Active Power's (ACPW) CEO Mark Ascolese On Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Active Power, (ACPW)

Active Power, Inc. (NASDAQ:ACPW)

Q2 2014 Earnings Conference Call

July 29, 2014 08:30 ET

Executives

Mark Ascolese - President and Chief Executive Officer

Jay Powers - Chief Financial Officer and Vice President, Finance

Analysts

Matt Koranda - Roth Capital

Carter Driscoll - MLV

JinMing Liu - Ardour Capital

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, 2014.

With us today is Mr. Mark A. Ascolese, President and Chief Executive Officer of Active Power and Mr. Jay Powers, Chief Financial Officer and Vice President of Finance. Following their remarks, we will open up the call for questions.

I would like to take a moment to read the company’s Safe Harbor statement. The company’s management on this call may make statements that relate to future results and events, including statements about Active Power’s future financial and operating performance, such as statements relating to steady progress in our rate of bookings and backlog growth, work to continue to increase bookings and consistency in order flow being well-positioned to improve sales and productivity improvements are forward-looking statements based on Active Power’s current expectations.

Actual results and the outcome of future events could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in the company’s filings with the Securities and Exchange Commission and in the cautionary note regarding forward-looking statements in the company’s press release. Active Power assumes no obligation to update these forward-looking statements.

On today’s call, the company will be referring to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is reconciled to GAAP net loss in the company’s press release, which we encourage you to review. Unless stated otherwise, all comparisons are to the period ended June 30, 2014 as we stated. I would like to remind everyone on this call that this call will be available for replay via Active Power’s website at www.activepower.com.

I would now like to turn the conference over to President and Chief Executive Officer of Active Power, Mr. Mark A. Ascolese. Sir, please go ahead.

Mark Ascolese

Good morning, everyone and thank you for joining us today. We issued a press release earlier announcing our results for our second quarter ended June 30, 2014. We made steady progress in the second quarter to increase bookings and to improve our backlog just as we did in the previous quarter. We booked more orders than we shipped in the second quarter. We believe continuing this progress is key as it aligns with our priority to increase bookings and improve consistency of order flow.

Our CleanSource HD UPS sales continue to gain traction as we booked an order from Caterpillar for shipment to Belgium during the quarter. The system will support the mission-critical motors and pumps associated with a water infrastructure project in the region. We also booked multiple CleanSource HD UPS units for shipments in the United States to one of the largest online retail lenders in the country. On the modular infrastructure solutions front, we booked an order for multiple modular infrastructure products from Dell.

In China, Active Power was named 2014 Green Environmental UPS Manufacturer of the Year by UPS Applications Magazine. The Beijing-based trade publication recognized a company for its energy-efficient environmentally-friendly products. Our battery-free UPS products are clean and green in our active use we believe will resonate with Asia-Pacific customers as they favor more of these types of solutions.

Now, for a few comments about sales for the first half of 2014. Although second quarter sales were down from the previous quarter and the second quarter of 2013, it’s important to keep in mind the inherently long sales cycle in our business and length of time between when an opportunity enters our pipeline and when it’s ultimately booked. Based on our recent analysis, a large percentage of dollars booked in the first half of 2014 entered our pipeline more than a year ago. We believe this lag time between opportunity identified and order booked is a function of a number of variables, including delays in customer deployment schedules and persistent sluggishness in the market. This in turn means opportunities are taking longer to close, however, and as I have mentioned last quarter, we are generally not seeing order cancellations.

Some of the latest UPS market data is consistent with what we are experiencing the field. It’s worth noting though a faster recovery is forecasted for 2015 in the larger UPS ratings above 500 KVA according to the June 2014 report from IHS Research. Our CleanSource HD UPS is directly targeted at the greater than 500 KVA segment. This KVA rating is a standard building block for large UPS system deployments, which one would typically find in a large co-location data center, for example. Based on current market conditions, we will continue to focus on increasing bookings and improving backlog. I also believe we need to take this time to increase productivity.

Before we go further though, I’d like to turn the call over to Jay to give us financial details about the quarter. I will then come back to share progress we are making in improving our sales and manufacturing operations and our efforts to increase productivity. Jay?

Jay Powers

Thank you, Mark. Revenue totaled $10.2 million for the quarter. This was a decrease of 7% sequentially and a decrease of 50% from the prior year quarter. The sequential decrease came from our service revenue, which were down $800,000 for the quarter. The decrease in revenue from the second quarter of 2013 was due to large MIS projects and their associated service revenues, which were not repeated in the second quarter 2014 partially offset by higher UPS sales in the quarter. By region, revenue for the quarter was $6.1 million in the Americas, down 23% compared to the first quarter 2014. In EMEA, revenue was $3.5 million, which is up 64% compared to the first quarter 2014. In Asia, revenue was $600,000, down 36%. Please refer to the supplemental information in our press release for more details on our revenue split by product and geography.

