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Executives

Mike Sund - VP, IR

David Schramm - President and CEO

Kevin Royal - CFO

Analysts

Philip Shen - Roth Capital

David Giesecke - Wedbush Securities

Zach Larkin- Stephens, Inc.

Colin Rusch - Thinkequity

Jed Dorsheimer - Canaccord

Ahmar Zaman - Piper Jaffray

Chris Kovacs - Robert Baird

Tom Daniels - Stifel Nicolaus

Jeremy Hellman - Divine Capital

Maxwell Technologies, Inc. (MXWL) Q4 2011 Earnings Call February 16, 2012 5:00 PM ET

Operator

Good day, everyone, and welcome to today's program. (Operator Instructions) It is now my pleasure to introduce today's speaker, Mike Sund, Vice President of Investor Relations.

Mike Sund

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

First, we need to advise you that the following discussion will include forward-looking statements that are based on our current expectations and assumptions, which are subject to numerous risks and uncertainties 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 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 Investors section of our website, maxwell.com, or via the SEC's website. Printed copies may be 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 online at our website. All information in today's call is as of February 16, 2012. 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 Maxwell's President and CEO, David Schramm.

David Schramm

Very good, Mike, thank you very much, and good afternoon, everybody. We're really pleased to report that Maxwell reported total revenue of $42.5 million for the fourth quarter ended December 31, 2011. Now, that's up 24% from the same period a year ago.

That growth was driven mainly by strong ultracapacitor sales of $26.2 million. That's up 30% from Q4 of 2010. Sales of our microelectronics and high-voltage capacitor products came in at $16.3 million for the quarter, up 16% from last year's fourth quarter. That's higher than usual for these mature product lines, which both continue to deliver solid contributions to the Maxwell bottomline.

This growth along with continuing cost and efficiency improvements enable the company to show a net profit of about $1.5 million for the quarter. On a non-GAAP basis, net profit for Q4 was $1.7 million, and this was the seventh consecutive quarter that Maxwell has been profitable on a non-GAAP basis. Total sales for the year came in at $157.3 million, up 29% from fiscal 2010. GAAP net income for the full year was nearly $0.75 million and the net was nearly $5 million on a non-GAAP basis. Kevin will provide a little more detail on that in a few minutes.

Looking at key ultracapacitor markets, wind turbine deployments in China and elsewhere continued to be well below level seen in previous years. So wind related sales continued to be down. However, sales for hybrid bus drive systems were our highest ever. And increasing contributions from a stop-start idle elimination system for autos in Europe and various backup power applications enable us to sustain rapid growth overall.

Looking ahead, we've received intelligence from various sources in China, including indications from several of our customers, that wind farm installations both on and offshore can be expected to return to a more normal level within the next couple of quarters.

The current level was predicted last year by the consulting firm we engaged to assess business conditions and the direction of government policy in China, particularly as they relate to the wind and the bus markets. What we're hearing now is that issues relating to wind farm siting and permitting abuses have been addressed and technical fixes mandated to solve low voltage ride through problems have been implemented, clearing the way for return to more normal activity.

The new Chinese five-year plan sets forth aggressive targets for wind farm installations to help to satisfy China's ever growing appetite for electrical energy and Chinese wind turbine OEMs are now marketing their systems globally. So we've got a good reason to anticipate a significant upturn later in the year.

Turning to public transit vehicles, energy storage systems for recuperative braking and torque assist in fuel efficient, low emission hybrid electric transit buses were the primary drivers of ultracapacitor sales growth in Q4.

Last fall, we announced a new supply agreement with Yutong, China's largest bus producer. Voith Turbo, a leading European heavy vehicle drive system integrator announced that it is introducing a Maxwell ultracapacitor-based hybrid system for buses in the North American market where we've had limited sales in the past. Obviously, this never keeps growing, but we now estimate that there are about 5,000 hybrid buses that are powered by Maxwell ultracapacitors in daily service around the world.

According to our consultants, all of the 25 Chinese cities that are eligible for government subsidies for purchases of hybrid and electric transit vehicles are running behind their new energy vehicle deployment schedules. So we're seeing bus OEMs and drive system integrators continue to gear up to deliver more hybrid vehicles.

In Europe, we're reducing CO2 emissions as the focus of regulatory policy. Hybrid bus, electric rail and other heavy vehicle OEMs and drive train integrators continue to incorporate Maxwell ultracapacitors into their designs.

Last month, we announced that Bombardier Transportation, a leading producer of rail vehicles and rail transportation equipment systems and services, has designed Maxwell ultracapacitors into its EnerGstor braking energy recuperation system. These are stationary energy storage units that capture and store energy that otherwise would be wasted in a conventional friction-based braking system.

