普拉格能源 (PLUG) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by welcome to the Q3 2004 Plug Power earnings conference call.

My name is Carlo and I will be your coordinator for today's presentation.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the presentation over to your host for today's call, Mrs. Cynthia Mahoney White, Manager of Public Relations and Marketing.

Please proceed, ma'am.

Good morning, and welcome to Plug Power's 2004 third-quarter financial review.

Participants on the call include Roger Saillant, President and Chief Executive Officer;

Dave Neumann, Chief Financial Officer;

Greg Silvestri, Chief Operating Officer; and Mark Sperry, Chief Marketing Officer.

During the course of the call management may make projections or other forward-looking statements regarding the events or future financial performance of the Company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Plug Power's actual results to be materially different from the future results expressed or implied in such statements.

Plug Power undertakes no obligation to release any revision to any forward-looking statements.

For a detailed discussion of the forward-looking statements, please refer to our press release issued today.

Now I would like to introduce Roger Saillant, President and Chief Executive Officer of Plug Power.

Thank you, Cynthia.

Good morning to everyone.

Our activity in the third quarter was steady and positive.

We continued to expand our product portfolio.

We strengthened our GenCore distribution channels.

We grew our revenue, finalized a five-year agreement with the New York State Office of General Services, and we remained on course to keep our cash usage below last year's usage rate.

Previously, I mentioned that we are firmly committed to building our Company around solid progress.

This past quarter represents one of those foundational quarters necessary for our long-term success.

Our people show exceptional patience and persistence in their efforts to develop relationships and execute agreements.

I am now going to describe how patience and persistence yields positive results over several years.

In May of 2003 we announced that we had entered into a joint marketing agreement with Tyco Electronics Power Systems.

Under this agreement we were able to gather data with an experienced partner like Tyco and understand the requirements needed to enter into the telecom premium backup market.

Based on those data, we have been able to direct our GenCore design efforts to obtain specific cost, reliability and feature sets, which will give us an early advantage in the telecom market.

The telecom market is based on reliability, system compatibility and systems integration.

It takes a long time for telecom customers to convince themselves that a new technology will be compatible with improvements against these goals.

We needed a way to build confidence in our service capability.

Therefore, while these tests were underway, we negotiated a service agreement with Tyco Electronics Installation services, which we announced this past summer.

That further underscored our serious commitment to reliability through the use of a known support company to the telecom industry.

Just a few weeks ago our relationship with Tyco matured to the point where we have reached a distribution agreement with Tyco Electronics Power Systems.

This large business unit of Tyco has deep relationships with a purchasing and engineering function throughout the telecommunications industry.

These agreements with Tyco have helped us to understand the market needs to secure support for services and to gain access to a strong sales force.

The market data from Tyco and others have helped us to characterize what GenCore design families we need to be successful.

Thus we have introduced at this quarter the new GenCore 5T24, a 24-volt, 5 kW backup fuel cell system for the wireless service providers.

This new product increases our GenCore suite of products to 4.

In addition to engaging Tyco over an extended period of time, we have been aligning ourselves with government product interests.

We've been working especially close to the state of New York.

First, the state has helped us with research money from New York State Energy Research and Development Administration, NYSERDA.

We followed that with a large demonstration project funded by the Long Island Power Authority, LIPA.

Based on the results of the work at LIPA, we were able to understand complex system interactions.

We redesigned our products to achieve breakthrough reliability and lifetime improvements.

Also these field experience insights enabled us to understand how to design the GenCore products for lower cost and better reliability.

We offered these products to New York State Office of General Services, OGS, as products suitable for commercial purchase.

We wanted this state to be a customer instead of a funding agency.

In the past, New York State had supported a research and development placement of 75 units at LIPA and over 60 other units at early adopter locations throughout the state.

On September 8, 2004, the New York State OGS notified Plug Power that we have been placed on the state's approved contract list.

This approval means Plug Power GenCore units may be purchased by New York State agencies and other authorized entities, such as New York State chartered municipalities and New York State not-for-profit corporations at a set price based upon standard terms and conditions.

