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Active Power, Inc. (NASDAQ:ACPW)

Q2 2012 Earnings Call

July 30, 2012 04:30 pm ET

Executives

Doug Milner – President & Chief Executive Officer

John Penver – Chief Financial Officer & Vice President, Finance

Analysts

Jeff Osborne – Stifel Nicolaus

Carter Driscoll – Capstone Investments

Jim McIlree – Collins Stewart

[Peter Hohman]

Carter Dunlap – Dunlap Equity Management

Operator

Good afternoon, everyone. Thank you for participating in today’s conference call to discuss Active Power’s financial results for Q2 and the six months ended June 30, 2012. With us today is Mr. Doug Milner, President and Chief Executive Officer of Active Power; and Mr. John Penver, the company’s Chief Financial Officer.

Following their remarks we will open up the call for questions. Then, before the conclusion of today’s call I’ll provide the necessary cautions regarding forward-looking statements made by management during this call. I would like to remind everyone that this call will be available for replay via Active Power’s 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. Doug Milner. Sir, please go ahead.

Doug Milner

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. Earlier today we issued a press release announcing our results for Q2 and six months ended June 30, 2012. We’re pleased to report record revenues this quarter of $21.7 million but more importantly did we achieve these revenues profitably. Net income for the quarter was $490,000 representing the bet quarterly profit in company history. Volume increase, mix, operational improvements and favorable timing on shipments of certain customer orders drove improvements in gross margins which increased to 36% from 27% in the previous quarter and 24% in the prior year.

As we have consistently stated our key priority is to get the business profitable by focusing on returning our UPS and continuous power systems to growth. We continue to see an increase in UPS opportunities as we execute our go to market strategy and as our sales organization gains experience and traction in the market. UPS revenues were 90% higher than the prior quarter and increased 61% versus the prior year.

We are pleased with the progress that we’ve shown. These factors combined with the introduction of our new UPS product platform later in the year lead us to be optimistic about the future of this important part of our business. Now I’d like to turn the call over to John to take us through the details of our Q2 results. I’ll then come back to provide more commentary on the quarter and discuss our priorities moving forward. We’ll then open the call to your questions. John?

John Penver

Thank you, Doug. Good afternoon, everyone. Thank you for joining us on the call today. Revenue for Q2 2012 was $21.7 million, increasing sequentially by 9% and increasing by 13% compared to Q2 2011. For the first six months of 2012, our revenue totaled $41.5 million, or up by 13% from $36.5 million in the first half of 2011. Revenue in the quarter included $9.4 million of infrastructure solutions and services which was 43% of our revenues.

Looking at our product revenues of $17.5 million, they were split as follows: UPS systems, $9.6 million; infrastructure solutions, $7.9 million. Based on the timing of customer demand we did not have any continuous power solution product revenue in Q2. Compared to a year ago, this quarter reflected significant changes in the composition of revenue. This reflects the inherent variability of our continuous power and infrastructure business lines where large value and low volumes of transactions can quickly cause large fluctuations in quarterly revenue. Our continuous power solutions revenues were down by $9.1 million but offset by an increase of $7.1 million from the sale of infrastructure solutions and services and an increase of $4.5 million from UPS revenues.

Now, looking at our revenues by geography, our revenues from Asia this quarter of $1.1 million were down by $500,000 in the previous quarter and were down by $3 million from Q2 2011. Revenues from Asia comprised 5% of our total revenue for the quarter compared to 22% of revenue in Q2 2011. For the first half of 2012, our revenues from Asia were 7% of total revenue compared to 12% in 2011. In absolute dollar terms, our business in Asia was $2.8 million in the first half of 2012 compared to $4.4 million in the first half of 2011.

Revenues from Europe of $5.3 million were up $600,000 or 12% from the previous quarter. Revenues from Europe increased by $900,000 or 20% compared to Q2 2011. Revenues from Europe were 25% of revenue in Q2 compared to 26% of revenue in the previous quarter and 23% in Q2 2011. For the first half of 2012, our revenues from Europe were 24% of total revenue compared to 34% in 2011; and in absolute dollar terms our revenue from Europe was $10.1 million in the first half of 2012 compared to $12.5 million in the first half of 2011.

