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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q2 2011 Earnings Conference Call

July 28, 2011 17:00 ET

Executives

Mike Sund – Investor Relations

David Schramm – President and Chief Executive Officer

Kevin Royal – Chief Financial Officer

Analysts

Craig Irwin – Wedbush Securities

Zack Orkin – Stephens Incorporated

Michael Lew – Needham

Dilip Warrier – Stifel Nicolaus

Philip Shen – Roth Capital

Ben – Baird

Walter Nasdeo – Ardour Capital

Matthew Crews – Noble Financial

Erik Olbeter – Pacific Crest

Operator

Good day and welcome to Maxwell Technologies Second Quarter 2011 Financial Results Conference Call. Later in the conference you will have an opportunity to ask questions during our Q&A segment. (Operator Instructions) At this time, I would like to turn the call over to our moderator Mr. Mike Sund. Go ahead, please.

Mike Sund – Investor Relations

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 and changes in circumstances and assumptions. Forward-looking statements in the following discussion 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 or via the SEC’s websiste. Hard copies maybe obtained by contacting the company. We encourage all investors to read these reports and our other SEC filings. Some of you are listening via the Internet and an archived replay of the call will be available at our website. All information in today’s call is as of July 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 Schramm – President and Chief Executive Officer

Thank you, Mike and good afternoon everybody. We are pleased to report that Maxwell recorded total revenue of $38.5 million for the second quarter ended June 30, 2011. That’s up 30% from the $29.6 million reported in the same period a year ago. That growth was driven mainly by strong ultracapacitor sales of $24.4 million. That’s up 54% from the $15.9 million recorded in Q1 of 2010.

Sales of microelectronics and high-voltage capacitor products came in at $14 million for the quarter, up 2% from last year’s first quarter and both of these mature product lines continue to make significant contributions to the Maxwell bottom line. That sales growth along with continuing costs and efficiency improvements enable the company to show a non-GAAP net profit of about $1.6 million for the quarter. Now, that’s the fifth consecutive quarter that the company has been profitable on a non-GAAP basis. Kevin will provide more details on those and some other financial items in a few minutes.

Ultracapcitor sales and modules for wind turbine, blade pitch and power quality applications and for hybrid and electric drive systems for public transit vehicles continue to be the main drivers of our ultracap sales growth. Along with increasing contributions from a stop-start idle elimination system for automobiles in Europe and various backup power applications. The number of Maxwell ultracapacitor equipped wind turbines operating around the clock worldwide is on pace to approach 20,000 by year-end. A significant portion of Maxwell sales into wind energy over the past couple of years have gone into China where renewable energy has been a focus of government policy and funding, although we continue to hear rumblings of slower growth. There as the government adjusts its wind energy subsidy programs we’ve been able to keep growing by attracting new customers to gain more market share. To augment what we are hearing from customers, we’ve engaged a consultant on the ground in China to analyze wind and other market opportunities and to assess the direction of government policies.

On the basis of that intelligence, we believe that China’s ever-growing appetite for electrical energy and concerns about urban air pollution and greenhouse gas emissions from coal fired power plants bodes well for further expansion of wind energy capacity there.

In addition, China’s leading wind turbine OEMs are now moving aggressively to export their products on a global basis. 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 primary driver of ultracapacitor sales. But before we get into what we are seeing there I need to set the record straight on some misinformation about a bus fire in Shanghai that has found its way under the web. One report described the bus as an ultracapacitor bus, in fact the bus used a combination of locally produced lithium-ion batteries and locally produced ultracapacitors, they were not Maxwell ultracapacitors to improve the efficiency for their system. The bus manufacturer has stated publicly and photos clearly depict that it was the battery pack that started the fire. This has also happened with lithium-ion batteries in cars, laptops and cell phones. Ultracapacitors did not spontaneously combust, which is one of the reasons they are continuing to gain traction in transportation applications.

There are now some 4000 hybrid buses powered by Maxwell ultracapacitors in daily service around the world and here again, we are gaining share. So that number is growing even faster this year. As we noted in the past, the Chinese government has identified a number of major cities with significant air quality issues and is providing subsidies for local public transit agencies for the purchase of hybrid and electric transit vehicles. China produces more buses than the rest of the world combined and hybrids are accounting for a growing share of that production. Our ultracapacitor continue to demonstrate their efficiency, safety and longevity in this heavy cycling application, so we believe we’ve already begun to tap the very large potential for our productions in heavy vehicles.

In Europe, where regulation focuses on reducing carbon dioxide emissions, hybrid bus, electric rail and other heavy duty OEMs and drive train integrators continue to incorporate Maxwell ultracapacitors in their designs. As we reported in May, Flextronics Automotive in Germany has designed Maxwell ultracaps into a breaking energy recuperation system that Flextronics will begin producing next year to reduce fuel consumption and CO2 emissions in commercial vehicles. The system captures and stores breaking energy to power air conditioning, heating, lighting and other passenger comfort and safety features, as well as providing a reservoir of standby power to stabilize the vehicle’s electrical system.

