Active Power's (ACPW) CEO Mark Ascolese on Q4 2015 Results - Earnings Call Transcript

| About: Active Power, (ACPW)

Active Power, Inc. (NASDAQ:ACPW)

Q4 2015 Earnings Conference Call

February 23, 2016 08:30 AM ET

Executives

Mark Ascolese - President and CEO

Jay Powers - CFO and VP, Finance

Analysts

Craig Irwin - ROTH Capital Partners

Amit Dayal - Rodman & Renshaw

Larry Litton - Second Line Capital

Operator

Good morning, everyone. Thank you for participating in today's conference call to discuss Active Power's Financial Results for the Fourth Quarter and Full Year ended December 31, 2015.

With us today are Mr. Mark A. Ascolese, President and Chief Executive Officer of Active Power; and Mr. Jay Powers, Chief Financial Officer and Vice President of Finance. Following their remarks, we will open up the call for questions.

Any statements made by management on this call that relate to future results and events are forward-looking statements based on Active Power's current expectations.

Actual results and the outcome of future events could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties, which are discussed in the company's filings with the SEC and in the cautionary note regarding forward-looking statements in the company's press release. Active Power assumes no obligation to update these forward-looking statements.

On today's call, the company will be referring to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is reconciled to GAAP net loss in the company's press release, which we encourage you to review.

I would like to remind everyone, that this call will be available for replay via Active Powers’ website at www.activepower.com.

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

Mark Ascolese

Good morning everyone. We issued a press release earlier today, announcing results for our fourth quarter and full year ended December 31, 2015. To summarize 2015, we are pleased to have delivered the strongest overall annual performance for Active Power over a three year period.

We demonstrated steady improvement across all of our key financial and operational metrics in 2015 including revenue, gross margin, operating expense, EBITDA and cash. We achieved double-digit annual growth in UPS and Modular Infrastructure Solutions or MIS, while reducing expenses and improving gross margin.

These results were due in part to a renewed focus on selling in to non-IT applications, increased adoption of our ClearSource HD UPS product and closer engagement with our OEM partner Caterpillar. Our backlog also improved 15% in 2015 compared to the prior year.

While we reported solid growth, we had and continue to content with a global economic slowdown, which we began seeing in mid-2015. This general malaise in the market is producing challenges across the board, which we’re seeing in the lengthening of sales cycles. We haven’t seen any order cancellations by our customers, but rather delays and orders being awarded and schedule changes to deferred delivery.

This was evident in the lower fourth quarter bookings we reported compared to the prior year, and the previous quarter. We will remain vigilant in managing expenses in light of these market conditions. We saw trends throughout 2015 that I believe had a potential to affect our future and transform how the world views critical power infrastructure for mission-critical and renewable applications.

First, an increasingly cost conscious environment is bringing total cost of ownership or TCO to the forefront of business decisions. Second, the desire to eliminate unnecessary hardware and leverage advances in electrical design and technology are reducing UPS run-time specifications which makes our flywheel technology even more compelling.

Finally, modular design [wheel] is becoming more accepted for a growing number of customers looking for rapid deployment, scalability and prudent capital investments. We believe we will benefit from these key industry drivers in 2016, as we emphasize our value proposition, which we recently refined based on feedback from some of the largest purchasers of electrical infrastructure equipment for mission-critical environments.

Our value proposition is squarely aimed at demonstrating the customer’s right up front, how we can deliver significantly lower TCO, superior reliability, and leading edge sustainability. While these values have been in place for some time, the way we go about communicating these values comes down to emphasis.

For a majority of customer engagements, we will TCOs as starting point, as we believe the tangible economic savings we can deliver will resonate with customers now more than ever. We believe our story goes beyond incremental feature benefits as compared to conventional offerings.

Our products and solutions can deliver significant capital and operating expense savings that reduce TCO by up to 40%, due to our products high energy efficiency, reduced cooling needs, lower maintenance costs and permanent energy storage. Our products are 12 times less likely to fail compared to competitive offerings.