A network of these units can enable rail system operators to reduce grid power consumption by 20% to 30%. They also serve as a backup energy source to provide enough power to get trains to the next station in event of a power outage.

Bombardier and other rail vehicle OEMs also produce on-vehicle systems that use ultracapacitor energy storage, and we are hoping to have some more good news on electric rail design in the near future.

Our automotive program with Continental AG for PSA's Peugeot and Citroen diesel cars in Europe is now its second year of series production. It's for a micro hybrid stop-start idle elimination and voltage stabilization system that PSA introduced in two of its diesel engine platforms for the 2011 model year. About 300,000 of these cars have been sold by the end of 2011. And PSA has predicted that number will grow to about 1 million cars by sometime next year.

European Union legislation requires that 65% of new cars produced in Europe this year emit no more than 130 grams of CO2 per kilometer. That equates to about 42 miles per gallon for gasoline engines and 48 miles per gallon for diesels. That standard will apply to 75% of the cars produced in Europe next year, 85% in 2014, 100% in 2015. In 2020, the CO2 emission threshold is scheduled to ratchet down to 95 grams per kilometer. So further hybridization and electrification will be required for all of those vehicles.

All hybrid cars incorporate a stop-star idle elimination function that turns off the internal combustion engine as the car slows and then restarts the engine when the driver releases the brake. Batteries have been the incumbent energy source for stop-start. The constant restarting and stopping in stop-and-go traffic wears out batteries quickly. Heavy cycling and cold weather also affect batteries' ability to recovery quickly enough to provide power for repetitive restarting.

So stop-start systems constantly monitor battery to determine if it has sufficient power for the next restart. If not, the system disables itself until the battery recharges. So no fuel is saved and no emission reductions are achieved until that battery recovers. PSA's ultracap-powered stop-start system restarts every time in all conditions, reliably reducing fuel consumption and emissions by up to 15% in urban driving.

Auto Bild, Germany's largest automotive publication, and the German equivalent of the AAA have both recognized the PSA system for its superior performance and reliability. We expect Continental would be able to capitalize on those good reviews to win more auto business.

U.S. automakers have begun announcing stop-start launch plans too. And we and Continental have been making the rounds in Detroit, explaining and demonstrating how ultracapacitors make micro hybrid cars more reliable, more fuel efficient and more environmentally friendly.

More than 60 million new cars are produced by automakers around the globe each year. So the industry drives huge volumes for part suppliers. Any amount of ultracapacitor content per car multiplied by any reasonable fraction of the vehicles produced would create $1 billion market opportunity by the end of the decade.

Maybe if you continue to ask when we might announce another automotive design-in, as we've said in the past, we continue to be engaged in development activity with several automakers and tier-1 suppliers. The success of the PSA program has validated our products and it's stimulating in generating request for price growth. But it's a slow process and the industry is secretive, so we can't predict timing for design-in announcement.

Back to the present, a number of other applications are beginning to drive serious volumes that have helped us to maintain the strong growth rate ultracapacitors generated for the full straight year. These include millions of posted stamp-sized PC-10 cells that are going into various storage devices called solid state drives or SSDs for enterprise computing installations such as data centers.

The ultracapacitor model is right on the circuit board where they stand ready to provide a few seconds of instantly available backup power to allow work in process to be saved in the event of a power interruption. PC-10s also provide power for wireless transmitters that allow smart utility meters to be read remotely.

Last year, we launched an ultracapacitor 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 is UL approved has been designed into systems going into several new installations and is beginning to make a meaningful contribution to 2012 sales.

Over the past couple of months, we've delivered the first 1,000 units of another new product and the Engine Start module that acts as an onboard jump start power source for hard-to-start diesel trucks. Field trials with several fleet operators last year went very well. And we recently announced the distribution agreement with Pana-Pacific, which specializes in truck products and has relationships with more than 2,000 truck dealers, OEMs and OE part distribution centers in the U.S., Canada and Mexico.

This module is exact size and shape of the Group 31 batteries heavy trucks carry. So it's easy to install, drop and replacement for one of a truck's existing batteries. It addresses a growing problem with truck starting failures due to cold weather and overworked batteries as a result of anti-idling laws that exist now in more than 30 states.

With some 4 million heavy trucks already on the road in North America, we are focusing initially on the aftermarket, while simultaneously working with truck OEMs to get a design-in as a standard option for new trucks.

Engine starting is also an issue for delivery vans, military vehicles, boats, backup power generations and construction and mining equipment. During the process of developing variance of this initial product to address what we think can become a very significant global market.

As we expand our presence in the wind, bus, auto markets and penetrate the other new verticals that I've been describing, it's only natural to expect that we will draw increasing competition. In addition to established competitors in Asia and Europe, we've begun hearing ambitious clients from some newer startups or upstarts. None of those competitors, old or new, has shown it can match Maxwell's products, technology, quality, delivery and overall value proposition. We are committed to growing our technology knowledge and in executing on customer satisfaction to continue to be the leader in ultracapacitors.

