普拉格能源 (PLUG) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the 2005 first-quarter Plug Power earnings conference call.

My name is Angela and I will your coordinator for today.

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

We will be conducting a question-and -answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]

And now, I would like to turn the presentation over to your host for today's call, Miss Cynthia Mahoney White, Manager of Public Relations and Marketing.

Please proceed, ma'am.

Good morning, and welcome to the Plug Power's first-quarter 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.

Today, Roger Saillant will begin with first-quarter progress against our 2005 corporate milestones, followed by Dave Neumann, giving a review of our financial results.

We will conclude the call with a question-and-answer session.

To begin the call, I would like to first read the Safe Harbor statement.

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 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 expected 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, everyone.

This year is about preparing to sell and selling our GenCore family of products.

We have committed to triple the number of GenCore orders received to at least 300 as one ever our five major public milestones this year.

We are on track to meet that milestone.

We have added five additional sales executives so far this year, who bring an additional 76 years of selling and channel management experience to Plug Power.

These new sales executives have direct experience selling to state and federal government entities, and within the telecommunication and utility industry segments.

These employees complement our relationships with our growing number of international GenCor channel partners.

As highlighted in our press release this morning, we added InterSec Corporation of Venezuela as a GenCore distributor this quarter.

InterSec personnel have already completed our GenCore product and service training and product shipments to InterSec have begun.

In addition, Tatung, our partner in Taiwan, has received an additional product shipment this quarter and personnel have been trained.

As a result of these investments in our sales channel, the GenCore sales funnel is strengthening, with more than 100 qualified prospects at various stages in the sales cycle.

A few existing customers have approved GenCore for broad deployment and are currently considering proposals for hundreds of units.

In the first quarter, we shipped 16 GenCore systems to a combination of channel partners and end-users.

The majority of these systems have been sent to pre-existing customers.

We've delivered over 125 GenCore systems since shipments began during the fourth quarter of 2003.

We have been actively collaborating with other fuel-cell companies to obtain tax credits for the capital investment and fuel cells at the federal level and in the states of Florida and New York.

These tax credits will make the investment in fuel cells even more attractive.

We expect decisions on the passage of the tax credits later this year.

In addition to activities designed to strengthen our sales capability, obtain tax and increase our distributor base, we have obtained approval to be listed on U.S.

General Services Administration (GSA) listing.

This listing enables federal agencies to purchase GenCore back up fuel cell systems directly from the federal supply service schedule under a pre-negotiated contract.

We expect to benefit substantially from these sales, enabling activities as the year progresses.

We are on target to achieve our second milestone, which is to reduce GenCore direct material costs by 25 percent in the 2004 year-end level.

We have improved the design, resourced to more competitive suppliers, and negotiated lower prices to achieve a 10 percent material cost reduction to date.

In addition, we have improved the manufacturing processes to secure additional cost savings.

These actions will not only improve our bottom line, but will also help us be even more price competitive with the incumbent technology.

We are are on track to achieve our third milestone, which is to begin fuel testing the next generation on product.

Our internal design-verification testing, across a number of units, indicates that we will begin field testing this new product later this year.

We have signed a contract with Honda to proceed with Phase III development activity on the home energy system.

This represents achievement of our fourth milestone for 2005.

In parallel with this agreement, we secured a second agreement to collaborate on advanced R&D on component technologies, expected to enable continued improvement in performance, cost, size, and reliability of the Home Energy system beyond Phase III.

Just as important , we will be applying these learnings as appropriate to our GenCor and other products under development.

As we reported earlier this year, we expect to experience a slight increase in our cash outlay for 2005 versus 2004.

This outlay is needed to support our growing sales effort, help build up inventory to support sales, and to provide investment in our late-stage product development process for our next -generation continuous-run product.

I expect that we will meet our year-end target to spend less than $40 million in cash for operating activities.

Finally, I am pleased to report that in the first quarter, I have met with each you are of of our 320 employees in small discussion groups of 10 or less.

These meetings were intended to improve my situational awareness of our organizational capability, and give me the opportunity to emphasize our focus on sales and selling in 2005.

