Active Power's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: Active Power, (ACPW)

Active Power, Inc. (NASDAQ:ACPW)

Q3 2011 Earnings Call

October 26, 2011 4:30 Pm ET

Executives

Jan Lindelow - Interim President and CEO

John Penver - CFO

Analysts

Shawn Lockman - Piper Jaffray

Dilip Warrier - Stifel Nicolaus

Carter Driscoll - Capstone Investments

Jesse Herrick - Merriman Capital

Walter Nasdeo - Ardour Capital Investments

Henry Levy - Private Investor

Operator

Good afternoon, everyone. Thank you for participating in today’s conference call to discuss Active Power’s financial results for the third quarter 2011 ended September 30, 2011. With us today is Jan Lindelow, Interim President and Chief Executive Officer of Active Power; and Mr. John Penver, the company’s Chief Financial Officer. Following their remarks, we will open the call up for questions.

Before I continue, I would like to take a moment to read the company’s Safe Harbor statement. The company’s management on this call may make forward-looking statements that involve risks and uncertainties, including statements relating to Active Power’s current expectations of operating results for the fourth quarter of 2011 and fiscal year 2011, its future operating results, and its customers' current intentions.

Any forward-looking statements and all other statements that maybe made during this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

Factors that could cause the actual results to differ material from the results predicted include among others, the deferral or cancellation of sales commitments as a result of the general economic conditions or uncertainties, risks related to our international operations, and product performance and quality issues.

For more information on the risk factors that could cause actual results to differ from these forward-looking statements, please refer to Active Power filings with the Securities and Exchange Commission including its Annual Report on Form 10-K for the year-ended December 31, 2010, and its current reports on Form 8-K filed since then.

Active Power assumes no obligation to update any forward-looking statements or information which are, in effect, as of their respective dates.

I would now like to remind everyone that this call will be available for replay online until November 26, 2011, via Active Power’s Web site at www.activepower.com.

I would now like to turn the call over to the Interim President and Chief Executive Officer of Active Power, Mr. Jan Lindelow. Sir, please, go ahead

Jan Lindelow

Good afternoon and thank you for joining us today. My name is Jan Lindelow. I am the Interim President and CEO of Active Power. Earlier today, we issued a press release announcing our third quarter 2011 results. Before we discuss those results I would like to take a few minutes to briefly discuss why our leadership change recently made and what we are doing to find a permanent leader to take Active Power to the next level and to achieve consistent and profitability.

Active Power is in a new phase, an exciting phase and I look forward to explaining why shortly. Jim Clishem made significant contributions to the company since joining Active Power in 2005 and his appointment to President and CEO in 2006. Jim laid a successful commercialization strategy in 2005 to get the business back on a solid track. Since that time Active Power has achieved substantial growth rate. However, what the company is missing in addition to this growth is profitability.

So, Active Power is in a new phase which we believe will benefit from new leadership. The company’s board of directors has inactively involved in discussions regarding ways to grow the business and achieve profitability. These discussions and the decisions to make change at the CEO level were not made in haste and managed very deliberately. I accepted the position of the Interim President and CEO to oversee the day-to-day operations until the company appoints a permanent President and Chief Executive Officer. We are now in this process of qualifying executive candidates with this permanent position with the support of Korn Ferry International, a leading well known executive search firm. Our goal is to bring this individual on board within the next 120 days.

Having been a board member at Active Power for more than 13 years, I am excited about where we are and the inflection point we say. Active Power has substantial intellectual property and differentiated products and solutions. Our UPS products and continuous power and infrastructure solutions offer simplicity and cost efficiencies for our customers enabling them to solve real problems in there mission critical environment.

Having been in leadership role for companies that serve the IT and power markets, I am also excited to see datacenter market continue to grow at the rapid phase particular with increased use of web-based applications, software as a service and cloud computing. This will continue to drive global demand for IT infrastructure such as the products and solutions that Active Power offers.

We have a seasoned management team in place and a passionate employee base driving day-to-day strategy, growing the business and working hard to manage the operational impact on issues we face. I am excited to work with them. In sum, our goal is to achieve profitability through a deliberate and calculated approach.

Now, I would first like to turn the call over to our Chief Financial Officer, John Penver, who will take us through the financial details for the quarter. I will then come back to discuss what we see as priorities moving ahead to achieve profitability and outlook for the fourth quarter 2011 and end of year, will then open the call to your questions. John?

John Penver

Thank you, Jan. Good afternoon everyone and thank you for joining us on our call today. Our revenue for the third quarter 2011 was a record $20.6 million increasing sequentially by 7% and up by 12% compared to the third quarter of 2010. For the first nine months of 2011, our revenue totaled $57.2 million, up by 25% from the $45.6 million were reported in the same period of 2010.

