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Executives

Michael W. Sund – Vice President, Communications and Investor Relations

David J. Schramm – President and Chief Executive Officer

Kevin S. Royal – Senior Vice President, Chief Financial Officer, Treasurer and Secretary

Analysts

Michael Lew – Needham & Company

Matthew Crews – Noble Financial

Walter Nasdeo – Ardour Capital Investments

Dilip Warrier – Stifel Nicolaus

Philip Shen – Roth Capital Partners

Craig Irwin – Wedbush Securities

Ben Kallo – Robert W. Baird & Co.

Zack Orkin – Stephens

Bryce Dille – JMP Securities

Maxwell Technologies, Inc. (MXWL) Q1 2011 Earnings Call April 28, 2011 5:00 PM ET

Operator

Good day ladies and gentlemen, all sites are now online in listen-only mode. Please note there will be a question-and-answer session later on in the call. (Operator Instructions) I will now turn the program over to our moderator for today, Mike Sund. Please go ahead sir.

Michael W. Sund

Good afternoon. In a few moments, you will hear from David Schramm, Maxwell’s President and CEO; and Kevin Royal, our Chief Financial Officer.

First, we need to advise you that the following discussion will include forward-looking statements that are based on our current expectations and assumptions, which are subject to numerous risks and uncertainties. Actual results could differ materially because of factors such as risk related to our international operations. These include our ability to comply with rules and regulations in countries where we conduct business, our ability to oversee and control our foreign subsidiaries and their operations, our ability to effectively manage foreign currency exchange rate fluctuations, and our ability to comply with U.S. Foreign Corrupt Practices Act, anti-bribery laws, foreign jurisdictions and the terms and conditions of our settlement agreements with the U.S. Securities and Exchange Commission and Department of Justice.

Also our ability to remain competitive and stimulate customer demand by introducing new products and match our production capacity to customer demand; dependence on the sale of our products to a small number of customers and vertical markets, some of which depend heavily on government funding and subsidies, reliance on certain suppliers of key materials and specialty equipment, and our ability to obtain sufficient capital to meet our operating or other needs.

Many of these factors are beyond our control, and there can be no assurance that we will not incur additional unseen costs in the conduct of our business. Forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. For further information regarding such risks and uncertainties please refer to the MD&A and risk factors sections of our SEC filings, including our most recent Form 10-Q and our annual report on Form 10-K.

Electronic copies of these filings may be accessed by visiting the investor section of our website and hard copies maybe obtained by contacting the company. Some of you are listening to this call via the Internet and an archived replay of the call will be available on our website. All information in today’s call is as of April 28, 2011. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company's expectations.

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

David J. Schramm

Good afternoon, everybody. We are pleased to report that Maxwell reported total revenue of $35.3 million for the first quarter ended March 31, 2011. That’s up 32% from the $26.6 million reported in the same period a year ago, that growth was driven mainly by strong ultracapacitor sales of $21.4 million, which is up 55% from the $13.8 million recorded in Q1 of 2010.

Sales of microelectronics and high-voltage capacitor products came in at $13.9 million for the quarter, up 8% from last year’s first quarter and both of these legacy product lines continue to make important contributions to the Maxwell bottom line.

That sales growth across all three product lines along with continuing costs and efficiency improvements enable the company to show a small net profit for the quarter; that’s a modest, but encouraging step toward our goal of sustainable and increasing profitability. Kevin will provide more details on those and other financial items in a few minutes.

As has been the case for the past several quarters, sales of ultracapacitor products into wind turbine, blade pitch and power quality applications and for hybrid and electric drive systems for public transit vehicles continue to be the primary drivers of ultracap’s sales growth.

We estimate that more than 15,000 Maxwell ultracapacitor equipped wind turbines are now operating around the clock worldwide. A significant portion of wind related sales continue to go into China, some directly to Chinese wind turbine OEMs and some through European pitch system integrators serving the customer in China.

China’s veracious appetite for electrical energy and concerns about urban air quality and greenhouse gas emissions from coal-fired power plants have been driving rapid expansion of wind generation capacity there. And the recently released five-year plan indicates that growth will continue.

Although, we’ve heard of concerns about a global slowdown in deployment of wind energy systems. We’ve added new customers during the past couple of years and that increased market share has driven significant sales gains for Maxwell ultracaps. The energy storage and power delivery systems for recuperative braking and torque-assist systems in low emission hybrid electric transit buses and zero-emission electric rail vehicles continue to be the other principal driver of ultracapacitor sales.

There are now more than 3,000 hybrid buses powered by Maxwell ultracapacitors in daily service around the world and here again we are gaining share in China and elsewhere, so that number should grow even faster this year and beyond.

As we noted in the past, the Chinese government has identified more than 30 major cities with significant air quality issues and is providing subsidies to local and regional public transit agencies for the purchase of hybrid and electric transit vehicles.

China produces more buses than the rest of the world combined, so if hybrids comprising a growing share of that production and ultracapacitors having demonstrated high efficiency and reliable performance. Heavy vehicles will continue to figure prominently in Maxwell’s future growth.

In Europe, while regulation is focusing on reducing CO2 emissions, hybrid bus, electric rail and other heavy vehicle OEMs in drive train integrators continue to incorporate Maxwell ultracapacitors and their designs. So we see accelerating growth there as well.

