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Active Power, Inc. (NASDAQ:ACPW)

Q4 2011 Earnings Call

February 15, 2011 11:00 am ET

Executives

Jim Clishem – Chief Executive Officer and President

John Penver – Chief Financial Officer and Vice President, Finance

Analysts

Matthew Crews – Nobel Financials

Michael Legg – Merriman Capital, Inc.

Walter Nasdeo – Ardour Capital Investments, LLC.

Dilip Warrier – Stifel Nicolaus & Company, Inc.

Robert Stone – Cowen and Company, LLC

Peter Homans – Parkman Group, Ltd.

Chris McDougall – Treaty Oak Capital Management

Operator

Good morning, everyone. Thank you for participating in today’s conference call to discuss Active Power’s financial results for the fourth quarter ended December 31, 2010 and full fiscal year 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 first quarter of 2011, its future operating results, and its customers’ current intentions.

Any forward-looking statements and all other statements that maybe made during this call that 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, the deferral or cancellation of sales commitments as a 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 filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year 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 like to remind everyone that this call will be available for replay online until March 1, 2011 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 thanks to everyone for joining us today. Earlier today, we issued a press release announcing our fourth quarter and full year 2010 results. We achieved record revenues again this quarter of $19.3 million. This was a 5% increase over our previous quarter and 38% increase over the same quarter a year ago.

For the full year, we also achieved record revenues of $65 million, an increase of $24.6 million or 61% compared to our revenue achieved in 2009. This significant revenue increased our improvements in gross, operating and net margins across-the-board for the second time in as many quarters, I’m pleased to announce Active Power was successful in achieving its first sequentially quarterly net profit.

While both net profits had been modest in dollar amount, we are encouraged that we have demonstrated an important inflection point in our company’s business model and history. We also achieved a positive EBITDA of $750,000 or 4% of revenues during the quarter, the same EBITDA margin as in the third quarter.

On an annual basis, the significant increase in revenues has resulted in a 93% increase in the amount of gross profit we realized. In addition, we achieved a 65% reduction in our operating losses from $11 million in 2009 to $3.8 million in 2010.

We’ve also generated $2.3 million in positive cash flow from operations during the fourth quarter. For the first time in the company history, we also achieved annual positive cash flow from operations.

To provide additional perspective, I wanted to share a few other highlights from 2010. First, our annual sales growth occurred across all regions compared to 2009 with Asia Pacific up 82%, Americas up 66% and EMEA up 42%.

All sales channels experienced annual revenue growth compared to 2009 with strategic IT channel sales up 240%, OEM channels up 30% and direct sales up 39%. Strategic solution selling generated $24.6 million in annual revenues from PowerHouse and continuous infrastructure solutions, up 251% compared to 2009. 25% increase also in our annual service and other revenues compared to 2009.

Later in the call, John will talk in more detail about our evolving revenue mix. Historically and as you know we have used certain key metrics such as number of flywheels sold and average selling price per flywheel to illustrate overall company performance. Now we’ve evolved from selling standalone UPS systems to delivering complete PowerHouse and continuous infrastructure solutions.

Now that we’ve done that, I believe that our metrics are no longer sufficient indicators for our overall business. Therefore, our metrics must also evolve to more accurately reflect our business model performance in UPS, continuous power solutions and continuous infrastructure solutions. So in the first quarter of 2011, we will begin to use a metrics based on dollars per megawatt sold, which will more accurately reflect our business model going forward.

Now I'd like to turn the call over to our Chief Financial Officer, John Penver who will take us through the financial details for the quarter and year. I will then come back to discuss our optimism about 2011, trends that support that optimism, key products in markets and a few significant points from our business strategy moving ahead. We’ll then open up the call to your questions. So, John?

John Penver

Thank you, Jim. Good morning everyone and thank you for joining us on the call today. As Jim mentioned, revenue for the fourth quarter was a record $19.3 million, increasing sequentially by 5% and by 38% compared to the fourth quarter of 2009. For 2010, our revenues were $65 million. This was $24.6 million or 61% higher than the $40.3 million of revenue we had in 2009. The revenue this quarter was favorably impacted by $7.3 million of PowerHouse and continuos infrastructure solutions.

Looking at the breakdown of our product revenues for the quarter that was split as follows; UPS systems $8.9 million; continuous power solutions $5.9 million and continuos infrastructure solutions $1.3 million. The split of product revenue between these categories will fluctuate on a quarterly basis due to the size and timing of our actual orders. These orders particularly for continuos power solutions like PowerHouse can be infrequent but large and it will cause significant fluctuations in the quarterly sales mix and revenues.

Say for example, due to the timing of particular customer orders, our revenue from continuous infrastructure solutions decreased by $6.1 million from the third quarter, but our revenue from continuous power solutions, which includes PowerHouse increased by $4.5 million from the third quarter.

On an annual basis, the product breakdown is as follows; UPS systems $30.9 million which represented 28% annual growth; continuous power solutions $13.2 million, which represented 117% annual growth and containerized infrastructure solutions $11.4 million, which represented 1134% annual growth.

These number show strong acceptance for our UPS systems and an increasing market acceptance of our power and infrastructure solutions that are based on our core UPS technology.

We shipped 117 flywheels in UPS systems this quarter at an average selling price of $85,000 a wheel. This compares to 86 wheels sold in the fourth quarter of 2009 at an average selling price of $90,000 per wheel and is up from the 97 wheels we shipped in the third quarter of 2010 at an average selling price of 88,000 per wheel.

For the year, we shipped 408 flywheels in UPS systems at an average selling price of $84,000, a 30% volume increase from the 315 flywheel shipped in 2009 at an ASP of $81,000. The average selling price per wheel is impacted by a number of factors including the mix between our OEM and direct unit sold as our OEM sales come obviously at a lower price per wheel.

Total UPS system revenues were up 26% compared to the same quarter a year ago. And the large continuous power solutions revenue this quarter with the PowerHouse applications sold through our IT channel business. This caused revenues from the Americas to be 74% of our total revenue this quarter compared to 82% in the third quarter of 2010 and 82% in the fourth quarter of 2009.

Our revenues in Q4 from the EMEA market increased by 90% from the third quarter driven by strong continuous power system sales in Germany and Switzerland and they were 124% higher than sales in the fourth quarter of 2009.