In short, this means that New York State agencies and other authorized entities like the statewide wireless network, police, emergency medical technicians and fire dispatch locations can purchase GenCore products by issuing a purchase order.

This streamlines the process significantly as no special projects request for proposals or pilot designations are required.

GenCores may be purchased in the ordinary course of business.

We expect to be receiving orders under this agreement in less than 6 months.

Furthermore, this OGS agreement with New York State allows Plug Power to work with other states to effect similar contract awards under similar terms and conditions.

This reciprocity among states will enable us to move more quickly through their processes because the New York State agreement has set the precedent.

We are already in negotiations with other states to have the GenCore product line considered for placement on their state contracts.

All this being said, it boils down to just one thing.

We are positioned in the commercial markets to be considered as a serious alternative to batteries for the premium backup market.

In summary, and from a broader perspective, what I am describing is our activities to cross the chasm.

This chasm is part of our follow-the-adoption curve strategy, which we described in the past and has become an industry standard.

Our solid base building activities have moved the GenCore product customer base from the visionary group to the early adopter group to the point where we are addressing the early majority pragmatists in both the telecom industry and various state agencies.

On top of these relationship efforts we have been operating to use our cash wisely.

To tell you about the third quarter financials is our Chief Financial Officer, Dave Neumann.

Thank you, Roger.

I will be providing a summary of our financial results for the quarterly and 9 month periods ended September 30, 2004.

Starting with our statement of operations, total revenue for the third quarter ended September 30, 2004 has increased to 4.6 million compared to 3.5 million during the third quarter of 2003.

Year-to-date total revenue has increased 11.6 million when compared to 9.5 million during the same year-to-date period last year.

Product and service revenue, a component of total revenue, was 1.3 million for the third quarter of 2004, which compares to $2.0 million in the third quarter of 2003.

We delivered 39 fuel cell systems during the quarter including 25 GenCore systems compared to 41 systems during the same quarter last year.

Year-to-date product and service revenue was 4.2 million in 2004 compared to 6.2 million in 2003.

Under our accounting policy for revenue recognition, we continued to defer product and service revenue at the time of shipment and at September 30, 2004 we had total deferred revenue of $6.5 million.

We expect to recognize approximately 3.2 million of this deferred balance throughout the remainder of 2004 as our service, maintenance and other contractual obligations expire.

The impact of deferring revenue on our statement of operations is conservative since the costs associated with production are fully expensed as they are incurred.

Contract revenue under research & development contracts was 3.3 million for the third quarter ended September 30, 2004 as compared to 1.5 million in the third quarter of 2003.

Year-to-date for the 9 months ended September 30, 2004 contract revenue was 7.4 million compared to 3.4 million last year.

The increase in contract revenue is the result of increased activity with the Department of Defense and the Department of Energy, which helps fund further development of our GenCore product , the National Institute for Standards and Technology, or NIST, which helps fund our high temperature technology development, and funding received from Honda for development of our home energy station.

Over the next 18 months we expect to receive approximately $12.6 million in additional net funding for current contract activity.

We also expect to pursue additional government and commercial contracts that are directly related to currently planned research and product development activity.

Cost of product and service revenues represent the direct material cost of the fuel cell systems delivered during the quarter and 9-month period combined with labor and materials associated with servicing all of the systems under contract.

These costs do not however include any factory labor or overhead expenses.

In addition to the 39 fuel cell systems delivered during the quarter, we supported approximately 175 additional systems.

During the quarter ended September 30, 2004 our cost of product and service revenues was $1.2 million, which compares to $2.0 million during the same quarter of 2003.

For the 9-month period ended September 30, 2004 these costs were 3.9 million and compare to 4.6 million for the same period in 2003.

Our cost of research and development contract revenues, representing the fully burdened cost of research and development contract activity was 4.3 million during the third quarter of 2004 compared to 1.6 million during the third quarter of 2003.

Year-to-date these costs were 9.9 million in 2004 compared to 4.1 million last year.