Revenues from the Americas of $15.2 million increased by $1.8 million or 13% from the previous quarter, and were $4.6 million or 43% higher than Q2 2011 driven by higher UPS and infrastructure solutions sales. Revenues from the Americas were 70% of our revenue this quarter compared to 68% in the previous quarter and 55% a year ago. For the first half of 2012 our revenues from the Americas were 69% of total revenue compared to 54% in 2011. In dollar terms, our business in the Americas during the first half of 2012 of $28.6 million is up 45% or $8.9 million compared to the first half of 2011. In total international sales were 35% of our revenues in Q2 compared to 32% in the previous quarter and 45% in Q2 2011.

Our service revenues will fluctuate with our product revenue as well as the amount of installation and other professional services performed on large projects. In total, service revenues were 19% of revenue in Q2 compared to 17% of revenue in the previous quarter and 16% of revenue a year ago. In absolute dollar terms our service revenue of $4.2 million increased by $1.1 million of 37% from Q2 a year ago.

Now that I’ve discussed revenue I’ll turn to our overall financial performance. Our gross margin this quarter was 36%. This was up from 27% in the prior quarter and driven by the mix, timing and operational changes Doug alluded to earlier; and this compares to a 24% margin in Q2 2011. Research and development expenses for the quarter were approximately $1.4 million which was up by $144,000 or 11% from the previous quarter, and up by $346,000 or 32% versus Q2 2011. This was driven by investment in our next generation UPS product that will come to market later this year.

Selling and marketing expenses at $3.9 million were 10% higher than the previous quarter and were higher by 15% compared to Q2 2011. This was attributable to our continued investment in sales talent and channel development. As we’ve had the opportunity to assess our sales, marketing, and commercial project management cost basis we have identified opportunities to become more efficient in these areas. Doug will discuss this in more detail later in the call.

Our general and administrative expenses of $1.9 million were $500,000 or 35% higher than a year ago and increased by 26% from the prior quarter. There were approximately $500,000 of costs incurred this quarter related to professional services, consulting, recruiting and other administrative items that we do not expect to incur at this rate moving forward.

The net result of the above was a quarterly net income of $490,000 or $0.01 per share. This compares to a net loss of $1.1 million or a loss of $0.01 per share in Q1 2012 and a net loss of $1.4 million or $0.02 per share we had in Q2 2011. For the first half of 2012 a net loss of $657,000 or $0.01 per share compares to a net loss of $2.5 million or $0.03 per share in the same period of 2011.

Changes in our balance sheet since the prior quarter have been heavily influenced by the timing of shipments of [variable] customer orders and the associated supply chain cash flow. Our receivables increased by $1.5 million or 9% from the prior quarter, consistent with the increasing quarterly revenues. Our inventories increased by $0.5 million or 6% due to receipt of inventory late in Q2 for Q3 orders. Our deferred revenue balances decreased due to the timing of customer shipments; an increase in payables was tied to the inventory received at quarter-end. These were offset by an increase of $1.5 million in vendor prepayments in connection with Q3 continuous power and infrastructure solutions orders.

We have recently negotiated an extension of our bank revolving credit facility for a further two years. We believe we currently have able liquidity to continue supporting the growth of the business. This completes the financial portion of the presentation. I’ll now turn the call back over to Doug for some further comments on the business and priorities moving ahead.

Doug Milner

Thanks, John. I want to highlight the results we’re seeing in terms of the core business priorities we’ve discussed over the last several quarters and why we believe a continued focus on these areas will drive further improvement in the business. These priorities include focus on the growth of our UPS and continuous power business; execution of our go to market strategy; improve the productivity in our infrastructure solutions business; and broaden our product portfolio.