In a few minutes, I'll discuss recent developments with our other two product lines and comment on future prospects. But first, our CFO, Kevin Royal, will provide additional detail on fourth quarter financial results. Kevin?

Kevin Royal

Thank you, David. I'm going to spend a few minutes providing some additional information on our 2011 financial results. Our revenues of $42.5 million for the fourth quarter of 2011 were up 3% from Q3 2011. The higher revenues in the fourth quarter were driven by a 5% increase in ultracapacitor product sales which generated $26.2 million in revenues for the quarter.

Despite what we believe to be a temporary slowdown in the wind market through regulatory changes in China, we continue to grow our sales in the bus, auto and uninterrupted power supply market. Revenues from our microelectronics and high-voltage business were relatively flat compared to Q3 2011.

Non-GAAP gross margin was $16.3 million or 38% of revenues for the fourth quarter of 2011 compared to non-GAAP gross margin of $16.7 million or 41% of revenues for the third quarter of 2011. The decline in non-GAAP gross margin was primarily related to our microelectronics business. In the fourth quarter, we recorded a loss on the sale of 14 single-board computers for a single customer due to significantly higher than expected manufacturing cost on this particular contract. Non-GAAP gross margin excludes stock-based compensation expense and amortization of intangible assets.

Total non-GAAP operating expenses for Q4 2011 were $13.8 million compared with Q3 2011 non-GAAP operating expenses of $14.6 million. Operating expenses were lower in Q4 2011 compared with Q3 2011 due to lower spending on legal matters, lower contract R&D spending and a lower fourth quarter bonus accrual as certain objectives were not achieved for the full year. Non-GAAP operating expenses exclude stock-based compensation expense, amortization of intangible assets and expense associated with an anticipated legal settlement.

We reported non-GAAP net income of $1.9 million or $0.07 per diluted share for the fourth quarter compared with non-GAAP net income of $1.2 million or $0.04 per diluted share for the third quarter of 2011. For the full year, non-GAAP net income was $4.9 million or $0.17 per diluted share for 2011 compared with $1.3 million or $0.05 per diluted share for 2010. Non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets, expense associated with accruals for legal settlement, the gain on embedded derivatives and warrants in 2010 and the impact of reclassification of assets from held-for-sale to held-and-used in 2010.

Our earnings before interest expense, taxes, depreciation, amortization and stock-based compensation or EBITDA was $5 million in Q4 compared to $3.4 million in Q3. For the full year, EBITDA was $11.7 million in 2011 compared with $2.7 million in 2010.

Now I'd like to turn to the balance sheet. We ended the quarter with cash and cash equivalent of $29.3 million, which represents a decrease in cash of $1.7 million from Q3 2011. Although we did generate cash from operations of $2 million in the fourth quarter, we spent $3.5 million in capital investments and also experienced unfavorable effects from exchange rates on cash of $500,000.

Cash generated from operations was lower in the current quarter compared to the prior quarter primarily due to normal patterns associated with the collection of accounts receivable as a few of our large customers extended their payment due to us at yearend.

Now I'd like to provide an update regarding the shareholder derivative suit. As we disclosed in past filings in 2010, two shareholder had alleged that certain of our past and current officers and directors failed to prevent us from violating the U.S. Foreign Corrupt Practices Act or FCPA. It's important to note that the company is only a nominal defendant in this suit.

In December 2011, mediation was held and a proposed settlement was reached that around $3 million would be paid to plaintiffs' counsels with $2.7 million to be paid by the insurance carrier and $290,000 to be paid by the company. In addition, we would be required to ensure that certain corporate governance measures are in place and enforced.

The agreement is subject to, among other things, court approval and notice to our shareholders. Without admitting any wrongdoing, the defendants to this suit were going to enter into this settlement in order to expedite resolution of the matter and to relieve the defendants and the company from further financial burden. We are pleased that this suit is in the final settlement and look forward to putting this matter behind us.

Finally, I have some new to share about the company's shelf registration statement. Today, we entered into an At-the-Market equity offering sales agreement with Citadel Securities LLC. Under this agreement, we may from time to time offer and sell shares of our common stock at an aggregate value for up to $30 million through Citadel. We believe this approach will enable us to raise equity capital opportunistically on terms favorable to the company.

We expect to use any proceeds from this offering to satisfy working capital needs and the acquisition of capital equipment and facilities associated with the ongoing growth of our business. We have filed the registration statement and prospective supplement with the Securities and Exchange Commission to enable this offering of common stock.

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

David Schramm

Thank you, Kevin, thank you very much. Having already covered ultracapacitors, we'll turn our attention to Maxwell's other products.