Research and development expenses were $8.6 million during the quarter ended September 30, 2004, compared to 10.2 million in the same quarter of 2003.

Year-to-date, research and development costs were 26.2 million in 2004 compared to 30.8 million in the same year-to-date period of 2003.

The decrease in research and development expenses is of the result of the additional contract activity mentioned earlier with the Department of Defense, , NIST and Honda which offset expenses associated with previously planned research and product development activity.

When combining research and development expenses with cost of contracts, our total spending for research and product development activities has remained relatively flat year-over-year.

Recurring general and administrative expenses were $2.0 million in the quarter ended September 30, 2004 compared to 1.7 million in the third quarter of 2003.

Year-to-date general and administrative expenses were 6.2 million compared to 5.1 million in the same year-to-date period of 2003.

The increase is primarily the result of stock based compensation associated with the amortization of restricted stock issued in June 2003 under our employee stock option exchange program.

Our net loss for the quarter was 11.7 million or 16 cents per share compared to 12.4 million or 20 cents per share for the same period of 2003.

Year-to-date, the net loss was 34.9 million or 48 cents per share compared to 39.0 million or 68 cents per share for the same period last year.

The year-to-date loss in 2003 includes a non-cash charge of $3.0 million for the write-off of in-process research and development expense related to our acquisition H Power Corp (H Power) in the first quarter of 2003.

Our net loss also includes non-cash expenses for items such as depreciation, amortization and stock-based compensation.

Total non-cash expenses were 3.2 million during the third quarter ended September 30, 2004 and year-to-date, non-cash expenses have been 10.4 million in 2004

Weighted average shares outstanding for the quarter were 73.2 million compared to 61 million in 2003.

For the 9 months ended September 30, 2004, weighted average shares were 73.1 million compared to 57.7 million shares during the same period last year.

The increase is the result of issuing approximately 8.9 million shares in connection with our acquisition of H Power and additional 11.7 million shares in connection with our public offering in the fourth quarter of 2003.

As of September 30, 2004, there were approximately 73.2 million shares issued and outstanding.

Net cash used in operating activities for the third quarter ended September 30, 2004 decreased to 7.3 million compared to 8.3 million in the third quarter of 2003.

Year-to-date net cash used in operating activities was 25.8 million compared to 27.6 million during the same period last year.

The third quarter and year-to-date amounts in 2003 include $300,000 and 3.4 million, respectively for acquisition fees and expenses, severance and integration costs related to our acquisition of H Power.

We continue to expect that net cash used in operating activities for the full year of 2004 will be less than the amount used in operating activities during 2003 of 34.4 million.

Our balance sheet continues to be strong with 80.0 million of cash, cash equivalents and marketable securities, including 4.7 million of restricted cash securing the debt on our facilities.

That concludes our prepared comments.

We would now like to open the meeting for questions.

Operator, will you please proceed.

(OPERATOR INSTRUCTIONS) Steve Sanders with Stephens Inc.

I wanted to see if you can bring us up-to-date on some of the cost reduction initiatives for the GenCore?

I know you won't provide a lot of specifics, but just some general commentary there would help.

And assuming that you're making good progress, provide some feedback on how often price, including installed costs is an issue for customers.

I will comment on the cost initiatives for GenCore, and I think Mark will talk about the sales process and where price comes into that.

We've, year-to-date made some significant improvements in the direct cost of the GenCore product similar to the types of reductions that we've demonstrated in the past on our SU1 stationary product.

Most of those costs continue to come out through the design process in working with our supply chain.

And we needed to secure during the course of this year a design that met the NEBS standard.

So there's a new round of learning that Plug Power went through so that we could pass those standards for use in the telecom industry, and I would say that now that we've secured that base design, we have additional projects in place where we expect to drive down the cost of the GenCore product again by a significant amount over the next 12 to 18 months.

So I think we've commented in the past on we know that price drives cost.

We know that we need to move this product to a positive gross margin, and we have design work under way to achieve that objective.

Okay.

With respect to what feedback are getting on the price side and specifically with respect to the total price including installation, I would say that clearly in all the conversations price does come up, and it is a view where the customers are looking at the total cost.