Lastly and most importantly, our flywheel technology uses nine times less carbon than competitive offerings over their useful life. To put this in to context, a 30 megawatt flywheel UPS deployment can save 1,800 tones or 200 train cars of coal over 15 years. The sustainability piece is an increasingly important objective for our customers, knowing more than 60% of electricity produced world-wide is still through fossil fuels.

Put simply, our technology improves the financial and environmental condition of mission-critical facilities making it the smart and responsible choice. Validating our cost, reliability and sustainability advantages, we are pleased to have announced in early February that Hydro66, a British based co-location provider selected our CleanSource HD UPS for its new 100% certified carbon-neutral hydro powered datacenter in Boden, Sweden, roughly 40 miles from the Arctic circle.

The hosting facility was built for eco-conscious customers is powered entirely renewable energy from a nearby hydroelectric dam and utilizes free air cooling year around. Our ultra-green UPS was selected over competitive offerings, due to its operating efficiencies and sustainability features. To learn more, you can go to www.hydro66.com.

Now a few highlights on bookings and shipments for the quarter; our bookings for the quarter is reflective of our efforts in selling in to non-IT applications. We receive CleanSource HD orders for a large hospital expansion project in Texas, a bottling plant in Japan operated by one of the world’s largest distillers. We also booked CleanSource UPS order to support oil repumping stations in Mexico in the second phase of a build-out of a colocation datacenter in the UK.

We fulfilled a number of large orders for a few customers during the quarter. We shipped CleanSource HD product to one of the world’s largest online service providers, which we booked in the third quarter of 2015. We shipped CleanSource UPS product to a number of healthcare and industrial end users, including a manufacturer of semiconductor LED materials in North Carolina, a hospital in Belgium, and an international brewer for their production facilities in Africa. We also shipped UPS product to a global technology company to support three of their enterprise datacenters in the US.

At the Board level, we announced our Chairman, Dr. Ake Almgren will retire from the Board after the company’s annual shareholder meeting on April 22. Ake served on Active Power’s Board for nearly 12 years and as a Chairman for more than three of those years. I want to personally acknowledge Ake for his friendship and professionalism, not to mention his leadership and vision over some of the company’s more challenging years. He has been instrumental in helping realize the vision of Active Power, and we will be forever grateful for his contributions.

Daryl Dulaney was recently appointed to the company’s Board. Daryl is known for being an exceptional leader, having successfully led the North America divisions for Siemens, the global technology in industrial automation leader. The Board unanimously voted to elect Daryl to succeed Ake as Board’s Chairman starting after the annual shareholder meeting in April.

We also announced the appointment of Steve Sams to the company’s Board. Steve is an accomplished technology and marketing strategist with nearly 34 years in executive and senior sales and operational roles at IBM. In particular, he built and managed the Global Site and Facilities Services organization at IBM, a leader in designing and building highly resilient datacenters in mission-critical facilities world-wide.

Steve and his team also launched Project Big Green, a billion dollar effort to make datacenters worldwide more energy efficient, cost effective and greener. Before we go further, I’d like to turn the call over to Jay to give us financial details about the quarter and full year. I’ll then come back to providing some closing comments. Jay?

Jay Powers

As Mark mentioned earlier, our business has not been immune to the soft economic conditions which we’re seeing in the lengthening of sales cycles. These conditions impacted our bookings, as we recorded $8 million in the fourth quarter, resulting in a book-to-bill ratio below 1 for the first time in eight consecutive quarters. This compares to bookings of 17 million in the previous quarter and $18.5 million in the fourth quarter of 2014.

Bookings amounts represent anticipated revenue from product orders received during the period that are believed to be firm and from signed contracts for service work. Please refer to the supplemental information in our press release for more details regarding bookings.