Revenue in the third quarter included $11.8 million of PowerHouse and continuous infrastructure solution demonstrating continuing acceptance of that solutions and technologies in the critical pattern infrastructure market. In terms of megawatts, the critical power delivered in combining our UPS systems and PowerHouse products we delivered a total of 22.2 megawatts of critical power solutions to customers this quarter. The average revenue we generated per megawatt of critical power delivered was $58,500, this compares 23.9 megawatts of critical power delivered in the third quarter of 2010 for which we generated revenue of $42000 per megawatts delivered. This increase in revenue per megawatt delivered reflects the high proportion of the solution sales compared the prior year.

I am now going to provide a breakdown of the revenue by a product category by geography and then by sales channel given you third quarter and year-to-date revenues and provides analysis and color behind these revenue numbers. Looking at our product revenues of $17 million for the quarter, we just call as UPS systems $6 million, continues power solutions $7 million, continuous infrastructure solutions $4 million.

While the general trend of many codes that has been positive the spilt of product revenue between these categories has and will continue to fluctuate on a quarterly basis to a variable size and timing of the actual orders. Orders particularly if it continuous power solutions like PowerHouse and even as infrastructure solutions can be large and therefore, cause significant fluctuations in the quarterly sales mix and revenues.

Our UPS system business has been a slowest growing part of the business over the last several quarters. This quarter, we shipped 91 flywheels and UPS system compared to 96 wheels in the previous quarter. This is also up slightly from the 97 wheels we shipped the same year-ago quarter. Some of these UPS systems, in fact 21 wheels are shipped in that continuous power systems such as PowerHouse and we will report the sale of such products as continuous power systems revenue. So, when you look at out stand alone sales of our UPS systems there was 28% decrease in UPS system revenue compared to the same year-ago quarter. This decline is largely attributable to a decrease this quarter in large UPS orders from our direct channel in US.

The absence of these large direct orders of the UPS systems this year has resulted in 11% decline in our UPS product revenue on a year-to-date basis. On a year-to-date basis our OEM sales were 19% higher in the first nine months of 2010. We believe this is a function of sales focus. That said, one of our key priorities moving ahead will be growing our core UPS business. The growth in our business compared to a year ago is from the sale of continuous power solution including our PowerHouse products where product revenues were up by 481% or $5.8 million compared to the same year ago quarter, and that was down 16% or $1.4 million compared to the second quarter of 2011. On a year-to-date basis, our continuous power solutions revenue have increased by $13.8 million or by 219% in 2010 to $20.1 million.

Sales of our infrastructure products fluctuate significantly due to the intermittent nature of the orders we receive for these products. This quarter we sold $4 million of such products compared to $7.1 million in the same quarter of 2010 when we delivered our largest ever infrastructure order to a US technology company. On a year-to-date basis, we have sold $7 million of infrastructure products which is 29% lower for the amount we've recorded in the first nine months of 2010.

Looking at our revenues by geography. On fairly small numbers, our revenue from Asia this quarter of $1.2 million roughly 43% from the same year ago quarter was down $3 million from the immediately preceding quarter. On a year-to-date basis, our Asia revenues of $5.6 million are up 38% from 2010 reflecting growth in our China operations and from a large number of PowerHouse sales in this region. Revenues from Asia comprised 10% of our revenues for the year compared to 9% of revenue in the previous year.

Our revenues from Europe were 12% of total revenue in the third quarter compared to 23% in the previous and 13% in the same year ago quarter. We had anticipated this increase in Europe and Asia on our last call due to the orders we had in hand. For the first nine months of 2011 our revenues from Europe were $14.8 million were up by 77% or $6.5 million compared to comparable period of 2010. And Europe revenues comprised 26% of total revenue versus 18% in 2010. This is increase is being driven from our UPS and continuous power solutions business with some large customer in the UK and the Netherlands.

Revenues from the Americas were 83% of our total revenue this quarter compared to 55% in the prior quarter and 82% in the same year ago quarter. In absolute dollar terms, our sales from the Americas were up $1.8 million or 12% from a year ago due to that strength of that continuous power and infrastructure solutions business.

Our total international sales were 20% of our revenues in the third quarter as compared to 45% in the previous and 18% in the third quarter of 2010. And on a year-to-date basis, our international sales of 38% of revenue compared to 27% in 2010.

Looking at our revenues by sales channel, we've had mixed results this quarter compared to a year ago from the different channels. The strong growth in our continuous power and infrastructure business drove the 44% increase in revenues from our IT channel compared to 2010. IT channel revenues were 52% of revenue this quarter compared to 27% in the prior quarter and 40% in the same year ago quarter. And on a year-to-date basis, the IT channel has contributed 31% of our revenue compared to 24% of revenue in the same period of 2010.