I found each group to be focussed, committed and confidence about the challenges we face.

In fact, all of our employees see themselves as part of our sales force, and are determined to exceed our commitments for the future.

Now I will turn the meeting over to Dave Neumann, our CFO, to give you our first-quarter financial details.

Dave?

Thank you, Roger.

I'll be providing a summary of our financial results for the first quarter ended March 31, 2005.

Starting with our statement of operations, total revenue for the first quarter of 2005 was $3.2 million, compared to $3.3 million in the first quarter of 2004.

Product and service revenue, a component of total revenue, was $1.1 million for the quarter, which compares to $1.4 million in the first quarter of 2004.

We delivered 16 GenCore fuel-cell systems during the quarter.

Under our accounting policy for revenue recognition, we continue to defer product and service revenue at the time of sale.

And at March 31, we had total deferred revenue of $5.2 million.

We expect to recognize substantially all of this amount over the next 12 months as our service, maintenance and other contractual obligations expire.

Contract revenue under R&D contracts increased to $2.2 million for the quarter ended March 31, 2005, when compared to $1.9 million in the first quarter of 2004.

The increase in contract revenue is a result of increased activity with the Department of Defense and the Department of Energy, which helped fund further development of our GenCore product,; the National Institute of Standards and Technology, or NIST, which helps fund our high-temperature equipment; as well as funding received from Honda for development of our Home Energy station.

For the next five quarters, we expect to receive approximately $11.5 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.

Our cost of products and service revenues represent the direct material costs of the 16 fuel-cell systems delivered during the quarter, combined with the labor and materials associated with servicing all of the systems under contract .

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

In addition to the 16 fuel-cell systems delivered during the quarter, we supported approximately 150 systems during the quarter.

And our cost of product and service revenue was $708,000, compared to $895,000 in the first quarter of 2004.

Our cost of R&D contract revenues represent the fully burdened cost of R&D activity, and was $2.9 million during the first quarter, compared to $2.6 million in the first quarter of 2004.

Other operating expenses were relatively flat year over year -- R&D expenses were $9.8 million for the first quarter, compared to $9.7 million in the same quarter of 2004.

General administrative expenses were $2.1 million in the first quarter, compared to $1.9 million last year.

Our net loss for the first quarter in March 31 was $12.5 million, or $0.17 cents per share, compared to $12 million, or $0.16 per share, in the first quarter of 2004.

Our net loss includes noncash expenses for items such as depreciation, amortization, and stock-based compensation, which totalled $2.9 million for the first quarter that ended March 31, 2005, compared to $3.7 million for the first quarter of 2004.

Weighted-average shares outstanding were 73.4 million shares during the first quarter, and at the end of the quarter, we had approximately 73.5 million shares issued and outstanding.

Net cash used in operating activities for the first quarter ended March 31 was $10.2 million, compared to $8.6 million in 2004.

As we move closer to commercialization, we expect to incur expenses associated with increasing the size of our direct sales organization, along with the working-capital requirements of executing against our 2005 sales objective.

We also expect to advance the development of our next-generation continuous-run product and will continue our R&D activity related to future products initiatives.

While we may use more cash in our operations, we do no expect that our cash requirements will exceed $40 million in 2005.

At March 31, '05, the company had approximately $60.7 million in cash, cash equivalents and marketable securities, and approximately $54.2 million in working capital.

That concludes our prepared comments and we'd now like to open the meeting for questions.

[OPERATOR INSTRUCTIONS].

And your first question comes from the line of David Smith.

Hi, guys.

Can you give us a bit of a sense -- one thing you''ve talking about recently is the number of customers that are bidding.

You said it was interesting.

You mentioned that there are about 100 customer possible contracts floating out there.

A) Can you give roughly the size of the average contract that is being bid out and b)You've talked in the past about customers who have actually approved purchase on a wider scale.

I think you mentioned two the last time we spoke.

Has that number moved up?

Sure, Dave.

Mark Sperry here.

I'll take you last question first.