As we stated, our business inherently varied from quarter-to-quarter, so we feel long term trends be more meaningful as we access performance. Fourth quarter revenues were $12.5 million down 19% compared to the fourth quarter of 2014 and 16% to the previous quarter.

On a full year basis, revenues improved 17% or $8.3 million to $57.4 million compared to $49.1 million in 2014. This increase in total revenue is due to higher product sales, primarily by the increase in MIS business driven by a large order from an IT channel partner and stronger demand for our flywheel UPS products.

As Mark mentioned earlier, we achieved double-digit annual growth in UPS and MIS. UPS revenue improved 11% to $31 million; MIS sales were up 50% to $12.2 million, primarily driven by the large order of an IT channel partner I just mentioned. Service revenue also improved 10% to $14.2 million.

As a reminder, inherent variability and demand for our products contributes to quarterly fluctuations in mix, as orders can range from a multi-million dollar MIS or UPS shipment to a single module UPS shipment for less than $100,000. One large MIS order in a quarter for example, can have a significant impact on the business of any particular period.

By region, revenue for the year was $43.1 million in the Americas, an increase of 37% over 2014. In EMEA revenue was $12.4 million down 11%, in Asia revenues decreased 37% to $1.9 million in 2015. Please refer to the supplemental information in our press release for more detail on our revenue split by product and geography.

The dollar amount of backlog was $30.8 million at year-end. This is an increase of 15% or $4.1 million from $26.7 million for the year. Of total backlog, approximately $9.4 million is not expected to be filled in the following 12 months, which includes long term service contracts and UPS product orders. Backlog represents the amount of anticipated revenue from prior bookings at the end of the period.

And moving back to the income statement, gross margins this quarter was 25% compared to 26% in the fourth quarter of 2014 and 26% the previous quarter. The modest decrease from both periods is primarily related to under absorption of fixed overhead cost of manufacturing and lower volume of service revenue which contains a higher margin.

For the full year, gross margin improved to 29% compared to 26% in 2014. This increase is related to higher margin MIS along with improvements in manufacturing absorption and increased production in 2015. Total operating expenses were $5.9 million for the quarter, down $100,000 from the fourth quarter of 2014, but up $300,000 from the previous quarter. The increase in the prior quarter is primarily due to the recovery of a previously reserved receivable recognized in the third quarter.

For the full year, operating expenses decreased 7% or $1.8 million to 22.9 million. The decrease was primarily due to lower spending on materials and services for product development, lower commissions and management’s effort to focus on productivity improvements and disciplined spending partially offset by increased expense for management incentive plan accruals.

We will remain vigilant in managing our expenses and identifying ways to improve operational efficiencies in light of current market conditions, while continuing to support the growth of the business.

As we mentioned last quarter, programmatic spending occurs through the regular course of business which can fluctuate from quarter-to-quarter and include variable sales compensation, employee incentive compensation and product development activities for example.

Adjusted EBITDA in the fourth quarter was a loss of $2.2 million compared to a loss of $1.3 million in the year ago period. This compares to adjusted EBITDA of a loss of $1 million in the previous quarter. The decrease from both periods is prevalent due to lower revenues resulting in higher net loss for the fourth quarter 2015.

For the year, adjusted EBITDA was a loss of $3.7 million compared to a loss of $10.1 million 2014. The improvement in adjusted EBITDA was primarily due to increased revenues, improved gross margins, and reduced expenses which delivered lower net loss for 2015.

Now turning to the balance sheet, we ended the quarter with $12.3 million in cash, a decrease of $2.5 million from the end of fiscal 2014, but an improvement of $1.6 million compared to the end of the third quarter of 2015. This is the highest quarter ending balance of 2015.

Cash requirements to fund any future working capital increases are expected to be funded to our revolving credit agreement with Silicon Valley Bank. The outstanding amount at December 31 of $5.5 million did not change during the year. We had an additional $6 million available to borrow with our accounts receivable and inventory collateral balances in December.

