Tradeshow in Dallas, Texas, allowing IT and construction professionals a first-hand look at this containerized continuous power solution.

That same week we were on-site at the HP technology forum in Las Vegas to support our partner, HP, in their containerized datacenter offering. We are constantly seeking out ways to evangelize the Active Power story, and our products and solutions. One of the most effective ways to do this is via speaking engagements. These opportunities enable us to share our perspective on various UPS and containerized infrastructure technologies, and their benefits.

On the distribution front, sales distribution that is, we continue to invest in our sales channels. In late 2009, we restructured these channels to have dedicated personnel providing focused resources and support to our OEM and our IT partners. This strategy has been a success. We have observed a high renewed interest on the part of Caterpillar on a global scale to market the CAT UPS as part of their continuous power solution for mission-critical facilities. And more to the point Caterpillar orders tripled in the first-half of 2010 compared to the same period in 2009, a 200% increase.

We are also expanding our direct sales efforts in China. And we will be opening our first sales office in Beijing next week. A direct presence in this market will allow us to leverage the success we have had in China to date and take advantage of the country’s growing UPS market. IMS Research indicates China’s growth will continue to generate demand for information technology and power infrastructure related equipment and in turn, of course, our UPS systems.

The research firm forecasts double-digit UPS sales growth over the next five years. Now turning our attention to the importance of solution selling, as part of our core strategy, solution selling continues to be fundamental to our growth. We are in an inflection point focused on creating and selling solutions, rather than just point products across all of our sales channels.

For example, and as John indicated earlier, PowerHouse sales were 30% of our total revenue in the second quarter, compared to only 9% in the first quarter of this year. We’re also leveraging our expertise around containerization and are now selling containerized infrastructure solutions. As a result of this move, we achieved and received an $8 million order from one of our strategic IT partners for a containerized infrastructure solution, the largest order in the company’s history to be delivered in the third quarter of this year.

We’re taking a solutions focused approach for several reasons. First, the continuous critical infrastructure business increases our addressable market more than fivefold versus just selling UPS systems alone. Second, a PowerHouse sale creates a lot of value for Active Power in terms of revenue. For example, when we recognize a dollar on a UPS system sale, we can magnify that UPS revenue to $4 to $5, when we containerize the UPS and integrate it with a diesel generator, switching fabric, monitoring software et cetera.

And third, solution sales increases the potential for repeat business. We are able to develop and nurture long-term relationships with these customers as a result. Now in terms of building for less in our commercialization strategy, we have been able to leverage the manufacturing and other infrastructure that we have in place to obtain significant sales growth without a commensurate increase in the cost of operating our business.

For example, in two years or comparing from Q2 of 2010 to the second quarter of 2008, we have been able to increase our revenues by 136%, yet we have managed to control our operating expenses, which have only increased by 5% over that same period. And most of that was attributable to higher variable sales compensation from the higher revenue levels.

We’ve also lowered our product cost through directly reducing our manufacturing overhead by over 20% in the same period, efficiencies from higher production volume and from continuous product design to eliminate this additional cost. Many of these cost savings mitigated commodity price fluctuations over the last several years and helped to preserve and improve our gross margins without having to increase pricing to customers attributable to the commodity price increases.

We continue to re-engineer our products and look for cost savings at the product level. We also believe we have the infrastructure in place to be able to grow revenues without any major increases in headcount. That said, we do expect to continue expanding our sales and service organizations.

Now looking at the third quarter of 2010, looking ahead, since the beginning of the second quarter we received more than $24 million in orders that is a company record. These orders are in various stages of processing and represent a diverse geography, partner and product set. With the momentum we have seen recently, we anticipate another sequential increase in quarterly revenues next quarter.