Now, continuing down the income statement, gross margin this quarter was 18.9% compared to 26.8% in the first quarter 2014 versus 34.3% in the year ago period. The decline in gross margin resulted primarily from lower overhead absorption in our factory and service organizations. We produced less manufactured product during the quarter, which resulted in inventory decline of $1.4 million or 11% compared to the previous quarter.

Total operating expenses were $6.2 million for the quarter, down 400,000 sequentially and down $200,000 versus the second quarter 2013. The sequential decrease was largely due to lower product development expenses associated with the CleanSource HD UPS. Net loss for the second quarter of 2014 was $4.4 million or a loss of $0.19 per share. This compares to a net loss of $3.9 million or a loss of $0.19 per share in the previous quarter and a net profit of $300,000 or $0.02 per share in the second quarter 2013. The increase in net loss from the previous quarter is largely due to a decrease in gross margin for the period.

The net revenue – the net loss versus net income in the second quarter 2013 is due to lower revenue and lower gross margin in the quarter versus the year ago results. Adjusted EBITDA was negative $3.8 million in the second quarter of 2014 compared to a positive $1.1 million in the second quarter 2013 and the negative $3.1 million in the previous quarter. The year-over-year decrease in adjusted EBITDA is due to the net loss recorded in the period versus net profit recorded a year ago results. Our press release contains details on how we calculated adjusted EBITDA.

Now turning to the balance sheet, we ended the second quarter 2014 with $16.2 million in cash, a decrease of $2.5 million from the first quarter 2014. The decrease in cash is due to negative operating cash flow of $2.5 million for the period. Operating cash flow for the first quarter 2014 was negative $4.1 million. The improvement in our operating cash flow for the period was primarily due to favorable changes in working capital, inventory decrease of $1.4 million versus the previous quarter, while receivables were down $1.1 million. We successfully completed and expanded three-year credit facility earlier this month with Silicon Valley Bank designed to afford us greater borrowing ability. The credit facility has $15 million credit limit in place, higher than our previous facility of $12.5 million and has a lower interest rate. This will allow us to respond to and finance large orders without the need to utilize our cash reserves.

This new facility coupled with a public offering we completed in early March should provide us the financial flexibility we need to support higher quarterly revenue levels. As a reminder and as we mentioned last quarter we will not provide guidance due to the continued variability in our business. However, we will continue to provide perspective on market trends that impact our business and growth prospects.

This completes the financial portion of our presentation. I would now like to turn the call back over to Mark.

Mark Ascolese

Thank you, Jay. We stated last quarter our intent to put the sales infrastructure in place that would enable us to increase bookings and improve consistency in order flow. To accomplish this we have made a number of organizational changes in the second quarter to strengthen our sales and marketing and manufacturing efforts. I am happy to report a number of these changes were promotions from some of our most experienced long tenured employees. First we promoted one of our most talented sales professionals to Commercial Sales Director for North America. Kamal Diwan has been with Active Power since 2006 and consistently demonstrates his deep technical knowledge of our products. This technical acumen has enabled him to serve as a resource to our customers to help them solve some of their most challenging electrical designs.

Second, Tom Spann has joined us to lead our Federal Sales efforts. Tom has more than 20 years of experience building and developing successful federal sales businesses for companies, including Oracle and Lockheed Martin. He brings critical expertise in the inner workings of procurement process within the federal government. We believe we now have the sales resources to identify federal programs in need of energy efficient, environmentally friendly and American made products to support mission critical applications.

To strengthen our sales leadership in the Asia-Pacific region, we appointed Kok Meng Ng as Managing Director of the region. Kok Meng is a well known and highly respected sales and operations executive with nearly 30 years of experience in the UPS and electrical infrastructure markets for large multinational organizations. Based in Singapore, he will expand our business development efforts and distribution network in the Asia-Pacific region.

In Europe, we promoted Rob Engelen to Sales Director to oversee activity in EMEA. Rob has been with Active Power nearly three years and is one of our top talents with a proven track record of success. His passion for the business and keen ability to effectively manage our network of sales partners in the Europe makes him an excellent fit for this role. Our field sales organization is engaged and excited about the sales opportunities they are already discovering which is encouraging.

Lastly, we hired Ken Johnson as Vice President of Manufacturing. Ken has a long successful career in operations, supply chain management, procurement and quality. He began his career at IBM and has recently worked at Eaton and Avaya.