Our automotive program with Continental AG for PSA, Peugeot and Citroë diesel cars in Europe is in full series production. It’s for our micro hybrid stop start idle elimination and voltage stabilization system that PSA introduced in two of its diesel engine platforms last fall. About 300,000 of these cars will be on the road by the end of this year, which will represent another very significant validation both for ultracap products and for Maxwell as a supplier. As most of you know, the European Union has enacted legislation requiring that 65% of new cars produced in Europe next year are met no more than 130 grams of CO2 per kilometer. That equates to about 42 miles per gallon for gasoline engine and 48 miles per gallons for diesel. That percentage will increase to 75% in 2013, 85% in 2014 and then to a 100% of cars produced in Europe in 2015. In 2020, the CO2 emission threshold is scheduled to ratchet it down to 95 grams per kilometer, so further hybridization and electrification will be required for all vehicles.

All hybrid cars incorporate a stop start idle illumination function that turns off the internal combustion engine as the car slows and then restarts the engine when the driver touches the clutch or accelerator. Batteries are the incumbent technology for stop start cars, but constant restarting and stop and go urban traffic wears out batteries quickly. This heavy cycling and cold weather also affect the batteries ability to deliver enough power for repetitive restarting, so stop start systems constantly monitor to the battery to determine if it has sufficient power for the next restart. If not, the system disables itself until the generator disabled itself until the generator can recharge the battery. So no fuel saved, no emission reductions are achieved until the battery recovers.

PSA’s ultra cap powered stop-start system restarts every time in all conditions reliably reducing fuel consumptions and emissions by up to15% in urban driving. PSA also knows that using ultracapacitors to power the restarts allowed it to reduce the battery size by 30%, that’s smaller, wider, less expensive battery that fits under the hood instead of having to be located in the trunk which eliminates about 20 feet of heavy expensive battery cable and simplifies the wiring scheme and reduces the assembly labor of the vehicle.

US automakers have begun announcing stop start launch plans also and we were in Detroit with Continental just last month to explain and demonstrate how ultracapacitors make micro hybrid cars more reliable, more fuel efficient and more environmentally, friendly. Although we only have one program in production so far with more than 60 million new cars being produced around the world each year, auto applications obviously represent an enormous opportunity. Even a small amount of ultracapacitors content per car multiplied by any reasonable fraction of the vehicles produced would add up to an energy storage market opportunity that could be measured in the billions of dollars by the end of the decade.

We know the world is waiting to hear about our next automotive design win. We have plenty of development activity underway with several automakers and tier one suppliers but we can’t tell you at any certainty when to expect another program announcement only that it is not enough. What we can tell is that a number of other applications are beginning to drive serious volume that are helping us to maintain the 50% plus year-over-year growth rate ultracaps are generating for the third straight year. For example, for the first time in company history we’ve produced and sold more than $1 million of our postage stamp sized PC 10 cells in the second quarter and we have orders for $1.5 million for Q3.

Most of them are going into data storage devices called Solid State Drives or SSD’s for enterprise computing installations such as data centers our SSD customers are mounting the ultracaps right on the circuit board where they stand ready to provide a few seconds of instantly available backup power to allow working process to be saved in the event of a power interruption. PC 10’s also are used in smart utility meters where they provide power for wireless transmitters that allow meters to be read remotely. Earlier this year, we introduced an ultracapacitors module 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 UPS module, which as you all approved has been evaluated in several beta sides and now is available as a standard product.

In June, we announced another new product, an engine start module that access an onboard jump start power source or hard to start diesel trucks, fleet trails are underway and we are in the process of signing up a distributor that specializes in products for truck OEMs, truck dealers and truck fleet operators to help us develop this very significant market opportunity.

In April, we announced the ShinMaywa, the world’s third-largest producer of garbage trucks has designed our ultracapacitors into a quiet fuel saving all-electric garbage loading mechanism for their trucks. ShinMaywa estimates that trucks equipped with this system will save 2,400 liters of diesel fuels and eliminate more than 6 tons of CO2 emissions each year.

Now that Maxwell ultracapacitors have established themselves in these and other markets, hardly a week goes by with our new clients from actual or would-be competitors. Few of any of them can speak as we count about millions of units soon to be $20 million Maxwell ultracapacitor cells that are out there working in the field everyday.

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

Kevin Royal – Chief Financial Officer

Thank you, David. I’m going to spend a few minutes providing some additional information on our second quarter 2011 financial results. Our revenues were $38.5 million for the second quarter of 2011, up 9% from Q1 2011. The higher revenues in the second quarter were driven by the 14% sequential increase in ultracapacitor product sales, which generated $24.4 million in revenues for the quarter.

Revenues from our microelectronics products were down slightly this quarter, while our high voltage product revenues were up slight compared with Q1 2011. Non-GAAP gross profit was $15.7 million or 41% of revenues for the second quarter of 2011 compared to non-GAAP gross profit of $14.1 million or 40% of revenues for the first quarter of 2011. In the current quarter, non-GAAP gross profit reflected improvement in our gross profit as a percentage of sales on ultracapacitor products due to ongoing product cost reduction programs and higher volume. Non-GAAP gross profit excludes stock-based compensation expense and amortization of intangible assets. Our target non-GAAP gross profit as a percentage of revenues remains 40%.

Our operating expenses increased during Q2 2011. The increased in operating expenses were driven by a reserve of $2.6 million for the anticipated settlement of a legal – and higher than anticipated legal spending due to ongoing legal matters. These increases were offset in part by lower research and development expense due to lower project relating spending in Q2 2011 versus Q1 2011.