This growing body of field experience with thousands of vehicles operating in very demanding duty cycles and harsh environments has validated ultracapacitor safety, reliability and longevity for these and other applications and has helped us to build the industry’s best applications engineering and field support capabilities. As first reported last fall, we are delivering BOOSTCAP ultracapacitor products in increasing quantities for our first automotive design in with continental AG for PSA, Peugeot and Citroë diesel cars in Europe. It’s for our micro hybrid stop-start idle elimination and voltage stabilization system that PSA says it expects to install in a million cars by 2013. Obviously, this serious production launch with a major automaker is another very significant validation for our ultracapacitor products and for Maxwell as a supplier.

Rising fuel costs and consumer and public policy mandates for more efficient and environmentally, friendly passenger, commercial and public transit vehicles are driving rapid innovation in hybrid and electric drive systems. All of the new hybrid and electric vehicles require safe, reliable, cost effective energy storage solutions and it is now obvious that Maxwell’s ultracapacitors will play an increasing role in supporting transportation technology innovation.

We have spoken often about the European Union’s aggressive carbon-dioxide emission reduction mandate for cars as the most immediate driver of automotive application for ultracapacitors. The EU legislation requires that 65% of new cars produced in Europe in 2012 in that no more than 130 grams of carbon dioxide per kilometer. That equates to about 42 miles per gallon per gasoline engines and 48 miles per gallon for diesels. That percentage will increase to 75% in 2013, 85% in ’14 and then to a 100% of the cars produced in Europe by 2015.

In 2020, the CO2 emission threshold is scheduled to ratchet down to 95 grams per kilometer. So further hybridization and electrification will be required for all vehicles; that’s why all of the European automakers have developed and are introducing more fuel efficient, lower emission, micro and mild-hybrid vehicles. And why the pace of new hybrid vehicles launches will continue to accelerate.

All hybrid cars incorporate stop-start idle elimination systems that turn off the internal combustion engine as the car slows and then restart the engine with a burst of energy when the driver touches the clutch or the accelerator. All stop-start cars from earlier model years have used batteries for restarting. But actual driving experience has shown that constant high-current cycling in stop-and-go urban traffic dramatically shortens battery life.

Heavy cycling and cold weather also affect battery’s ability to deliver enough power for repetitive restarting. So stop-start systems have sensors to determine whether the battery has sufficient power for the next restart, if not, the system disables itself until the battery recovers, so no fuel is saved and no emission reductions are achieved until the generator can recharge the battery.

Based on that experience, several automakers and leading Tier 1 part suppliers are now developing systems that take advantage of ultracapacitor’s ability to charge and discharge a million times or more for a guaranteed restarting and reliable performance down to minus 40 degree centigrade throughout the expected life of the car. TSA also notes that by using ultracapacitor's to power restarts, it was able to reduce the battery from a 100 amp hour battery to 70 amp hours, a 30% reduction. That smaller, lighter, cheaper battery can also fit under the hood instead of having to be located in the trunk.

That eliminates about 20 feet of heavy expensive battery cable, simplifies the wiring scheme and reduces the assembly label of the vehicle. With the European and Asian automakers moving aggressively to produce cleaner, greener, more fuel efficient cars, the U.S. automakers are recognizing, that even if their cars meet tougher CAFE fuel economy standards, which require a fleet average of about 36 miles per gallon by 2016.

Their miles per gallon ratings won't be competitive with the imports, so automakers have begun announcing stop-start programs of their own. We have had several technical meeting in Detroit, some of them would continental with us, so there is definitely a growing sense of urgency in Detroit. With some 16 million new cars produced annually the world, even relatively modest ultracapacitor content per car multiplied by any reasonable fraction of the vehicles produced adds up to an energy storage market opportunity that could be measured in the billions of dollars by the end of the decade.

Keep in mind that our quarter-over-quarter growth of 55% was accomplished with only minimal auto business, plus the next phase of auto business will be truly explosive growth for Maxwell, more to follow as this opportunity unfolds. There are also a number of backup power wireless communication and other industrial applications in production or in development.

Couple of months ago, we announced and exhibited a new UPS ultracapacitor model designed specifically to handle brief power disturbances and provide short-term bridge power to the primary backup power source within an integrated uninterruptible power supply system. This new product is being evaluated in several beta sides and we have started taking orders for the last month.

We unveiled another product and the engine start module that acts as an on-board jump start power source or hard to start diesel trucks at a major trucking industry trade show last month and fleet trails will begin soon. In an another interesting heavy vehicle development, we announced earlier this month that ShinMaywa, the world’s third-largest producer of garbage trucks has designed our 48-volt ultracapacitor modules into a quiet fuel saving all-electric garbage loading mechanism. ShinMaywa estimates that trucks equipped with this system will save 2,400 leaders of diesel fuels and eliminate more than 6 tons of CO2 emission each year.

This is also significant and that it represents the first major win for our products again strongly infringe competitors in Japan. Now that ultracapacitors have established themselves as an up and coming segment of the energy storage mainstream, we are hearing more from actual and would-be competitors that few of any of them can speak as we can about millions of units, more than 15 million ultracapacitors, Maxwell has in service. They are all working in the field today.

In a few minutes, I will discuss recent developments with our other two product lines and comment on future prospects. But first our Chief Financial Officer, Kevin Royal will provide some additional detail on Q1 financial results. Kevin?