We believe our cash, projected cash and available [liquidity] will be sufficient to fund our operations for the next 12 months. As a reminder and as we mentioned last quarter, we will not provide guidance; however, we’ll continue to provide perspective on market trends that impact our business and growth prospects. This completes the financial portion of our presentation; I’d now like to turn the call back over to Mark.

Mark Ascolese

While our fourth quarter revenue and earnings were lower than prior periods, and the same soft market conditions have persisted thus far in 2016, we demonstrated the depth of our fundamental long term planning. As compared with our past three years, we started 2016 with a higher black log a lower cost base and an opportunities pipeline bolstered by a higher number large project opportunities.

Our priorities for 2016 remain unchanged, as we stand committed to delivering increased shareholder value through a continued focus on increasing bookings and backlog, improving operational efficiencies and controlling costs. We remain encouraged by an expanding opportunities pipeline, a compelling TCO story, and trends that we believe are guiding the industry in our favor, making the timing right for the refinements we’ve made to our value proposition.

I’m excited about the fact, our refined value proposition is already having an impact and delivering us intended results. We recently presented the two prospective customers leading with our TCO story first versus driving in to the technical (inaudible) of our technologies and its peak feature benefits.

The first prospect was a large healthcare organization based on the east coast of the United States that operates 13 hospitals and the second an industrial customer in Latin America. We were invited back for a second meeting in both cases.

Near-term challenges notwithstanding, we look forward to 2016 being another year of improved performance. We will discuss our refined value proposition in more detail at our annual shareholder meeting scheduled for Friday, April 22 at 8:00 AM at Active Power headquarters here in Austin, Texas.

Now with that, we would be happy to open the call up to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Craig Irwin of ROTH Capital Partners. Please go ahead.

Craig Irwin - ROTH Capital Partners

I wanted to ask if we could dissect the booking and backlog in the quarter and maybe talk about the pipeline that you’re looking at coming in to 2016. Can you maybe share with us geography or product mix in the backlog and in the bookings that came in to the backlog in the fourth quarter and any additional color on the pipeline will be helpful.

Mark Ascolese

So let me take a stab at that. If look at our - and I think this was in the press release, if you dissect the numbers. But if you look at our revenue performance last year, you’ll see that in North America we grew the business by 34%. In our market in North America, that’s been reported by IHS that it was down last year by 15%.

And if you look at our bookings numbers for the first three quarters, you’ll see they’re in the high teens. Fourth quarter was half of what we had been normally seeing throughout the year. What’s interesting about that is that we lost one small order in Latin America from what we thought we were going to book in the fourth quarter which we thought was obviously trending for the prior three quarters.

The rest of those opportunities that we anticipated booking then were merely pushed to the right, the first and second quarter of this year. We don’t have the numbers for the bookings and backlog here that we can share relative to what is in that backlog. But I would suspect that our backlog reflects the revenue numbers that you can dissect from the press release in the geographies.

So we’ve grown in the Americas, we were down 10% or 11% in Europe mainly because of the weakening of the euro and the strengthening of the dollar, and the same situation was going on in APAC where our business was down also.

In terms of the pipeline, I don’t know we have never communicated the absolute size of our pipeline, but I’ll tell you that our pipeline in 2015 grew by well over 20% and that the mix of deals in the pipeline that are greater than $1 million were almost doubled. So that was a significant increase.

I don’t have the exact number but I think the deals that million dollars are greater for the prior year where less than a hundred not much less than a hundred and for 2015 where our backlog currently stands today, that number is closer to 200. And so we are encouraged by what’s going on in our opportunities pipeline, and we are encouraged by the size of the deals that are in the opportunities pipeline.

And we have seen by the way the increase in opportunities across all three of our geographies. So it’s not just limited to one geography, and 2016 has started out a little more robust than 2015 did in terms of what’s going on in the pipeline.