Total non-GAAP operating expenses for Q2 2011 were $13.7 million compared with Q1 2011 non-GAAP operating expenses of $13.1 million. Non-GAAP operating expenses exclude stock-based compensation expense, amortization of intangible assets, and the expense associated with the anticipated legal settlement. We expect non-GAAP operating expense to range from $14 million to $14.5 million per quarter for the remainder of 2011. We have increased the outlook for operating expense due to anticipated spending on ongoing legal matters. These matters include the government ongoing review of the SCPA matter, which focuses on past offices, effort related to intellectual property protection and other corporate related matters. Our legal spending in the second quarter of 2011 was higher than historical levels and we anticipate this level of spending to continue through the remainder of the year.

We reported non-GAAP net income of $1.7 million or $0.06 per diluted share for the second quarter compared with non-GAAP net income of $161,000 million or $0.01 per diluted share for the first quarter 2011. Non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets, the anticipated legal settlement and a gain on embedded derivatives. Our earnings before interest expense, taxes, depreciation and amortization, or EBITDA was $929,000 in Q2, a $3.5 million excluding the expense for anticipated legal settlement compared to $2.5 million in Q1.

Now, I’d like to turn to the balance sheet. We ended the quarter with cash of $29.8 million, which represents a decrease in cash of $3.3 million from Q1, 2011. The significant components of our cash activity for the quarter include capital spending of $4.4 million offset by favorable effects on cash from changes in exchange rates of $1.6 million. Cash used in operations in Q2 was approximately $238,000 and the increase in accounts payable was offset by consumption of cash related to inventory growth and increased accounts receivable balances. The increase in accounts receivable is due to sales growth and shipment linearity in the second quarter of 2011 with 57% of shipments falling in the final month of the quarter. While our cash balances are lower at the end of Q2, this is driven by investment and capital equipment and facilities as well as an increase in inventory to support Q3 sales.

In April 2011, the company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to sell up to an aggregate of $125 million of the company’s common stock, warrants for debt securities. In July, we entered into a memorandum of understanding with the financial institution to obtain a $27.5 million line of credit, as credit availability should provide an alternative to raising capital or issuing debt. 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 of current shareholders.

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

David Schramm – President and Chief Executive Officer

Very good, Kevin, thank you. Earlier I focused mainly on ultracapacitor products and the applications. So, let’s turn our attention to the developments with Maxwell’s other products. As many of you know, the Swiss subsidiary Maxwell acquired in 2002, 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. These high voltage caps are not even close relatives of ultracapacitors. We sell them mainly to large global prime contractors that build power plants and install electric utility infrastructure around the world. Maxwell is the world’s leading supplier of these high voltage capacitors for the grid and our sales track with global spending on electric utility infrastructure.

Developing countries 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 in 2010, due at least in part to the difficult financing environment in 2009 which delayed some of the projects, sales are bouncing 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 utility grid. We are also monitoring plans for the so-called Smart Grid here in the U.S. and elsewhere to determine how our products can contribute.

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 inline with our expectations. Space programs typically span several years, and our deliveries are tied to program schedules and funding cycles. So, volumes vary quarter-to-quarter, on an annual basis sales are a function of a number of satellite and spacecraft launches in the 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 more importantly, the space market’s requirement for failure-free performance allows our microelectronic products to command high profit margins that contribute strongly to our bottom line. The steady performance in cash flow provided by these material high-voltage and microelectronics product lines has given Maxwell the staying power and resources to invest in the home run potential are ultracapacitors are beginning to realize.

Ultracapcitors sales accounted for nearly 64% of our total in Q2. As we reported in April we doubled production capacity for ultracapacitor electrode, cells and modules over the previous year. And we are moving ahead with additional investments in capacity expansion and research and development and other resources, to support anticipated further growth.

A few months ago we moved into a new expanded technology center here in San Diego and we are in the process of negotiating the lease for 100,000 square foot building in the Phoenix Arizona area. It will house a second electrode production facility and provide growth space rather engineering and manufacturing activities going forward.

Also as announced early in the year 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 $1.7 million phase has gone very well and two additional phases when approved, could push total funding for this program to about $8 million $48 million in March we announce that the US auto industries advance battery consortium ABC which is managed by the Detroit automakers and funding by the DoE had approved our application for funding to develop and advanced energy storage system for power-assist hybrid electric vehicles. Now that’s worth about $2.8 million to Maxwell over 24 months and it gives us an opportunity to work directly with the US automakers. Last month we announced Maxwell’s participation in three smaller government funding energy storage technology development programs and we have some other R&D funding irons in the fire, including collaborations with potential battery partners, so stay tuned for further developments there.

Looking at prospects for the current quarter, as we stated in our press release, we expect third quarter revenue to be up 5% to 7% sequentially from Q2, which keeps us on track for our annual guidance of total top line growth in excess of 20% for the full year versus 2010.

At this time, lets just open up for some questions.

Question-and-Answer Section

Operator

Thank you. (Operator Instructions) And our first question comes from Craig Irwin with Wedbush Securities. Go ahead please.

Craig Irwin – Wedbush Securities

Evening everyone congratulations on a really solid quarter first question I wanted to ask the new facility that you are going to build can you speak about the customer commitments for this facility I know you pretty straight on your capital allocation over the couple years it is something where you believe orders that are essentially in hand can justify the CapEx over the next several quarters?