So the cost of the hardware as well as the installation and then the ongoing service.

And I would say that in particular in the telecommunications industry when you're talking about a life cycle cost analysis there is a bias I think towards a first cost comparison as opposed to life cycle and we need to get to I would say about a 3-year sort of pay-back window on a total life cycle is where the conversations generally want to go.

I would say that price to this point really has not been an issue in terms of moving units.

The activities that we've been doing have been more around show me that this technology set works.

But we know full well that as we move through that activity and we continue to make good progress on that front that there is going to be some more conversation around what is the price that we really to be at to make this market take off.

Okay, and just a follow-up on that.

You know, assuming a 3-year payback, how close are you getting there?

And what are some of the things that you need to do to drive that?

I would say we are very close.

It clearly depends on, I think a key drivers there are around the life, the current life of the battery sets that are being deployed.

So there is a fairly substantial range in terms of the lives -- the different customer sets are experiencing.

And it goes from a couple of years to 4 years.

And depending on where you are in the particular experience, that drives it.

But in general, we are quite close with respect to where we need to be on a total life cycle analysis today.

Okay, and then a follow-up on the Tyco relationship.

Obviously good progress there over the past year and a half or so.

Could you just characterize their activity, sales, training, are they accounting for much in the way of your shipments right now?

Just sort of bring us up-to-date on the level of activity through Tyco.

Sure, Steve.

At this point they are not accounting for any substantial number of shipments that are in the GenCore family.

We have begun the formal engagement of the sales force.

So at this point we have had a formal training program with the Northeast sales force.

We still have 2 or 3 regions yet to go to roll that out.

So we are at the front end of really getting their sales force equipped with all the tools and information and training that is required.

And we are in the process of transitioning a lot of the early missionary customer set work that we have been doing directly out of our sales team into the Tyco sales team.

So that activity is underway.

We are a little bit further in front, as you know, on the service side.

In that we executed that formal agreement a few months back and have actually progressed quite nicely in terms of setting up the infrastructure, the call escalations, the training required and their service force.

So we're on a path to have that training complete as we go out the year and expect as we go into next year that Tyco will be fully engaged on the productline.

A final question for Dave, just an update on the outlook for changing the revenue recognition policy, maybe over the next 12 months or so, are you -- do you feel like you are close to having enough reliability data and warranty information that maybe you can change the policy next year?

We continue to have those discussions both internally and with our external auditors.

And there is no set of black and white guidelines there.

But you hit on a couple of good points.

You have to gather enough warranty information to be able to reasonably estimate the warranty obligation.

And we are building that database.

And it also depends on progress you are making in that commercial marketplace.

So we continue to look at that, and will continue to do that next year.

I would suspect that over the next 12 to 18 months you will see us make a switch.

Okay.

Thank you.

David Smith with Smith Barney.

Good morning, guys.

Just a follow-up to Steve's question.

What do you think the impact would be if something like an energy policy that did offer incentive?

Kind of from what you're saying it sounds like the immediate driver for this probably would not be price.

But if you were to get a 30 percent reduction or 20 percent on that initial capital cost, do you think it would drive in the near term?

I absolutely think it would, David.

We are getting to the point where with several of the accounts we've come through sort of the first internal technology assessments, and we are beginning to move out into sort of field tests.

What I would characterize as the next step is real field deployment -- a handful of systems type testing that will go on.

And at the end of that, will come the question of can we now -- are we as they say in the industry certified to be deployed or standardized into the equipment that is acceptable to various customer sets?

When that happens, clearly that is when I think the real conversations around price are going to happen and a tax credit to facilitate really taking that off the table would definitely help.

Having said that, I think most people are aware that most all of the energy provisions were stripped out of the various legislation, the tax legislation that were approved including the fuel cell tax credit.

So there will be no credit as we move into next year.

And we clearly will work to reengage and get that legislative platform back in front of Congress.

But that does not appear to be in the next 6 to 9 month horizon at this point.

David, this is Roger.