For the year, our revenues in EMEA increased by $3.8 million or by 42% from 2009. Reflecting improved performance in Germany and the U.K as we continue to build our sales team and add engineering and services capabilities into our operations. The revenues from EMEA were 24% of total revenue this quarter, which compared to 13% in the previous quarter and 15% in the fourth quarter of 2009.

Our revenues from Asia, although still small and approximately 2% of total revenue this quarter, were up by 82% in 2010 from our levels of 2009. We've seen an increase in orders from Asia recently and anticipate continued higher sales growth from this region in 2011.

Looking at revenue by sales channel, we have seen year-over-year growth across all of our channels. On an annual basis, our IT channel revenues increased by 240% or $12.3 million. IT channel revenues were 30% of our total revenue in the fourth quarter compared to 40% in the previous quarter.

For the full year, the IT channel revenues were 25% of our total revenue compared to 10% of revenue in 2009, showing how this channel has become an important catalyst to our growth.

Direct sales, which includes sales made by Active Power directly or through its network of manufacturers, representatives, and distributors represented 51% of our revenue this quarter. This compares to 50% of total revenue in the previous quarter and 21% of revenue in the same quarter a year ago.

For the year, direct sales revenue increased in absolute sense by 39% compared to 2009 and they were 55% of total revenue compared to 64% of total revenue in 2009.

Sales from our OEM business, which includes sales to Caterpillar increased to 19% of our revenue in the fourth quarter from 10% in the third quarter and from 9% in the same quarter one year ago. This level fluctuates substantially based on the size and timing of orders from this channel, but the smaller OEM percentage is more indicative to higher growth rate and a larger total sales by direct and IT channels this quarter.

For the year, sales from the OEM channel increased by 30% from 2009, which was a big improvement after a 44% decline in 2009. We continue to assume our orders from the OEM channel that allows us to believe this channel will continue to grow in 2011. Although the rate of growth may not be as much as we expect in our direct and IT channel business.

Service revenues this quarter improved by $1.3 million or 70% from the third quarter driven by professional services related to design, installation and commissioning of continuous power solutions. The level of professional services can fluctuate quarterly based on our sales mix but for the year, our service revenues grew by $1.8 million or 25% compared to 2009.

In total, international sales were 34% of our revenues in the fourth quarter, 18% in the third quarter and this compares to 22% for the fourth quarter of 2009. For the year, our international sales were 29% compared to 31% in 2009.

Gross margin this quarter was 28%, this compares to 30% in the prior quarter and the change was due to a change in sales mix on slightly higher revenues. The margins on our continuous power systems or solutions can fluctuate and be lower than the margins on our containerized infrastructure solutions and this change in mix cause the overall margins to decrease slightly. And this margin compares favorably to the 19% margin we had in the fourth quarter of 2009.

For the year, our gross margin improved to 28% from the 23% margins we had in 2009. The improvement was driven by an increase in UPS systems and infrastructure solutions which improved the efficiency of our manufacturing operations from higher overall sales volume and higher average selling prices.

Research and development expenses for the quarter were approximately $900,000, which was 7% higher than the previous quarter and 2% lower than the fourth quarter of 2009. The increase in spending reflects high development activities on containerized solutions and initial efforts on our next generation UPS products. We anticipate an increase in R&D expenses as we add headcount and increase product development efforts in the next year.

Our selling and marketing expenses at $2.8 million were 23% lower than the prior quarter reflecting lower sales compensation expense including payments made to third-party manufacturer’s representatives, as a result of that sales channel mix that were 5% lower than the fourth quarter of 2009.

For the year, our selling and marketing expenses increased by 15% primarily due to high variable sales compensation from our higher revenue levels and from higher performance-based compensation.

Our general and administration expenses are $1.5 million, increased by 39% from the prior quarter and prior year fourth quarter primarily due to higher performance-based compensation expenses. For the year, our general and administration expense costs increased by 16%, which was the higher performance-based compensation expense compared to 2009.

As Jim mentioned, for the first time in Active Power’s 18-year history, we recorded consecutive operating profits, with our second positive quarterly operating and net income. While essentially break-even on a per share basis, our operating profit for the quarter was $170,000, which compares to an operating loss of $2.2 million in the fourth quarter of 2009.

We had a small net income for the second time of $145,000 and zero cents per share, this compared to a net income of $55,000 or zero cents a share in the third quarter of 2009 and our net loss of $2.2 million or $0.03 per share in the same quarter a year ago. For the year, our net loss of $3.9 million or $0.05 a share was a 64% reduction from the $11 million net loss or $0.17 per share that we had in 2009.

We generated positive cash flow from operations during the quarter of $2.3 million. This compared to cash used in operations of $2.5 million in the third quarter and cash used in operations of $1.3 million in the fourth quarter of 2009. We are even more excited to announce it for the first time and for the full year, we generated positive cash flow from operations of $65,000.

This compared to cash used in operations of $6.9 million in 2009. And it's clear the improvement in operating results are driving these numbers.

The increasing size of the number of our sales orders particularly for the continuous power and infrastructure solutions has increased the potential volatility for changes in our levels of receivables, inventories and payables.

Managing this in our overall working capital continues to be a challenge for us and our expanding balances for these balance sheet items can change materially very quickly and materially change our net liquidity position. So credit management, obtaining deposit and interim payments from customers and negotiating payment terms with vendors are how we are managing this situation.

The new bank facility that we added in the third quarter also allows us some flexibility by providing additional funds that can be used to finance new orders in overall sales growth. We did repay $1 million into that credit facility in the fourth quarter and we had $2.5 million outstanding at year-end with approximately a further $9.4 million available to borrow as of that day. Overall, this credit facility has a much higher credit limit of $12.5 million and will allow us to respond to and finance large orders without the need to raise additional equity which would dilute our cash reserves.

The financial flexibility this gives us should support a significantly higher quarterly revenue level about $25 million a quarter without requiring additional funding. Based on our current plans for the remainder of the year, the equity funding we completed last year in this credit facility and our experiences that we’ve had with managing our cash, we believe we’ve got adequate cash and investments on hand and available sources, liquidity to continue finding new growth of the business.

Our capital expenditures were not significant during the quarter. We historically invested substantially in manufacturing infrastructure and have a production capacity far in excess of our current revenue level, so we can substantially increase production level without needing to make any material capital investments. As a result, capital expenditures will primarily support expansion of our sales and service capabilities and our marketing and promotional efforts as required.

This completes the financial portion of the presentation. So I'll now turn the call back to Jim for the comments about the quarter and year ahead. Thank you, Jim.