We right now have what I like to call internally is okay-to-buy approval or deployment approval with six different accounts at this point, and that's across both the public and private sectors.

So the latest one being adding the GSA schedule that Roger talks about in his comments.

And the private ones, are they telecom related or utilities related or ...

At this point they're all telecommunications, and I would characterize them as major telecommunications companies.

With respect to --

One thing, Mark, actually before we move on from there.

What is the level of confidence they've given.

Have they actually taken a couple of units so far and they feel they could deploy this on a wider-scale basis?

Yes, that's essentially exactly what they've done.

They've take in some cases one unit, in most cases more than one unit, put them through internal testing and in most cases put deployed them into an application within their infrastructure and said yeah, this is fit for deployment on a broad scale.

In particular, on the commercial side, the private, side, that's the process with the telecommunnications companies.

With the public sector, it's more of a, if you want, you're in an agency and you happen to have a need for a Gencor backup system for telecommunications that the state owns and operates or utility infrastructure.

Or more traditional UPS-type applications.

You just need to be on the state list or the federal list in order for you as an employee to be able to order one.

It's more of a process of working through that paperwork on the public side.

Have any of the private guys or the public guys stepped up and gone a little further?

Those at this point would fall into the category of some of the larger proposals that are out there being considered right.now.

That would be the next thing.

Can we talk about that a bit?

This is as we thought the process would evolve.

It takes a fair amount of time to get to the point where we are with these major telcos.

What we're finding out on the utility side is that it's very similar.

You have to go through a period of test evaluations, both in labs and then an application before you can get to the point where you can deploy it.

Then you can actually begin the selling process.

So that's where we're actually brought in the people now, in addition to our channel partners, sitting around having the conversations with the actual operational decision-makers who have the budget, who can deploy this into their territories.

Typically there's some sort of geographic alignment inside the operations side of those businesses, where it's zip-code oriented or it's a particular geography that covers that number of cell powers.

And you need to sell to each individual that covers those particular geographies.

We're out right now doing that activity and we're beginning to get some positive feedback in terms of requests coming back for pricing, for tens, hundreds of units in those accounts.

It's taken a fair amount of work and effort to get to this point, but. ... [INTERRUPTION, MORE OPERATOR INSTRUCTIONS] So I mean in the -- In the process right now, we've got requests coming back from some of those telcos asking us for pricing around that, and in some cases, have delivered proposals that are being considered.

So, you know, in where is the optimism around delivering an orders book of 300 systems, it's clearly driven out of those conversations..

Again, you know, we have reached approve-for deployment-status and okay-to-purchase with six different accounts, and I would also point to the number of repeat orders that we're seeing.

So in Roger's comments, he referenced that the number of shipments in the first half, majority of them, super majority of them actually were two repeat customers, and I would say also that the majority of them were to channel partners, so we are seeing that where the channel partners have come in, they have gotten trained, they've taken initial systems into their labs to understand them, and are now placing orders that are in route to direct end-users, so of those things, those are what are driving the optimism.

I think also -- part of your earlier question -- you talked about the existing customer pace base, for GenCore alone, we have 50 different customers that we have been able to deliver systems to since we began shipping in the fourth quarter of '03.

And then on the prospect list, most will be made up of 50 different customers, or will there be new ones?

There's some in there as well as new, and those, you know, let me give you more color to the prospect, I mean those customers are people that have, have been called, made some contact and indicated that they have an interest and want to have a meeting, so we have a prospect stage that goes from, let's set up a meeting, to please send me a proposal, to we are in negotiation --all of those activities would fall into what I characterize as prospects.

We obviously have what I like to call a suspect list, which are really unqualified people that might be interested, that's substantially larger than that, but the 100 or so that we referenced in the comments really are qualified prospects that are in some phase of set-up-a-meeting, send-me-a-proposal, let's-talk-about-the proposal-you sent-me type of activities.

So they would include RFP's and potential RFP's.

That's correct.

Do you have any comment on the backlog right now?

Current backlog is 25 -- the majority of that being GenCore systems.

Okay.

Another thing on Honda.

Can you just give us a sense of directionally where this is going?