Our Swiss subsidiary develops and markets high-voltage capacitor products that are used in the electric utility grid and other applications involving the transmission and measurement of high-voltage electrical energy. Despite the similarity of their names, high-voltage capacitors are quite distinct from ultracapacitors.

We sell high-voltage caps 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 high-voltage capacitors for the grid and our sales are driven by global spending on electric utility infrastructure. Developing countries such as China that are expanding electrical energy generation and distribution to support commercial and industrial activity and improving standards of living are major consumers of our products. High-voltage sales rebounded last year after being off a bit in 2010 due at least in part to the difficult financing environment we had in 2009.

As we reported earlier, we won a major contract to supply capacitive divider products for the multi-billion dollar renovation and modernization of Russia's utility grid. And we are in the process of delivering a new product that functions reliably in minus-60 degree temperature conditions in Siberia. We are also monitoring developments and opportunities for the so-called Smart Grid here in the U.S. and elsewhere to determine where and how our products fit.

Shifting now to our microelectronics products, sales of the radiation hardened components of single-board computers that we supply to satellite and spacecraft OEMs in the U.S. and Europe continue to be steady and in line 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 driven by the number of satellite and spacecraft launches and the Maxwell content per launch. The high-value, single-board computer we introduced a few years ago continues to gain traction in the very conservative space market, giving us an opportunity to significantly increase the value of Maxwell content per launch.

Last fall, C-MAC MicroTechnology, a leading European supplier of radiation hardened space-qualified components, and our U.K.-based microelectronics unit announced a collaborative initiative to supply Maxwell design memory devices to the global space market. So that too should help to generate new revenue in the years ahead.

As you know, the space market's requirement for failure-free performance allows these microelectronic products to command high profit margins that contribute strongly to our bottomline. The cash flow generated by these legacy high-voltage and microelectronics product line has made it possible for Maxwell to invest in the ultracapacitor technology and products that are now driving the company's growth. Ultracapacitor sales accounted for nearly 62% of our total sales in 2011.

As we reported earlier, we have doubled ultracapacitor production capacity over the past couple of years, and we are moving ahead with additional investments in capacity expansion and research and development and other resources to support further growth.

Last year, we moved into a new expanded technology center here in San Diego. And last month, we began outfitting a 123,000 square foot leased facility in the Phoenix area. It will house a second electrode production line that will redouble electrode production capacity by the end of this year and provide growth space for other engineering and manufacturing activities going forward.

As we stated in our press release, while sales in the first quarter are on track to increase by more than 50% compared with the same period last year, they are likely to be about 5% lower sequentially compared the just reported fourth quarter. This is consistent with historic seasonal softness in Q1. And with our increasing sales volume in China, the two to three-week shutdown of most businesses there for New Year celebration adds to that seasonal effect.

For the full year, we still expect sales to grow at a rate similar to the 29% recorded last year, which should enable us to generate cash from operations and to continue improving that bottomline performance.

At this time, now we can open this up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Philip Shen with Roth Capital.

Philip Shen - Roth Capital

My first question is related to the Engine Start module. Now that you've gone through more testing and you signed Pana-Pacific, can you give us a sense for your unit expectations in 2012?

David Schramm

What I'll tell you, Phil, is that we're past the testing. We've actually got these out to Pana-Pacific and we have been training Pana's sales staff and so we are out in the field right now. So it's a little early for the revenue expectations to be delivered. But I will tell you that we are training people as to how you use this and Pana is excited about being the distributor for this. And more to follow. I would think we're going to have a better update for you probably at the end of Q2.

Philip Shen - Roth Capital

As it relates to the anti-idling legislation and the needs of running hotel loads, many truck fleets and truckers are adopting so called auxiliary power units. Can you see the Engine Start module serving as a potential APU killer? Do you think there is still a market out there for APUs?

David Schramm

I think like us, Phil, with a bunch of choices, and I think what you end up with is our anti-idling laws, but there is lots of different ways to configure and do it. The advantages we see using the ESM and the ultracap is the fact that no fuel is required at all; whereas, the APU is going to require fuel to run it. So it depends how much fuel do you want to eliminate out of the system. So I think both have got attributes that different markets we'll serve.

Philip Shen - Roth Capital

Let's transition to the SSD market. We saw some reports by the companies that sell the actual SSDs and sales I think have been quite brisk. I think one company reported sales up 60% quarter-over-quarter. Are you seeing this kind of strength in your SSD sales and how do you expect this to trend in 2012?

David Schramm

The expectation I have right now is that I don't see SSD going backwards from where we were last year. So it's a little early to tell, because it is only February, but right now I think the SSD is going to be a strong market for us.

Operator

Our next question comes from the side of Craig Irwin with Wedbush Securities.