David Schramm

Yeah, Craig we’ve done a lot of analysis as to where our growth is and where the growth coming from frankly our new sales and marketing activity as really unlock some nice markets for us. The engine start module the low voltage right through the different things we are seeing in the energy storage deal we got a lot of confidence that we are going to need that electrode capacity – the facility we have here in Santiago for electrode we have just modernized, we have speeded up everyone of those calendars and frankly we are out of space. So with a question on timing that you know we are negotiating the least right now we will have that done I mean that they are saying the next 90 days will have that least done and the intention would be there sometime in the middle of the third quarter of next year that we would have equipment running we had (indiscernible) that up the speed that is going to give us nice capacity good for electrode to couple with that that also gives us a place to do make an USA for that customer line and then tie with that the third thing is it gives me another city to recruit engineering helping.

Craig Irwin – Wedbush Securities

Excellent, excellent. So, previously your lectured expansion in the regional San Diego facility, if I remember correctly, you’ve more than tripled the capacity on that line. Are we looking again maybe more than tripling capacity or are you going to add capacity in a more measured manner as you complete the CapEx in the new facility?

David Schramm

Yeah, and that’s a very good question. What’s going to happen when that capacity is everyday we learn a little bit more and we get smarter and what kind of equipment to have. So, the new facility is going to have the capability to at least match the capacity that we’ve got here in San Diego and it is fully my expectations that our engineers are going to figure out how to make that go even higher. And then of course our best dream is that we keep the market growing to where we look at the third facility.

Craig Irwin – Wedbush Securities

I like that. So, next question is if I could ask about stop-start and some of the lessons that you are learning roughly 300,000 vehicles using ultracapacitors on the road by the end of this year. That’s a significant accomplishment and your customers will be accumulating operating data of those vehicles that will help them significantly understand the real benefits from their business case and probably many that they didn’t already anticipate and do know that PSA is the most experienced customer in the market and stop- start. But I was hoping you might be able to share with us some of the lessons that they’ve learned and some of the other benefits that they are seeing that might not have been anticipated at the front of this program?

David Schramm

I think Craig it’s almost too early you get feedback, I will tell you that the reliability feedback has been outstanding at this point. What we are looking for is let these cars get through a couple of winners and then let’s see what happens for the extended battery life, all the testing suggest that that batteries are going to last 30% longer. So, but real life testing as we worth a lot more to it. Again those cars have been on the road since last fall. So, it will be 300,000 cars by the time we hit fourth quarter of this year and then of course that contract continues on and we’ve got a degree of – continental is going to sell the systems to somebody else, so we are looking forward to a follow on program with another customer.

Craig Irwin – Wedbush Securities

Great, great. And then last question before I hop back in the queue and let other people ask. But can you give us an update on the breadth of your win customer base, I think previously you might have said there were around a half dozen. Can you maybe give us an update on the progress of adding new customers and whether those customers add, it would be within the top ten OEMs out there?

David Schramm

The answer to that is yes. To win customer we are saying there is two end customers one as we deal directly with the windmill manufacturers and that we also deal with companies that only make the pitch control and those pitch control makers the one we’ve announced is moved which is located in Germany and a lot of a pitch control systems they build they distribute on a global basis. Intercom was our launch customer with this market and they are doing quite well also in the European market. So if with the catastrophe that happened in Japan you know we are seeing a real search and how much wind is going to be available because you got to replace that nuclear power or something and we looks like a get alternative. So right now the number of customers we are adding is growing this consultant we hired in China is really giving us some good solid data as where that markets going and like most markets like that is government sponsored and the Chinese have a very solid energy plan and a way forward and we are getting some confidence at that market been continued to be a good (indiscernible).

Craig Irwin – Wedbush Securities

Great, congratulations again on the solid quarter.

David Schramm

Thanks.

Operator

And our next question comes from Zack Orkin with Stephens Incorporated. Your line is open.

Zack Orkin – Stephens Incorporated

Gentlemen, thanks for taking my call congrats on the quarter. I wondered if we could may be big and a little bit further on Craig’s question just wondered if you had a sense for kind of the number of significant customers that are out there that is on top may be just as a percent of the overall market both on the pitch control on the manufacture side?

David Schramm

I guess that the best way to do that is if you look at all the windmill manufacturers roughly about a third are in use hydraulic for pitch control in the other two thirds are using electric. So our focus is been to convert the two thirds of use electric using ultracap. At the same time we are talking to the third that use the hydraulic system today and try to share within the benefits that we think they would see from electric control system using ultracap. So we are basically out talking to every wind OEM and every pitch control manufacture on the merits of using an ultracap over current system being have (indiscernible) we are replacing the ultracaps they have with new improvements for Maxwell.

Zack Orkin – Stephens Incorporated

Perfect. And would you say that I mean I’m just covering a kind of frame and broadly that you address may be 20% of the market with existing customer so 80% remains on top is or that something you are not going to disclose.

David Schramm

So, it’s closer to half of the market we got addressed at this point keep in mind we brought a license to the technology which allowed us to go to the rest of the market and that has really opened up a lot of doors for us.

Zack Orkin – Stephens Incorporated

(indiscernible) and then just one final question if I may looks like last quarter we saw tick up and accounts receivable during the shipments they came through right at the end of the quarter we seen that again this quarter, is that just normal -- just kind of normal quarterly seasonality if I can use that phrase that we should expect to kind of see a lot of orders come back-end loaded toward the end or is that something maybe unique in these last two quarters.