We currently expect third quarter revenue to be between $15 million and $18 million. This would represent an increase between 76% and 111% compared to the revenue level we recorded in the third quarter of 2009. And based on the projected sales mix, this would result in a gross profit margin of between 26% and 30%. At current operating expense levels, this would result in net earnings per share between a profit of $0.01 per share and a loss of $0.02 per share. It is likely we will achieve EBITDA profitability this quarter and potentially GAAP operating profitability for the first time in Active Power’s history, a significant milestone in our company maturity and creation of a sustainable, profitable and rapidly growing business.

The achievement of these results with 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 second quarter. Cash used in operation will therefore be largely driven by our working capital requirement during the quarter, and will be affected by the timing and size of orders we fulfilled during the quarter.

We will continue to utilize our banking facility and manage customer and vendor cash flows appropriately to mitigate cash requirements.

Thank you for being on our call this morning and on behalf of the senior management team here at Active Power and our board I would like to express our continued appreciation for the support of all of our customers, employees and shareholders as we work to achieve quarterly profitability during 2010.

Now at this time, John and I will be happy to take your calls, your questions rather. So, I think we are ready to do that at this time.

Question-and-Answer Session

Operator

(Operator instructions) At this time, I have Dilip Warrier. Dilip Warrier your line is now open.

Dilip Warrier – Thomas Weisel Partners

Hi, good morning, Jim and John.

Jim Clishem

Hi, good morning, Dilip.

John Penver

Good morning.

Dilip Warrier – Thomas Weisel Partners

Congratulations on the quarter, by the way. I was wondering, if you look at the product gross margin, it seems to have declined a bit sequentially. I was wondering if it had anything to do with product mix or perhaps even effects of the variation.

John Penver

It was actually up marginally, Dilip. But, it certainly, sales mix was the primary contributor to the change. We had PowerHouse revenues, where we do generate slightly lower margins than we do from UPS systems, and we also had what we call datacenter infrastructure solutions. So a higher proportion of non-UPS based revenues, which tend to pull the margin down a little bit. Otherwise, we might have expected it to be a little bit higher on that revenue level.

Dilip Warrier – Thomas Weisel Partners

Okay. And what drove the big improvement in the service revenue gross margin?

John Penver

That is primarily due to PowerHouse. So, when we provide solutions to those customers there is usually a large service component to it relating to design, fulfillment, installation, commissioning and start up. And so typically when you see large PowerHouse system sales, you will usually see a large increase in service related revenues that come with that. So that number will fluctuate with changes in the volume of PowerHouse sales.

Dilip Warrier – Thomas Weisel Partners

Got it. In the $24 million in new orders that you've booked since – I guess since 2Q, is all of that expected to turn into revenue in 2010?

Jim Clishem

It is going to vary during the remainder of this year, but largely yes. Largely, almost all of that will be part of the 2010 outlook.

Dilip Warrier – Thomas Weisel Partners

Okay. Is this a stat that you're going to consider providing on an ongoing basis, because it actually is very helpful for us?

Jim Clishem

Yes.

Dilip Warrier – Thomas Weisel Partners

Good. Okay. And the 3Q guidance, the range, is that solely down to order timing?

Jim Clishem

It is Dilip. It is a function of both. As you know from previous discussions, UPS sales that then turn into PowerHouse sales, sort of delay the revenue recognition, and of course the collection of cash. So it is related to more of that than anything else.

John Penver

Yes, sometimes there is some question about the ability to obtain components and stuff when you are delivering a solution set. So, it can potentially cause an order to miss the cut off. That is really the only reason you have that potential volatility.

Dilip Warrier – Thomas Weisel Partners

Okay. And one last question, I know you don't generally provide guidance beyond the next quarter, but is there any reason to expect that this trend of sequential quarterly revenue growth will not continue into 4Q?

Jim Clishem

Nothing we see today that would jeopardize that Dilip.

Dilip Warrier – Thomas Weisel Partners

Very good. Thank you.

John Penver

All right. Thank you.

Operator

Our next question comes from Walter Nasdeo. Walter Nasdeo your line is now open.

Walter Nasdeo – Ardour Capital

Thanks. Good morning, men.