It sound like the relationship continues to expand quarter to quarter to quarter.

It sounds like, is it really developing into more of a stationery, a longer-lasting stationery agreement?

You mean the stationery -- A standing agreement?

Yeah, it just sound like every quarter, there's more and more happening with Honda.

Well, first of all, that's true, but second, I've had many -- two decades of dealing with the Japanese, and we are extremely honored that Honda is working closely with us in what I would consider a traditional Japanese fashion, and that is that they go really slow in order to go really fast.

They -- they are moving deliberately, they are clearly embracing a technology exchange between the two companies, and I'd say the relationship is growing.

Of course, they determine the dance, but on the other hand, they don't look at this as a quarter in and out.

They look at it as many years of relationship building and bringing our companies in a strong strategic alignment, so your sense of it is correct.

Okay.

Now, it it sounds like it's moving along well.

Last thing is the energy policy.

How dependent upon getting the energy policy passed -- and I do realize it's moving along nicely right now to the Senate.

But how dependent upon the energy policy is it going to be to hit your targets for this year?

It's a macro catalyst.

There has been no one who has had conversations with us -- who specifically in Florida, or in New York, or in any of the federal, I mean;

I'm sorry, in any of the rest of the country -- that specifically go back and talk about the tax-credit process at the federal or the two-state levels as a need.

We do know, though, from a catalyst perspective, if the bill is passed, it makes the conversation a whole heck of a lot easier with anyone that we're dealing with.

And so I would say that today, there's nothing at all in our planning that is contingent on the tax- credit passage either in New York, at the federal level, or Florida.

However, we believe that if it goes through, that it really will get people's attention, and will substantially aid us in, in making sales.

And I want to point out that what Mark says is also true: There will be no instant pudding, no matter who is interested in buying.

If that does catalyze them to react, and they haven't already started the process with us, it will still take some time of experimentation, negotiation, familiarization, so although it will be really exciting and is important to us, the passage of those tax-credit bills -- it will not make things happen instantaneously.

So it's necessary, but not sufficient.

As far as a telecom company placing an order, you don't think they actually sit there and say we're going to go with 100 units if this energy policy passes this year?

We've never heard a single comment like that.

All right.

Thank you.

Your next question comes from the line of Steve Sanders with Stephens Inc.

I wanted to follow up again on this if you approved in considering hundreds of units.

I guess since it's only a few, maybe you could shed a little detail on whether the issues for each are the same or whether for one it's getting the zip-code manager approval, for another, it's getting funding, for another it's pricing.

Can you just give us more detail on, you know, what the issues are to sort of get over the hump and get the orders?

Yes, Steve, Mark Sperry again.

I characterize it as there is a fair amount of work involved in determining which are the proper locales.

So there's a degree of effort involved in going out, actually surveying the sites, understanding what is the right back-up technology set for a particular cell tower or particular hut, for example.

So in some cases, it's the work involved in literally going out and surveying hundreds, almost thousands of sites, to say what is the right technology set?

What's the right footprint?

Do we have enough physical space?

Do we have to go out and renegotiate real estate leases to get more space to provide whatever it might be --a microterminal fuel cell, additional battery strings ... so in, in some cases, that is absolutely the issue, in terms of an issue in terms of what is taking time.

In terms of budget, in some cases, there are budget items specific to fuel cells that are there today and available, and other accounts, it's a matter of working off an existing battery budget -- so doing tradeoffs against budget lines that were earmarked for other types of technologies, where we were going to be a substitute technology, and understanding where those budgets are.

As with any company as you are going through the year -- the ebb and flow of the revenue streams -- budgets sometimes get, come in and get scooped and we have to renegotiate and think differently about where some of those come through.

So I would say, you know, those are the types of things that are involved in the process right now.

Okay.

That's helpful.

And then on your unit guidance for the year of 300, with 16 through the first quarter, there's obviously a ways to go here.

Can you sort of single your way to 300 throughout the year, or do you have to land one or two of these big ones in the next quarter to -- in your mind, to get to that 300 number?

Our approach is absolutely not going to be to single our way.