I’ll first address productivity and then turn our attention to the balance of our core initiatives. In line with our ongoing efforts to improve operating margins we’ve been evaluating ways to improve our fixed cost position. As a result we’ve recently executed a cost savings initiative that we expect to yield annualized savings of about $1.8 million. This initiative, which is largely complete, involves headcount and other expense reductions and we are expecting to record a one-time restructuring charge of approximately $350,000 in Q3. We believe these measures will ensure we are making appropriate investments for the future while also aligning our overhead to support consistent and profitable growth.

Moving forward, our efforts in growing our UPS business are paying off. UPS systems sales nearly doubled compared to the previous quarter and were up 61% versus Q2 2011 as I mentioned earlier. Our opportunity pipeline is growing with diverse projects in terms of both order size and geography. This includes a growing set of opportunities for our continuous power systems. This growth is also a testament to the fact that our technical differentiators – efficient, reliable, and green – continue to resonate with some of the largest and most mission-critical datacenter operators in the world.

A good example is Parkland Health and Hospital System in Dallas, one of the largest hospital datacenter projects in the US, which we announced in May. We partnered with the customer and the electrical contractor to engineer an infrastructure solution that met the organization’s design and sustainability goals for its datacenter and imaging facilities. We’ve continued to improve the processes and variable cost productivity within our infrastructure solutions business. We are working as well to expand our partnerships in the growing market segment, leveraging our expertise in design, engineering and containerization.

The market for our continuous power solutions continues to expand. An important driver of this is the prefabricated modular datacenter market which is currently estimated to be more than $650 million and growing at more than 50% per year according to a May report from 451 Research. We believe we are uniquely positioned to be a significant player in this dynamic market. For example, our UPS systems are uniquely suited to be containerized due to footprint and temperature tolerance, and we have leveraged this capability in the production of our continuous power solutions such as PowerHouse.

These systems have been deployed globally, supporting both brick and mortar and modular datacenter operations. In addition, we are well positioned to develop and deliver new solutions into this growing market based on our technical experience and reputation as a market leader in enabling innovative modular infrastructure. Recent research by the Uptime Institute reports that for organizations pursuing a modular deployment, the most popular option is to deploy conventionally-built server rooms with a preconfigured factory-tested power and cooling infrastructure. We are capitalizing on this opportunity with our solutions which we have deployed in the US, Europe and Asia, and believe we are one of the leaders in this space based upon customer deployments.

We are also taking steps to broaden our product portfolio and are excited about the early customer interest in and the opportunities created by our next generation UPS system. We remain on track to introduce this new product platform later this year. Our efforts will not stop there as we look forward to other developments and innovation in the datacenter infrastructure space targeted at solving customer problems and meeting customer demand.

In summary, our strategic focus and priorities remain consistent. We will concentrate our efforts on growing our UPS and continuous power solutions, ensure our go to market efforts continue to gain traction, improve productivity in our infrastructure solutions business, and expand our product portfolio. The successful execution of these business fundamentals will enable us to achieve profitable growth.

Now, turning to our Q3 expectations as well as some remarks on full-year performance. For guidance we usually provide a range of expected revenues as many of our customer projects are large in dollar value and as such changes in customer needs and unforeseen customer events can impact the timing and amount of revenue recognized for a particular quarter. Based on orders we have on hand and our current view of customer demand we’re providing revenue guidance of $17 million to $20 million for Q3 2012. This range is somewhat lower than our Q2 revenue and is reflective of the variability previously mentioned.

We anticipate lower margins in Q3 due in large part to timing of shipments of a significant amount of third-party ancillary equipment which we pass through to customers at a lower margin than our own manufactured products. As a result of these factors and our restructuring costs Q3 earnings per share is expected to be between a loss of $0.03 and $0.01 per share.

While these short-term timing and mix issues will result in a weaker Q3 we remain highly encouraged by the trends and potential for improvement we see in the business over the long term. As I mentioned earlier we are very pleased with the results we have seen in developing our pipeline of sales opportunities for our UPS and continuous power solutions. We continue to focus our attention on these areas of the business and expect to see the results of these efforts float through to and improve our financial results in Q4.