Our direct sales, which include sales made by Active Power or through our network of manufacture representatives and distributors represented 36% of our revenue this quarter. This compared to 61% of revenue in the previous quarter and 50% of revenue in the same quarter a year ago. And on a year-to-date basis, our direct sales represented 50% in 2011 compared to 57% of revenue in the first half of 2010.

Sales from our OEM business, including sales to Caterpillar, were 12% of revenue in the quarter compared to 12% in the previous quarter and 10% a year ago. Like last quarter, we also experienced an absence of large orders from our OEM channel this quarter. I have mentioned previously this [little] can fluctuate substantially from quarter to quarter based on the size and the timing of orders. On a year-to-date basis, we think this volatility on as apparent as the OEM represented 19% of revenue in both 2011 and 2010 for the nine month period. In absolute terms, the OEM revenues have increased by $1.8 million or 19% compared to the same period of 2010.

Our OEMs partners efforts to sell solutions appears to helping them selling to large which will drive the UPS product revenue and we anticipate this channel will continue to grow in absolute dollar terms our partner continue to broaden its marketing activities.

Our service and other revenue recorded improved year 101% compared to the same year ago quarter, mainly reflecting professional services associated with the higher level PowerHouse and continuous power system sales. Service revenues associated with these large projects will fluctuate along with the level of product revenue and can cause our quarterly level of service and other revenue to fluctuate accordingly. In total, service revenues were 18% of revenue in the third quarter compared to 10% of revenue in the same quarter a year ago.

So, now, I having discussed revenue let me look at the overall financial performance. Our gross margin this quarter was 24%. This is the same margin as we had in the prior quarter compared to 30% in the third quarter of 2010. The decrease in margin is primarily due to the change in product mix and the proportionately higher sales of continuous power and infrastructure solutions we have this quarter.

We generate lower margins on these products than our UPS systems but we expect the higher proportion of continuous power and infrastructure solutions revenue would contribute to an overall lower gross profit margin. The decrease in UPS revenues also exacerbate the situation as the lower volume of UPS revenue this quarter resulted in less efficient utilization of our manufacturing facility and higher unobserved overhead cost further negatively impacting margins.

We also invested in additional infrastructure support for solutions business resulting in an increase in the absolute cost of production further decreasing the gross margin level. This situation was the same as we experienced last quarter and it will take a combination of higher absolute UPS systems revenue, lower absolute manufacturing overhead, increased margins on our continuous power and our infrastructure products grow margins to continue to improve and return to historically higher levels. However, we believe improving UPS systems revenue will have the most immediate impact on our margins.

We continue to have lower than expected margins in our professional services revenue associated with continuous power system installation although we have improved since the second quarter. As we mature and develop more experience and expertise on the deployment of these solutions we anticipate that the margins will further improve. Overall, our service margins improved to 27% this quarter from 6% in the same year ago quarter reflecting better professional services margin and better utilization of S service personnel.

Our research and development expenses in the quarter were approximately $1.3 million which was $439,000 or 53% than the third quarter of 2010; 17% higher than the previous quarter. This increase in spending reflects development efforts on our next generation UPS products, high development activity in our containerized infrastructure solution and increased headcount. We anticipate that R&D expenses will remain at these higher levels compared to the prior year as we add headcount and increase product efforts.

Our selling and marketing expenses at $3.5 million were 4% higher than the previous quarter and flat with the same year ago quarter on higher sales volume. Higher headcount costs were offset by lower variable sales compensation.

General and administrative expenses of $1.3 million decreased by 11% from the prior quarter but was $200,000 or 19% higher compared with the same year ago quarter, and the increase from the prior year is primarily from higher headcount cost and professional fees including recruiting cost.

Our operating loss for the period is $1.2 million or $0.02 a share. This compares to an operating profit $31,000 or $0.0 per share in the third quarter 2010. It was a 4% reduction compares to an operating loss of $1.3 million of $0.02 a share that we had in the second quarter in 2011. Our net loss per period was $1.3 million or $0.02 a share, this compares to a net loss of $1.4 million or $0.02 a share in the previous quarter and net income of $55,000 in the third quarter 2010.

On a year-to-date prices a net loss of $3.8 million or $0.05 per share was an 8% reduction from the net loss of $4.1 million or $0.05 a share we had in the first nine months of 2010. Since the last quarter the changes in advance rate has been heavenly imposed by the timing and value of our continuous power and infrastructure orders. The net cash used in operations during the quarter was $114,000. As inventory decreased by a net $1.3 million, although our UPS inventory was approximately $1 million higher and receivables decreased toward a $1.1 million. We also decreased our accounts payables by $5 million this quarter and which was offset partially by higher net of prepaid deposits from customers.