John Penver

Hi, Walter. Good to hear you.

Jim Clishem

Hi Walter.

Walter Nasdeo – Ardour Capital

You too. A quick question, is there any way you can give me what your capacity utilization was for this quarter?

Jim Clishem

Factory-wise?

Walter Nasdeo – Ardour Capital

Yes.

Jim Clishem

Okay, John.

John Penver

Yes, Walter, I would say it is approximately 40%. We would have to add direct labor to increase the volume, but from a purely testing and you know, manufacturing capacity we probably are at about 40% theoretical capacity of that facility.

Walter Nasdeo – Ardour Capital

Are you striving for a specific percentage number to get to, so that you have some dry powder but also working at a high level of utilization?

John Penver

Honestly, I think I am more focused on us hitting profitability, and being able to absorb the excess cost, and we are getting closer to that. The way I look at it right now is that with the amount of capacity that we have we won’t be constrained for quite some time in terms of our ability to respond to an increase in orders. We just would have to add variable labor to increase outputs from the factory.

Walter Nasdeo – Ardour Capital

Okay. You mentioned that sometimes some of the systems take more than a quarter to get delivered. Is there a way that you could – is it through manufacturing, assembly, or what's the bottleneck there that does take that length of time? And is there anything that you're working on to expedite that process?

Jim Clishem

Yes, Walter, I wish I could give you one answer that would fit all, but I will give you sort of a flavor. So, there are long lead time items for example in a solution set. Generators can sometimes be long lead time items, depending on when the orders are placed and when the delivery dates are confirmed, they could fall on quarterly boundaries.

The second thing that happens sometimes is customer, right. There are a lot of moving parts at a customer facility, and so there is a projected delivery date to integrate with all the other things going on in the facility. So sometimes those can move dates, and although they are not part of our supply chain concern like a generator would be, they are part of the delivery concern.

And I think the last thing I would tell you is that the customers oftentimes look at these solutions and try to decide, this is why I think PowerHouse has been so strong, is there is this propensity for just-in-time capital deployment, and a PowerHouse gives them a great opportunity to delay the decision for having to buy all the components as early in the cycle as they normally would, because they get a pretested system, and it minimizes their risk of capital delivery and just-in-time capital deployment, and also their turn up time delivery, but that can adjust sometimes the delivery dates, because they know they can sort of wait until 12 to 14 weeks before they actually needed as opposed to several months before they need it. So, hopefully that gives you a little color on that answer.

Walter Nasdeo – Ardour Capital

I got you. Okay. And then if I could just finish up with some – can you kind of walk me through a little bit the international penetration procedures or how you're working through really developing large business outside of the United States? I know that that's working now, but can you kind of just fill me in on how that's moving and what you're doing to really ramp that up? Because I think that's your next level of growth is obviously going to be Asia and then maintaining what you've got in Europe and the Middle East and building upon that.

Jim Clishem

Yes, like most things I would tell you, Walter this is Jim, in business common sense tends to rule. In the early days, when I first got here to Active Power, we were trying to put people on airplanes and to sell in Europe and Asia just doesn’t work. So the investments that this company now has made in its service distribution, its service capability and its demonstration capability are actually in each of these regions now. So for example, in Europe we have a major committed installation in the UK, which both provides service, sales and demonstration capabilities.

We also have an integration facility there for Active Power. So, it just gives and in country and in case of Europe, an in European opportunity to really show off our wares and at the same time have local feet on the street, both our own direct sales people for complex sales, and our distributors. In addition, dovetailing into the Caterpillar comments is that Caterpillar has researched, and they have a very strong presence in all the markets that I just mentioned, including Asia, Europe and the US. And that is really hitting quite well with of course the last release that we had of nearly three times the amount of orders in the same period, just to the Caterpillar channel.