David Schramm

Well, if you look back over the last six quarters, what you would see is that these two quarters have been significantly more back-end loaded than the previous quarters. I would be cautiously optimistic what we will see this quarter is a slight improvement into Q4 as well. But we are not planning on a significant improvement in the linearity. And if you take a look at the receivables and large part of growth that we had in Q2 is directly related to the growth in revenue. So we didn’t have the deterioration of DSOs. We just had about the same level of back-end loaded shipments during the quarter and then the increase in the revenue is throughout the receivable balances within the Q2.

Zack Orkin – Stephens Incorporated

Great Kevin. That’s helpful. Thanks and congratulations again on the quarter.

David Schramm

Thanks, Zack.

Operator

And our next question comes from Michael Lew with Needham. Go ahead please.

Michael Lew – Needham

Hi, thank you and good afternoon.

David Schramm

Hi, Michael.

Michael Lew – Needham

Hi, with regard to (indiscernible) you had mentioned the 700,000 backlog at the end of the year, I mean it maybe a bit earlier, you are expecting write off that 700,000 in 2012 this entirely?

David Schramm

Yeah, Michael, let me help you there. What (indiscernible) told us is to be prepared for a million vehicles between when we started in the 2013 model year.

Michael Lew – Needham

Okay.

David Schramm

So it’s 300,000 by the end of 2011 and then the other 700,000 before they introduce the 2013 model. And that’s strictly for this order, so follow-on orders, future models, other models within PSA, other customers that continental gets are all outside of that number.

Michael Lew – Needham

Okay. And also with regards to ShinMaywa, you highlighted that briefly on during the remarks, but have you been able to leverage that relationship in two additional opportunities in the Asian markets. As we’ve recently seen over 1,000 trucks rolled out in Beijing?

David Schramm

What’s interesting is my sales guy actually gave our PR department a back-handed compliment, because when we made that announcement we actually had interest from some U.S. manufacturers of garbage trucks. And so, the sales guy told the PR guy you finally did something good for me. So we are in discussions with other garbage truck manufacturers on how you use that system. So again that’s a market that I think that grow for us.

Michael Lew – Needham

No, it certainly does seem like it can grow. And also on the U.S. front is Maxwell involved with the national clean fleet partnership, is that initiative seems to be adding more members and obviously with auto reduction as one of the initiatives there.

David Schramm

I don’t believe you know there is a lot of associations so we have lot of people involved with but that one I don’t believe we are involved with it at this time we will take another Michael.

Michael Lew – Needham

Now see a last question here is you know you highlighted the recent battery bus related bus as far as in China have you experienced the recent surge or in RFP’s or demand ultracaps you know based on those incidences I mean it was relatively recent they been reported?

David Schramm

You know what we’ve seen is the continuing growth in the number of hybrid buses. We had done a few of the all electric but that’s been a rather small segment at this point but the number of bus companies we work with they are doing hybridization of a traditional internal combustion and they are using ultracaps for battery regeneration. We are seeing good interest there and we are brining in new customers on a regular basis.

Michael Lew – Needham

Okay, well next quarter thanks very much.

Operator

And our next question comes from Philip Shen with Roth Capital. Go ahead please.

Philip Shen – Roth Capital

Good afternoon, everyone. Thanks for taking my question. Switching years they were just gotta that we been focused on ultracaps given the recent legislation that has been past in Germany about laying an additional 3,600 kilometers of new high voltage, power lines in the next again can you – I know that you guys are design into the ABB and Simmons (indiscernible) and they have high penetration into this development in this market can you help us quantify with the potential revenue opportunity might be from Maxwell’s high voltage capacitor business?

David Schramm

Yeah, Michaels it’s a good question we have said that when we take a look at that market with the high voltage capacitors that today we are enjoying over 60% of market share and again the two major customers that we enjoyed as ABB and Simmons as you said right now we see single digit growth because as that market develops it tends to longer term those projects been more than a year a time so what we are seeing is the replenishment of the European system from maintaining being done in the US system some significant growth in the big countries the one I specifically addressed in my comments was Russia. We have validated a new minus 60 degree sea capacity of voltage divider that they goes in the Siberia so what we are seeing a lot of good growth but to quantify what that is the best way to say it is we still don’t see high voltage being much more than a single digit growth in the next year too.

Philip Shen – Roth Capital

UK, Michael. Hello?

Operator

Hi, this is the operator – just a moment and we’ll continue with our Q&A session. If you can please standby we will be underway in just a few seconds. Thank you for your patience. We’ll take our next question from Dilip Warrier with Stifel Nicolaus. Go ahead please.

Dilip Warrier – Stifel Nicolaus

Taking the question, I was wondering if you could just shed a little bit more light on the litigation settlement, was this in relation to the past FCPA investigation or was this something new and then also sounds like you were expecting an increase in legal expenses over the next two quarters, perhaps on IP protection and stuff like that, I was wondering if you’ve seen any sort of new competitive threats over the recent months?