We put in place to resolving credit facility last year in anticipation this trend towards more solution business and have drawn upon the line this year. When monitoring this trend in sales mix we are working it as credit provider to evaluate we need to further increase the credit facility or modify to enable more inventory borrowing. Credit management, obtaining deposit initial payment made customers, negotiating payments terms with our vendors how we will continue to manage this process.

We currently believe that we have adequate liquidity to support our quarterly revenue and enough liquidity to see at the next 12 months or more of revenue growth.

Our capital expenditure were primarily building of several PowerHouse systems for marketing use in China, Germany and the United States. We also had tooling and other related cost in connection with the next generation UPS product. We expect the level of capital expenditures will decrease significantly next quarter.

On the investor relations front, we had two new analysts from Piper Jaffray and Rodman and Renshaw initiate coverage of Active Power this quarter rising the number of firms covering the stock to seven. We believe this will help to provide visibility for the stock.

This completes the financial portion of presentation. I will now turn the call back over to Jan for some further comments on the business and our priorities moving ahead. Thanks Jan.

Jan Lindelow

Thank you, John. As we look to finish out the year and transition into fiscal 2012 we will focus on three critical areas to drive the business forward. They are, first, grow the business. They are first, grow the business with emphasis on growing our core UPS system. Second, to improve margins particularly for our continuous power and infra structure business. And third, achieve consistent and predictable profitability.

The first point we are going to focus on -- to achieve that we are going to focus on our core UPS business which has been underperforming this year. We believe we can grow its sales volume by improving our sales execution and increase in sales resource. We don’t believe this is a market business.

Our second priority is the chances on margin improvement. This will require a investment in the sales and processes require to execute our continuous power and infrastructure solutions business.

Our third priority focus is on achieving consistent profitability. This objective will be achieved by our successful execution of the first two priorities, ultimately leading to a creation of value for our shareholders.

Turning to our guidance, we usually provide a range of expected revenues as I am foreseeing customers and can impact of timing and the amount of revenue recognized for particular quarter. Based on the orders we have on hand and our current forecast to providing revenue guidance of $18 million to $21 million for the fourth quarter of 2011. This would result in full year 2011 revenues between $75 million and $78 million. We expect fourth quarter earnings per share to range between a loss of $0.03 and breakeven with $0 per share, which includes cost of $0.01 a share directly associated with the change in President and CEO.

Changes in cash and investments are expected to be minimal and driven by changes in working capital requirement. Operating expenses excluding cost associated with the CEO transition should be fairly consistent with those in the third quarter.

Cash used in operations will largely be driven by our working capital requirements during the quarter which would be affected by the timing and size of orders which we fulfill. Our plan is to work closely with our credit provider to determine if modifications need to the made for credit facility, but also manage customer and vendor cash flows appropriately in order to mitigate cash requirements where ever possible.

With that John and I would be happy to open the call to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Ahmar Zaman. Your line is open.

Shawn Lockman - Piper Jaffray

Hi, this is Shawn for Ahmar. If I look at, just real quick, guys, if I look at the wheel number that you put out for UPS system, if from my (inaudible) I am missing a higher ASP in the quarter, is that correct? I mean in terms of just UPS system?

John Penver

It was a little high; don’t have the exact number Shawn but I'll make that when we update the website that we put that number up there, which is supplemental data.

Shawn Lockman - Piper Jaffray

Is that, I mean is it fair to assume that you guys to maintain that level going forward or is that something that you would expect to watch little bit?

Jan Lindelow

No, it’s been improving, has been for several year, so, I don’t see anything that would indicate that would expect that to trend the otherwise this point. We have been the pricing of our sales as been pretty strong.

Shawn Lockman - Piper Jaffray

And you talked a little about goals for the, going forward in terms of an emphasize on growing the UPS business. Is that the state that you are going to do that in addition to continue to try to build the PowerHouse business, is there going to be sort of a re-emphasis on UPS that you try to sort of can’t gain back your margin structure a bit, and sort of shift that more toward the UPS business?

Jan Lindelow

Well, this is Jan, I think on the plain UPS businesses so to speak, clearly we have suffering a lack of sales resource, we have been significantly below where we should have been on head counted especially in the US direct sales organization. And we likely had from issues with focus on the UPS systems as well. So, we don’t thinks that’s the market problem, its something we have been, we can recover from and continue to grow as we move forward by putting resources and focus behind it.

The other businesses are not in that sense less important though we need to improve our execution on the infrastructure business to improve our margins, but it is still strategic and important to us.

Operator

Thank you. Our next question is from Dilip Warrier, your line is open.

Dilip Warrier - Stifel Nicolaus

Good evening, thank you. Just going back to the your goals for the core UPS business, I understand that, it may have loss some focus on that business of late, but sales of flywheels have been relatively stagnant now over the past 18 to 21 months, and OEM channel has not quite materialized. Just wondering what is your sense of confidence that you can grow this business in 2012, in light of to date sort of weak OEM demand and then as of given sort of the what appears to be macro economic uncertainty?