Kevin S. Royal

Thank you, David. I’m going to spend a few minutes providing some additional information on our first quarter 2011 financial results. Our revenues were $35.3 million for the first quarter of 2011, up 3% from Q4 2010. The higher revenues in the first quarter were driven by the 6% increase in ultracapacitor product sales, which generate $21.4 million in revenues for the quarter. Revenues from our microelectronics business were down slightly this quarter, while our high voltage product revenues were essentially flat compared to Q4 2010.

Non-GAAP gross profit was $14.1 million or 40% revenues for the first quarter of 2011 compared to non-GAAP gross profit of $15.1 million or 38% of revenues for the third quarter of 2010. In the current quarter, non-GAAP gross profit was positively impacted by improvement in our gross profit as a percentage of sales on microelctronics and high-voltage products that was negatively impacted by unfavorable product mix in higher outbound freight costs for ultracapacitor products.

Non-GAAP gross profit excludes stock-based compensation expense, the impact of reclassification of assets from held-for-sale to held-and-used and amortization of intangible assets. Our target non-GAAP gross profit as a percentage of revenues remains 40%.

Our operating expenses increased during Q1 2011. The most significant increases related to increased spending in research and development in support of current and new product development, as well as headcount to support our continued growth.

Total non-GAAP operating expenses for Q1 2011 were $13.1 million compared with Q4 2010 non-GAAP operating expenses of $11.6 million. Non-GAAP operating expenses exclude stock-based compensation expense, amortization of intangible assets, and impact of reclassification of assets from held-for-sale to held-and-used.

We expect non-GAAP operating expense to range from $13 million to $13.5 million per quarter for the remainder of 2011. Due to the timing of certain expenses, our operating expenses for the second quarter of 2011 will likely be at the top end of that range.

We reported non-GAAP net income of $161,000 or $0.01 per diluted share for the first quarter compared with non-GAAP net income of $1.1 million or $0.04 per diluted share for the fourth quarter 2010. Non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets, the impact of reclassification of assets from held-for-sale to held-and-used and a gain on embedded derivatives and warrants. Our earnings before interest expense, taxes, depreciation and amortization, or EBITDA was $2.5 million in Q1 compared to $3 million in Q4.

Now, I’d like to turn to the balance sheet. We ended the quarter with cash of $32.1 million, which represents a decrease in cash of $14.8 million from Q4, 2010. The significant components of our cash activity for the quarter include $6.7 million for the initial settlement payment to the SEC and DOJ, an increase in accounts receivable of $5.1 million and capital spending of $2.9 million.

The significant increase in accounts receivable is due to the shipment linearity in the first quarter of 2011. The first quarter has always been a somewhat challenging quarter for the company, with shipments occurring later in the quarter. We expect shipment linearity to return to normal in second quarter, which should lower our days sales outstanding and improve cash generated from operations.

In February 2011, the holder of the convertible debentures converted the remaining $8.3 million principle balance in the shares of the company’s common stock increasing the current share count to 27.3 million. The remaining debt consists of borrowing at attractive interest rates at our Swiss entity, which has local Swiss banks approximately $5.7 million.

On April 5, 2011, the company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to, from time to time, sell up to an aggregate of $125 million of the company’s common stock, warrants of debt securities. The shelf registration statement is not currently effective and we expect the process to become effective would take approximately 30 to 45 days.

While our cash balances are lower at the end of Q1 2011, this is driven by the payment of the first installment of the SEC and DOJ settlement, as well as other factors such as seasonality, which should improve during Q2 and Q3. Further, we are currently discussing the potential for line of credit with various financial institutions, which could provide an alternative to raising capital to the issuance of debt per equity.

While we have no current plans to sell stock or issue debt, it is reasonable to assume that we may do so in the future. It has been our intention and remains our intention to do so opportunistically in order to minimize dilution to current shareholders.

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

David J. Schramm

Thank you very much, Kevin. Earlier I focused mainly on our ultracapacitor products and markets. So, let’s turn our attention to developments with Maxwell’s other products. As most of you know, Maxwell’s Swiss subsidiary develops and markets high voltage capacitor products that are used in the electric utility grid and other applications involving the transmission and measurement of high voltage electrical energy.

Although the name sounds similar, high voltage caps are not even close relatives of ultracapacitors. We produce high voltage products for large global prime contractors that build power plants and install electric utility infrastructure around the world. Maxwell is the world’s leading supplier of high voltage capacitors for the grid, and our sales track closely with global spending on electric utility infrastructure.

Developing countries such as China that are expanding electrical energy generation and distribution to support commercial and industrial activity and improving standards of living are major consumers of our products. High voltage sales were off a bit last year, due at least in part to the difficult financing environment in 2009, which delayed some projects.

Sales have begun to bounce back this year, and as we reported in February, we just won a major design in for our capacitive divider products for the multi-billion dollar renovation and modernization of Russia’s electric utility grid. We are also monitoring plans for the so-called Smart Grid here in the U.S. and elsewhere to see how our products comply.

Moving to our microelectronics product line, sales of the radiation hardened components and single board computers that we supply to satellite and spacecraft OEMs in the U.S. and Europe continue to be steady. And we are up to that for a couple of new single board computer programs. These space programs typically span several years, and our deliveries are tied to program schedules and funding cycles. So, volumes vary quarter-to-quarter, but the annual sales have been in line with our expectations. Sales of these products are a function of a number of satellite and spacecraft launches and the amount of Maxwell content per launch.