We operate here with the idea that if they ever come there will be a bonus and a real plus up.

But our philosophy is we're doing everything with no accounting, no allowance, no expectation that there will be government incentives.

And we have as Greg described, we have a very detailed cost down stair step process, very similar to what we use in the auto industry to achieve the objectives that we need.

Just some other quick questions.

Could you just give us more background on this GEMEDICA and the ties (ph) and the order that they have talked about?

It is GEMEDICA.

They are a distributor in the Dominican Republic that started their existence as a distributor for GE Medical Systems and wound up finding themselves in the power business because of the rampid reliability of the grid down in the Dominican Republic.

So quickly they realized that providing MRI machines if they didn't have power was not going to really serve the market today were trying to serve.

So they became somewhat experts in providing power along with the medical equipment, and have that expertise.

The Dominican Republic I think is a very good example of where there is extreme power problems.

They've had significant outages for literally 8 to 10 hours a day where most of the population does not have primary power coming from the grid.

So there has been inexpensive to buildup of backup technologies, primarily around generator sets that have been deployed.

And GEMEDICA is extremely interested in servicing the industry down there both the utility markets as well as at the communication markets, markets that were targeted in deploying the GenCore technology to that end.

So, and with respect to the size of the order I would characterize it as less than 10.

Okay.

Just following onto that, you talked about utility and communications markets.

In general, are you finding any new opportunities as far as markets go with the GenCore?

Be it broadly based through the U.S., or Asia or Europe?

Are you seeing more markets develop or more interest from other markets in the standard telecom or cable markets?

Yes, we are.

Actually some very interesting markets that we hadn't anticipated.

I would say broadly in more the industrial UPS arena, so for example in the Dominican Republic, one of the key applications that they are looking at is in the banking industry where much of the infrastructure goes down, in particular ATM machines that are remote that have power requirements that have lighting requirements around the sites and need to be able to operate when the grid goes down.

And as we dig into that, it turns out that there is an appetite to have those systems more reliable, if you well.

And those types of applications that I would again broadly characterize as more traditional UPS markets are markets that we're finding significant interest in.

Is there an update you can provide us with on Verizon?

I know they stopped their testing I think in August, but is there a follow on intention there?

What I would say about Verizon at this point is we have decommissioned the unit that was over at the airport at this point in time.

That was a year-long test funded by NYSERDA and we've reached the end of that testing period.

During the quarter we did receive notification from Verizon's compliance office that we had achieve their level of NEBS conformance.

So as I said in the last call, NEBS level 3 is accepted by most of the industry but there are incremental requirements from Verizon we have cleared through and that has cleared the way for the next phase of testing with Verizon.

So our current expectation is there will be a handful of units, 6 or 8 units deployed in a broader field test still in a test mode with Verizon over the next I would say 3 to 6 months.

We expect those units to be deployed and that testing to begin.

Okay.

And is there any comment you've got on backlog?

Is there any numbers you are putting out there as far as where the backlog is today?

Our current backlog is 13 GenCore systems.

And anything on the GenSite or GenSys?

Not at this point in the backlog, no.

And is the GenSite on track for later this year?

We still intend to put a system in the field later this year.

At this point, we have a system that is up and operational and providing the hydrogen requirements for our facility in Appledorn, which has been operational now for what Greg, about 4 months?

And we've actually transitioned there to where I think the majority, if not all of the hydrogen demand for our labs over there is being satisfied by our own equipment.

Additionally we have a system that has been installed here in Latham.

We have substantial hydrogen requirements here, and we have tied that system into our hydrogen infrastructure and in fact are eating our own cooking, if you will, here at our site in Latham.

So we continue to make progress on the GenSite front.

When is that going to be delivered to customers?

Our expectation is the first system will go to customers later this year.

Great.

Thanks.

David Kurzman with Needham & Co.

I would like to try to understand your 3-year payback number that you threw out there.

Since these units don't generate any revenues for the customer, how are you calculating a 3-year payback?

David, just in the context of their current solutions, which primarily are batteries?