John Penver

Hi Dilip. Actually, overall the volume of sales of the UPS systems has actually gone up. We have had mixed performance from the OEM channel. We have had mixed result in our direct business as well, which speaks to our need to put more resources in it. And we did enjoy some success with some very large UPS only orders from technology companies in the US market, in particular over the last couple of years. Technology colocation companies, and there is definitely opportunity and we see clouding activity, sales channels those things suggesting that there is plenty of underlying demand of those products, and we believe that we have got more resources dedicated to at the soon as opportunities that, and we can actually wring more of that business.

And then separately, we work with OEM partner. Their business has started to concentrate on larger customers. So, there is probably a fewer transactions but potentially larger transactions. And given their brand and distribution and capabilities, we believe there is plenty of opportunity for that channel to continue to grow, but it certainly become a little more lumpy on a quarterly basis than it historically used to be. I hope that answers your question, but we think with few more sales resources specific to direct business that there's significant room to grow the business. And we are not seeing price erosion or other fact as which would suggest that you had a market issue, truly a matter of getting in fort of the opportunities and being able to win them.

Dilip Warrier - Stifel Nicolaus

And sales resources, would you be looking to build more I mean just qualitatively it is more North America focused or perhaps other possibility?

John Penver

I think initially, because we are seeing such strong growth from the other parts of world with our direct business where we have being investing over the last two years, we probably need to put some emphasis on the North American market which is probably our lowest performing of those regions and that’s probably where the emphasis will be in short term.

Dilip Warrier - Stifel Nicolaus

And I am guessing that the higher power product which launches next year, you would expect it to be a higher margin product I guess?

John Penver

One would hope so for a new product I guess. And I think Jan may provide some further commentary, but expanding the product range such as for example with that new product is part of the strategy on how you want to grow and broaden the UPS business.

Dilip Warrier - Stifel Nicolaus

Is there any sense of I am not exactly sure if you are talking about the timeline to commercialization or introduction of the product to the market, but have you thought of developing sort of I don’t know soft orders on the product yet or it is too early to tell.

John Penver

No, it’s a little premature to be having those kinds of conversations yet.

Dilip Warrier - Stifel Nicolaus

Okay, just one final question. Is Jan kind of in the mix for sort of a more permanent solution to filling that CEO gap right now?

John Penver

I should probably let Jan answer that question.

Jan Lindelow

What was the question?

John Penver

Of whether you are in the mix for a permanent CEO position. That response that might tell you. Jan will answer, I believe he agreed to step in on an interim capacity and its not his intention to be the --

Jan Lindelow

That is not my plan. I promise to do this up to six months.

Operator

Our next question is from Carter Driscoll, your line is open.

Carter Driscoll - Capstone Investments

Good afternoon gentleman, I guess I want to get back to focus on the UPS side and maybe just play devil's advocate a bit. Given that you have had a reasonably stable and even modestly increasing ASP over the past several quarters in UPS business and the need really to bring up the capacity utilization in terms of its effect on overhead absorption, would you consider in the near term some type of discounting strategy to drive the top-line and may be make the bet that lowering the price might yield some more sales, especially North America?

John Penver

I don’t think we need to do that just because we see anecdotal evidence from our sales activities, it doesn’t suggest the price is the issue. The issue is that we are not addressing significant portions of the opportunities that are out there. And on a competitive basis, it’s usually not price-centric, so I don’t think there is a need to have to do that.

Jan Lindelow

I think it’s correct to say that the message here is we believe strongly that the market is still there. We have weeded out some non-performing personnel and it's taken time to replace them with fully skilled fully trained personnel, and that’s why we have been under performing enough for a while, on top of which we might have had somewhat over top of this issue. But, I think both John and I and the rest of the team are feeling stronger that this is we can regain both growth rate and the focus that we want to have on this business.

Carter Driscoll - Capstone Investments

Can you maybe address the number of direct sales people that you are looking to add in particular in the US? Are there people already emplaced or they are still to be hired?

John Penver

It's a combination, Carter. I mean qualitatively we are probably looking at adding equivalent to what we already have, and we probably have been upgrading with half of what we wanted.

Jan Lindelow

It’s a significant factor.

John Penver

Yeah.

Carter Driscoll - Capstone Investments

Then may be you can just address with little more color, the revolver and where you think you might let's say a quarterly run rate you might need to, if that’s the right matter to use, to seek another increase the impact and working capital side. I mean, are we looking with couple of quarters out if you had a run rate of say more than $25 million and the comparable working cap relationship to the direct sales where you may have to go back to your financial provider for that.