The high-value, single-board computer product we introduced a few years ago has gradually gained traction in the very conservative space market and is now allowing us to significantly increase the value of Maxwell content per launch. Perhaps most importantly, the space market’s requirement for failure-free performance allows our microelectronic products to command high profit margins that contribute strongly to Maxwell’s bottom line.

The steady performance in cash flow provided by these legacy, high-voltage and microelectronics product lines has given Maxwell a staying power to add resources to invest in the potential we have always envisioned for ultracapacitors.

Ultracapacitors sales accounted for more than half of the company’s total revenue for the first time last year and crossed the 60% threshold in Q1. As we reported a couple of weeks ago, we have doubled production capacity for ultracapacitor electrode, cells and modules over the past year. And we are moving ahead aggressively with additional investments in capacity and facility expansion in research and development and other resources, including a new expanded technology center here in San Diego, all to ensure that we stay a step ahead of both our competition and the rapidly growing demand.

As announced during Q1, we are getting some help in the form of research and development funding from both the Defense and the Energy Departments. DARPA, which is the Defense Advanced Research Projects Agency, awarded a contract to Maxwell to combine ultracapacitor and battery technology to develop a lighter, longer-lasting energy source for field radios and other portable electronic equipment carried by military personnel.

The initial one-year phase is worth $1.7 million to Maxwell and two additional phases, one approved, could push total funding for this program to about $8 million. In March, we announced that the U.S. auto industry’s Advanced Battery Consortium, which was funded by the Department of Energy, had approved our application for funding to develop an advanced energy storage system for power-assist hybrid electric vehicles. That’s worth about $2.8 million to Maxwell over 24 months and it gives us an opportunity to work directly with the Detroit automakers. We have some other government funding irons in the fire, including collaborations with potential battery partners, so stay tuned for further developments.

Looking at prospects for the current quarter, as we stated in our press release, we expect second quarter revenue to be up 5% to 7% sequentially from Q1, which keeps us on track for our annual guidance of total top line growth of more than 20% for the full year versus 2010.

And now I’d like to open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) First, we’ll go to the site of Michael Lew from Needham & Company. Please go ahead.

Michael Lew – Needham & Company

Thank you, good afternoon, thanks for taking my questions. You had highlighted the favourable demand drivers in China and Europe for the heavy duty applications. Could you characterize the U.S. market opportunities, given what’s seems like a going effort by fleets towards cleaner technology solutions?

David Schramm

I think Michael, the best way to sum that up is what we see is the government in China and in Europe offering subsidies to communities to buy buses that are cleaner. And we don’t see that same activity yet in the United States. So, I do believe that’s why we are seeing such large numbers of buses in both China and Europe and not that many here.

Michael Lew – Needham & Company

But David, do you have an idea or feel when you expect to see an acceleration in demand just given the fleet seem to be making, starting to make a consorted effort?

David Schramm

I hear what you are saying, but when I take a look at the bus market, what we see is municipalities tend to buy buses and I would dare say that as local governments have financing difficulties that’s probably not the highest priority they have. And again, what we see in European government is they have made that a priority and they are funding the buses with the hybridization.

Michael Lew – Needham & Company

And also just switching gears with regard to the recently announced rough use collection industry, I realize it is still very early, but can you discuss the potential time or [potential] opportunity in that market?

David Schramm

All I can tell you is that they are the third largest garbage truck manufacturer in the world and they are using the 48 volt module that Maxwell produces. I do not have the total available market on that, but that’s something that we can get for you, Michael.

Michael Lew – Needham & Company

Sure. And one last question too is, with regard to the Russian opportunity, you mentioned it is progressing well. Do you see a potential acceleration in that, given the opportunity and was it over $20 billion to $30 billion being invested by the government to modernize the grid?

David Schramm

We see that as a huge opportunity because it’s all new business to us, so Russia is going to be a real growth opportunity for our high tension business as we move forward.

Michael Lew – Needham & Company

Okay, great. Thank you.

Operator

(Operator Instructions) Next, we’ll go to the site of Matthew Crews from Noble Financial. Please go ahead.

Matthew Crews – Noble Financial

Good afternoon, gentlemen. A question regarding, actually this would be for Kevin, how are you going to record the funding for the grants for DARPA and the assist or the assist grant?

Kevin Royal

So the DARPA grant is Canada’s revenue and it’s running currently roughly between 500,000 and 600,000 per quarter, that’s the good news. The bad news there is that contract, the gross margins on that are not real significant. So, think in terms of 5% to 7% gross margin on that revenue. So that probably has an impact at this point. I'm not sure you asked about it, but the USABC grant, which is upcoming, we had a very small amount in Q1 will actually be – because of the characteristics of that contract will actually be recorded as an offset to expense down in R&D line.

Matthew Crews – Noble Financial

Okay. And then switching gears, maybe David you can answer this, I think you’ve addressed it, but I was just trying to get maybe a better number to it. With the possibility in Russia with the federal grade company and just spending overall in China, do you think the high-voltage business can be a 10 plus percent growth this year, I mean a rebounding to more normalized infrastructure spend in that area?