The combination of our sales strategy implementation, a focus on productivity and execution, and the cost reduction action we described earlier puts us in a favorable position to deliver the first profitable year in company history. Active Power’s management team remains squarely focused on achieving this milestone. With that, John and I would be happy to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions.) And our first question comes from Jeff Osborne. Jeff, your line is live.

Jeff Osborne – Stifel Nicolaus

Great, thank you. I was wondering if you could just touch on the third-party revenue that will ramp up this quarter. What typically is that as a part of revenue in the past?

Doug Milner

Well, it depends. It’s a great question and it depends on a contract-by-contract basis because as you know we sell fairly large, complex systems and incorporate lots of pieces of equipment. In this case we are shipping generators to a customer. We have a much larger than usual component of our revenue is the shipment of generators, and of course we don’t manufacture those and can’t command the kinds of margins that we do on the products that we do manufacture.

Jeff Osborne – Stifel Nicolaus

Understood. And then on the $350,000 for next quarter on the restructuring, is any of that going to be cash-related or is there any way to think about that?

Doug Milner

It’s all cash related.

Jeff Osborne – Stifel Nicolaus

Okay, I got you. And then how many fly wheels were shipped this quarter?

Doug Milner

We stopped reporting on fly wheel shipments. There’s just a little bit too much competitive intelligence in that number so I’m going to have to disappoint you on that one.

Jeff Osborne – Stifel Nicolaus

No problem. I assume pricing is fairly stable though despite not being able to report the number, though? Is that fair?

Doug Milner

Yeah, remarkably stable.

Jeff Osborne – Stifel Nicolaus

Okay, perfect. And then as you think about the product cycle later this year is there any kind of gross margin impact, greater warranty expense? I mean how do we think about that financially coming through?

Doug Milner

Related to our new product introduction?

Jeff Osborne – Stifel Nicolaus

Exactly.

Doug Milner

Yeah, that product is going to be introduced later in the year and so you’ll see some early adopter revenue. But in terms of being really a player in our mix going forward it’s going to be more of a 2013 impact. You’ll see a little bit later in the year but…

Jeff Osborne – Stifel Nicolaus

Okay. And then it sounds like you’re pretty enthusiastic about the continuous power market for the second half of the year despite having zero revenue from that if I heard you right this quarter. So how do we think about the impact on gross margins if that were to play out in Q3 and Q4?

Doug Milner

Well, it’s hard to tell right now. I mean we have a pretty robust forecast for UPS products in Q4 and so the reason for the lumpiness in that business – as you know they’ve got a very high average selling price and shipment of them are usually tied to the deployment of projects. And so when you have a project move you move big chunks of revenue with it. So certainly we think it’s going to be a significant player in our Q4 numbers and we’re looking forward to shipping them.

Jeff Osborne – Stifel Nicolaus

Perfect, and if I could squeeze in two more quick ones here: on the R&D side should we think about that decelerating later in the year and into next as you have this product cycle? Or are there more products beyond that that you kind of continue to tick that up as a percentage; or on a sequential dollar amount but steady as a percentage of revenue?

Doug Milner

That’s a great question and right now we are putting together our activity roadmap. All guns are aimed at getting the new product introduced. We may even make investments at that level in that organization. It’s going to at least [stay]. And so we have some pretty good prospects in terms of value that the Engineering Group can bring and you may even see us take that number up a little bit.

Jeff Osborne – Stifel Nicolaus

Perfect. And the last one for me is just on the solutions revenue, very strong this quarter. Was that just one chunky customer and should we think about that decelerating going forward or is that pretty widespread?

Doug Milner

No, that was pretty concentrated and yes, I believe you will see that business be chunky going forward. That’s the nature of the beast. But I think what we have been trying to reinforce in the past two to three quarterly calls now is that we are focused on growing that base running rate of our UPS and continuous power system solutions so that any chunkiness in that revenue is less of a factor for us.

Jeff Osborne – Stifel Nicolaus

Thanks so much for all the detail. Congratulations on the quarter.

Doug Milner

Thanks for the questions, and thank you.

Operator

Our next question comes from Carter Driscoll. Your line is live.