We are certainly still writing a lot of single-unit proposals, but we're getting pretty focussed on who we think the core set of accounts are in the targeted accounts are, and I would say it is dependent on us landing, at least one significant order, and that has absolutely been our approach.

Okay.

And then on the continuous-run-time product, is that something that we should be thinking about now?

I know you've laid out insulation milestone, is that a product that could potentially be ready for select segments of the market in '06, or is it sort of two-year development, and we are thinking about this in more of the '07 time frame?

I don't want to give specific guidance, Steve, at this point.

What I would tell you is our plans for this year continue to evolve and it's a matter of we absolutely will be in the field with customers in application testing that product.

And how fast we go from there will be dependent on how the product performs in those initial tests.

We are hardened with where we are.

We continue to be on schedule to our expectations.

And as Roger said in his comments, we still are on track to be in the field doing those tests.

And depending on how those product tests, as well as there's a fair amount of channel readiness that needs to be developed in order to full up-launch that product as well.

So to make sure that people can actually install it, service it, train, do documentation -- all of those things are in order.

Also need to come along and that's going to be dependent on how solid the product is and the feedback we're getting when we go out here later this year.

I want to amplify on that, Steve, that continuous-run is a 24/7 product, and we have to be very confident about the reliability growth of that product.

And in order to do that, it's going to take a significant amount of time and numbers of units in real environments in order to really prove out the reliability.

Steve, I wanted to come back on your question about the large accounts and we're going to single our way.

I would also like to comment that, you know, we do expect these are going to continue to take some amount of time.

So in the last call, I said I expect it's going to be back-end loaded;

I continue to feel that's the case.

Okay.

Okay.

And then just a final question, can you just give us a quick update on GenSys and GenSite shipments in the quarter?

How you feel about those for the balance of the year?

Again, with respect to the GenSite, we, I'm not quite sure if -- We made an additional shipment, but I think it occurred earlier this month as opposed to in the quarter.

We continue to want to place somewhere between six and eight of those systems out in the field throughout the year.

We are on track to do that.

And with respect to GenSys, our current platform SU-1 product, we expect to have a limited number of placements there as we're gearing up internally here for our next generation.

Thank you very much.

Thanks, Steve.

Your next question come from the line of Pierce Hammond [ph] with Simmons & Co. International.

Good morning.

If you could refresh the economics of the GenCore system versus the valve-regulated lead-acid batteries, both on a capital cost upfront -- sort of total lifetime costs-- and if you could provide some color around what the tax credits might add.

Sure.

Essentially, when you look at the GenCore application and the technologies that are considered to provide backup, it really is a first-cost economic evaluation, so you don't get into the cost of electricity.

You will have a life cycle over a five- or a ten-year horizon, and basically our strategy is to price that parody with respect to the incumbent technologies, primarily value-regulate dlead-acid batteries.

So to get to a first cost parody -- in some cases we are there and some cases we might be slightly disadvantaged on first cost, and the real advantage comes in life cycle costs -- essentially, the first time you have to swap those batteries because they have reached an end of life, the economics profoundly shift towards the fuel-cell solution.

The fuel cell comes with a ten-year life and the batteries don't last ten years typically in a valve-like regulated.

And people will coach you, like, all over the map, with respect to that -- shortest 12 months -- maybe five or six years -- and you have to get into it with each particular account.

It depends on how well they do the maintenance, how much care and feeding they give to it in terms of the environmental controls, what kinds of environment they are in; if they are in high climates, cold climates, there tends to be shorter life than if they're in moderate climates.

So it really does vary.

But the one constant is as soon as you need to swap out that battery string, the economics flop over to say that fuel cell is the right way to go.

Can you quantify some numbers around.

I was just curious, if you looked at someone like Verizon. ... and you talk about the first cost.

How would you compare the first cost for the GenCore system, on average, versus the first cost for a Panasonic valve-regulated lead-acid battery?

If you are looking at our costs -- our capital cost is $15,000 for a 5-kilowatt system that will provide you as much back-up as hydrogen essentially.