David Giesecke - Wedbush Securities

This is actually David Giesecke in for Craig. Can you guys give us a little update on the status of the Arizona facility? You touched on it. Is there any further details you can share?

David Schramm

What I'd tell you, David, is that we are on track with the schedule we laid out. We signed the lease for that building last year. We are now in the process of building out the building itself as to how much utility we have to wear, where it has to be located in the plan, putting in the necessary offices and the infrastructure. So we are in process on that.

And again, the expectation is that the equipment will be delivered between the second, third quarters. We will then start to debug process somewhere in the third quarter. And fourth quarter, plus or minus, we should be in production. So we're right on schedule with the plan we laid out about four years ago.

David Giesecke - Wedbush Securities

The gross margins declined a little sequentially. Can you talk to that please?

Kevin Royal

Sure. The gross profit was down, as I mentioned in my prepared remarks, really due to one main factor. And that is that we had a contract for single-board computers where the cost came in higher than what we had originally estimated. So we recorded a loss on that contract of about $750,000 during the quarter, which equates to just shy of 2%. So that was the primary driver.

But looking forward, we kind of view that as a one-time and we think that our gross profit margins will return to 40% level in 2012.

David Giesecke - Wedbush Securities

The litigation expense in the quarter was $290,000 that you guys have to pay? Was that included in that?

Kevin Royal

We did accrue the $290,000 in the quarter, and we had other legal spending beyond that related to ongoing legal matters that were in the $1 million range.

David Giesecke - Wedbush Securities

Were there any new wind customers added in the quarter?

David Schramm

No. In fact, what we've said before and it continues is that we see wind as being relatively soft until somewhere in the second half of this year. There is a lot of activity going on in China specifically, which has been the largest growth market for wind in the world. And we think that's going to get it itself sold out here. And by talking to customers and to our consultant, we don't expect that's going to pick up in the second half, but we don't see a lot coming down the pipe here in the first quarter.

David Giesecke - Wedbush Securities

And to kind of piggyback on that, the low-voltage ride through, can you give an update as to what the opportunity you see there is and where you are in your product cycle?

David Schramm

That's one that's in development, if you will, but low-voltage ride through there is a lot of ways to configure that. We think we have one potential, but there is really nothing of any significance at this point to report.

David Giesecke - Wedbush Securities

Could you go into a little detail of the mix of the ultracap sales for standard cells, custom cells if there are any of those still being put together in the modules please?

David Schramm

That's real simple. We don't do custom. What we do is we build customized solutions for standardized componentry. We have four standard families of cells, of which we build standard modules, and then we can figure the standard modules into a custom configuration. That's the way we draw cost out of this company is to standardize the componentry and then standardize the modules.

David Giesecke - Wedbush Securities

Are cells split out between standard cells and modules?

David Schramm

It's mostly module business.

David Giesecke - Wedbush Securities

Can you give a number range, percent range maybe?

David Schramm

We don't break that out, but it's mostly modules by a lot.

David Giesecke - Wedbush Securities

Can you talk to potential for price improvement with ultracapacitors and where that might come from in the next 12 months?

David Schramm

The price improvement always comes by way of cost improvement. And I'll tell you what our engineers are working there. They always drive the cost out. The whole name that we've got here is we have to keep developing better and better technology that costs less and less, which allows us to compete in the marketplace. So we sell at the market-based prices, plus the value proposition that we bring to our customers. And that's the track we're going to stay on.

David Giesecke - Wedbush Securities

The stop-start, can you talk to what the gating factor for announcements might be? You mentioned earlier in your remarks that it's slow and secretive. Is it possible that you've already been awarded contracts that haven't been announced yet?

David Schramm

I'll not answer that, David, because if it's secretive in U.S., I can't speculate enough. By definition, I can't, one way or the other. But trust me, if we can announce anything, we will.

David Giesecke - Wedbush Securities

Can you talk to what those gating factors might be?

David Schramm

The gating factors would be customer acceptance and more importantly the customer agreement to allow a press release.

Operator

Our next question comes from the side of Zach Larkin with Stephens, Inc.

Zach Larkin- Stephens, Inc.

The first question I have was just on the seasonality and kind of the way that you think about recovery as we move throughout the year. So with the 5% down in 1Q, the first part of the question is are there any specific segments that are experiencing more and less seasonality with the new caps? And then as we go back, should we expect a pretty for any decent jump in 2Q and then more of a linear continuation of the growth as we move through the back half of the year, as they're going to be very back-half weighted?

David Schramm

Well, we don't plan to have a traditional hockey stick. We just get there right out of the table. We plan to continue growing in Q2, Q3 and Q4. Q1 frankly was the business that we have in China, they take three weeks off for Chinese New Year, and that's been more significant to us. But on the other hand, Q1 historically for Maxwell has been our slower quarter. So I think there is some seasonality there. It gets exacerbated with the Chinese New Year. But the market there right now is soft. As I said in the remarks, it's wind. And when the wind picks up, we think it's going to pickup and get back to where it was.