Carter Driscoll – Capstone Investments

Good afternoon, gentlemen. Can you talk about the annualized savings? I’m assuming the $1.8 million you’re expecting to save from the recent actions starts from the second half, so if we think about the annualized run rate we should kind of focus that from second half ’12 to first half ’13.

John Penver

Really from Q4… Or repeat that again, Carter.

Carter Driscoll – Capstone Investments

Yeah, I was just trying to get a smoothing effect, and obviously I heard your answer to Jeff’s question on R&D so I’m just trying, for modeling’s sake, trying to figure out when you expect that $1.8 million to kind of start to kick in.

John Penver

Perfect. We would expect those to kick in from August 1 absent the impact of the restructuring costs. So the decisions have already happened.

Carter Driscoll – Capstone Investments

On the deferred revenue line, I know it’s not always a meaningful line. I saw a big tick down – is that just a timing issue more than anything else?

John Penver

Yeah, absolutely. Typically it’s got two primary things in there. It’s got advanced payments and deposits from customers on infrastructure and continuous power solutions orders. And so what happened here is we have a big increase from infrastructure solutions revenue, those advanced payments get applied against that and that’s what drove the decrease down.

Carter Driscoll – Capstone Investments

My last question is how do you plan to launch the next gen UPS? I mean are we going to hear about it once you have a customer who adopted it or are you going to announce it with much fanfare and less kick-the-tires? How do you plan on introducing it?

Doug Milner

Well, that is a datacenter-centered product and without getting too specific there are a number of logical events here at the end of the year where it would make sense for us to start introducing engineers and datacenter operators to that product. There’s been an informal process thus far but I think in terms of a first eyes on the box it’ll probably happen at a conference or a meeting, or some logical venue where a lot of likeminded customers will be attending.

Carter Driscoll – Capstone Investments

And then just lastly, if I heard correctly you do expect to have full GAAP profitability for 2012 – that’s your expectation currently, correct?

Doug Milner

We are committed to that, and as we say every quarter, quarter in and quarter out we’ve got variability as projects move across quarter boundaries. So from what we see now and what we have in our sights now including projects that we are working on closing, we feel like we’re in a real favorable position to achieve annual profitability and that’s the goal.

Carter Driscoll – Capstone Investments

Okay, and if I heard correctly I know you’ve given a UPS backlog number, at least a flywheel number. I know it’s not meaningful anymore and a lot of that was pulled through in this quarter. Can you talk about what stands on the books at the end of Q2?

Doug Milner

That’s another thing that I have a strong preference not to disclose – backlog. I can’t remember the last time…

John Penver

We have not disclosed the amount of outstanding backlog. We’ve given some general guidance in terms of the quality of pipeline or how the market was growing to give you some indication of where things were heading but we haven’t actually disclosed the dollar number of value of the backlog.

Doug Milner

With that said, though, we are putting a great deal of effort and attention into tracking the quality of what’s in our pipeline and we continue to see really gratifying results in the number of deals that we’re quoting and the number of deals that we’re getting exposure to. And we believe that that is a function of our sales organization maturing and gaining traction, building the relationships in their respective territories, as well as our channel managers starting to develop a channel which we haven’t really put a dedicated emphasis on in the past. So in terms of opportunities things continue to improve.

Carter Driscoll – Capstone Investments

And then Doug, I guess the last question – sorry for all the follow-ups. But the last question: last time we talked I think you talked about some deals you walked away from that maybe people were too aggressive on the pricing side and you weren’t going to sacrifice margin again. Is there still pricing pressure? I know there’s a lot of stability on the UPS side but have you continued to pass some certain opportunities that might not necessarily fit the increasing margin profile you’re shooting for or is it kind of just really what you’ve been focused on – UPS, UPS, UPS and then growing that and going from there?

Doug Milner

Yes, but I would say really over the past three months it has not been more than what you would expect in the due course of running the business. And so there are certain types of deals that we just don’t want to get involved with because the features of the product or the unique value of the product doesn’t make a difference – it’s just a blind pass through bid and everyone’s going to get beaten down on price. And I’m more than happy to let my competitors go fight that out.