So if you looked at what does it cost to provide backup power to a particular site for 3 years, for 5 years, for 10 years, utilizing batteries and then what would it cost if you utilized fuel cell technology.

So basically what you're saying is if it is a 3-year payback, you are saying you are 3 times more expensive than batteries?

No, no.

Then I'm still not understanding.

If you just looked at the total cost of ownership associated with deploying the technology, whether it's battery technology so what does it cost to install it up front, then what does it cost to maintain it, over a 10-year life, and at what point do you need to provide significant maintenance or capital upgrades like replacing the batteries?

If you looked at that profile and then said what does it look like if you install a 10-year fuel cell with a 10-year life and compare those streams.

So effectively what you're saying is that the fuel cell is still slightly more expensive than the battery?

I guess I don't really understand because if the battery has a useful life of X, try to get it down here for me if you would please -- what is the cost comparison, then, to fuel cells?

The way I look at it, David, is essentially when you do that analysis the first time you have to swap out the batteries there is a significant economic advantage to the fuel cell solution.

So if you are experiencing a less than 3-year battery life today, the economics the way they work, you're going to certainly go towards the fuel cell.

If you're having a longer than 3-year battery life, the way it is priced today because they are essentially, if you're looking at a green field installation, the costs are roughly the same capital costs up front.

I see.

Okay.

I got you.

And as you come down the cost curve effectively, you're pay back period actually increases, not decreases because you would be able to beat batteries in more longer applications?

That is a way of looking at it, yes.

Okay.

You guys have something like 10 distributors now and 4 or 5 different products with the GenSite in view as another new one coming down the pike.

I'm just trying to figure out here when can we expect some of these products to begin selling in meaningful quantities through these distribution partners that you've established?

How can we think about this?

The way I would think about it is most of these distributors set GenSite aside because that will actually be a different set of distributors.

But on the GenCore product in particular, many of the systems are actually in the channel today.

The distributors are using those A, for their own education purposes to come up to speed to put their service infrastructure in place, to put their sales infrastructure in place.

Many of them have transitioned them into local end-user customer accounts.

And those end-users have begun the technical analysis of the product side as well as begun to deploy them in the actual infrastructure that they are intended to serve.

But these are all still field trials?

I would characterize them as the majority of the sites are field trials where the end-user accounts are getting themselves comfortable with the technology.

Okay.

As we've said, that is in the telecommunications industry in particular it is a fairly rigorous and time-consuming process.

And there is, frankly, no way to make that go any faster.

And as we've been describing from the time you really begin to engage at the technology level, you're looking at 6 to 9 months from their deploying into what we are typically seeing is a 5 or 6 -- 8 maybe 10 field deployment where there is a broader test actually in the application as opposed to in the lab or in a one unit field trial.

And from that, at the conclusion of those tests are where we expect to really begin to see broader-based acceptance of the product and you get yourself to a position where you are acceptable technology and then the real selling begins.

So the decisions are localized once the technology offices have said this is okay, it's standardize, its equipment that you guys out in operations land can deploy.

Now we have to go out and find the operations decision-makers and hence when the really selling begins.

So that continues to be what we are experiencing.

We are very happy with the progress we are making in terms of we're not finding any technology issues.

It is, we are passing mustard with respect to what we're being asked to do.

It just takes time.

One of the other issues here is taking a look at the GEMEDICA example -- where is somebody in the Dominican Republic going to get their hydrogen from?

Actually, there is the hydrogen in the Dominican Republic for the most part comes in from Miami.

It comes in fairly regularly.

There's multiple shipments of hydrogen coming in a day.

And there are actually people who service that market, the traditional merchant hydrogen providers are active on the island and or are actively looking at does it make sense to actually put a hydrogen facility on the island itself.

And clearly we have some technology that might be appropriate for that depending on the scale.

I'll hop back in the queue.

Thank you.

Walter Nasdeo Charter Capital

I would like to kind of step back to the Tyco GenCore agreement.

Do you guys have some sense or feel on how this telecom market spending is going to be shaping up over the course of the next couple of quarters?