So expectation is that's going to pick up. The transit market, we don't see that slowing down a whole lot. That's been a great business for us. UPS is coming online and automotive is always the one that's got to be getting around the corner.

Zach Larkin- Stephens, Inc.

Maybe a good way to think about it is we've got the dip, but should recover decently in 2Q and then have more just a steady kind of growth as we move through the year. Is that a good way to paraphrase?

David Schramm

I think that's a good way to look at it.

Zach Larkin- Stephens, Inc.

You always get a lot of questions on when is the next auto guy coming. The thing I wondered is if you could give any color on with PSA now having 300,000 cars on the road, continuing to produce. They had really good reviews from a lot of the independent review sources. But we're only on two small diesel variance right now. Can you frame the potential for a follow-on order from PSA at sometime in the next year?

David Schramm

We can't comment on that at this point, but I would just say that if this program is successful, it should lead to the opportunity from our follow-on.

Operator

Our next question comes from the side Colin Rusch with Thinkequity.

Colin Rusch - Thinkequity

Can you guys talk about the progress you're making on the cost reduction side, the specific initiatives that you're working on that may have a near-term impact? And if you could comment on the programs that you're working on with graphene providers and if you're starting to see any real cost effective high surface area materials becoming available?

David Schramm

Well, let's start with the materials. Basically, an ultracap is made up of some very specific carbons and aluminum. So we've got a research department with several PhDs that are constantly researching new carbons. There are many new carbon companies in the world that we had contacted with very, very regularly. In fact, I would dare say there is not one that we don't know about in the world, whether it's graphene-based or any other base material. So that we keep looking at, because that's obviously a sort of cost reduction.

The other I'll tell you is that we've got a rather dynamic engineering group that has really been ultra-successful, I would say, in the last four years to improve the yield and the throughput of our electrode, which is the intellectual property and that's the basis of our ultracapacitors. But we are now running substantially faster through our process equipment than we were five years ago. And frankly, we're going to take the best level of technology we have, and that's where we're starting Phoenix. Phoenix will start a course with state-of-the-art equipment and we're going to grow from there.

So I think the cost reduction you're going to see is going to be really focused on the electrode and then whatever cost reduction we can bring into the mechanicals just really help that whole cost come down even further.

Colin Rusch - Thinkequity

And then can you talk about in relation to the growth strategy you're talking about it on a year-over-year basis, how much of that has been driven by the Engine start module. And if you just want make it simply, what part of your 2012 revenues are expecting to get out of the Engine Start modules?

David Schramm

Yes. That's a small number right now. It was some $5 million for 2012. And that maybe conservative, because right now, we have to educate the market as to what this is. That's been really the cornerstone of Maxwell for the last five years that I am totally aware of and that is educating the market is to what is an ultracapacitor.

People have dealt with lead acid batteries for 150 years. And the ultracaps have been commercial for less than 10, a lot less than 10. So educating the market as to what these things are, what their capabilities are and what is the value proposition. And again, you can't compare cost unless you look at total value. So when we look at the value, we want to pitch control in windmill, it was there. When we look at the value, we bring the start-stop, it's there.

My expectation is we're going to have that same value proposition into the trucking industry and beyond that. It's more than just trucks, its heavy industrial, its remote power unit, so there's a lot of applications that remote starting and having that assured ability is going to be there. So I've got high hopes for that market, but 2012 is going to be our year to see the market and see how much traction we can get.

Colin Rusch - Thinkequity

And one final quick one from me. Can you comment on partners outside of continental for start-stop applications? How you might be able to develop a couple of other channels for your ultracaps into the automotive industry?

David Schramm

Yes, over the last few years we've announced we are in relationship with Valeo, and they do have start-stop systems that they have developed that are on their website. We've also announced a relationship years ago with a AFL, which is now Flex Auto, and they are also working on their automotive Tier 1. And I would there say, every automotive Tier 1 is going to have some form of a start-stop available for their customer.

Colin Rusch - Thinkequity

And can you comment a little bit on timing with those folks?

David Schramm

It gets back to the previous caller. We got a secretive customer and we will tell you just as soon as we can.

Operator

Our next question comes from the site of Jed Dorsheimer with Canaccord.

Jed Dorsheimer - Canaccord

I was wondering maybe if you could provide some commentary on the AMI market, now that Itron purchased SmartSynch?

David Schramm

We saw that yesterday. We have done some work in the past with the PC10 ultracapacitor being the power source with an automated meter. And again, I think that's a huge opportunity for us and we've got some more work to do there.

Jed Dorsheimer - Canaccord

Can we quantify it a bit more in terms of dollar content, just a range per meter or how we should be looking at that or perhaps what the configuration would be that's going into that meter?