John Penver

Yeah, it’s really driven more by the sales mix right now than it is by the run rate, so if there is a disproportionate level of large orders on the infrastructure or continuous power solutions. They tend to require significantly more working capital which is the investment in equipment.

And they take significant longer to manufactures for actually tie up in working capital longer. So, if there was a substantial increase and orders in that particular business either single or the multiple orders that may necessitate a need to have access to more working capital.

We have talked with our current lender about how we modify the line to get extra capital if we would need to do that, and believe that we have to ability to do that. Right, if the growth was coming more from the UPS business where there is less working capital tie ups and a shorter sale cycle, we probably have adequate liquidity support on the revenue levels we are talking without having to do anything. So, right now, that’s really the dynamic that’s driving.

Carter Driscoll - Capstone Investments

Really volume sale of the UPS solves so many problems?

John Penver

But for a lot of reasons, I mean on the working capital front it also utilizes the factory, it also drives the gross margin up, it’s the quickest path to improving the margins and the profitability of the business.

Carter Driscoll - Capstone Investments

And then, just drill down a little bit on that point, you saw some mixed signals from the colocators and datacenter providers, can you talk about some of the trends what you saw I mean in the beginning of the quarter? How they impacted kind of linearity throughout the quarter, and what you are seeing now they were kind of the month through the first part of the fourth quarter?

John Penver

Yeah, I am a little bit limited because I have a lot of direct customer contact, but the feedback that I am seeing is that certainly over last several months we have seen some of those companies readdressing their capital requirements and reengaging, where as probably four to six months before that I had been kind of in a state of paralysis or just kind of uncertainty. So, we have seen some increase in a number of large potential UPS opportunities over the last several months. I am not sure whether the business model is performing, but long term we believe the underlying demand for storage and datacenter requirements nothing is really fundamentally changed it.

We think the long-term outlook is good. And I think, it’s really access to capital and comfort generally about making long-term capital decisions it’s really what’s kind of get those guys moving forward with a capital plans for us.

Carter Driscoll - Capstone Investments

Just briefly about the sales cycle on UPS side, in particular whether it differ geographically or by a particular customer, and what may or may not affect that length?

John Penver

Yeah, I mean relative to the continuous power and infrastructure solutions it tends to be shorter. It can actually very quit a bit depending on the scale of the customer. Some of the very large scale customers, the collocations and the large IT guys, their sales cycle can be just as long, I mean if you take several quarters you can take longer. We've had some that can take years from initiations through the decision to actually commit and purchase. Where as, some of the smaller to mid size enterprise customer by the time they are looking at kind of products that sales cycle can be one to two quarters, so that tends to be the cycle that’s is going on. And really access to capital impact of those two different customer segments in different ways, and the small to medium size customer is often the cycle is not the issue, its accessibility of capital and availability of budget that tends to drive it. The larger scale businesses have to prepare through the cycles regardless or put themselves in a really bad spot. So, I don’t know if that adds some color, but that kind of a dynamic that we see.

Operator

Our next question is from (inaudible), your line is open.

Unidentified Analyst

Yes, thank you. I want to ask what is your cash burn that you foresee for the next quarter, and may be beyond that per month?

John Penver

We tend to provide it on a quarterly basis. Right now, I mean for example the quarter we just did, the cash used in operations excluding what we invested in demonstration equipment was $114,000. So, basically we are able to balance at receivables, inventory, vendors, accounts payable and customer deposits. And we don’t see that changing significantly in the near term. What can change things is, if I get some large infrastructure or PowerHouse orders this quarter that I start working on because I tend to lap over one period to the next. So, if you take a snapshot in particular point in time you could see my inventory and my payable moves up by millions of dollars throughout. So, right now we are going to anticipate any significant changes, but I always put a qualifier on that that if I already start and get significant orders then we need to start commencing on the 2012 delivery that may change that. And if that happen we will probably look to use out bank credit facilities to help finance that.

Jan Lindelow

And there again, we managed on the execution in the infrastructure business as one of the issues that we want to improve on. And you have to whole gamut of steps you can take from getting prepayment from a large on an infrastructure order to how quickly execute and how professionally. So, some of it is in our hands and some is with the market, but we are focusing on it.

Unidentified Analyst

Okay, that said, what catalyst should we expect in the Q4 and beyond that?

John Penver

In terms of, help clarify that for me a little bit.

Unidentified Analyst

Well, just looking at news and maybe future press releases I understand you cannot find in too much details, but what's our investors expect that going forward maybe what time of the answer maybe just opine on that?

John Penver

My general comment that I provide when I talk to a lot of people is you want to look for continued sales wins on all parts of our business. I think you probably seen a few more press releases around our PowerHouse and infrastructure this year. And I think a healthy barometer would be to starting to see some releases which also talk about large UPS transactions as well. That’s probably the main thing I'd tell you to prospectively look for.