So if you looking at an equivalent string of batteries to do that, our first cost is on par for the most part.

There are, depending on where you are and which account you are with and what their buying clout is with their particular supplier, we may be slightly disadvantaged, but in general, I would say we are at parody.

And then the second question for Dave.

Looking at the cash balances right now and the burn rate, clearly, we are looking at probably trying to come to the equity markets maybe this year or early next year.

With the markets softening up here recently, any thoughts around, around that particular issue?

Well, we do continually evaluate where we are from a financial position.

And we have the shelf in place which gives us the flexibility to be able to do something.

But we have nothing in mind at this point.

But you do, you have hit the right note when you say that we're continually looking at those kinds of things, and we'll announce something when we have something in mind.

Certainly.

And when you look at the relationship with the Honda or somebody like that, do you think it's a possibility they may be willing to make an investment?

We haven't ruled out anything.

We've looked at going back to the public markets, we've looked at existing shareholders and whether they put more money into the Company, and we're not ruling anything out at this time.

Thank you.

Yep.

Your next question comes from the line of Walter Nasdeo with Ardour Capital.

I just have a couple of follow-ups to some of the tech questions that have already been asked, mostly about products being shipped.

Obviously, this will be back-end loaded.

Assuming that you start -- that the orders do start to ramp up, with your backlog of about 25, and is that all supposed to be shipped this year -- the 25 that's in backlog?

Yeah, those would all ship this year; the majority of them shipped this quarter.

So you have about, to make your goal, you have about 260 or so to go.

That's a big number.

So are you expecting to see, with all the things that you are negotiating now -- these things being back-end loaded -- what can we look for as far as second, third quarter, as far as chunks of -- I guess I'm saying, how do we judge how your progress is going throughout the year to make the milestone?

I mean, this is Mark, my sense would be to look for announcements around fairly large orders.

Okay, okay.

What -- Are you still selling them for about 15?

That's correct.

Okay.

And what kind of capacity on the manufacturing side do you have right now, assuming that these orders did start to come in, how fast can you get them out the door?

Water, this is Greg Silvestri.

We've put in place ... a plan that's consistent with expectations on sales and orders, so we've been taking the steps necessary in terms of exercising our manufacturing capability and working with our supply-chain partners.

So all the critical parties are aware of what our plans are, and we actually have demonstrated our ability to build the units consistent with the back-end loaded year.

So we have confidence that we will not run into shipping problems, if you will, commensurate with the sales plan.

That's based on actual performance.

It's been verified by us and verified by our supply base.

Okay.

How long does it take you to build one?

We're not going to share the direct labor content with the public, but I can tell you that as part of working these companies that are in the sales funnel to the approval to buy, and then supporting Mark's efforts and the sales force's efforts, our manufacturing capability has been given a lot of hard looks by these companies.

And we've never been in a situation where they had any questions or concerns about our ability to deliver to their expected sales objectives.

Okay.

And just one final ..

How many have you shipped so far this quarter?

16.

and -- Okay.

I'm sorry, 16 in Q1.

And what's going on now?

Have you shipped any out? --

We'll give you an update at the end of this quarter.

Okay.

Thank you.

Your next question comes from the line of Ben Sun with Adams Harkness.

Good morning.

I have two questions.

The first question is regarding the cost reduction.

So far, we have seen approximately 10%,.

And is that still the goal to achieve the 25% by the end of this year?

Yes, Ben.

This is Greg commenting.

I think we affirmed in both the press release and Roger's comments that we've accrued 10% through the end of the first quarter, and we remain highly confident in the year-end objective of 25.

Okay.

So -- And presumably, there are several areas listed here.

I see the new designs, alternate suppliers, and I guess if we ramp into higher volumes and lower price negotiations, could you provide a little more color on which one of the areas will be maybe more efficient or most important going forward to realize the additional cost saving?

I think we listed the generic factors that go into the cost reductions that you've just cited, and I think we expect those factors to continue to be at work throughout the rest of the year.

And if you look at the significant advances that Plug Power has earned a lot of credit around, most of those come through design.