David Schramm

Yes. In the meter itself, if you're going to use an ultracap solution, depending on how many ultracaps you need. It'd be less than $10 in total on the high-end and I think on the bottom-end it'd be just over $2.5.

Jed Dorsheimer - Canaccord

And then, I think a previous caller was asking in terms of cost down. I was wondering maybe coming out at it from a little bit of different angle, if you could provide some commentary, how we can track cost? Is it dollar per ferret or how should we be looking it, the cost of the energy? And how that's trended over the past years? And where it is now and where we expect that to go?

David Schramm

I will tell you that that I think tracking it on any kind of a dollar per ferret doesn't get you where you want to go to. Because there is a huge difference between a large cell and a small cell and it's not just a ferret, but the cost isn't a straight line. So dollar per ferret isn't the right way to look at that thing.

I think it's more the value proposition of, when you put the ultracap in the system, what happens to your total lifecycle cost. And again, when you look at the windmill application, they use to have to trade out the lead acid batteries periodically, because of timing, because of the temperature load. They put the ultracap in and they fully expect them to last significantly longer.

The customers that we deal with tell us that the ultracap should be in there 10 to 12 years. And we'll find out, because we haven't had these in that application that long. But right now we've been going on eight years in the windmill and they're still working strong.

Jed Dorsheimer - Canaccord

So is that consistent through all the applications that the lifetime is the primary driver in terms of the cost of ownership?

David Schramm

Well again, the cost of ownership, a couple of the features of an ultracap, there is no mass transfer going on in the ultracap. There is no chemical reaction. So you can charge and discharge an ultracap up to a million times or more. Whereas batteries, you tend to measure that in the thousands. So your lifecycle, if you do a lot of charge discharge cycles, an ultracap ends up being very, very competitive over the life of an application.

The fact that the ultracap weighs about a third of what a battery weighs is another value that lot of customer see and then, of course, the temperature. An ultracap works at plus-65 degree Celsius and it works down to minus-40 degree Celsius. And again, because a battery is made up of a chemical reaction, cold temperature is not something they like to do. So there's places that we naturally fit just because of the environment and because of the cyclability that the customer requires.

Jed Dorsheimer - Canaccord

Maybe just housekeeping update on Arizona plant?

David Schramm

Yes, like I said a little earlier, the lease was signed last year. We have got started on putting the infrastructure in the plant, putting the power where it needs to be, make sure we have all the utilities in place, where the walls go, the equipment is on order, we expect it to be delivered between second and third quarter, debug third quarter and then production in fourth quarter of this year. So we are on track.

Jed Dorsheimer - Canaccord

The last question here from me, and I'll jump back in the queue. Have you seen any new entrance in the Chinese market for ultracaps?

David Schramm

We see the same competitor list. Its LS Mtron and Ness are the two primary competitors we see. Nippon Chemi-Con announced a system where they have a little different way to do ultracaps, but they announced the start-stop system with Mazda. So we look at that as good news that here is a competitor that validated that the ultracap is a way to configure the application.

Operator

Our next question comes from Ahmar Zaman with Piper Jaffray.

Ahmar Zaman - Piper Jaffray

My first question is, as trying to back to the first quarter here, first quarter guidance of down 5%, if I look at last year 1Q '11, you were able to grow revenues in low single-digits, and if I look at the last time 1Q '09 when Chinese New Year fell in the month of January, you were still able to grow sequentially. What are some of the differences during this quarter that have caused you to be a little more conservative?

David Schramm

I think it's the Chinese wind, a couple of years ago, Chinese wind was pretty strong. In Q1 we just don't see it being strong. Now that said, Q3 was a record quarter for us, for the bus market. In Q4 we beat that record. So will Q1 be Q4, its just too early tell at this point but the buses were still strong. So when we put it all together, the wind being short and with China being such a large portion of our revenue, the three-weeks they take out. When you add it all together, it gives us a sense that it's going to be a typical Q1, just a little bit below Q4.

Ahmar Zaman - Piper Jaffray

And then, Kevin, if I may ask a question on OpEx, last quarter you mentioned that going forward we should look at of our $14.5 million to $15 million in OpEx on a quarterly basis, does that still stand given where you came in this quarter?

Kevin Royal

I think moving forward, we do have plans to expand, add capital, which will add depreciation and increase our headcount. This last quarter and the fourth quarter our legal spending was bit lower than the previous quarter. We also had a bonus accrual at a lower rate in the fourth quarter than the third quarter. I think the $14.5 million to $15 million is still a good number as we move forward.

Operator

Our next question comes from the side of Chris Kovacs with Robert Baird.