David J. Schramm

I think it’s normalizing with an upside of 10% and I say that because there was a dip in the amount of infrastructure financing that available in ’09 and ’10 and we’re seeing some of that starting to come back again. China hasn’t slowed down a whole lot from everything we see, and we do see the growth in Russia, Europe and North America, once we get the smart grid defined as what that is there should be another opportunity for us.

Matthew Crews – Noble Financial

Okay. I’ll jump back in the queue. Thank you very much.

Operator

(Operator Instructions) Next we’ll go to Walter Nasdeo from Ardour Capital. Please go ahead.

Walter Nasdeo – Ardour Capital Investments

Thank you, good afternoon guys. I have a question, it’s a little bit broader, I’ve seen a couple of articles lately that are discussing and questioning some of the safety features in the hybrid vehicles of the ultracapacitors, in case of an accident or something like that. Can you discuss that a little bit and what precautions needed to be, or is that overstated or what’s your position on that?

David Schramm

I guess Walter, I would like you to forward those articles and might send a few of it because we don’t know of any safety considerations there would be in hybrid vehicles because today the only ones that I am aware of is the [previous] users, a small ultracapacitor to backup their electric brakes and then the PSA system for start-stop, but there have been no safety concerns raised that I'm aware of.

Walter Nasdeo – Ardour Capital Investments

Okay. So that’s good to know because and I will dig those up and then send them over to Mike. One of whom was in the form of procedures for rescue people going into get somebody out of a hybrid vehicle in case of an accident and what they needed to do.

David J. Schramm

They were talking about batteries and I’d understand your concern because again, there is no chemical reaction that goes on in our ultracaps, it is strictly storing the static electricity and its carbon and aluminium foil. So, there is no chemistry, there is no reactive metal. So, I’d be interested to know more about that, but I'm not aware of any safety concerns.

Walter Nasdeo – Ardour Capital Investments

Well, thank you for addressing that and I will dig those up and send them over to Mike.

Operator

Next we will go to the site of Dilip Warrier from Stifel Nicolaus. Please go ahead.

Dilip Warrier – Stifel Nicolaus

Thank you. So, we’ve noticed that the largest lead acid battery producer in the world actually announced plans to start up an AGM battery plant here in the U.S., about half our which is already sort of pre-committed to OEMs. I was wondering if, you know, in recent weeks you’ve seen any sort of increase in momentum in discussions with automakers on start-stop and if the AGM infrastructure being created here in the U.S., is something that actually helps you open up the market here?

David Schramm

When you look at the synergy that we keep talking about between the battery and the ultracapacitor, I go right back to what PSA has found and that is if they were able to reduce their battery 30% and that’s 30%, there is a cost factor, there is a mass factor and there is a complexity of putting it back under the hood and saving that long cable to the back.

But I think the other factors you get is, the ultracapacitor because there is no chemical reaction going on is capable of working at 40/0 and batteries don’t have that ability because chemical reactions can’t function at that low temperature. We also can function at 65 degree C, which is about 149 degrees Farenheit and we can cycle our product a million times.

So when you look at the life cycle of a vehicle, a million cycles for most people would outlast the life of the car where as a battery can only be cycled thousands of times and that won’t last the life of a car especially if you have a stop-start feature on.

Dilip Warrier – Stifel Nicolaus

And then it sounds like you’re kind of optimistic about the UPS business, and I was wondering what’s your expectations are for the business over the next couple of years?

David Schramm

I am very optimistic about UPS, we just introduced the new module and it’s doing very, very well. We are getting traction in the marketplace. And I think that’s probably the biggest comment I’d make it in the last 3.5 years, we have done I think a very good job with our engineers and our sales people educating the marketplace as to what the ultracapacitor can do. I think we’re just starting to benefit from the traction. In 2007, total company sales were $57 million and this quarter was $35, so we are getting some great traction in the marketplace and right now it’s been driven by the ultracapacitor market.

Walter Nasdeo – Ardour Capital Investments

Okay. One last question just related to the Chinese wind market, so if I heard it right, the slowdown in Chinese wind is already kind of baked into your guidance here, it sounds like you’ve made enough of sort of customer acquisitions of penetrating new customers that you can offset any relative weakness in China?

David Schramm

We haven’t seen any weakness in the Chinese wind market. Again, we have picked up several new customers. So, our total volume for wind we see that growing not slowing down at all this year.

Dilip Warrier – Stifel Nicolaus

Very good. Thank you.

Operator

Next we’ll take a question from Philip Shen from Roth Capital Partners. Please go ahead.

Philip Shen – Roth Capital Partners

Good afternoon, everyone. Thanks for taking my questions. Following up on that question about the Chinese wind market, I think following the disaster in Japan, the Chinese government is actually increasing potentially its mandate for wind capacity additions between now and 2015. So, I think the original goal from the regional tax side of your plans actually in March of this year were 7 gigawatts by 2015. And I think there are discussions now that hit maybe between 90 and 100 gigawatts over the next few years. So that represents call the 35% increase. Are you starting to see any signals from your wind customers that orders may even be picking up?

David Schramm

We have been picking up in orders, Phil.

Philip Shen – Roth Capital Partners

So more than what you had been expecting as a result of the disaster in Japan so over the past one or two months?