Craig Irwin - ROTH Capital Partners

Let me get a little bit more precise, because everybody has the numbers of your bookings and backlog for the last several years. Out of the 30.8 million at December 31, 2015 in your backlog did you continue to see the mix shift towards North America, with the strong growth that you’ve seen in the last year, or were there other markets or orders that shifted in that backlog that we should make notice of.

Mark Ascolese

We’ve reported in Q2 and Q3 that we had some significant orders come in to the backlog from Asia and from Eastern Europe. And so the makeup of our backlog is reflective of those large orders. So we still have obviously significant orders in the backlog for the Americas, but we did pickup business last year that we intended to start shipping later this year that came from Europe and came from Asia.

Craig Irwin - ROTH Capital Partners

Excellent that was really what I was looking for. So then as a follow-up, as we look at the balance sheet and the cash flow in 2016, you’ve done a really good job sort of leaning up and down the sheet over the last couple of years, maintaining sort of strict financial discipline, and that’s benefited the cash flows. Can you walk us through the major items that you think would impact available cash as we exit 2016?

Jay Powers

Correct Craig, as we mentioned in my prepared remarks, we look at the cash position that we had which is our strongest position we had during 2015, combined with our outlook for the year and our available liquidity is certainly been more than sufficient to cover our cash needs, we’ve disclosed for the next 12 months.

So we’re going to continue doing what we are doing through our supply chain initiatives and manufacturing initiatives, we think there’s further opportunity to reduce inventories and get much more just-in-time consignment inventory to keep those inventory levels to continuing down.

Our receivables, we’ve always had a very good discipline on the negotiation and collection of our receivables, and we’re going to manage our spending to ensure that we’re spending optimally to support the business and grow the business in an efficient and effective manner. So I think we’re really going to continue the same discipline we’ve demonstrated for the last couple of years in managing our cash.

Craig Irwin - ROTH Capital Partners

As we look at the specific items should we expect a material change in things like CapEx and other items on the cash flow versus last year or are we looking at the same discipline that we’ve seen for the last couple of years.

Jay Powers

Yeah, so same with the CapEx, given the capacity we have in the business, we typically would not anticipate for the foreseeable future CapEx exceeding depreciation. We definitely say that we would be investing at or below the rate of depreciation to continue to maintain our equipment in good working order, but we also need for any significant expansion in that area.

Craig Irwin - ROTH Capital Partners

As we look down the run rate at 2016, can you make me describe for us if there are any specific large opportunities that you think would really move the needle for you, any elephants that you’re chasing that maybe you can frame out for us without naming them specifically.

Mark Ascolese

This is Mark. We are chasing a number of what you call elephants, both here domestically and in Asia and Europe. We continue to see an expanding opportunities pipeline in that area, and my comment around our changing the emphasis we put on our value proposition I believe is going to help us in this area.

Typically, we would start a conversation with a perspective customer to talking about the company and about the technical features and benefits of our products, and eventually as I like to say on slide 36 or 37 we’d get to our TCO story.

Today, we’ve changed that strategy and we get to the TCO story before we even talk about the company. Want to get in front of the customer the fact that we can save them significant amount of operating expenses and capital dollars by going with this technology, and because so many customers today are focused on the CO2 and carbon emissions, we tell the story that by using this technology, by just making this one decision can significantly reduce the amount of fossil fuels that have to be burned to operate the datacenter.

They don’t have to go out and buy a photovoltaic farm or wind farm to do that. They can just change the type of UPS’s that they are deploying, it is as simple as that and they can make a significant impact on the burning of fossil fuels. We feel better this than we did last year in the beginning of the year looking at the big opportunities that we see in progress.

Operator

Our next question will come from Amit Dayal of Rodman & Renshaw. Please go ahead.