Jim Clishem

Okay, thank you John. So obviously we’re pleased with our fourth quarter and annual results and optimistic about 2011.

Ultimately our primary goal for this year will be to achieve full annual profitability. We believe we'll achieve this by continuing our trend to substantially increase revenues by expanding the activation of our multi-channel sales distribution strategy between OEM, IT and direct business channels.

We’ve planned to make the necessary incremental investments in Europe and Asia to enhance delivery capabilities throughout the world. We’ve also completed our first five-year strategic plan to lay out a roadmap for Active Power to become a significant player in the power and infrastructure solutions business.

We believe many of the macro-economic trends which underpinned our success in 2010 will gain momentum this year and in the years to come. These trends include a drive towards energy and space efficiency, which reduces overall energy consumption and cost of operations and resulting in a greener environment for the client.

The global need for increased power for high-density computing also continues to grow. Customers in several market segments are seeking innovatively designed modular datacenters which are driving the need for innovative complimentary power and infrastructure solutions. It’s still all about convenience, value, accountability and a lower total cost of ownership.

Another important trend is the increased used of web-based applications software as a service and cloud computing, which will continue to drive the global demand for IT infrastructure. In fact, cloud computing has been forecast thus to continue its growth path reaching a $13 billion share of the IT solutions market by 2014 according to firm In-Stat. The firm also indicates software-as-a-services anticipated to increase approximately 112% by 2014. The increased use of these platforms will require additional server, storage, network equipment which will in turn require more physical infrastructure.

What's even more staggering is the fact that approximately 50% of the total electricity consumption of datacenters is tied up in power and cooling infrastructure that supports IT equipment. This is according to a U.S. EPA Report on Congress datacenter energy efficiency.

With several key markets trends in our favor and the inflection point that we are at, the question now becomes how will we support our momentum and keep the business growing? Last quarter, we highlighted core components of our five-year strategic plan to grow revenues and profit in the years ahead.

We believe we are well-positioned to execute against these plans because of our focused efforts to get the core business on track and healthy. We have successfully reduced cost and conserved cash, while at the same time fuel channel and geographic expansion which resulted in sales growth and market awareness for Active Power.

For 2011, our balancing act, I believe will be to focus on making imprudent investments to scale the business for the future while not compromising our goal of annual operating profitability. In short, our management team’s challenge will be to meet our short-term objectives while simultaneously positioning ourselves for future growth. To achieve this, we will work to serve clients well and cultivate a healthy mix of sales and marketing among geographies, channels and products. The strong diversification will enable us to mitigate risk for the business moving ahead.

Now, let me briefly discuss our approach that will enable Active Power to meet the short-term goals, but still position us for the future. We will leverage our partner strategy to grow the business. We will continue to nurture existing relationships but also develop and announce new partnerships across all geographies.

We’ll continue to work closely with our strategic IT partners as this will expose us to more datacenter and infrastructure projects we most likely would not have had any visibility into. These opportunities were partly reflected in 2010 revenues from our strategic IT channel which grew 240% compared to 2009. We believe this positive momentum will continue.

From a market perspective, we’ll focus on developing five global centers of operations, addressing 13 trading markets that represent approximately 76% of global UPS markets. With this focus, these five operating center are located in Austin Texas, Evesham U.K, Osterode Germany, Beijing China and Tokyo, Japan. The mid-term goal is to achieve a revenue mix of roughly 40% from the Americas, 40% from Europe and 20% from the Asia Pacific region.

Our focus is to grow our solutions business as well. Our modular continuous power systems like PowerHouse are assembled and tested in a factory environment, which enables a shorter delivery interval and a greater system reliability than over bricks and mortar deployment.

This provides the client with benefits of just in time capital deployment, a capital expense reduction of approximately 25% over bricks and mortar and the ability to expand their modular systems on-demand. As we’ve mentioned on prior calls, selling a solution magnifies our revenue opportunities on an average of 4 to 5 times over that of a point product sale in the UPS market alone.

As we’ve mentioned during our last call and in terms of ongoing products initiatives plan to launch the next generation flywheel UPS system in early 2012. This product will be of higher power density allowing us to compete in the larger power application markets, which is the fastest growing segment over the next several years.

The inherent benefits on energy and space efficiencies are magnified as customers move up to a megawatt and above. The bottom line is that this new product will allow us to leverage the anticipated growth at the higher ranges of the global UPS power market helping fuel our growth.

Active Power has consistently delivered efficient, reliable and green power and infrastructure solutions that are trusted worldwide. We accomplish this by developing ingenious people, products and services. We expect the positive momentum we accomplished in 2010 to continue in 2011. We believe more global innovators who demand a 100% uptime will turn to Active Power for ingenious infrastructure solutions to protect their mission critical operations.

Now looking at the first quarter and 2011 expectations, for our guidance we usually provide a range of revenues as unforeseen customer events can impact the timing and the amount of revenue recognized for a particular quarter.

Based on orders we have on hand and our current forecasts, we’re providing revenue guidance of between $16 million and $19 million for the first quarter of 2011. Now it’s important to realize that this expectation reflects traditional seasonality when compared to the previous quarter. It would represent an increase though between 44% and 71% as compared to the same quarter a year ago.

First quarter earnings per share is expected to range between breakeven and a loss of $0.02 per share. Changes in cash and investment are expected to be minimal and driven by changes in working capital requirements. It is likely we will achieve the EBITDA profitability again this quarter.

Operating expenses excluding variable selling expenses should be fairly consistent with the results recorded during the fourth quarter of 2010. Also cash used in operations will therefore be largely driven by our working and capital requirement during the quarter and will be affected by the timing and size of orders we fill during the quarter. We will continue to utilize our bank facility and manage customer and vendor cash flows appropriately to mitigate cash requirements if possible.

Thank you again for being on our call this morning and on behalf of the entire senior management team, our employees in our Board, I’d like to express our appreciation for your continued interest in Active Power.

Now at this time, John and I would be happy to open the call up for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first guest is Matthew Crews. Matthew, your line is now open.

Matthew Crews – Nobel Financials

Thank you. Good morning gentleman.

Jim Clishem

Good morning Matthew.

Matthew Crews – Nobel Financials

Just a question on the break out of revenue, is it possible to give second quarter product revenue, so we can try to put together full-year model between EPS, continuous power and datacenter infrastructure?

John Penver

In sense of guidance, Matthew?