Kevin Royal

Yeah. So, first of all, related to the anticipated legal settlement, this is – it’s not related to FCPA. It’s related to a customer they had a sort of a legal claim against us for product that was sold quite a few years ago actually and the matter had been ongoing. We evaluated during the current quarter the ongoing cost of defending against us and determining would just be in our best interest. To sell the claim and so we are settling for US$2.6 million. We’ll pay approximately $800,000 million that we estimate in the fourth quarter. We’ve not yet got a definitive agreement. And then the remaining amount will be paid out as product discounts over the next two years. The question related to the intellectual property is as there’s not a lot for us to say there. Generally what we were doing is forcing intellectual property rights and we had a significant amount of spinning on that during the quarter. Our best guess at this point in time if things go well is that we would be able to lower that spinning after Q4 this year. But we would anticipate based on the outlook and the activity that we’ve got in that area that Q3 and Q4 will still acquire some significant legal spinning on that intellectual property enforcement.

Dilip Warrier – Stifel Nicolaus

Got it. And then this quarter I think you had 14% sequential growth in ultracaps. Is it fair to say that sequential growth was driven both by wind as well as some of the newer applications and then as it relates to your guidance for 3Q for 5% to 7% growth, I was wondering how that would tie in with -- I think there’s typically sort of 3Q seasonality for your high voltage business?

Kevin Royal

Yeah, again the high voltage and the micro that tends to grow a lot slower than the ultracap and the ultracap growth we are seeing it across all of our markets. So, that’s still continuing. I think the biggest thing we’ve got going for us right now is the education that Maxwell has done in the marketplace to get customers to understand what an ultracapacitor does and how it fits in as a value proposition that’s really starting to pay off for us. We are the market leader right now and we are developing the markets and as we get more and more of our product out under the marketplace we are finding more and more applications that customers are coming to us. So, the growth right now 5% to 7% is – as a company, the ultracap is still on target to be in that 15% year-over-year.

Dilip Warrier – Stifel Nicolaus

Thank you, David. One last question and this is really back to basics, but when you win over a new end customer on the win side, typically how do you see the adaption of ultracaps versus perhaps their legacy solution?

David Schramm

Well, what we do is we are working on the value proposition, most windmill manufacturers offer maintenance packages or long term warrantees and frankly we can last a significant amount of time with constant charge and discharge and also with the temperature requirements. And again the windmills were working on our – 2 to 7 megawatt, these things are 150 meters tall, so the solution that they’ve used historically is lead acid batteries and it gets to be a very basic problem as to how do you change the batteries, while u got to climb up that 150 meters to take him out and that’s expensive. So, putting the ultracap in and the history we’ve got in the near term here has been that these things just keep on ticking. So, it’s a maintenance proposition that says the customer saves money and their total cost goes down.

Dilip Warrier – Stifel Nicolaus

Thank you.

Operator

Thank you. We’ll take our next question from Walter Nasdeo with Ardour Capital. Please go ahead.

Walter Nasdeo – Ardour Capital

Thank you. Good afternoon guys.

Operator

My mike won’t work, I mean, I don’t know what to do?

Walter Nasdeo – Ardour Capital

Can you hear me?

Operator

Yeah, we can hear you fine, I am not sure who else is on the call?

Walter Nasdeo – Ardour Capital

I think that’s the operator trying to figure out what’s going on?

David Schramm

Okay, Walter go ahead.

Walter Nasdeo – Ardour Capital

Okay, listen I just got a couple of questions relating back to Europe. On the start-stop, what -- as you go out and look into different markets over there what do you -- how you established the selling cycle and what are you seeing as far as the time that it takes you and hit the ground and kind of talk to your customers and kind of give them insighted about what you are doing and for them to start the adoption, on the automotive side which is traditionally kind of a longer term adoption cycle?

David Schramm

That’s true and I’ll tell you that I have just passed my four year anniversary here with Maxwell. And four years ago we started talking about doing this first system and he took a good part of it four years to land the first one. Landing the first one that was really the hurdle to get over because that system now has been completely validated by continental and is running down the road with PSA. That gives us a huge head start on the second customer because the leg work has been done. The validation has been done. The certification is being done. So, it won’t take near that long to get the next one in. One of the many strategies we’ve got in automotive is to work on a concentrated basis with the Tier 1 because the Tier 1 has validated the complete system. If you look online at the continental system, basically it’s a control box with two of our 1200 fared ultracapacitors and they change out the alternate – with an alternative starter, it’s a belt starter that’s capable of restarting the engine in less than a 400 milliseconds. So, in most applications this is a – and I’ll use the word drop-in system and what I mean by that is you don’t have to reengineer the vehicle in order to make this start stop work. So, I’m very confident that we’re going to have a lot of upside as other car companies take a look at what DSA has done.

Walter Nasdeo – Ardour Capital

Okay. How are you – but how are you selling to these guys, I mean you are not going to endorse or how is the – what’s the process like?

David Schramm

Yeah that’s a good question. If you can picture a triangle and what you got on that triangle is you got the OEM, you got the tier 1 and you got Maxwell. We are spending time at the OEM educating them as to what the technology is and what the benefits of it are. We then spend time with the Tier 1 on how we work with them and how you put together the sub system. And then in the case of Detroit, we have gone with our Tier 1 continental and we’ve knocked on the doors of Ford, Chrysler and General Motors to tell them how this system works and how we operate in partnership with Continental. So, it’s a push call if you will that we are educating the OEM and working the Tier 1. The other Tier 1 that I talked about in my comments is Flextronics and Flex Auto and that was the old Alcoa AFL and we’ve been working with them for about four years. The other one that we’ve announced the relationship with that’s still ongoing is Valeo, out of France. So, we’ve got three good solid Tier 1s we’ve announced and I dare say we’ve talked about or talked with about every automotive OEM there is.