But I would say that our sales organization has been coached very well and has done a good job connecting us to deals where the size of our product, the efficiency of our product and the fact that we don’t force the customer to use batteries really makes a difference and has value. So you know, it’s hats off to our Marketing Team here and our sales management because they’ve done some very good training and coached them well in the field.

Carter Driscoll – Capstone Investments

That’s it for me. Again, congrats on a very solid quarter. Thanks, gentlemen.

Operator

And our next question comes from Jim McIlree. Your line is live.

Jim McIlree – Collins Stewart

Thank you, good afternoon. Can you split the $1.8 million in savings between OPEX and cost of sales?

Doug Milner

It is all OPEX.

Jim McIlree – Collins Stewart

Okay. So if I take that out of the current OPEX quarterly run rate and also subtract the $0.5 million or so, is that $6.2 million-ish quarterly OPEX a good run rate going forward?

Doug Milner

Yeah, you get right to the baseline. If you split that out, I mean as John said those cost savings will start flowing in on August 1st and then you’ll get the first full quarterly benefit of it in Q4. And so yes, that will be our new baseline going forward on headcount-related expenses. We obviously are looking for other ways to become more efficient and we’ll continue to pursue those and make improvements as we see fit. When you go through cost reduction exercises you also create the opportunity to make investments back in the business when the time is right and the opportunities are more well-defined, and so we’ll be as transparent on those as we can as we move forward.

Jim McIlree – Collins Stewart

Okay. The improvement in gross margins both sequentially as well as year-over-year, I’m assuming that’s mostly a function of the zero revenues in continuous power. But was there margin improvement also in the other two businesses?

John Penver

Jim, I’ll (inaudible) and maybe double clarify it. I wouldn’t have come to that conclusion. We certainly saw margin improvement across all of our product range; certainly the increased volume in UPS helps with the efficiency in the manufacturing organization. Pricing on our UPS systems has also improved; our service activities relating to CPS and infrastructure was also significantly higher and drove a lot of margin improvement, and then improved pricing and operational efficiency in our manufacturing infrastructure. So we really saw margin improvement across all the activities that we did.

Now granted, an increase in sales mixed with a bit more continuous power systems in there would suggest a slightly lower margin but most of that increase is really due to pricing efficiency and improved performance.

Jim McIlree – Collins Stewart

Okay, great. And the last one: for the new products, how are you contemplating cannibalization of old products?

Doug Milner

It’s a completely different platform with a different power rating so clearly we think there will be some and that cannibalization will… We are planning for cannibalization to ramp up over the course of 2013.

Jim McIlree – Collins Stewart

Great, thank you.

Operator

Our next question comes from Jung Lee. Mr. Lee, your line is live. It seems like Mr. Lee has disconnected so we’re going to take our last question from [Mr. Peter Hohman]. Your line is live, Mr. Peter.

[Peter Hohman]

Good afternoon; very impressive margins and operating expenses – it was great. There wasn’t anything in your operating income improvement etc., etc. similar to the improvement last quarter which was sort of a bounce back from an unusually low number in the December quarter, is that right? In other words, this is, understanding that you might have swings in this range would you think we are for a while anyway in the 30% plus gross margin range as opposed to the 25% to 30% gross margin range?

John Penver

I think we talked the last couple of quarters of how we took some steps to improve efficiency in which we fulfilled the infrastructure and continuous power systems business. We made some steps to improve the pricing of that last year; the effects of that are coming through in business in 2012 and they’re both probably responsible for driving the margins up. That said we did indicate that because of sales mix, coming out in Q3 with a proportionately higher level of ancillary equipment in there or third-party equipment the margins will dip down from the levels they’re at in Q2 but will probably still be comparable to what we had in Q1 of this year.

So and then we see that the UPS business is looking very strong for the remainder of the year and we’d expect the margins to recover in Q4 from that level. So I hope that answers your question, Peter, but certainly compared to a year ago the improvements in product pricing and the service business should be able to maintain the margins at a higher level than what we had last year.