Chris Kovacs - Robert Baird

You guys talked about some of the development on the UPS solution, and maybe some of the visibility you have there into future revenues and essentially any expectations or color on how they're kind fit into the hierarchy of products you have, for sales in 2012?

David Schramm

There is a couple of different ways we're doing UPS, one is on the solid state disk drive, that business have been growing very nicely for us with our PC-10 product. The other is the 56-volt module and again it's a UAL approved module but that is designed to fit in the rack. So it's a good back up system for computer forms. Again, we're seeing a lot of interest in that.

As I said earlier, Chris, educating the marketplace as to what is an ultracap takes up a lot of our time. And we have got a group that basically is dedicated, if you will to do in that market education. Internally we call them our technical presale. But educating the people and getting to understand what the product is opened some doors. So we fully expect that 2012, the UPS market is a going to be a great market for us.

Chris Kovacs - Robert Baird

Can you talk about any hybrid bus sales or potential momentum you are seeing reaching this quarter end in Europe as opposed to China?

David Schramm

We had a couple of announcements this year, Voith Turbo is a European-centered integrator and they announced that they are going to do a hybrid bus using Maxwell ultracapacitors. Previously, we've announced (inaudible) was another integrator. And there are other bus companies and integrators we are working with. So we've got about 5,000 busses now world-wide that are working everyday using Maxwell ultracaps, so as that word gets out I think we're going to see more and more penetration in those markets.

That said, you got to keep in mind that most busses are funded by the governments, the trains of authorities. So we see a real push in China because we have quality issue. We see a real push in Europe because of the greenness and frankly the U.S. should be a huge opportunity once the government funding gets put into the place to support these programs.

Chris Kovacs - Robert Baird

You talked in the past that you see in China 1,000 buses in a city. I know it's still early days I guess, so some of the negotiations you had in Europe. But can you resize what you believe the market opportunity is there? And how much of that you can address in the near term? And then from there, do you still think or still view hybrid bus is being roughly a third of your revenue going forward for the next year too?

David Schramm

I think the hybrid bus if you take a look at, what we've done there. Maxwell has standardized the 48-volt module that basically we use as a same building block for each of our Chinese bus customers. In the European market, we standardized on a 125-volt module. So that helps us take cost out of the system, which helps us with the customer value preposition and helps us to put some gross margin on the paper too. So we think we got a win-win solution there.

The Q3 as we reported, Q3 of '11 was our record quarter for the number of modules we sold to transit buses. In Q4 it was bigger than Q3. So we'll be able to tell you in about three more months of Q1 came-in, but right now we don't see the bus market slowing down for us.

Operator

Our next question comes from the side of Tom Daniels with Stifel Nicolaus.

Tom Daniels - Stifel Nicolaus

I was really helpful to hear that the truck starter business is slightly less than $5 million. Is there anyway you can give us a kind of number for UPS stations in 2012? We're thinking maybe $10 million to $15 million. Is that too high?

David Schramm

$10 million is probably a good number.

Tom Daniels - Stifel Nicolaus

And then SSD is that in the same kind of ballpark or is SSD bigger than the 56-volt module?

David Schramm

SSD would be bigger. We've got a little more traction there right now.

Tom Daniels - Stifel Nicolaus

And then I know you talked a lot about the wind, obviously it was kind of weak in back half of 2011, expect to pick in 2012 year-over-year, do you guys expect your wind business to be down or kind of flat?

David Schramm

It will be kind of flat.

Operator

Our last question comes from the side of Jeremy Hellman with Divine Capital.

Jeremy Hellman - Divine Capital

Just kind of curious, do you have any presence in South Africa. And recently, it was reported that they want to make some big investments there in energy and transportation infrastructure and so on. I kind of think about what quasi-greenfield opportunities you might have. I was kind of curious if South Africa is on your radar and what you might think about it?

David Schramm

As a specific local, it really isn't on the radar, but it would be an opportunity for the UPS modules. The question, which other customers would go there? A lot of the customers we deal with out of Europe have global distribution, and they satisfy a lot of the requirements in South Africa. So right now I'll tell you we don't have a direct link in their, but I bet we have an indirect link.

Jeremy Hellman - Divine Capital

If one of your existing relationships is in there doing a light rail or even wind turbines for example?

Kevin Royal

For instance, if a light rail we're doing with Bombardier, that's a pretty global company on railcars and that would be an opportunity. I will also tell you that the Chinese wind market, most of the Chinese wind makers are looking to globalize their windmills. And I think there has been some announcements on that in the recent past that they're looking to come to the U.S. to sell windmills. So where they go from there we'll be more than happy to follow them.

David Schramm

Very good everybody. Well, I want to thank you very much on behalf of the 400 employees of Maxwell. And we look forward to speaking with you in the end of the quarter. Thank You.

Operator

That's concludes today's conference. You may now disconnect. And have a wonderful day.

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