Walter Nasdeo – Ardour Capital

Got you. Okay, good, good. Thank you. And then just kind of off that a little bit, would you ever – what you are doing with Switzerland, would you ever envision kind of bringing the ultracapacitor manufacturing assembly kind of stuff over there or would you still do that over here and just kind of ship it?

David Schramm

Well, keep in mind we use to do these sales in Switzerland and the number one reason Maxwell is in business is to make money and the best way to make money is you protect your IP which is why we keep that in the US or Switzerland and then the final assembly, the hand assembly if you will we’ve taken the low cost sources as the volume goes up and we’re able to mechanize that and the labor is no longer a function and then we’ve got a different discussion on our hands. But at this point, Switzerland’s labor rate is pretty compatible with Southern California. So, that’s not the place you want to be doing in hand assembly. It is the place you want to control your intellectual property because you can.

Walter Nasdeo – Ardour Capital

Right, okay. All right, good, thank you very much, I appreciate it guys. Have a good day.

Operator

And our next question comes from Michael Horwitz with Baird. Go ahead please.

Ben – Baird

Hi, this is Ben in for Michael. Hey guys I’m looking at your guidance here, if I assume $40 million next year, which is actually below your quarter-over-quarter guidance and stay flat in Q4, we have to be doing about 26% year-over-year growth, so how much conservatism have you baked in here and then in with your visibility level what are the risks you are getting down towards that 20% or rather up towards the 30%?

Kevin Royal

I’ll just say that’s a tough question to answer because you answered it, but what I’ll tell is we are going to stick with what we’ve got here. But 5% to 7% quarter-over-quarter we are on track, the 20% year-over-year, obviously we would like to do more than that. But with what’s going on in the world today that’s got some inherent risk in it, it’s also got an off a lot of upside in it. So, I don’t think I can comment any much past that.

Ben – Baird

Okay. On the cost side are you seeing any increase in cost specifically around activated carbon, if so do you guys have any pass-throughs in your sales you can do?

David Schramm

Well, right now as you know our – we track our commodities obviously carbon and aluminum are very near and dear to us. But we haven’t seen a lot of major shifts in our material base at this point. We have got some great suppliers and they’ve been working hard with us as to what we do to get better cost reduction. We are also working on our processes, how do we get better yields so that for every kilogram of carbon that we process we get it as close to a kilogram of product out the back end of it. So, there is lots of ways to conserve that material and at this point, I think we got it pretty well under control.

Ben – Baird

Okay. And then I think this call I heard you say high speed rails more than other calls, have you seen an uptick in that business, I knew you had some businesses in Korea, are there other regions where you are seeing an uptick?

David Schramm

Yeah, let me help there and if I said that that’s not correct. It’s not high speed, its electric, (indiscernible) more trolley cars. Keep in mind the ultracap is best suited for capturing breaking energy and that’s where we are working with electric trains. So its going to be a trolley car that starts and stops a lot, a high speed rail would not have as much applicability for us. Now we’ve had them trolley cars in Germany since 2002 and that’s capturing the breaking energy when the electric car comes into the station and then reusing that electrical energy to accelerate the cars that leaves the station.

Ben – Baird

Okay, great. Thanks.

David Schramm

Okay.

Operator

And our next question comes from Matthew Crews with Noble Financial.

Matthew Crews – Noble Financial

Good afternoon gentlemen. Question on the new site in Phoenix, you mentioned there is a lease, is this a Brownfield site that you are going to be installing equipment in?

David Schramm

Actually what it is it’s over negotiating right now is a brand new building that’s never been occupied, the lease rate is very, very good for our business, the cost of electricity is very good and the whole attitude of doing business in Arizona right now it’s starting off very, very well. So, we are moving into a brand new building. The building will have the ability to house or next electrode line. We’ll have the ability to do some assembly there as I stated in my comments made in USA is something that we have to have capability for and that will help us with some of that. It also gives me a second location their crude engineers. If you just looked at some of the stuff online today Phoenix is significantly lower cost than Southern California. So, it may help us recruit more talent as we continue to grow. So, it’s got a lot of advantages to us at this point. Probably the other advantage math that really helps us is there is 25 today between San Diego and Phoenix, so we can get our PHDs there if you have an issue within hours.

Matthew Crews – Noble Financial

Okay. I was just curious on the cost was there any change in that expectation in the CapEx if (indiscernible) has already built versus from the ground up?

David Schramm

Well, we are looking at a lease right now that I think the cost of it is quite good, obviously Kevin always does the analysis should we buy it versus lease it and I can let him address that.

Kevin Royal

Yeah and I think the question may center around the equipment that we’re going to put into that facility and we had anticipated expanding our electrode manufacturing capability and so that was built into our 2011 plan as we are getting closer to 2012 and working on that planning, I’m sure it’s just a follow on to 2011. So, there is really no new spending as a result of announcing the Phoenix facility and fairly no increase our capital spending base?

Matthew Crews – Noble Financial

Okay, that’s I think okay, thank you. Question on new R&D development, so obviously there has been a lot of work for you to expand David – to expand new product lines and building around your central pieces into different modules, but clearly there is interest in increasing the energy storage of these ultracapacitors whether its hybrid capacitors or what not, while your manufacturing might be better than everyone else’s or we are market leader here. What’s your take on either trying, what’s your R&D spend on increasing energy capacity?