[Peter Hohman]

I guess the question is, actually let me ask one different question: from a representative standpoint, I’m always interested in when you win deals why you win them, when you lose deals why you lose them. Without going into specifics as to names with whom you competed, can you give us any sense at all is there from a VP Sales perspective a reason for which you are winning deals and therefore what you are pushing on going forward?

Doug Milner

Well yeah, I mean it’s efficiency and footprint. We deliver a lot of power in a much, much smaller footprint than conventional UPSes that require large banks of batteries. We also don’t require large banks of batteries which have their own sets of issues. The acceptance of a brief ride through on a flywheel backed up by continuous power from a generator is becoming much, much more accepted as time goes on and you see that as we build the sales of our continuous power solutions or our PowerHouse; notwithstanding the fact that we didn’t ship any in Q2.

So the value that we bring is efficient use of power, very small footprint and the fact that we require less cooling than a conventional UPS because we operate over a much wider temperature range. And you know, as you look at the scale of datacenter that we support and you take those perhaps on their own a small difference between products – except for footprint where we’re massively smaller – and you multiply it over the scale of IT that’s being deployed we save the customer a lot of money.

[Peter Hohman]

Okay, so it is an ROE sale.

Doug Milner

Yes.

[Peter Hohman]

It’s not just a nice to have; it’s a need to have.

Doug Milner

That’s correct.

[Peter Hohman]

Okay. Guys, it was a great quarter – congratulations. And Doug, I’ve never talked with you but you seem to have come in and brought good stuff to the company. So congratulations.

Doug Milner

Thank you, Peter.

Operator

And our next question is from Carter Dunlap. Mr. Carter, your line is live.

Carter Dunlap – Dunlap Equity Management

In the continuous power, I realize the business comes in in a lumpy fashion but can you speak to the manufacturing cycle? How far in advance are you building? I assume you’re building to suit or is it an assembly of standard components and therefore you can sort of scale it to when your order gets pushed out?

Doug Milner

There’s two; you can break it down into two categories of components – actually three. There’s the uninterruptable power system in a PowerHouse with switch gears and controls, and a generator. And so the generator is almost always the longest lead item and so you’re basically planning your construction and delivery around the lead time you can get on a generator, which makes it very comfortable for us to plan our material and assembly very close to the time that it needs to be delivered to the customers. So we’re typically building in advance of shipment to the customer but we’re not building six months in advance of shipping to the customer – we’re building just before. We do all the final assembly and testing just before we deliver it to site.

Carter Dunlap – Dunlap Equity Management

Okay. So more globally will the reduction of headcount and I presume shifting to more variable costs in any of the three businesses alter your cycle times? Or will those stay the same?

Doug Milner

No, it won’t have any impact.

Carter Dunlap – Dunlap Equity Management

Alright, thanks much.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Milner.

Doug Milner

Thank you for being on our call this afternoon. On behalf of the entire senior management team, our employees and our Board of Directors I would like to express our appreciation for your interest in Active Power. Thanks for your continued support and we look forward to speaking with you again next quarter.

Operator

Before we end today’s call I would like to take a moment to read the company’s Safe Harbor statement. The company’s management on this call have made forward-looking statements that involve risks and uncertainties including statements relative to Active Power’s current expectations of operating results for Q3 2012 and F2012, its future operating results and its customers’ intentions. Any forward-looking statement and all other statements that may have been made during this call were not historical facts and are subject to a number of risks and uncertainties, and actual results may differ materially.

Factors that could cause the actual results to differ materially from the results predicted include among others our dependence on our relationship with Hewlett-Packard and Caterpillar; our increased emphasis on larger and more complex systems solutions; the deferral or cancellation of sales commitments as a result of general economic conditions or uncertainty; risks related to Active Power’s 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’s filings with the Securities and Exchange Commission including their annual report on Form 10(k) for the year ended December 31, 2011, and its current report on Form 8(k) since then.

Active Power assumes no obligation to update any forward-looking statements or information which were in effect as of their respective dates. This concludes today’s call. Thank you for joining us and you may now disconnect.

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