Now, a few comments on our efforts to increase productivity. Ken and his team are helping us effectively reduce our inventory levels, improve the inventory turnover and build efficiencies in our supply chain. To achieve this, we will deploy robust strategic sourcing plans and supplier relationship management programs. We continue to implement Lean Six Sigma programs to help us identify and eliminate waste and drive efficiency and productivity throughout the organization. We are also working to reduce our fixed cost structure and refocusing our operating expenses to more value-added activities, all of this to strengthen our operating platform. We believe having this strength and platform in place will help us build momentum for future growth. The work of Ken and his team is already beginning to yield results evidenced by a $1.4 million reduction in inventory, which benefited our cash position as Jay mentioned earlier. We have further plans to reduce our inventory and improve our turns.

In closing and as I have mentioned before, we expect to begin seeing improved results in the fourth quarter of 2014. We have an elegant technology that is supported by a passionate group of employees and selected by great global customers. The three priorities we laid out late last year have not changed, which include generating increased bookings and more consistent sales performance, leveraging the products and solutions we have in place now to grow the business, and positioning Active Power as a mission-critical and energy storage company.

Now, with that, we will be happy to open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Matt Koranda with Roth Capital.

Matt Koranda - Roth Capital

Good morning, guys. Thanks for taking my questions.

Mark Ascolese

Good morning, Matt.

Jay Powers

Good morning.

Matt Koranda - Roth Capital

Just wanted to start off with bookings, on the last call you guys provided some color on sort of how they compare sequentially? Just to clarify, did you guys book more than you shipped in – or did you book more in Q2 than you booked in Q1?

Mark Ascolese

We booked more in the quarter than we shipped in the quarter as we did in the first quarter, where we booked more than we shipped.

Matt Koranda - Roth Capital

Okay. Any commentary sequentially though, how does it compare to Q1 in terms of just bookings to bookings?

Mark Ascolese

We normally don’t share that information, but if you look at the press release and go to the revenue numbers, you will clearly see that our UPS sales are up year-over-year and quarter-over-quarter and then our sales were up everywhere except in the United States. And if you take out that big order in shipments we made last year in the MIS Group, fundamentally, UPS business here is growing nicely and is strong.

Matt Koranda - Roth Capital

Okay, that’s fair enough. I noticed that the UPS does look strong, Mark. Maybe you could segment out sales during Q2 for us, in the past we have discussed kind of four basic markets for you guys, the hyperscale, co-lo, large corporate data and then smaller datacenters, can you just discuss where you saw strength in the quarter and then were there any areas of softness? And also if you could comment on those segments and how they are trending for the remainder of 2014?

Mark Ascolese

So, I would say that we had a nice mixture of orders, some in the millions of dollars coming from large co-los and enterprise type datacenters and some in the one and two module system size coming out of smaller datacenters, hospital applications and some industrial applications. So, we are seeing both in our pipeline and in our bookings trending good spread of business across our traditional markets. I think I mentioned on the call last quarter that while the datacenter market is our largest market representing almost 50% of our business, there are many other markets we serve broadcasting, pharma, medical and others that have a lot of our products installed and we are seeing a good flow of activity in all those markets, in all of our traditional markets.

Matt Koranda - Roth Capital

Okay, that’s helpful. And then just one more here from me and this is a little bit higher level, Mark, but as the new sales force starts to take shape and ramp up, how do you measure success on this front? Could you frame it out for us with various future timeframes in mind, for instance, what does success look like to you during the second half of 2014, during 2015, and then in the longer run? And then what metrics would you look at – do you think about a certain bookings run rate, a share of the served addressable market or in another way?

Mark Ascolese

Initially, what we are looking for is activity, new activity coming into our pipeline and then the conversion of that new activity coming into our pipeline into bookings. And we look at that on an individual basis for each one of our sales people on a global basis. And so we are looking for activity in the field. We are looking for that activity to convert to quotes and then we are looking for quotes to convert to orders. And if you are based on the revenue numbers which I can speak to, we are having and seeing good activity in all three regions when it come to the UPS business. And I would – as I have said all along, we would expect to see significant upward trending by the end of this year, figuring that we have started this exercise late last year, early January. And we replaced almost half of our sales force and we have got new leadership in place now that would be a very good performance on the part of the sales team here for us to see that within that 12-month period.

Matt Koranda - Roth Capital

Okay, that’s helpful. And that’s it from me guys. Thank you.

Mark Ascolese

Thank you.

Operator

We will take our next question from Carter Driscoll from MLV.

Carter Driscoll - MLV

Hi, guys. Good morning.

Mark Ascolese

Good morning.