Matthew Crews – Nobel Financials

For Q2 of 2010. We’ve got nine months in Q4, but not the first two quarters.

John Penver

I will get that information for your Matthew, certainly.

Matthew Crews – Nobel Financials

Okay. Thank you. Could you give the sales headcount at the end of the year and just sort of describe the mix between regions and sort of the growth there?

John Penver

Yeah, so our sales mix is geographically dispersed Matthew. We don't run everything out of the U.S. and we did it obviously for both commercial and cultural elements to the models here. So in the U.S. market, we have channel sales support people that are really focused on our OEM channel business and we have direct sales folks that largely support the larger accounts. And then we have folks that are sort of supporting the manufacturers, reps and distributors. So if you look just sort of a total account across-the-board, we do similar thing in Asia and a similar thing in EMEA, so slightly different in those markets, but pretty similar.

So in Asia, we’ve got just sales people no sales support, three people, in EMEA, ten and U.S., 16. And now we have got an Applications Engineering Group in the North American market, which supports that team and we have an Applications Engineering Group also in Europe and we have an engineering group also in Asia. And we have service personnel sort of separate from that across-the-board and then we have an overlaid engineering organization that supports as a backup to the application engineering teams which also at times get involved with sales opportunities.

Matthew Crews – Nobel Financials

Okay. So that would be, okay, thank you. And then just lastly, Jim you mentioned the strength in the megawatt plus sides and the sort of cloud side, is that still where you are seeing the most growth as in the megawatt plus versus 350 to 900 kVA?

Jim Clishem

We are and it’s really sort of in that 800 kVA and above, to be honest with you and the compound annual growth rate at that level, it’s double-digit 13.6% roughly, compound annual growth and that looks like that’s tending and trending up from that point. And there's some macroeconomic trends that are really driving that as well Matthew that really has to do with the fact that you get a higher economic scale to manage larger datacenter operations that's how you get some inherent operational efficiencies and as such and that consolidation to generate higher power in those locations.

But external to that, you have the cost of energy going up and continuing to go up and you have the volume of the energy continuing to increase and both of those factors in addition to the consolidation of operations tend to drive higher power instances than the, say distributed smaller systems.

Matthew Crews – Nobel Financials

Okay, thank you for that. I'll jump back in the queue. Thank you.

John Penver

Alright, thank you.

Operator

Thank you. Our next guest is Michael Legg. Michael your line is open.

Michael Legg – Merriman Capital, Inc.

Thanks, congratulations on the great quarter guys.

Jim Clishem

Thanks Michael.

Michael Legg – Merriman Capital, Inc.

You’ve mentioned the five operating centers and your goal to have 40% coming out of Austin, 40% in UK, Germany and 20% from Beijing and Tokyo. Can you give us the timeframe on when you would expect to get there?

Jim Clishem

Yeah, really the next 18 months to two years is sort of what we're thinking. We've built out a five-year strategic plan and sort of developed three Tiers of success in that five-year plan. So we’ve got some goals for 2011, we’ve got some 2013 and 2015 goals.

So we’ll start seeing a pretty significant trend going towards that mid-term goal of 40-40-20 in the next 18 months to two years. I think the fully realize that would be really in that between that second Tier and third Tier timeframe before we see that really stabilize.

Beyond that, if I look really beyond the five-year strategic plan, I really see Asia in particular growing and will continue to grow so that you may see on a long-term basis more of a third, a third, a third between Americas, Europe and Asia, but I think it's a reasonable goal in the next two-year timeframe you'll see that shift 40 for America, 40 for Europe, and 20 for Asia [without] making investments appropriately to that. Yeah, I'm sorry, go ahead.

Michael Legg – Merriman Capital, Inc.

Okay now you also, you put out a nice press release on the win over in Germany and now you have the Beijing office you opened up this year. Can you just comment on what you're seeing over there internationally from a competitive perspective and the landscape?

Jim Clishem

Do you mean Asia specifically?

John Penver

Or Europe or both?

Jim Clishem

Or Europe or both?

Michael Legg – Merriman Capital, Inc.

Both.

Jim Clishem

Yeah, both. So in Europe much more established and well understood UPS marketplace with the UK being the largest and the second largest being Germany. Now, Germany is growing from a GDP perspective at a faster pace than England at the moment and we see that shift potentially in UPS markets also sort of shifting according to that.

But still by no stretch of the imagination that UK and Germany will be the two largest markets and we have operations as I mentioned of these five, two of those five are in fact in Germany and in the UK. So I see that growth driver is going to continue and I would expect that Germany will begin outpacing the UK within this five-year strategic plan timeframe.

As far as competition is concerned in the European market, it’s still heavily driven by especially at the larger power areas. It’s going to be heavily driven by the rotary UPS competitors. These are the Hitec, Eurodiesel and Piller primarily.

In the Asia market, let me, before I leave Europe I’d also say though that I think that the double conversions sort of static UPS providers will be making attempts at trying to garner some of that markets but the physics of being able to achieve higher power in smaller footprint and higher efficiencies is still going to be dominated by the likes of rotary competitors and Active Power.

Now, in the Asia marketplace, we are seeing a great deal of growth. The difference is that there is, it’s sort of an open market to a large degree. You see it a large industrialized set of nations primarily driven by China, without a predisposition for particularly UPS technology and as such because of the industrial revolution that is taking place there, that infrastructure requirements for power, cooling space and fiber optics, all of those raw materials is going to continue to grow and I think Active Power is in a very good position.

For example, in China we’ve already achieved Chinese certification on our products. We’ve sold several PowerHouses into that market and already this year we’ve received several orders really around the full solutions selling both for mobility purposes and because they sort of get the economic advantages of building these things pre-tested in factories.

We’ve also developed partners in Asia to help fulfill some of that integration and developing the solution so that we are incurring freight charges and other tariff duties. So operationally we see overall growth potential in Asia and they are going to be heavily, as far as competitors are concerned, at the high level. There is some rotary that’s in place but there is a lot of Chinese battery and Chinese double conversion UPS at the lower-level.

The question then will become how fast they move up the power value chain into these higher power instances versus the low power and I think that's the big question for us how fast that conversion will takes place We know than in U.S and Europe that’s going to happen quickly but I think the Chinese market is so large that the inroads that we’re making and the good name we’re building for ourselves and the partners that we’ve developed I think is going to continue a good pace of growth for us.

So hopefully that answer, mostly all of your questions are there.