So I think putting our own people in place, having business plans in place, gaining market share as a result of success, and then throwing more marketing into those territories, we built a pretty good brand. We are now being specked into many, many opportunities against our competitors, winning against those competitors. That happened because of an explicit go to market strategy in those countries. Now you just heard me announce that we have been in China for a while, but we now are forming a legal entity and opening the office. In fact, John Penver is jumping on a plane Friday, and will be there along with our VP of Sales, Dietmar Papenfort, to officially open the Chinese office. And we are following a very similar strategy in that market place. We have got several distributors in place now that sell the Active Power solution, in addition to our own sales people on the streets with the appropriate RFPs now being shipped our way in that market.

So I think it is – I like to tell you there were some secrets also to it. I think it has just been hard work and focus in putting our own people and our own processes in place in those countries as opposed to trying to do it just from the US.

Walter Nasdeo – Ardour Capital

Okay. Well, listen, I appreciate your time on this. Thanks, guys.

Jim Clishem

Thanks Walter.

John Penver

Thanks.

Operator

Our next question comes from Matthew Couth [ph]. Matthew Couth, your line is now open.

Matthew Couth

Yes, thank you. Good morning, everyone.

Jim Clishem

Hi Matthew.

John Penver

Hi.

Matthew Couth

Question, just trying to get a sense for the breakout of product revenue. I know that the PowerHouse is – can you break out – I'm not sure if – between products and service tied to PowerHouse revenue?

Jim Clishem

Yes, for the quarter PowerHouse was about 4.9 million, service revenues were 2.7 million for the quarter.

Matthew Couth

Now, the –

John Penver

Now, I think Matthew what you are after, in the service revenue there is probably about $1.4 million of service revenue that is attributable to the PowerHouse. Is that the piece you are after?

Matthew Couth

Yes, sir. Thank you. Just trying to – sequentially, I think going back to a previous question on gross margins, I'm just trying to – on the product side, just trying to ascertain, was there any competitive pressure on the CleanSource products? Were you happy with the ASPs there?

Jim Clishem

We typically like to – we were happy with that. Right in there around 80,000 ASPs is sort of ideal in our model. Last year we exceeded that, this quarter we were just a little bit on the figure of 79,000 ASP. I would tell you that we strategically hit some pretty large PowerHouse orders, and one in particular I can think of in Europe was a little bit less on a margin basis than we normally would, but it was done for strategic reasons. It was a very large order, on which we think there will be repeat business.

So as John mentioned a minute ago, I think the PowerHouse and some of the other infrastructure order work that we have been doing probably migrated the gross margins down just slightly, but they were still quite good there, and I think the wheel was extraordinarily good on the margins. So we’re not seeing any erosion there on the UPS sales, I would tell you?

Matthew Couth

Okay. I think you said it in the prepared remarks, the integrated work with HP, that type of infrastructure, ex-PowerHouse. What was the product revenue there again?

John Penver

That was about – $2.1 million came from infrastructure solutions.

Matthew Couth

Infrastructure solutions, okay.

John Penver

Yes.

Matthew Couth

All right, thank you. And just lastly, do you have a D&A number, depreciation and amortization number, to kind of get at free cash flow?

John Penver

It was approximately $900,000 between the D&A that includes the stock based compensation, as well as depreciation and amortization.

Matthew Couth

Okay, so that $900,000 is D&A plus stock comp?

John Penver

Yes.

Matthew Couth

And your CapEx was minimal, but do you have a rough number there?

John Penver

Approximately $200,000, but I had to verify that number Matthew. We will be filing our 10-Q today, and it will be in that.

Matthew Couth

Okay. Okay, so that $900,000 is good for the EBITDA number as well. Okay. Thank you very much.

John Penver

Thanks Matthew.

Operator

Our next question comes from Brian Kowalchyk. Brian Kowalchyk your line is now open.

Brian Kowalchyk – Patara Capital Management

Good morning, gentlemen. Thanks for taking my questions.

Jim Clishem

Hello Brian.