And so for anyone that really studies where we are and looks at this industry, real substantial cost-downs are almost universally design-driven.

And we break our GenCore system down into about a dozen modules or sub systems, and so we have work underway across the full breadth of those to tie into our year-end objective.

Great.

That's what I thought.

And second question regarding R&D funding.

Other than existing DOD, DOE, and Honda funding, are there any other potentially significant funding sources that actually the Company is applying for or bidding, that we should be aware of?

Potential opportunities?

Ben, this is Mark Sperry.

There continue to be, at the federal and local levels, opportunities that come up.

I wouldn't point to any one particular opportunity right now, like the larger DOE awards that were made probably a year and a half ago, maybe a little bit more.

There are -- there continue to be the traditional funding sources out there.

Budget cycles are going through in most states right now, as well as at federal level, to determine exactly what funds might be made available for new energy-type things or some of the other activity we are involved in.

So we are very active in scanning those, actually at the international level as well as the national and local levels.

And we continue to have a strategy where we will go after funding where it aligns with the work that is core to what it is we are trying to do.

So we are not going to go chase money, if you will, that's not really -- that might be tangential to what we are trying to do.

We really are pretty selective and go after moneys that are aligned with driving our product-platform plans forward.

Good to hear that .

And one just quick follow up, if I may.

In terms of the direct sales expansion, are we pretty much done here, or there's more to hire?

We are pretty much where we think we need to be.

There might be one or two more additions on the margin.

But between external hires and redirecting some of our internal resources to be directly in the sales and sales support functions, I think we're where we need to be.

Right.

Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Jarett Carson with RBC.

Good morning.

Dave, remind me of kind of the way you book revenue.

So if we, theoretically we get the big ramp on the shipment flow in the second half, that you are still deferring that -- that that probably would not mostly materialize until 2006.

Is that reasonable?

We continue to defer revenue upon shipment, and amortize that over the life of the warranty obligation, which generally is 12-24 months for most of those things we are deferring.

So your point is a good one, that we will continue to do that for at least the next couple of quarters.

We do continue to evaluate our accounting model, and when we get more experience with the warranty base, we will end up changing that method of accounting.

And we'll end up recording sales at the time of shipment when we change that method.

And that's something we've kind of been talking about for a number of quarters now.

Is there any, is that something that could be at 2005?

Or more like 2006, probably type of an event where you flip the model, if you will.

We haven't necessarily committed to any particular time.

But as we get more units of this GenCore out in the field, and start to understand what it's capable of doing and what the service obligation really is, we'll make that decision.

But as volumes start to pick up here, we are getting a lot of of valuable experience.

Mark, can you give me some idea -- You're going up against lead-acid batteries, but what are you seeing, if anything, on the competitive front, from either alternative technologies or other things -- other fuel-cell companies in the telecom back-up area or some other, maybe lithium ion, some type of battery-type technology.

Are you seeing some -- not some of your direct competitors but indirect competitors?

Anything going on?

Sure.

Jarett, what I would characterize as the single biggest competitor we have is the incumbent technology set.

So the valve-regulated, lead-acid batteries, for the most part.

And the other technology sets -- to some extent, generators.

But for the most part, it's around batteries that are incumbent.

What we do see is most of the large telcos or utilities -- they are in a position where they do not want to be in a sole-source scenario, so in fact, having other fuel-cell companies ready and able to deliver in a -- is necessary for us to succeed.

And we're, we welcome that.

We think that we understand why they don't want to be in that particular scenario.

But by and large, we're getting in and going head to head.

It's more of a matter of the cash flows that are being put together and the cost-by analysis, if you will.

Typically your're against the incumbent technology sets.

We are not usually bumping into any advanced battery technologies or any other fuel-cell company per se.

Okay.

And can you just, from a customer segmentation standpoint, do you feel like either the land-line guys or the wireless guys -- one or two of those -- is maybe a little more out in front, of being a little more, say, progressive?

And secondarily, the, what are the kind of size ranges, generally, that you are seeing on land-line, in terms of installation, size of kilowatts -- one, two, three kilowatts or so -- versus on the wireless side?