Michael Legg – Merriman Capital, Inc.

That's great. Just one last question and I'll jump back in the queue. You mentioned your R&D expenses could go up a little bit this year. Then you also talked about your next generation products is being a 2012 event now. If I could remember correctly I thought you had mentioned that it might be possibly announced by the end of 2011. Can you just talk a little bit about the R&D and what the next generation is?

John Penver

Yeah, I mean our goal is that we’ll have some sort of a pilot development systems towards the latter part of the year with these sort of, but that’s going to be really focused more on, a very much an engineering focus delivery to get some very favorable client exposure but in terms of real production and systems, I think you're looking more at early 2012, because it’s certainly more than developing the product. There is a go-to-market strategy associated with that. There is a supply chain and operations depending on those geographies. And so I think when you really look at production sort of level as opposed to just getting a few systems out, it's really early 2012.

Michael Legg – Merriman Capital, Inc.

Okay, great. Thank you.

Jim Clishem

Sure.

Operator

Thank you. Our next guest is Walter Nasdeo. Walter, your line is open.

Walter Nasdeo – Ardour Capital Investments, LLC.

Well, thank you. Good morning, guys.

Jim Clishem

Hi, Walter

John Penver

Hello.

Walter Nasdeo – Ardour Capital Investments, LLC.

Continuing in the geographic discussion that we’ve been having, you still list the group as EMEA, so is there anything going on in the Middle East or Africa or obviously it is dominated by the Europe, but do you have anything else going on in those other regions?

John Penver

We do have some sales Walter, mainly through distribution. What the difference is that we don't have as much direct presence. So we’re using third parties and stuff from the Middle East. Historically, we did have operations in Africa and that they were lower margins in frequent and really looked at the cost of maintaining presences in a wide array of markets and said where is the opportunity.

So we still have footprint, service capability and sales representation in those regions. So we still see business coming out of Turkey, North Africa, Middle East, Central and Southern Europe. So we still do have a presence across the Europe and even in those two centers where we have operations they are selling beyond the international boundaries to other parts of the EU for example the Nordics and Russian as well.

Walter Nasdeo – Ardour Capital Investments, LLC.

So, your main competition out there in Europe is still battery backup systems and UPS systems?

John Penver

It's predominantly rotary based in Europe versus the battery based systems. Certainly at the high power level, it’s all the rotary based UPS manufacturers. At the lower power levels, 250kVA level you probably complete along with battery-based guys, but the big transactions for us and the big growth is coming in higher power applications where we seem to have some technical space efficiency and other advantages against the battery-based competitors.

Walter Nasdeo – Ardour Capital Investments, LLC.

Got you, and now given all the moving parts that you’ve got right now in margin make up, what would be a good gross margin to kind of work in to the model here over the next couple of quarters?

John Penver

The next couple of quarters, I think it look for us to trend up to 30% to 33% range. That is depended on the sales mix, I think for the next year or so you’d look for it to get to 33% to 35% range long-term. Beyond that, I think our goal is to get it between 35% and 38%, but that might be two to three years away.

Walter Nasdeo – Ardour Capital Investments, LLC.

Got you, okay and then just real quick, what were the DSOs for the quarter?

John Penver

They are running about 57 days. We do have a bit of concentration with several large customers, our IT channel and Caterpillar but generally they are trending fairly stable.

Walter Nasdeo – Ardour Capital Investments, LLC.

57 days?

John Penver

Yes.

Walter Nasdeo – Ardour Capital Investments, LLC.

Outstanding, thank you very much men.

John Penver

All right. Thanks Walter.

Jim Clishem

Thanks Walter.

Operator

Thank you. Our next guest is Dilip Warrier. Your line is open.

Dilip Warrier – Stifel Nicolaus & Company, Inc.

Just had a question for you here on, going back to the gross margin question, it sounds like you're pretty optimistic about the growth in continuous power solutions and the IT channel, given that this is typically in the lower gross margin business and as it becomes a bigger portion of revenues, I was wondering is the 30% to 33% gross margin raise you’ve talked about, is that a realistic number?

Jim Clishem

Dilip this is Jim. I absolutely think that it is and remember the allure for us of selling these continuous power systems and also continuous infrastructure systems is to drive higher margin also UPS business on a unit margin basis. Now also recall though at the larger let me just give you a couple of numbers here so you can have something to work with.

When we sell a megawatt UPS system sort of alone, we’ll sell that depending on the channel somewhere between $320,000 and $400,000. When you sell that in these solutions based vehicles that same megawatt coupled with generation switchgear or software platform and the like, it’s on the order of $1.6 million to $1.8 million.

So even on the solution sell that the per unit margin is slightly below that and I think for modeling purposes John has given most of the analyst conservatively think about it as about a 25 point gross margin business, but on an absolute margin dollar or gross profit basis it's pretty significant in terms of the amount of dollars that it generates and then pulls through our higher per unit margins on the UPS. John you may want to add something to that to.

John Penver

Yes and I’d add a couple of comments Dilip. One of the things that we can bate based on our experience in 2010 is that as we've increased the volume of production on both continuous power and infrastructure solutions, we are increasing our gross profit, improving efficiencies of just manufacturing and stuff like that.

So I think that gives me some comfort that we can maintain the margins and/or improved them on that and in the other part of this is that the key part of the solution is also the service component that goes with it. And so when you combine and look at the total, the total opportunity for Active Power, even though you don’t get the solo margins on pass-through items such as generators and switchgear, you can still improve the profitability of the overall application, so pretty comfortable with it.

Dilip Warrier – Stifel Nicolaus & Company, Inc.

Okay, thank you. Another question here is still, it looks like the move to containerized just-in-time data centers is becoming a very real one from perhaps just a little bit of a maybe a little bit of a fashion fad maybe last year, but it’s becoming very real now, just in a bigger picture strategy, do you as you do more of this working with IT channel partners, do you kind of run the risk of becoming a potential competitor in some of your more established customers perhaps in the co-hosting or collocation market?

John Penver

I’ll [have] the first attempt at that, while Jim thinks about a little bit longer. I could see potentially being a competitor or perceived to be a competitor with someone who might have been a traditional purchaser of just the UPS system.

Like for example, if a large enterprise, who is using a consulting or a general contractor to built data centers for them, that contractor might see us offering a solution as doing something that he might otherwise previously have done, but I don't think when you look at our IT channel partners, we’re really an enabler for them. What we’re offering them is different form factors to be able to sell their equipment and their content. And so we're really an enabler for them. I'm not sure that I see that’s probably my first cut on it, now let’s see what Jim.