David Schramm

Yes, I guess, when I take a look at Q1 of last year and Q1 of this year and I look at 55% growth and again automotive is really not been a pusher on that. The growth that we have seen has been driven by the buses and the wind. And they’re neck and neck as to which one has a bigger share for our market. So to answer your question, we have not seen any slowdown and I think we are going to see continued growth out of the wind market.

Philip Shen – Roth Capital Partners

And I am not suggesting slowing at all, in fact, so my question is, over the past month or two, have you seen something to change with your customers and accelerate in terms of orders?

David Schramm

We have not seen any slowdown, we’ve seen an acceleration in the total number because we have picked up some new customers. Hope that answers your question.

Philip Shen – Roth Capital Partners

Great. In terms of I think the German government, they are now talking about putting an additional 3,600 kilometers of new high voltage lines. And again, this is following the Japanese disaster as well and they are talking about improving their grid. I can imagine this is supportive for your high voltage capacitor business. Can you walk us through what kind of exposure you have to the high voltage driven market and if this is passed do you believe that this might support your business as well?

David Schramm

This is going to help our business. In Europe, we have been working very, very closely over many years with ABD as well as Siemens and they tend to be the power plant contractors if you will, the project managers and we’ve been designed into many of their systems and we see that continuing. We had a little bit of a downfall here because of the financing about 18 months ago, but we are seeing a pickup in the high tension business, single-digit growth for this year, I think if something is getting clear as the quarters go by. So Europe is going to grow for us because of the unfortunate incident that happened in Japan.

Philip Shen – Roth Capital Partners

Great. My last question here is bit of a housekeeping question, can you remind me what Kevin mentioned in terms of OpEx commentary guidance, I think he said something about being at the high end of the range, can you just remind me what that range was?

David Schramm

So the range is from $13 million to $13.5 million for the remainder of the year and what we said because of the timing that's going to be a little bit front end loaded. So, in Q2 we expect to be at the high end of the range and then we expect that to drop off a bit in Q3 and probably Q4 will be close or near to that range.

Philip Shen – Roth Capital Partners

Thanks, very much.

Operator

Next, we’ll go to the side of Craig Irwin from Wedbush Securities. Please go ahead.

Craig Irwin – Wedbush Securities

Thank you, thanks for taking my question. Kevin, if we could actually just continue along that theme of the OpEx. In the first quarter, you had OpEx just shy of $14 million, but you're anticipating this to go down throughout the course of this year. Was there a certain project or certain expenditures that took place in first quarter that were (inaudible) that you expect to take off or is there a certain amount of application engineering that’s front end loaded for this year that's likely to not be recurring in the back half of the year?

Kevin Royal

Craig, I think we’ve got a bit of a mismatch on what we're talking on here. So the numbers I’m giving are non-GAAP operating expense, which would exclude the stock based compensation and the $13.9 million number that you cited for Q1 included that 800,000, a bit more than 800,000 in stock compensation. So, if you carve that out the non-GAAP OpEx was about $13.1 million, we expect that to get to roughly $13.5 million in Q2 and then drop a bit in Q3 and probably in the middle of the range again on a non-GAAP basis.

Craig Irwin – Wedbush Securities

Great, great Dave thank you for that clarification. Then the second financial question that I had was in the past when you had switched manufacturing operations on the Ultracap side, some of the currency swings tended to have bit of an impact on not just the revenue, but also on the gross margins and with the change in your business mix, obviously you still got high voltage over there with the Ultracap manufacturing both in San Diego and China that's going to change your currency sensitivity, could you discuss with us a little bit about how some of the currency swings might impact your revenue and gross margin over the next couple of quarters?

David J. Schramm

What we did at the end of 2009 is we purchased (inaudible) property that they resided in Switzerland and related to ultracapacitor products and brought that back in U.S. and towards the end of 2010 we started selling all of our ultracapacitor product from the U.S. entity, mostly in U.S. dollars and then not entirely we saw some customers that we sell to in Euro.

So, by taking those steps what that did is in part that mutualize while the currency impact that we had seen in the past related to the ultracapacitor business. Now, if you take a look at the Swiss business, the high-voltage business we – our functional currency there is the Swiss Franc and we saw a lot of that product in the Euro and as you are probably aware the Swiss Franc has been strengthening against the euro. That's necessitated that we take pricing action in order to hold those gross profit margins as historical levels, we’ve taken that pricing action, it's been accepted thus far and we had very comparable strong gross profit margins for our high-voltage business in Q1 of 2011.

Craig Irwin – Wedbush Securities

Great, great. The next question I wanted to ask was for a clarification around guidance, so it's great that you guys are growing basically just as fast as you did last year, if not faster, 20% revenue growth, seems like it might be a little bit conservative. Now if we just do the basic math of 5% to 7% sequential revenue growth implies 25% to 28% growth in the second quarter after achieving 32% in the first quarter, but then really the back end would be, I mean the second half of the year would only be about a 12% to 13% growth period. What you factor into your choice of 20% as the commentary you choose, I mean what deltas do we have here that could potentially drive you above or well above that debt mark?

David Schramm

Craig, that one, what I said at the end of last quarter is that 2011 would grow no slower than 2010 and 2010 was over 20%. So, the visibility we have to the markets is better today than it was a couple of years ago. But again the 20% I can see, could it be higher than that, everyday we learn a little bit more that’s going to give us more confidence as to where we’re going to be. And we’ll update that as we go through the calls this year. But obviously, we’re going to try to execute and push out as hard as we can.