Brian Kowalchyk – Patara Capital Management

Hi there, guys. Just want to clarify, the comment with regard to the orders received during the quarter that was $24 million received during the second quarter, so end June 30?

Jim Clishem

That is correct.

Brian Kowalchyk – Patara Capital Management

Is that correct?

Jim Clishem

Yes.

Brian Kowalchyk – Patara Capital Management

Okay. And can you clarify whether any – these colo providers or the search engine providers, are they ordering the PowerHouse solution, the CleanSource product, or some combination of the product line?

Jim Clishem

Largely, our UPS solution, but the reason I’m sort of stammering here a little bit is because the implementation at those facilities are not containerized but they are complete continuous power systems, which include generator, UPS switchgear, but just so happened to be deployed in the traditional mechanism, which is inside the building as supposed to being in a container outside.

Brian Kowalchyk – Patara Capital Management

Are they looking to you to provide the complete system?

Jim Clishem

Yes, oftentimes they do. And we are seeing more and more of those. And I think I made a comment in my remarks that the opportunity that leads to Active Power is much larger than just the UPS market segment alone, when you start integrating that because you also pull through not only generator and switchgear, but the service business and also you mitigate a lot of onsite risk when you do that.

Brian Kowalchyk – Patara Capital Management

Sure, understood. I completely understand the argument and the potential increased market opportunity for you. But why do you feel they're not deploying? If they're coming to one vendor, in a sense, for the entire solution, why are they not deploying in a containerized manner?

John Penver

Brian, this is John, I can say that some of the colocation companies depending upon where they are in the world, it is possible that they will deploy a containerized package for example in Europe, but in the United States they may speak to a more traditional room of infrastructure rather than a modular package. So it can be situational depending upon the facility, environment, the climate, and in some cases they believe they get better leverage by procuring the different components separately. They have that expertise but not all customers do.

So depending upon who the company is, we actually can depend upon the situation sell them both UPS systems and containerized solutions.

Brian Kowalchyk – Patara Capital Management

Understood. You guys have indicated that you've expanded a little bit on the sales and marketing side. Can you give me some idea of what the current headcount is in sales and marketing and what it looks like through the end of the year?

Jim Clishem

Yes, so currently in the US we have our own direct sales people, and we have sales support folks along with application engineering. So, in the US that would be somewhere on the order of about 25 to 30 people. And in EMEA, we have about 6 to 10, a little bit fewer, but we also again have multichannel sales distribution strategy. So, we have got tons of feet on the street with Caterpillar. A lot of feet on the street now with Hewlett-Packard, and our traditional, distributors and manufacturers’ reps. So, if you add all that together we have hundreds of people now representing Active Power across the globe, but I think you were just asking about our…

Brian Kowalchyk – Patara Capital Management

Yes, just what's on your payroll right now. So it sounds like somewhere around 35 to 40-ish globally.

Jim Clishem

That is right, and I do not anticipate that we will be expanding too much further than where we are. We will get a lot of runway out of this current structure that we have in place now?

Brian Kowalchyk – Patara Capital Management

Okay. That's helpful. And I think I heard you mention that the large containerized order from your partner, the large $8 million order that you announced previously, did not hit the second quarter?

Jim Clishem

Partly. It spread out really between this quarter and next quarter. So, I am sorry, Q2 and Q3.

Brian Kowalchyk – Patara Capital Management

Oh, okay, so there was some in Q2.

Jim Clishem

There was some in Q2. There was 2 million. I think John quoted $2.1 specifically and the balance will be in Q3.

Brian Kowalchyk – Patara Capital Management

Understood. Okay, thanks for the follow up.

Jim Clishem

Thanks.

John Penver

My pleasure.

Operator

At this time, I have no other questions in queue.

Jim Clishem

Okay. So, we again want to just thank you again for joining us today, and we appreciate your continued support and look forward speaking with 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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Source: Active Power, Inc. Q2 2010 Earnings Call Transcript
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