And what type of market segments do you feel that you're going to carve out of that going forward?

This sense we are getting is that the budgets are flat to slightly up capital budgets as the end-user telecommunication folks are putting their budgets together.

And again, it varies depending on the Company, if you look at many of them bringing fiber to the home still as an active program that is out there and is a substantial capital investment.

So you need to get inside the total capital budget and understand where funding is being allocated.

As it relates to the budgets that will typically fund the type of activity we're talking about, it will be the battery budgets that are out there today.

So the ongoing business of providing backup either in the maintenance mode or in a new build mode and most of the new build is on the wireless side as opposed to the wireline side.

I would characterize the wireline side as much more of a legacy market whereas battery banks are expiring.

We have an opportunity to have a conversation about alternative technology versus the wireline side of the business, which is still building out quite rapidly and depending on where you are in the world, really quite rapidly.

What, then, would be your ability to meet the market if it kind of took off on you a little bit?

In terms of our ability to, what ?

Get units out?

Get units out.

We are ready to answer the call I think.

Bring that problem on.

And Dave, real quick, just I got to believe the H Power expenses just have to be winding down.

When are we going to stop seeing those hit the sheets?

Nothing has been recorded this year.

The comparative that I give is versus 2003 when we did have those expenses.

The last of those expenses hit the books in the fourth quarter of '03.

Okay, perfect.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS) Jarett Carson with RBC.

Good morning.

Mark, could you talk a little bit about what I think one of the challenges with the distributor, if you will, in terms of trying -- and you mentioned about the sales force -- is trying to kind of gain mind share inside the sales force and get them to start to look at your products and some of the other companies we've seen kind of you get the big distributor, but then you kind of bogged down and you don't see the kind of the product start to roll through on the outside.

Talk about kind of that a little bit what you are maybe seeing or not seeing and how you're mitigating that and maybe creating some of the pull through.

Sure.

A couple of thoughts.

We have been very active prior to having what I would characterize as a fully functioned distribution channel and end-user interest and stimulating end-user interest.

So we've been doing a lot of outbound marketing activities.

We've been utilizing a very small sales force, direct sales force here to call on accounts and really begin the missionary work if you will to describe what this technology is all about.

What we're finding is that in the distribution channel, the sales force is actually quite excited about the technology set.

It is something new.

It is something, frankly, that is getting them audiences with the customer set that had been difficult because if your main product that you are selling is batteries and batteries are very well understood, they are a commodity.

The customer is not likely to call you up and answer your phone call in terms of hey I want to come to pitch you on a new battery or let me try and get into a different location.

They understand it.

They mostly just issue POs.

So what is happening is there is actually an audience being gained that wasn't being gained before.

It allows them to talk about clearly fuel cells and anything else that happens to be on their mind.

So I would say what is really -- what we're finding out is it is absolutely an exciting technology from the sales people's perspective.

It is a foot in the door where they've been having problems getting in before.

I think you've kind of talked all around this and maybe just to clarify for me, and I'm not holding to the Plug Power forecasts per se, but in the industry particularly with the telecom guys, it sounds like another round of field trials.

What kind of in your mind of what you are hearing, how they might deploy and in terms of some types of rates because I think another challenge is you are "selling reliability But you have a new technology."

And so things have generally been a little slower on the up take.

So maybe some thoughts around do we go from 1s to 10s or 1s to 100s of units and also the field trials, how long are they generally targeting?

Is it 6 months or 18 months -- that kind of thing?

The trials are generally 6 to 12 months kind of time frame is what we're hearing.

And a lot of that, frankly, gets sort of built as we go.

So we will be in the middle of fairly well understood test program and then decide if we want to test 3 or 4 other things, which elongates the test.

But in general, they are in the 6 to 12 month timeframe.

What we are seeing is the interest.

It really is driven by the operations manager on the ground.

So there is in the case of a wireline business, there's an area code or a regional manager who makes that buying decision.

And you will find zealots for new technology in that customer set.

You will find people who are very risk adverse (ph) and will be the last person on earth to stop buying batteries.