David Schramm

Yeah, that’s very good question that’s exactly what we work on our daily basis. We’ve got a top notch group in our R&D. We’ve just added a couple of new PHDs and what we keep working on are the two variables that we’ve got, you want to get voltage higher and you want to get resistance lower and right now I will tell you that we’ve got work going on both of those. As the capacitance goes up the energy goes up, as the voltage goes up the energy goes up. So, obviously we are a great power device and what we are working on is how do we maintain that power and improve it and at the same time move the energy level markedly up. And those are the ideal situations we’d like to get to. Some of the grant money that we’ve got between the DARPA contracts and the ABC contracts really helps us fund the similar R&D because we learn as we do.

Matthew Crews – Noble Financial

Are you working with any other electro material beyond the activated carbon that you work with today?

David Schramm

We work with everyone you’ve read about in the newspaper and online. No, we seriously have, we’ve got activated carbon that works extremely well right now. We work with graphines, we looked at the nanotubes, we’ve looked at refinium, every material that comes across the radar screen we are totaling agonistic as to how we get our capacitance higher and get more power and energy. So, we continue to look at everything and we work with a lot of different people who have new material break throughs and they want to work with us.

Matthew Crews – Noble Financial

Okay. Last question, this one is more of an interesting new market discovered, seems like there is a development for ultracapacitors with LED street lighting. I know that in China there is a big push for smart communications on the lighting systems, other smart grid companies are installing equipment for that. I don’t think if you seen are -- or been approached to spec ultracaps for street lighting?

David Schramm

That one there, I’m not aware but will tell you a related application is the one that we did a few years ago on cell powers as well as what we did for meters where the meter itself would have an ultracap and it would pause the data out for the smart grid application if you will. But they are all similar applications of a smart grid of some sort of independent what you want to control. But thanks for the heads up on that, we’ll have somebody look at it.

Matthew Crews – Noble Financial

Yeah, I think its Nippon that’s working on that one. All right, thank you very much.

David Schramm

Thank you.

Operator

Next we’ll go to Erik Olbeter with Pacific Crest. Your line is open.

Erik Olbeter – Pacific Crest

Hey guys. Let me add my congratulations to the bunch, great quarter. Two things, to focus on, one you talked about inventories building higher, so this quarter and will it meet the third quarter spend how should we think about sort of inventories and that sort of build you are moving into fourth quarter and to next years that’s and we could, you expect to sort of continued building that inner voice up for 2012 or should we see a fall after that?

David Schramm

Great question, Eric. And I’ll tell you the inventory has got a couple of sides to it. When we were going through this road for the last couple of years, frankly we are developing growth faster than we were having the ability to have it on the right spot and we were using an off a lot of air shipment. Cautious decision we made was the put in the hub strategy where we’d have the inventory in standard SKUs if you will closer to the customer and when you do that the trade off we have is we could play in the airlines and we start paying for more inventory. And it’s saving significant money in our premium freight and the inventory cost is significantly less. So you are going to see our inventories going up as we get this hub strategy into place. And of course the goal is that we have the revenue work quite a bit faster than the inventory goes up. And then at some point it will level itself out as we get – as we get the boost to ship a little bit more consistently to all of our hubs.

Erik Olbeter – Pacific Crest

That’s really helpful color. Thank you. And maybe just last question on, ultra batteries I mean there has been certainly a lot of discussion and talk about potential for combining and ultracapacitor into a battery and there has been several battery company who are presenting some ultra batteries with some very good results. I guess question I mean did you have any partnerships right now we are working those batteries, and which of you want to that market opportunity for Maxwell?

David Schramm

We have got a defect of ultra battery that we have announced and that’s the engine start module, there is always done on heavy duty truck as if they typically have four batteries you take one battery out and you put our ultracap back in which exactly the same form factor. So what you get basically is a battery in an ultracap into one system design. So you have one ultracap and three batteries. We have got a nice relationships with battery manufacturers and other ones that we haven’t announced yet, but obviously we see the great combination of a complimentary nature of taking advantage of the temperature and the power and the cycling benefit of an ultracap in and the energy benefits of a battery and there in together you get the best system design. So the answer is yes we are definitely looking at how do we do that and what’s the best way to enter the marketplace.

Erik Olbeter – Pacific Crest

Thanks David. Congratulations on the quarter.

David Schramm

I think we have got time for about one more question.

Operator

And your final question comes from Philip Shen with Roth Capital. Go ahead please.

Philip Shen – Roth Capital

Hey guys, don’t know what happened earlier I think I just had a quick follow up on SG&A I recall from Q4 you guys talked about, that’s kind of range non-GAAP OpEx expansion between $13 million and $13.5 million per quarter in 2011. Can you kind of give us a sense for what back half operation expenses might be per quarter?

Kevin Royal

Yeah we expect about a million dollar increase to that guidance that we had originally given. And so we think that operating expense will range from about $14 million to $14.5 million largely driven by increasing in legal expenses for the remainder of the year.

Philip Shen – Roth Capital

Okay, great. I think that’s all congrats on driving strong revenues and look forward to more good news in the future.

Mike Sund – Investor Relations

Great, well everybody. Thanks for listening, thank all of you on board today. Thank you very much.

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Source: Maxwell Technologies' CEO Discusses Q2 2011 Results - Earnings Call Transcript
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