Carter Driscoll - MLV

Question about – you talked about some of the initiatives you are doing to drive down I guess at a high level the fixed cost structure. Could you talk about maybe any changes with all the new hires in the sales side to their compensation? Is there more mixed component? Has the variable been ramped up? What are you doing to incentivize some of these people? Has that changed at all from past behavior?

Mark Ascolese

It has changed from a year ago. We compensate the sales team today 100% on bookings. And I think I mentioned this last – on our last call that the rest of the company, the incentive program for the rest of company is based upon bookings and operating income. When it comes to the sales force, it’s 100% on bookings. So, these guys are compensated based upon orders that they bring in that they get rewarded very nicely there is lot of upside potential obviously built into the plan.

Carter Driscoll - MLV

Okay. And then just shifting gears a little bit, MIS, while it was up sequentially and it’s certainly a very lumpy business is down pretty significantly year-over-year. Could you maybe add little color to which of those targeted end markets are still kind of on the fence in terms of making their purchase decisions? And you talk about very low cancellation rate, but it’s been a couple of quarters since you have been able to pull one of those big orders in. Could you maybe talk about the dynamic of maybe is it the partners you are with that maybe you aren't executing, is it a CapEx environment you see starting to get healthier in the back half of the year? What is your kind of internal expectations of when that business might be able to turn around a bit?

Mark Ascolese

So, we go to market two ways in the MIS world. We go to our partners obviously HP and Dell. And on the other side, we sell direct. And the business that has been slow and has been pushed to the right has been the business that goes through our partners. And we have seen just very recently some freeing up of the business that we give to the direct channel in terms of a couple of orders. I don’t know if you have seen the most recent IHS report that I mentioned in the prepared statements, but in some markets, there has been a dramatic slowdown in the UPS business between 250 and 800 KVA, in the 20% range here in North America contraction. And so I think what’s going on, I mentioned this last call, that there was some sluggishness. I think that some of these large deals and large datacenters that are being built co-lo, etcetera, have been slowed down and moved off to the right, because of demand issues on the compute side of the business. I don’t see this – I don’t see that going away.

Now, the indications from the research are that we should see an uptick some starting late this year, sometime third, fourth quarter as they are talking about a 4%, 5% uptick in growth in those markets in 2015. And so I think – I think that’s what we are seeing. Having said that, we are a small company playing in a very large marketplace here, well over $2 billion in our serve addressable market and so there is plenty of opportunity for us. And I think that as our new sales team gets more and more focused and acclimated that we will start to see more and more opportunities on the MIS side. And we are actually seeing more opportunities on the MIS side in our pipeline.

Carter Driscoll - MLV

Thank you for that. And then just my last question is in terms of the bookings, in terms of closing the deal or the sales cycle for the newer version that you introduced last year, is it a longer sell, a shorter sell, maybe you could kind of compare to your – kind of the core 300 product? And what your expectations are, you talked about year end? You are starting to see an uptick, you think 12 months is pretty realistic for an uptick there, could you compare that to what kind of the close rate had been historically before you arrived and how you have been able to affect some change there or what you believe to be your effect in the change there?

Mark Ascolese

Are you asking the segment to 750 out in the question or just in general terms?

Carter Driscoll - MLV

I would really like to hear more of the 750, but comparing it to the other ratings?

Mark Ascolese

So, I would – there is no difference in actually between how long it takes to book 750 or how long it takes to book a 300. If you are talking about one or two module systems, if you are talking about large 1 megawatt, 1.5 megawatt, 2 megawatt system, whether it’s 300 or 750 that cycle is longer. And we have seen evidence of that cycle kind of being elongated over the last 14 months to 16 months. I would expect that over time we are going to see the contracting. We have had a lot of activity now in our 750 pipeline. It is growing very nicely from where it was beginning of the year. We are getting a lot of activity outside of the United States to our partner Cat with 750s. We booked our first large multi-module system here in United Stated. It will be shipping this quarter. We also shipped a very large multi-module system in Europe in the quarter.

And so we are starting to see traction on the 750. And my experience is that once you release the product to the field and start making the calls on consultant engineers and the end users, you have got a 6 to 12 month kind of timeframe before you start seeing a cadence of bookings flowing from that. And in reality, we officially released and trained our sales people in the first quarter on that product. And ever since then, we start with seeing a nice increase in the pipeline. But I would say hopefully that by the end of the year in the fourth quarter that we would see ever more bookings for the 750. The other surprising information in our revenue numbers in the first half is we have had no cannibalization that we can see on the 300 line. So, the sales we are getting on the 750 and shipments we are making are not hurting us in the core 300 business, both of those businesses are growing in the first half, both of those product lines.