Operator

Thank you. (Operator Instructions). Our next question is from Jesse Herrick. Your line is open.

Jesse Herrick - Merriman Capital

Just wanted to talk a little bit about your sales bolstering efforts. Just if you talk about a specific hire, how long does it really take between when you hire that person to when they become a real producer on average?

Jan Lindelow

I think some of the recent hires we have been able to make and the process that’s been used in the last couple of months by Martin Olsen and the marketing team here and the tech team is very, very much more thorough and deliberate than anything we've done before. So, there's no need to be very definitive about it but from what I hear the new resources that we have brought on board are up to speed very much more quickly than before, and should give us a good pay off.

Jesse Herrick - Merriman Capital

Okay, if I look at the compensation structure on those new hires, are we going to see, as you guys are trying to bolster, are we going to see significant increase in SG&A prior to an increase in UPS sales? Or do you think that its pretty much going to go hand in hand? Are they commission only, is it base salary type situation and how many individuals are you really looking to add? How much impact that could have on the SG&A is what I'm trying to get at.

John Penver

Jesse, I think you'd see a marginal increase in SG&A but I think our intent would be add these additional resources and look at what our total spend was and not have a major increase in operating expenses as a result of it. I hope SG&A being driven up by variable compensation specifically the state will have a base and then performance based compensation. And so, if that numbers going up that means our business is going up so, I'm okay with that. And I think right now, we are formulating our full year 2012 plans so we will (inaudible) with a number of what that total headcount add will be for next year but I think like I said overall, the ratio of selling and marketing expenses to revenue, you would expect to maintain. Thanks Jesse.

Jesse Herrick - Merriman Capital

Actually I got one more question for you. Wanted to just go into a little bit deeper what you guys are looking for. Obviously, you got an interim management team in place right now as you are going forward looking for a new CEO what really is -- what are some of the search criteria that you guys are looking for to try to push you guys into a more sustained profitability?

Jan Lindelow

Well, we're clearly looking for a CEO that can come in and help us be very smart strategically, be very hands on operationally because I think we're still the size of company where you need a CEO that can do both the strategy and visionary also the job and also be an operations hands on person and work with the team right to. And hope the driving criteria would be ones that Jan and I have mentioned, get the skills and processes in place for the infrastructure business I've seen that done before many times. We have a lot to learn but if not a brain or rocket science we can do that but we need to put those disciplines in places. And I know that as we do our profitability will improve and the volumes and the revenues will come by better sales and more sales. So, I feel very confident that we can gradually get out (inaudible) where we are and do better as we move forward.

Jesse Herrick - Merriman Capital

I guess somewhat sensitive but how does really differ and how he was -- how he sort of had things laid to achieve those goals?

Jan Lindelow

Well, I think you've heard us talk much more on this call than you probably ever heard before use and profitability. And a lot of that goes back to not the pricing of the product that we sell to the market, but how you execute the orders internally and how you set up the organization to deal with those orders and execute on them and take care of the products with the customer. And that’s I think the main area where we think we can improve fairly significantly.

Jesse Herrick - Merriman Capital

Okay. And I guess we are jumping around here a little bit. The last question, just if you can give a little bit of an update and I touched on it briefly, but a little bit of an update on the next generation flywheel and sort of where they are standing, and if we should still be expecting the same timeline that we were looking at previously?

John Penver

I don’t think there has been any real change in timeline since we spoke last quarter. I think its ongoing product development and prototyping, and it’s a little premature to get too detailed with it publicly because I know my customers will be want to know where it is. At this point, we will anticipate in second half 2012 that we are trying to get that product into the market. And I just expect it might be significant contributed to 2012 revenues at this point, and probably the year beyond. I am sure as we get the opportunity we will figure out a way to get some more updates out may be in the next call we'll have someone.

Operator

Our next question from Walter Nasdeo. Your line is open.

Walter Nasdeo - Ardour Capital Investments

Hi, I know that you guys have been talking about this quite a bit on the call already, but if I can just touch on it again, and its kind of revolves around the sales but marketing and penetration strategy. And I am just -- if you can kind of may be lead me through a little bit of -- I mean I understand you are hiring more sales guys and you are training them better and faster in that. But, how are you penetrating, or what is your strategy to penetrate into certain markets that have been a little bit difficult to get into or haven’t been as receptive as originally expected from a strategic perspective? And how do you think, changing or coming up with a new strategy or new focus to get into those markets, and when do you think that could happen?

John Penver

Okay, I will have the first attempt and I will see if I can answer your question. Ultimately, I think what we have done is we have changed the way we focus and look at the market and try to segment the market out into various category. And I don’t think we necessarily took that approach in the past. And what happens is when you segment that market at looking at medium sized enterprises, looking at large IT and technology and collocation customers, we've identified that there is different reasons that the different statement buy the products, and certain products work better for others.