What we had in the comment sections here, we have over doubled our capacity and we announced here not too long ago that we’re looking for another facility. So, we’ve got three in San Diego and we’re going to have another one somewhere, we said an adjacent area, but we’re going to add more electrode capacity. So, we should still see an awful lot of growth in our future.

Craig Irwin – Wedbush Securities

That’s really great news. If I could shift topics a little bit, obviously wind has been a great business for you over the longer term, I mean several new customers, some real diversification and they’re driving continued growth. In a wind market it’s got a little bit choppy out there. Can you give us an idea on the breadth of customers that are contributing significant revenue and feel free to define significant, anything you like, but can you comment a little bit on maybe how many of the top ten OEMs you’re shipping product to on a consistent basis? What your expectations are as far as potential contributions to the overall mix of turbine systems out there?

David Schramm

I think the same we’ve had and the market we’ve seen is about two-thirds of the wind mills use electric to control and the third are hydraulic. So, obviously our total market is going to be that two-thirds uses electric control. And so we’ve been calling on every one of the windmill makers that has electric control and we’ve been growing very, very nicely on converting people to the ultracap. They like the modules, some of them like individual sales. We don’t have any one customers that’s over 10%, so we got a pretty good diversified base there. And I think right now, last column I hit, Greg, was about seven different windmill manufacturers that we’re dealing with.

Craig Irwin – Wedbush Securities

Excellent, excellent. Then on to the stop-start opportunity, this is really an impressive potential opportunity for you over the next couple of years and one key win really anchors your presence in that market already. Can you give us a little bit of color on the number of OEMs there that might be in serial sampling or – are obviously spending significant development dollars on their side of the house that they could materialize those customers from (Inaudible).

David J. Schramm

Yeah, Greg, the strategy we’ve had is, we are educating the OEMs, but working with the Tier 1 and again that the strategy worked out extremely well with us working with continental because continental now has a start-stop system that they can now take and market to different OEMs. So the one we’ve announced is one with PSA that you are very aware off, but again the thing I want to stress is that this last quarter 65% growth in ultracap and the auto hasn't really kicked in to this full potential. And you’re exactly right start-stop is a huge opportunity for us as a company, but we got 55% growth without it. So with it I think we’re going to see a huge upside, I can't give you the name of other OEMs, other than I can tell you a lot of OEMs are looking at how you use ultracaps and how you use the continental system.

Craig Irwin – Wedbush Securities

Great, thanks and then one more if I may, I hate to ask too many questions, but I will make this my last. Kevin if you could clarify for us you have $13 to $13.5 in OpEx guidance, non-GAAP for the remaining quarters. Does that include any of the R&D offset that will come in from your government funding that you are going to be receiving?

Kevin S. Royal

Yes, the numbers that I gave Greg would be net so on a gross basis let's say in Q2 maybe you are at 13.7 we’ve got an offset coming in from the government so that will get a stand of the 13.5 member, which I have quoted. So that is included in our forecast that I will offset.

Craig Irwin – Wedbush Securities

Great, well congratulations on the strong progress. Thank you for taking all my questions.

David J. Schramm

Thank you.

Operator

The next question we have comes from Ben Kallo from Robert W. Baird. Please go ahead.

Ben Kallo – Robert W. Baird & Co.

All right, thanks for taking my questions. I will try to keep it brief here, I want to start on your production capacity and the ramp up there and specifically to strengthen, did we see the full effect so that actual capacity in Q1 or how much did we see in Q1 and how should we expect to look ahead, how is that going to ramp up over the next few quarters?

Kevin S. Royal

Yeah, the obvious answer from our vantage point is to add capacity faster than we are adding the revenue and that's what we are doing. The electrode is the key to the technology we’ve got that's where the intellectual property is and we have more than doubled our capacity there. As I just alluded to Ben, we’ve got a second facility that will be dedicated to making electrode, we are in the process of looking for wares the right site to do that that gives us the best cost scenario and we’re going to have that identified pretty soon and once we do, we’re going to start loading up with equipment and getting that capacity online. So, the plan we’ve got is if we stay on this growth rate of what we saw last quarter, a 55% quarter over last year’s quarter, I got to make sure we’re putting and at least that much capacity and we now look at our marketing plans and make sure we stay ahead of it.

Ben Kallo – Robert W. Baird & Co.

Okay and then kind of (Inaudible) back around to the question though that Craig asked about your guidance, I look back over the past couple of years sequentially every quarter has – there has been a growth in every quarter sequentially at least for the past three years. Is there any reason for me to think it would a down quarter this year?

Kevin S. Royal

Let me help you, if you go back a little bit, Q1 has been historically a little lower than Q4 this one is one of the first, Q1 was actually greater than Q4.

Ben Kallo – Robert W. Baird & Co.

Right

Kevin S. Royal

But you are right the rest of them tend to be sequential, as we sit here right now, I have no reason to believe that Ultracap one grow double digit for the rest of this year.

Ben Kallo – Robert W. Baird & Co.

And that would offset any decline in the other two businesses.

Kevin S. Royal

I don’t see a decline in the other businesses either, I just don’t see double digit growth in those two.

Ben Kallo – Robert W. Baird & Co.