Carter Driscoll - MLV

So – and for example, you wouldn’t necessarily try to package multiple 300 systems and compete with one that might more realistically take a 750 system, is that what you are saying?

Mark Ascolese

Right. We would absolutely not do that. We would configure a solution to the customer that makes most sense for that customers’ application and we certainly wouldn’t want to have our two product lines competing with each other, but there are very specific applications here that we are talking about. And depending upon what the customer is doing and what their future plans for growth are dictates which one of those products we would quote.

Carter Driscoll - MLV

Perfect, alright. That’s all I have for now gentlemen. Thank you.

Mark Ascolese

Thank you.

Operator

(Operator Instructions) We will take our next question from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital

Good morning. Thanks for taking my question.

Mark Ascolese

Good morning, JinMing.

JinMing Liu - Ardour Capital

First, regarding the fixed cost reduction I mentioned, I mean, are you going to focus more – I mean, my question is which areas you will focus more, whether it’s in the corporate overhead part or in the just make your production operation more efficient to cut some cost in the production side?

Mark Ascolese

The answer JinMing is yes and yes. We are obviously as we said we were out doing the capital raise earlier in the year focused on our SG&A numbers and the intent was to hold on level. As you can see from the most recent numbers, we have actually kind of broken the back of that increase and when actually seeing a decrease in our SG&A. The only uptick in SG&A we would expect would come from the incentive compensation that we pay our sales people for bookings or manufacturers, reps and sales partner commissions. And so it is the intent here to continue to drive the SG&A down both in dollar terms and as a percentage of our revenues. We are doing the same thing in the manufacturing operation. We are looking for any and every opportunity to take cost out. As an example just last week, we put in a program to reduce our shipping costs outside the United States and our warehousing costs. So there is no cost here that is (indiscernible) taking a look at it trying to reduce it. We are very excited about our inventory program, the fact that Ken and his team were able to take inventories down this last quarter. Our current share not good compared to industry average or compared to the world class kind of numbers and so we are going to strive over the next 18 to 24 months to get to those type of numbers. And we would hope to see a continual decline in our inventory levels as we go forward.

JinMing Liu - Ardour Capital

Okay. Is there a targeted amount – dollar amount that you want to cut from your fixed costs?

Mark Ascolese

No. We have not sit down here and say that we are going to reduce spending by 30% or anything like that. But as you can see from the trend line we have done an excellent job so far breaking the back of the upward trend. And I would expect to see a kind of continual slow decrease in the SG&A.

JinMing Liu - Ardour Capital

Okay, good. Switch to your sales infrastructure rebuilding, I’d call that, are you almost finished with what you wanted to do or there will be more to align more sales teams?

Mark Ascolese

I think we are done. We are pretty much done there. We have got the sales leadership in place now. Randy has put together a team of regional managers that are experienced in this business. Three of them have been here for a number of years. They know how to sell the product. Kok meng is a very experienced sales executive in the Asia-Pacific region. So, I feel very comfortable today where we are in the field sales. Now, it’s all about execution. It’s all about driving new opportunities into our funnel and it’s about converting those opportunities anyhow into purchase orders. Field sales organization today is very excited and motivated about the opportunities that they are seeing in the field.

JinMing Liu - Ardour Capital

Okay. Lastly, regarding your federal government market, I think you mentioned that you have a team setup for just targeting that market, when can we see some big sales numbers from that market?

Mark Ascolese

I would be so happy if we can see some tomorrow. Typically, the federal government, it takes time, it fits you if you are going after program bias and our strategy is twofold. One is to go after program opportunities. One is to go what I would call one-off opportunities. Tom just got in place here in the last six weeks or so eight weeks. And so I would hope by year end we will see some revenue coming in of that channel. But the real uptick in business coming through that channel will happen in 2015 just because when Tom has joined up and when he has gotten engaged in the market.

JinMing Liu - Ardour Capital

Okay, got it. Thanks a lot.

Mark Ascolese

Yes. Thank you.

Operator

This concludes our questions-and-answer session. I would now like to turn the call back over to Mr. Ascolese.

Mark Ascolese

Thank you for being on our call this morning. On behalf of the entire senior management team, our employees and our Board, I would like to express our appreciation for your interest in Active Power. Thanks for your continued support and we look forward to speaking with you again next quarter.

Operator

This now concludes today’s call. Thank you for joining us. You may now disconnect.

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Active Power (NASDAQ:ACPW): Q2 EPS of -$0.19 misses by $0.05. Revenue of $10.2M (-49.5% Y/Y) misses by $3.2M.