Amit Dayal - Rodman & Renshaw

Just a follow-up on 2016 pipeline, you mentioned in your press release that you’re entering 2016 with a higher number of larger project opportunities. Can you elaborate on this in terms of size and timeline etcetera? You said the mix in your backlog is leaning towards higher dollar value projects, are these million dollar plus projects, $5 million projects, just some sense on what these potential opportunities, how big they are, and time lining the context of slowing (inaudible).

Jay Powers

Yeah Amit, the way we characterize this publicly in the past is that we track opportunities that over $1 million in our pipeline and obviously opportunities that under $1 million. In the year ago, we had less than 100 opportunities in the pipeline that were over $1 million and not a whole lot less than a 100 but less than a 100.

This year we were approaching 200 opportunities that are $1 million or greater, and in terms of when those are supposed to book, I don’t have an exact number to quote you. But the anticipated book dates that we have in the pipeline today would suggest that a significant number of those deals are going to be decided in the first six or seven months of this coming year.

Now as I talked earlier about the softness in the market, those schedules and timelines may change and those decisions may not be made till later in the year. But it’s something that we track here quite honestly every week and we update the Board on every quarter of opportunities like that and items that are in our upside and in our forecast.

Amit Dayal - Rodman & Renshaw

In relation to the relative sort of weakness in the fourth quarter because of various pressures, was it more on the MIS side or the UPS side? And again looking in to 2016, in the context of again the slower sales cycle, like where will be sort of focusing on to ensure a stronger performance in the year from a growth perspective?

Mark Ascolese

Another good question, in terms of the actual bookings and what we have forecasted, we were forecasting a pretty strong mix of UPS orders in the fourth quarter and we were chasing a couple of very large MIS orders, and we thought that we would have a balanced number, let’s say, between those two segments in the fourth quarter.

Unfortunately on the MIS side, as we go through partners there. Our partner launched the deal that they were chasing and we didn’t get any of that business, and so our second half bookings in MIS were significantly less in our first half.

And in terms of the UPS business, the stuff that we thought we would book as I mentioned earlier, we lost one small deal of less than $0.5 million and the rest of it just moved to the right. So we had good opportunities coming our way to have a trend line bookings quarter and we just did.

Now we’ve not seen so far this quarter that those opportunities that those projects have been cancelled. What we’ve seen is that the customers really did moving to the right and they really are kind of repositioning and re-deciding when those order are going to book. Some of them have already booked; some of them are projected to be booked in the second and third quarter.

So we watched that very closely obviously because if customers start killing those projects for one reason or another that would become problematic. But the business in North America was down significantly last year. I mean in the third quarter North American market was down almost 30%.

The fact that we continue to grow the business in that market environment is really testament A, to our technology and product; B, the fact that we’ve got smaller share in a very large market and there’s plenty of room for us to grow. That’s why I believe very strongly that the way we depict and present our value proposition is critical, because the customer base today is looking for ways to get the most value for the money they’re spending and we have a story to tell there that has been proven and we’ve got over 4500 systems deployed around the world. So this is not an experiment, this stuff really works, and we can show our customers on the TCO side the money that they can save for their individual application.

Amit Dayal - Rodman & Renshaw

And just final question, the cost cutting efforts you guys have been undertaking have been really constructive. But we did see a slightly higher operating expense of around $2 million in the fourth quarter relative to the prior three quarters. What should we expect on this front in 2016, is there more room to cut cost or are these levels where we sort of level out in terms of operating expenses.

Mark Ascolese

So the short answer is, yes there’s more room to cut cost and you should expect to see us continue to control our cost and have a laser focus on that. I also firmly believe that there’s an opportunity to continue to cut inventories. We haven’t got the inventory terms up to the 10 turns a years that we’ve talked about, so there’s also opportunity on the balance sheet in that area. And we are focused very strongly on both of those categories, as we have been and will continue to be as we go forward.

Operator

Our next question will come from Larry Litton of Second Line Capital. Please go ahead.