A simple example would be, media size enterprise the PowerHouse solution is the most simple plug and play solution, whereas the most sophisticate investor is not looking for us to provide a 100% solution, he is looking for the most efficient UPS product. And so, what we are trying to do is target the specific resources that focus on these different segments and address the specific customer requirements and attributes that they are looking for as supposed to having a sales force that tries to sell the same thing old ways to all segments in the market.

So, the market segmentation is the probably the different approach that we are going to take and provide resources to direct, specifically to reach out those segments. And that segment tend to cross national boundaries as well. So, I don’t know enough of an answer but directionally that’s really what we want to focus on as we move forward.

And our evidence is been where we have focused resources on channels or on particular segments, we have been able to drive an improvement in our business. And we saw that with the IT channel where we put the specific resources in it. We saw that several years ago when we provided resources to put the OEM channel. And we probably have to provide resources again differently to all those channels as we move forward. Well, hopefully that gives you some color.

Walter Nasdeo - Ardour Capital Investments

Yeah. Now, have you looked at or you are considering going in to more of a distributor network or you are going to continue with in house sales and just build that up or have you looked to cross over it off?

John Penver

That’s also a function of the segmentation, Walter. So there are some segments where the distribution model is effective and there are some models where its not. And so, for example, on large scale UPS systems, most sophisticated end users preferred to deal direct with the manufacturer. They really don’t want to intermediary in between. There is some customers in the medium enterprise who are comfortable buying from systems integrators, who are comfortable buying through distribution channels. So, I think your find little end up with a combination of all those channels, it’s just that old channels might address old segments for us, right. There are some places around the world where for bunch of reasons including economic it may not make sense for us to have a direct presence and we may decide to regional representative and distributors because that’s an effective way to get into that market. So, I think you will find we will end up with a much more focused direct sales force, resources supporting the channel and where it makes sense depending on the segment the kind of product that they are buying from us, we will continue to use reps and distributors as well.

Operator

Our next question is from Ahmar Zaman, your line is open.

Shawn Lockman - Piper Jaffray

Hey guys, this is Shawn again. Just wanted to get an one quick follow up, last year when I looked at through your megawatt delivered your flywheel account and so forth, you talked a bit of fourth quarter, I assume this is on sort of through typical sort of fourth capital spending that can happen in the IT space. Should we look for something similar to that this year? Are you seeing in that fourth quarter or not?

John Penver

I would say not right now and last years fourth quarter results that megawatt delivered was actually influenced quite a bit by some very large UPS orders for some technology companies in the US, I know there is a single customer. For example, probably we delivered by between 50 and 60 systems one customer and I indicated we had an absence of some of those large orders this year. So, I would expect the year that to be down comparison, Shawn.

Operator

Thank you. Our next question is from Henry Levy, your line is open.

Henry Levy - Private Investor

I am a long standing shareholder of Active Power and with no disrespect intended to management or the board, I am here for wondering whether we wouldn’t be better of a company finding another company to merge with or to sell to, rather looking for new CEO. We have been incorporated now for almost 20 years, we have been public for 10 years, we have had hiccups, disappointments, delusions, we've never made a penny. And now to look for a new CEO and to have him out plummet himself and get up to speed, I think you have got another two to three years before you begin to see any profitability or any meaningful profitability. And I am not showing these things just disrespectfully, but we are continued to be a pretty small fish.

Jan Lindelow

Well, I can certainly, this is Jan speaking. This is the interim guy. I agree with your small fish comparison, we are still a small company. Still the company needs a leader. The company has the incredible value when it comes to intellectual property and technology and products. I think of the company has been on some adventures, you are right, taken a long, long time, for a longer than, should have taken and some of us had wished it taken, it would taken. It’s the board's responsibility and mine of course and I am still a director as well to think about the questions you just raised and board always will do that as part of it duties. I think the board’s current thinking is that we have a, an asset here that can perform much better and can perform much better fairly soon. I am not going to put the timeline on it, but I think the steps were taking our, as I indicated, are some they are based in very good experience, in good practices, and with very predictable out comes. And we are prepped to execute on then and move forward. I think you can see the company stabilize fairly quickly here. And we can move out from there, but I will be happy to meet with you and discuss your concerns at any point you want.

Operator

Thank you. And our final question is from Michael Ren. Your line is open.

Okay, gentleman, I have no further questions in queue.

Jan Lindelow

Thank you, operator and thank you all of you who have been taking part. On behalf of the senior team here of Active Power employees and our board I would like to express our appreciation for your interest in Active Power. We do appreciate your continued support and look forward to speaking at you again next quarter. Thanks.

John Penver

Thank you.

Operator

That concludes today's conference. Thank you for your participation. Everybody may now disconnect.

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