So I think it is going to be really kind of lumpy from the perspective of you will find people who in their region may order up 10 units, and deploy them broadly.

And then you might have somebody who will say the field trial really wasn't in my territory, so I'm going to do my own field trial.

And again, I think it is going to vary by customer set by Tyco (ph).

What is important is we get to the point where we are -- we reach a status of being standardized or being spec-ed in such that they can buy if they want to buy it.

And then it really becomes a matter of just good old-fashioned selling.

And final question.

I've seen a few little data points around particularly kind of post the blackout last year some of the wireless guys that were hit pretty hard.

Kind of going back and most of the -- I guess most of the sites are 4 hours, if you will, on average in terms of amount of backup power.

But going back and trying to high-grade very key important different sides and looking at selling generator sets or something for extended run time so some small percentage?

Is that a trend that you are also seeing and developing?

Clearly the trend is to longer run.

So more extended backup.

Certainly the hurricane season that went through Florida and some of the islands have accentuated that on the heels of Northeast blackout in areas where we've had prolonged outages.

I think the infrastructure in general, whether its communications or its the utility infrastructure of the transportation infrastructure, certainly water, sewage, those types of things, people are realizing that 4 hours just doesn't get it done.

And there are case examples now after case examples of multiple years.

And not multiple years, multiple days of outage and literally you get back up for a couple of days and you are out again.

So the trend is for longer run backup systems.

And clearly our technology is more and more advantaged.

The longer run or outage protection that you are looking for, the less viable batteries become from an economic perspective and more viable we become.

And then it becomes really a conversation about fuel cells versus generator sets as opposed to batteries.

But there is, I would say a really nice position for our technology as you move from say 6 to 8 to 12 to 24 hours of back up, we really actually play very nicely in that space.

Thank you.

John Quealy with Adams Harkness.

Good morning.

A quick question on the backlog with the 13 GenCore systems.

Can you talk about how it will break out on the revenue line when they get amortized, whether it is going to be in the research line of the product line and some of the trends going forward in that mix that we can anticipate?

Essentially all of our units going forward are going to be rolling out on the product and service line.

We do have a few that have shown up on the contract line as they are under the DOD program, under our GenCore product development program.

But all the backlog will likely roll out on the product and service line.

Great.

Then on cash burn year-to-date 9 months when we strip out the H Power costs, cash burn is a little higher.

Can you just talk about why that is and if we expect that trend to continue moving forward again on an annualized basis?

The guidance we've given is that we will spend less on a full-year basis than we did last year.

And as you know, that has been improved for the last 3 years running.

And our expectation is that we are going to continue that trend, and we are going to continue to work on spending less each year.

So that is the guidance that we've given is that we will spend less this year than we did last.

Then lastly on the balance sheet in the deferred revenue line, flat quarter-on-quarter given the amortization and some shipments I'm sure impacting that line.

Would we expect that line to be flattish to down in Q4, or is it too early to tell?

Our accounting policy will be the same so if units shipments go up, the deferred revenue line will likely go up as well.

So if the total volume shipped out of the facility increases, you will see that number go up.

Because we haven't changed our accounting policy.

To a question earlier today regarding when you make that change, you will get a one-time benefit by pulling in that revenue when we switch from being development stage enterprise.

Great.

Thanks, Dave.

Todd Ziogas (ph) with Smith Barney.

Just a quick question in regards to the shelf registration that was filed in July and just wanted to know if that was going to end up being -- or any idea if it was going to be a private placement or if that is going to be issued to the public, the 100 million of common and preferred?

At this point, we do not have any plans for that shelf.

We put it in place to be able to react quickly if an opportunity arose that we thought would be beneficial the Company and the entity.

But at this point, we have no plans in place.

So I can't give you any more color there.

All right.

That was it.

Thank you very much.

Folks, I'd like to turn the call back over to Cynthia Mahoney White for any closing remarks.

Thank you very much.

This will conclude our call today.

We hope that you found this session informative and we look forward to having you join us next quarter for another update.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes you presentation, and you may now disconnect.