Great. And then as we go to the wind business, are you seeing an increase in the use of Ultracapacitors over other source technologies as we move to larger turbines and how is that are you winning new business because of that, I mean how is that effecting your markets there?

Kevin S. Royal

The thing that drives that Ultracap over a battery solution is that the windmill makers we work with basically when they install the windmill they’re responsible for the maintenance, one customer that I know very well, he is responsible for 12 years of maintenance. And of course these windmills are very tall, they’re 150 meters, that’s 500 feet up in the air and if you got to change that battery out there is no easy way to get up there to change the batteries out.

So, the Ultracapictor has been a solution in that once you put it up there, its good for all 12 years. And that’s really been the value proposition that we eliminate a lot of the main installers we also give them the peace of mind that this works at low temperature and high temperature and you can cycle at a million times. So, we are growing the business and replacing battery solutions today because of the value proposition over the long term.

Ben Kallo – Robert W. Baird & Co.

Okay. And my final question, just going on to auto, could you just remind us of a, I don’t know if there is a typical time line, but a time line that you can see if a new OEM decides they are going to move forward with Ultracaps, when can we expect in significant revenue, how long does that whole process take/

Kevin S. Royal

Yes and again the strategy that we’ve used is hooking up with the tier-1 and it’s continental. So continental has got a start-stop system that has been validated and its been accepted by PSA, that took us working with Continental (Inaudible) about four years to get designed and validated through the system. The second one won’t take nearly as long because all that validation work is done. And I don’t have a crystal ball, but I would tell you if we had one taking a look today that somewhere 18 months plus or minus I think they could have it in the vehicle.

Ben Kallo – Robert W. Baird & Co.

Great. Thank you guys.

Operator

Next we’ll go to the site of Zack Orkin from Stephens. Please go ahead.

Zack Orkin – Stephens

Good afternoon gentlemen, congratulations on the quarter.

David Schramm

Thank you.

Zack Orkin – Stephens

Obviously a lot of my questions have been answered. I wanted to may be just follow-up on your comments regarding capacity additions and just see if you could address what potential CapEx dollars behind some of these future additions might be in the implications on margins?

David Schramm

We said in the past that we can duplicate an electrode facility, the words I’ve used is always 10 million plus or minus and that’s still a pretty good number for us. So it’s not a huge amount of money. When we look at facilities, to date, we have been leasing facilities and we’re finding that right now is a good time to be looking for facilities across this relatively low. So, again electric facility 10 million plus or minus and again, we’ll be doing that relatively soon.

Zack Orkin – Stephens

Okay. Thanks. And then also a quick question on the tax rate, it was a little bit higher in this quarter than others, is that something we should expect to continue throughout the rest of the year, how should we think about taxes going forward?

David Schramm

So the tax accrual that you see in the financial statements relates to our Swiss business where we’re a tax payer and it’s difficult to assign a rate to that because as the ultracapacitor business becomes more profitable then you’re going to see that tax rate go down. What I would say for guidance from that line is you forecast somewhere between 600,000 and 700,000 each quarter, that should cover the taxes for that business for the remainder of the year.

Zack Orkin – Stephens

All right. Thanks very much and congratulations on a good quarter.

David Schramm

Thank you. I believe we got time for one more question.

Operator

The last question is from the line of Bryce Dille from JMP Securities. Please go ahead.

Bryce Dille – JMP Securities

All right guys. Thanks for taking my questions and getting me in on time. It’s clearly the performance and maintenance characteristics and benefits you guys have over lead asset and lithium ion, but can you talk about how the auto manufacturers and OEMs evaluate you guys on pricing? Is that kind of like a price per car, price per watt, price per start type metric that you’re using?

David Schramm

The answer is probably all of the above, but I would tell you that I worked most of my career for the auto companies and I will tell you that typically auto companies are rather conservative in adopting new technologies because of the complexity of the vehicle they have today. And when we show up with an ultracapacitor, it's a technology they’ve not worked with before and it is a new technology. I’ve had a battery manufacturer tell me it’s a disruptive technology because it changes a whole paradigm on how you do a power and energy system.

So, I think as we get carmakers more comfortable with that that the acceptance of the technology will lead, but second it is going to be cost. So it gets back to the value proposition as to what level do you look at cost. If I can look at cost relative to the whole system over the life of the vehicle, I think we have a pretty good argument. If you look at it relative to adding it today just on an appeal basis then we got some discussion we got to do. But everybody measures, it’s just a little different price.

Bryce Dille – JMP Securities

Okay, thanks for that clarity. And then just to follow-up on the production capacity, I understand you guys have CapEx and electrode expansion here in San Diego, but can you just talk about what your third-party capabilities are today and maybe what they would need to do to take your electrode at this point?

David Schramm

Let me back you up there, it’s total conjecture that the second electrode facility will be in San Diego, we’re going to go where we can protect our IP and have the best cost scenario. So what we had in the last press release was we were looking at adjacent states so that’s somewhere within a four-hour flight to San Diego, so our technical talent can be available.

Our contract manufacturers also added capacity and we are double that capacity also in the last year. So, we’re pretty comfortable right now that we know what we got in front of us, we know how much we think we can get on a high side and we're going to make sure that we are never capacity constraint on getting the ultracap out of the marketplace.

Bryce Dille – JMP Securities

Okay, thank you guys.

David Schramm

Very good and I thank everybody for attending today.

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