Jim Clishem

Yeah, I guess I know, I really don’t view it as competition too. I think your question really was around collocation or managed service providers. I want to make sure I’m clear on that question. Is that what you intended by the question?

Dilip Warrier – Stifel Nicolaus & Company, Inc.

Yes, that's right.

Jim Clishem

Yeah, okay. So those folks as you know do that business for a profit and what they sell to their customers at the end of the day is mission-critical space. In the case of managed services, if they’re offering cloud computing as an example or even software upgrade maintenance as well as database services. That's really where they are differentiating and as such, what they look for from people like us is number one, a cost compelling solution that’s more inclusive than at the end of the day, just the UPS.

So for example, every mission-critical data center operator now for that matter whether it's for profit or not, looks at a base level they’re looking at high reliability, but for the operating expense side of things, they are looking at a space, which is finite and they are looking at their cost of the utility build.

Now, what a continuous power infrastructure does, is it allows us to build these systems to give both of those advantages, certainly the space minimalization as well as the energy cost reduction, but in addition to that it gives them a 25% cheaper way to bring infrastructure and to support their customers from a CapEx perspective and give some adjusting time capital deployment, so it’s a better use of their dollars as a function of time than a traditional construction bricks and mortar venue that they would have to support.

So the solution I think gives them lots of economic advantages and I really don't see that what we’re doing for them is any different than the alternative today, which is to take piece part, showing up on their loading dock and then hiring someone to integrate that.

I think John's point was that it could be perceived that some of that people that do that on-site integration work could see us as a competitor, but certainly not the users of this technology like collocation and managed services customers who in fact want to mitigate their risk by having stuff build, pre-tested and delivered so that it's not interrupting their systems because you have to realize that when you just have piece parts that show up to a mission-critical facility, integrating all that together you’re introducing risk in their mission-critical operation. So as much can build pre-test and then deliver as working full operational system offers a tremendous amount of high-value to that customer.

John Penver

I’ll add one last comment Dilip, which is I mean, I hope it’s relevant which is that the collocation companies are in fact the target market customer for us, because the real trend here is not us enabling an enterprise necessarily to have it’s own data center, because a lot of enterprises want to outsource that because I don’t see it as either a key strategic activity or something that’s complex and changing.

So our solutions are really geared towards collocation and co-hosting companies to give them a competitive advantage with their infrastructure so they can be competitive to their market. So I think I see it as an enabler rather than as a competitor.

Dilip Warrier – Stifel Nicolaus & Company, Inc.

I got it, thank you for that answer. One last question then, in the last couple of quarters you've actually given some information on new orders booked since the beginning of the quarter, I was wondering if you'd be able to comment on that this time?

John Penver

Yeah, I’ll be glad to hit that for you, so if you look at the total amount of business carryover as orders and along with what we've received to-date, it's about $24 million is what we currently have to-date. Now that will be delivered over the course of this quarter, the next quarter and the quarter after, but it's a very, very healthy if you will pipeline and projection.

Now the other thing to remember too as you’re thinking the business model as these systems get deployed both infrastructure systems and individual UPS there is a time shift of service revenues that occur and certainly project management and commissioning revenue.

So that's why for example you probably saw and noticed that our service revenues were really way up in Q4 and that was as a result of quite a few systems both sold previous quarter and this quarter for the service it enable, so that’s the other thing to sort of think about in your model.

Dilip Warrier – Stifel Nicolaus & Company, Inc.

I got it. Thank you very much.

John Penver

You are welcome.

Jim Clishem

Thanks, Dilip.

Operator

Thank you. Our next guest is Rob Stone. Rob, your line is open.

Robert Stone – Cowen and Company, LLC

Good day gentlemen, a couple of questions if I may. One, could you comment on the sales cycle and in particular whatever trends you might be seeing towards shorting or lengthening your visibility on orders from each of repeat and new customers.

John Penver

Yeah, good question Rob. So I'm going to try to answer that question depending on the way the customer buys the product or service from us because I think that's really the operative variability here.

If they are buying say UPS systems as individual component parts from us, we're seeing anything is from 30 days to an average of five or six months. It's that sort of thing, trending a little bit closer to the 30 to 90 days timeframe than the six months but that's what we’ve seen historically.

On the system solution side of the business, that's really a different animal because especially with these PowerHouses and infrastructure solutions, they are being brought into the construction schedule in kind of a larger level. So when you get to say for example the engineers that are designing a location for a customer, these can be literally three to nine months to maybe as much as 12 months before the production schedule of construction is completed.

So the good news with that is we’re getting involved much earlier in the early side of the construction schedule and in many cases and once construction schedules start to evaporate, people lose time and so forth. Then and they start to beat end dates, all of a sudden now these pretty configured pre-tested complete power systems given that they are very, very quick time-to-market become very appealing to them. But I think the way to think about the continuous power and continuous infrastructure business is easily a five to six months sort of sales cycle and they can trend up as high as a traditional build out as much as the year.

Robert Stone – Cowen and Company, LLC

Okay. Question on competition, you’ve been increasing the total value add that you deliver with systems versus the discrete UPS. So your revenue growth reflects that mix shift, you mentioned who you see as the main competitors, do you have a sense of how things are trending with your market share?

Jim Clisham

Yeah, definitely trending up, I mean you have John and several of folks here have been watching as everyone else’s sort of releasing earnings and so forth. So if you look at the big guys, Emerson, Eaton, Schneider which owns APC and so forth, their share and their growth in the market is, their share is high but their growth in the market has actually gone well below the growth that Active Power has seen over this last year and we have been stealing share and I think we're going to continue stealing share as we continue to be better known now than we ever have then.

And we are getting designed in 19 of the top 25 engineering consultant firms, now spec in Active Power solutions, five years ago when I joined the business that number I think was zero in terms of, actually no one is, so we know that there are some qualitative things that we’ve seen like engineering firms.

We’ve seen quantitative in terms of increase in our business, I mean our business grew 61% year-over-year and I think the data that we are seeing from some of our competitors have been, what John nine to…

John Penver

Really, a range from the battery based guys we’ve seen growth rate of 2010 between 6% and 15%.

Jim Clisham

Okay.

John Penver

The rotary guys in Europe, we’re seeing negative growth for some of them. But it would indicate that our rate of growth is multiples of that competitors as evident that we are taking market share.