Larry Litton - Second Line Capital

We’re almost two-thirds through the first quarter, anything interesting in terms of bookings so far this year, or should we given to save the economy we really have to wait till the second half of this year?

Mark Ascolese

Larry based upon the pipeline that we’ve got and the activity, we expect the second half to be stronger than the first half, but we do not expect the first half of the year to be anything like we saw in the second half of last year. We expect the first half to be stronger than that.

Larry Litton - Second Line Capital

And again with two months in this quarter, are you feeling okay about the first quarter bookings or you can’t comment?

Mark Ascolese

You know I can’t comment on anything that’s going to happen in the future, but I’m feeling pretty good in general.

Larry Litton - Second Line Capital

Well January and February are the past, I guess that’s my point, but you’ve [answered] my comments. You don’t want to comment on January and three weeks of February is that correct?

Mark Ascolese

That’s correct, I can’t do that.

Larry Litton - Second Line Capital

When you dissect the pipeline which is strong and up and particularly strong in terms of larger orders, can you back that out for me. If you look at, I would call the core pipeline, things that are less than $1 million, by my reckoning that might be kind of flattish year-over-year, is that a fair estimate? Is it up, is it down, is it flat?

Mark Ascolese

It is up; we are up in the high double digits. I mean we are up in the 20% range in terms of the growth of an already multiple $100 million pipeline. So its significant dollars that we went up last year in the opportunities and while there are a lot more million dollar opportunities in there, we are obviously a lot more single, double and triple module type opportunities in there. We’re seeing and are getting access to many more opportunities than we have in the past.

Larry Litton - Second Line Capital

In terms of the large orders, the million dollar orders that we’re chasing, I know everyone is different, but what’s represented of the competitive situation? Is it us against batteries, is it us against batteries versus people not even deciding design yet? What’s the nature of the competition, how stiff is it relative to your standard small order?

Mark Ascolese

So generally speaking, 90% of the market is buying battery based solutions, 10% is buying something other than battery. So typically we are out there talking to people that are ahead of predisposition to buy a battery based solution. With our new value proposition or the way we’re going to emphasize it, we have an unbelievably strong story to tell just based upon the dollars. Forget about the CO2 and that part of the story, just based upon the dollar we have a very compelling story that’s very hard to beat.

We also are finding ourselves in front of some large opportunities competing against the non-battery type of solutions that are out there. People like that, what they call drugs in the market which is people like Pillar and Hitech and Eurodiesel and those kind of folks.

We’re finding ourselves in front of more large opportunities against those folks especially in Europe and in Asia, not so much here in the United States.

Larry Litton - Second Line Capital

And just one more on that in that regard, so if you look at things that are near-term, where are we in a breakup process? Has it come down to us against one other or is it go to the end, we’re best than three others or four others?

Jay Powers

Typically in a deal it’s down to us and other competitor. Typically the deals are shortlisted, and if we’ve done our job and have had serious conversations with the end user and made our proposition clear to them, and I’d say we have a very good chance to win those deals.

If we were late to the opportunity and got shortlisted, than the probability that we’re going to win that is much less, obviously because these are large purchases when you’re stuff over million dollars, you absolutely got to have the relationship with the end user and the end user has got to believe what you’re telling them relative to the OpEx and the CapEx that you’re saying they are going to save.

Larry Litton - Second Line Capital

And lastly from me for now would be, you said we missed some big MIS orders that you would hope to have booked. Was that just on price or any other reasons, why you think we lost those orders?

Mark Ascolese

MIS orders are a little more complicated because we’re just not selling an IT container, our partner is filling that IT container full of servers and racks and typically the pricing on the IT container that we’re providing or the power house we’re providing may not be material to the total decision that’s made. It’s probably more wrapped around the servers and everything else that goes in to that package.

What we know at this point is that our partner didn’t win those deals and typically they don’t win those deals and the customer would tell them because of price on the server side, which you never really know if that’s it or there are some other issues that’s floating around there.