Robert Stone – Cowen and Company, LLC

Okay. And my last question is kind of a housekeeping one, I think you said, expense is roughly flat sequentially in the first quarter ex-variable comp, roughly how much is variable comp and how much in terms of big picture are you expecting sort of sequential expense growth through 2011 along with sales as you invest in distribution and new product development or what’s the shape of the envelope on a full-year basis? Thank you.

John Penver

I’ll probably be a little cagy with my answers, since we don’t provide full year guidance. But we would anticipate the variable selling expenses would be between 3% and 4% of revenue, which should be great and so you could see a math on that. We indicated we expect the R&D expenses to go up, because in the next generation UPS product and I’m trying to put a number around it, but I think you could probably look to a 20% increase that at least in R&D expenses for the year, so you could factor that in.

Outside of that, I’m kind of little uncomfortable giving annual guidance on expenses without giving you an annual revenue guidance which we really as a policy don’t do. But if we expect to get $25 million quarterly revenue rates, that would suggest the growth rates 25% to 30%. I think you would expect expenses to grow less than that number, probably half of that number.

Robert Stone – Cowen and Company, LLC

Well, part of your picture on getting the full-year operating profit is getting some operating expenses leverage this year.

John Penver

Yes, a lot of it is going to be driven by continue to increase volume. We’ve leveraged, I’ll just, some reference point, we’ve been able to leverage our operating expenses quite a lot. If you look at our absolute operating expenses now are probably lower than they were five-years ago while revenues five times higher.

And the challenges that Jim indicated is that becomes a limit to how far you can leverage what you’ve done and so we have to carefully continue to expand to grow the business, so it is set up for future growth but not do so in a way that compromises you hitting that profitability target. And when you’ve got variability and revenue that becomes a delicate Tier growth and so as we see the revenue growing, I think you'll see the expenses go up after that more so than in anticipation of it.

Robert Stone – Cowen and Company, LLC

Great, thank you very much.

John Penver

Okay, thanks Rob.

Operator

Thank you. Our next guest is Peter Homans. Peter your line is open.

Peter Homans – Parkman Group, Ltd.

Thanks very much. Good quarter. I just had a couple of questions. My phone was buzzing when you discussed the signing Hewlett-Packard as IT partners (inaudible). Either what percentage was that or do you have individual percentages of each of those?

John Penver

Peter, hi. IT channel revenues were 30% of our revenue for the quarter. It was 40% in the previous quarter, I believe for the full-year it was 25% and it had been 10% the year before and then as far as the product mix I'm not sure, but it was 1,000 is, I don’t know.

Peter Homans – Parkman Group, Ltd.

Was there any reason for the, I would have thought that with the growth in the overall market and those two companies entered in the market that the percent would have stayed in the sort of 39%, 40% range. So is there any reason that you’re aware of for the change?

John Penver

The relative change is not necessarily because that metric, it didn’t mean that sales from that channel fell by a third. It is just that our OEM channel sales increased significantly compared to the prior quarter as did our direct business. So relatively it may have decreased, but in absolute dollars that’s not true.

Peter Homans – Parkman Group, Ltd.

And two other questions, in rotary manufacturers in Europe, do I understand correctly that those vendors essentially sell the flywheels and expect the customers to, in essence assemble whatever system they can sort of drive?

John Penver

No, that’s not the case. They sell complete integrated generator with energy storage as a single rotary UPS system. So they are assembled before reaching the customer pre-tested and the like, so, yeah.

Peter Homans – Parkman Group, Ltd.

What is the competitive difference between, sort of the generic European rotary player and your solution?

John Penver

Yeah. That's a good question. Basic difference between a rotary UPS and ours is that most often, not always, but most often they are mechanically coupled the flywheel energy storage to the generator with a common mode failure being the link between the two. Our systems are electrically coupled, which gives us some advantages in that regard, no common mode failure along a single link. It’s not mechanically linked, again electrically linked. The other element to it is that today our systems are very right-sizing kind of power systems.

So in other words, if you want to buy in a data center today a megawatt of power we can sell that to you as four quarter megawatt system, so you can better right-size your demand that you currently have with a system like ours. And then as you grow, we can grow in a more granular fashion which is a quarter megawatt at a time, whereas the equivalent would be take for example one of our bigger competitors is a pillar system which is 1.67 megawatts is their unit of power.

So for the smaller applications, they would have to go buy and incur the cost of a full 1.67 where their demand may only be three quarters or a megawatt at the time. So that's also the modularity is sort of a difference. One of the biggest differences is though is the cost of maintenance is extremely high with rotary UPS manufacturer and ours is very, very minimal.

I can go in some detail on a separate call with you if you would like as to what really is involved there. And the only other thing I would tell you is that not only are the rotary guys somewhat linked together often times mechanically together but they are sort of bound often times to a particular generator or as because we are electrically coupled we can take best availability, best pricing on generators when we built the solution.

So at sometimes and most often, they will be Caterpillar but Caterpillar can’t meet our demand on the availability. We can interconnect with a comments, or if a customer says I have got Mitsubishi engines and I want to continue with that, it gives us a lot more flexibility for the customers how they build up the whole solution whereas often rotary UPS manufacturers are bound to a particular generator type.

Peter Homans – Parkman Group, Ltd.

Then there was a decline in gross margin in the quarter and it looks like it was more in the service business on a percentage wise than in the product side. Now I was just wondering what the cause of that would have been?

Jim Clishem

Actually, Peter the mix, the decrease in margin is actually is due to the change in product sales mix.

Peter Homans – Parkman Group, Ltd.

Okay.

Jim Clishem

Selling between PowerHouse and containerized infrastructure solutions and just eventually that, having sold more PowerHouse this quarter, which we in some cases make less margin on that than we do containerized infrastructure and really the change in sales mix would explain the change in gross margin.

Peter Homans – Parkman Group, Ltd.

And if I recall what you said earlier, going forward the mix is actually more PowerHouse?

Jim Clishem

Yeah, it’s volatile to a extent that we believe that’s going to be the case, but the mix between those two is a little bit unknown over the longer term.

Peter Homans – Parkman Group, Ltd.

Okay. Thanks very much.

Jim Clishem

Okay. Thank you, Peter.

Operator

Thank you. Our next guest is Matthew Crews. Matthew, your line is open.