The good news is that we have seen uptick in more MIS opportunities as we come in to this year. We’ve also changed our strategy and that we’re going to take the total solution to the market. So we’ve allowed our sales people to start selling the IT containers that we manufacture and of course powerhouses that have the UPSs in them.

So we’re starting to offer now a complete solution to the market in terms of a datacenter. We can give a modular solution to the customer that includes the power front end and the IT solution on the backend. We don’t supply the servers obviously, but we can supply the container and the housing and the structure.

Larry Litton - Second Line Capital

Michael last thing from me, in terms of these big deal we’re going after, obviously the competitors are saying, you can’t buy from Active Power, look at their balance sheet, they are losing money, you don’t know if they’re going to be around for their TCO. How do you respond to that in terms of the competition and the customers concerns about the viability of backup power?

Mark Ascolese

As I mentioned earlier, if we can get in front of the end user, we can easily differ that kind of concern from the customer. If we have not been in front of the potential and when I say we, I mean Jay or myself. What typically happens is we’ll get on the phone mostly Jay will get on the phone with the customer and talk them through our financials and our balance sheet and the public information that’s out there and get comfort with them about what we’re doing. I can’t sit here and tell you that we’ve lost a deal or a customer wants to buy our stuff because of our balance sheet or our financials. Not since I’ve been here.

Operator

[Operator Instructions] our next question will come from [Bill Dakin] from (inaudible) Dakin. Please go ahead.

Unidentified Analyst

Really all of my questions have been answered from the prior analyst questions, but I do have one, how many sales people do we have in the field?

Jay Powers

We have total people deployed both direct and indirect in the neighborhood of 35ish, 35 or 40, depend up on where we are at any given time.

Unidentified Analyst

And a tough question on that, in your mind what percentage of is 35% or upper tiers.

Mark Ascolese

Not enough obviously. We have, and I have stated this probably before Bill, we are not getting the productivity out of our sales channel as one would expect compared to the industry average. Now some of that is because of the market, some of it is because we turned over half of our sales force over the last two years, we’ve had to train people and bring new people on board.

But part of it is - we have very good sales people out there in the field. Part of it is based upon some conversations I’ve had in the fourth quarter last year with customers, is that we’re not leading strong enough with our value proposition, which is what I’m kind of harping on that today.

But everybody wants to know where the money is and how much money is it going to cost. And we have an unbelievably strong story to tell that somebody who buys our technology whether it’s a multi-megawatt datacenter or a two-module system in a hospital, that customer can save 40% over the life of that installation, buying our solution as opposed to somebody else’s.

And we just have not done a good job on the marketing side in my opinion of getting that message out in front of the market, and we are focused on that. We had all of our sales team, me and Jay worry, we started talking about that in a big way. What you will see in the next few weeks changed our website and a stronger emphasis on the TCO and on the sustainability features that we bring to the table.

Because they are unmatched and they’re unmatched in all categories, whether you’re talking about battery based over conversion UPS or what they call [drubses] these Hitech and Pillar solutions that you talk about or some datacenters that operators are deploying just lithium ion batteries with no UPS. We even have a proposition where we still save those customers in excess of 30%.

So in my it’s more about our marketing and it is about our sales people. We have good sale people, we just make sure we get the right tools in their hands and that they lead with the right story in front of the customers.

Unidentified Analyst

Well it’s (inaudible) to me. I mean you got a wonderful [pitch], you really do. I can’t understand how somebody can sit at the table and say no. That’s not my question in respect of the sales people. I’m a little confused in respect of that, but anyway thanks for your time and I appreciate you hard work on the operations.

Operator

Having no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Ascolese for any closing remarks.

Mark Ascolese

Thank you everyone for being on our call this morning. On behalf of the entire senior management team, our employees and our Board, I would like to express our appreciation for your interest in Active Power, and thanks for your continuous support, and looking forward to speaking to you all again next quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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