Matthew Crews – Noble Financials

Well, thanks gentlemen, and thanks for taking the time, I know the call is getting long. Just one follow-up question on the revenue mix on regions, 2010 I think you would calculate Americas to be around 73%, EMEA is around 20% for the year and you are taking about 40-40 split on a go forward basis over the next couple of years, can you characterize the different growth rates between the regions that’s going to get you there?

Jim Clishem

Yeah, Matthew, it’s Jim. I would say most of that mix change is more due to our internal capability to capitalize on the markets. I wouldn't read into that Europe for example is growing faster than the Americas. What we are in fact doing is putting more investments, we’re really building out our German operations and we've got a trading region around Germany which includes Austria and Switzerland, the whole dock region.

And as we continue to make investments there, we’re going to get more not only mind share but more transactions out of that region, same thing in the UK. So we’ve done a really good job in building out both our awareness and our infrastructure, sales infrastructure in the North American markets.

I think what you’re seeing there in terms of the, making it little bit more of an even split is really our focus and our investment in Europe and then what we think will be our long term growth as well in China. We have, fewest number of people really in the Chinese market. As you know we just opened that market from a legal entity perspective last year. And so I wouldn’t read as much into, is it a market thing as in it’s been more of an Active Power focus thing.

Matthew Crews – Noble Financials

But you are going to see accelerated growth in Europe versus the Americas over the next couple of years just due to your increased presence?

John Penver

That's right, yes.

Matthew Crews – Noble Financials

Okay. All right thank you.

John Penver

You’re welcome.

Jim Clishem

Thanks Matthews.

Operator

Thank you. Our next guest is Chris McDougall. Chris, your line is open.

Chris McDougall – Treaty Oak Capital Management

Yes, thank you very much. I was wondering, you had talked a little bit about the overall expense leverage and for I guess next year you’d expect if you saw $25 million run rate you’d see about half as much growth in operating expense. How about in the out years so, obviously if you have a growth model for the company over the next five years how much long term operating leverage do you expect from the, op expense line? Should we see that same kind of half of the overall company growth continue with the operating expense?

Jim Clishem

Let me give you an indirect answer, which is that we look to get our EBITDA model in the long term between 15% and 18%. And we think differences between GAAP and EBITDA will diminish because of the age of lot of their infrastructure and investment. And clearly, I think that will get you to where you want to go but the only reason is, anyhow we’re hitting 35% to 40% gross margins, that will make our operating expenses down into 20% to 24% range to hit that kind of operating margin that we’re anticipating.

And we would expect most of the growth in the operating expenses to really be in sales and marketing at least after we get through a few more investments in R&D this year. We think we can leverage that, we can leverage our G&A infrastructure where they won’t be increasing anywhere near proportionally to the increase in the business?

Chris McDougall – Treaty Oak Capital Management

Okay, great. Thanks a lot.

Jim Clishem

Okay, thanks Chris.

Operator

Thank you. Our next guest is Peter Homans. Peter, your line is open.

Peter Homans – Parkman Group, Ltd.

Sorry, I’ve got two follow-on questions I forget to ask for, one is in the Nordic deal that you won, which I think was a six, four year, it was below megawatt. Did you have any rotary competitors in there, if as I understand now they tend to have mechanically tied and higher individual power sizing, which would have made them, sort of too much for the Nordic deal or was it all battery?

And then if one were to assume that PowerHouse increases and mixed to some degree, where does additional gross margin come from? I think when we spoke in Boston, I think Jim you mentioned, potential for something between 3% and 6% gross margin improvement opportunities over time sort of embedded in the company. I wonder where that came from?

John Penver

Okay, let me start off and so, the particular opportunity I think you’re referring to, we had a press release where we were successful in providing solutions for ski lifts, the Nordic count.

Peter Homans – Parkman Group, Ltd.

Right.

John Penver

And what was interesting is that the primary competition on that I think, opportunity was actually battery-based UPS competitors and through the selling approach and marketing approach of working with consulting engineers and the end users, we had a number of inherent advantages because our ability to upright in a wide ambient operating temperature.

Peter Homans – Parkman Group, Ltd.

I think those are one of your keys.

John Penver

Yes. And in fact, after we hadn’t quite won the job, we did have some competition from some of the rotary-based competitors in Europe. Some of those rotary-based competitors do offer battery-based product at the lower end as well. And so they can offer both solutions, but the non battery-based solutions was more than what the customer wanted.

So ultimately, I think we won it because of the physical attributes of the wide-operating environment, the service capabilities that we offered them and then demonstrated efficiency of the product. But just, yeah not as those competitors could complete it. So that was ultimately the basis that we run it on.

On the second part and I think Jim will probably jump in but the opportunity to improve our margins with our non-UPS systems comes from continuing to improve the efficiency of our manufacturing operation as we build more of these here in our factory. And then just as we increase the volume of these things, we’ve been operating at a very low level and we believe there is opportunities for us to improve the profitabilities for procurement through standardization of design, efficiency and manufacturing.

And frankly in some foreign markets, the ability to process better, to extract more value for the fact that they are getting an integrated delivered solution so that people don't look at this as just to some parts of it’s component part, but we are able to extract value for the fact that we’re providing this benefit in this solutions to our customers. And we’ve had differences in pricing in different regions of the world and that comes down to less improving and selling in our marketing activities to extract that.

Peter Homans – Parkman Group, Ltd.

That’s 24% or $24 million, what I guess was described as backlog, that will the driver of the next three quarters, can you describe what the mix is in there in terms of PowerHouse flywheels, et cetera, et cetera?

Jim Clishem

Yeah, Peter, I haven’t actually done the breakdown in terms of percentages. I’m familiar with what’s in there and it is a broad collection of PowerHouse, continuous power infrastructure and individual UPS systems, so it’s a pretty broad range. And then that’s what we like to see that we are not depending on any one particular either channel or particular product solutions that. So I don’t have those numbers right in front of me to give you what the percent of breakdown of these.

Peter Homans – Parkman Group, Ltd.

Maybe, I will give a call later on.

Jim Clishem

Sure, sure.

Peter Homans – Parkman Group, Ltd.

Thanks very much.

Jim Clishem

Thanks, Peter.

Operator

Thank you. And we have no other questions in queue.

John Penver

Okay. I guess I will cut in for Jim and say thank you for joining us today. And we appreciate your continuous support and we look forward to speaking to you again next quarter. Thank you.

Jim Clishem

Thanks.

Operator

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

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