Yeah, the -- I would characterize it as ... there's interest on both the wired and wire-lined side.

More activity, more interest, more what I might characterize as aggressive sort of behavior on the wireless side.

I think a number of factors that are in that.

But if you look at where the growth is, where the build-out is being conducted in outside plan areas, it's in the wireline.

Or in the wireless -- I'm sorry, the wireline -- side.

It's more of a replacement market, so you are going into an existing hub and looking at changing out the plant thats already there as opposed to new-growth business buildout, new towers that you see on the wireless side.

And what are the, say, typical size ranges on each one of those?

When you look at it, depending on whether you are talking about a tower or a remote terminal serving a tower, they are going to range down to maybe a kilowatt up to, say, 20 kilowatts in application.

We think we are pretty well positioned with a 5-kilowatt offering.

But in general, when you look at -- and I'm referencing primarily the outside plant environment or the utility substation environment -- you are going to see it in sort of the 1-20 range.

As you move into central offices and actually generating plants, those types of things, They are much larger scale, but those are not applications that we are targeting.

Okay.

Thank you.

Your next question comes from the line of David Smith with Smith Barney.

Please proceed.

Hey, guys, just a follow-up on the sales force.

Can you give us an update as to the size of the sales effort today and maybe some of the actual efforts that are going on?

And how -- how you go about completing a direct sale?

Yeah, Dave.

Essentially the way we are structured is we have a set of people who are what I would characterize as zip-code aligned accounting executives who have particular geographies, both here and in Europe.

And then we have a set of reps that are public-sector reps, so they are targeted specifically at the government and public-sector accounts.

We have a, some resources that look specifically to channel management, and international channel-management development.

So the screening and actual sign-up of new channel partners, as well as day-to-day care and feeding of that, once they are on board.

And then we have some technical sales engineers that are technical resources to that set of people who are what I call sales reps.

So they provide the support to them that go out and help them once we have to get into site evaluations and looking at what's involved with some of the installation work.

What's the size of the sales force, the direct?

In terms of direct quota-bearing salespeople, it's around 10.

And if you, in the past year, with GenCore, have you learned anything new that you've capitalized on, like what has worked and what hasn't worked?

We've learned a lot, and patience being one of them.

One of the main learning elements, but the -- I think what we've come to understand is the process that you need to go through in order to get yourself in a position to really do the selling.

So going through that with a number of different accounts and different industries has enabled us to understand what's involved with that, what it takes, how the customer wants to be served, how they want to buy the equipment, how they want that equipment to be serviced.

We have a very good understanding based on the past year as to what is involved with all that.

There is no one-size-fits-all.

It's very much customer dependent.

Some customers wants to do much of that work themselves; some don't want to do any of that.

They expect turnkey solutions.

And being able to understand and ask the right questions and probe in the dialogue and in the conversation with the customer is absolutely, has absolutely helped us provide offerings, you know, broader than just the actual fuel-cell itself, but actual offerings that might include service, that might include financing.

That entire spectrum has been where a lot of learning is been garnered.

I think at the end of the day, the people that we brought in have a lot of experience and the basics of how to sell.

And that fundamental knowledge has been there -- been more about the industry and what are they, what's it take to introduce new technology sets into a fairly -- into an existing marketplace.

Okay.

And so just to understand who the 10 people are, they do have a fairly extensive sales background?

Yes, they do.

Okay.

Great, thank you.

Your next question comes from the line of Neil Jacobs with Boundary Capital.

Back to the competitive landscape for a second.

As these telcos, both on the wireless and wire-line side, evaluate your product, is it a situation where you are one of two or more fuel-cell alternatives, and they are going to make a wholesale switch when they finally decide so to your point about the sole sourcing capability.

They will announce a whole program of which you will be a part?

Or what's the dynamic there?

It's some and some.

There are some -- Where the dynamics are exactly as you described it, they are going to make a migration to fuel-cell technology, and they are going to use vendors A, B and C. In other cases, there are -- because of the application requirements -- we're really not in competition, if you will, with another vendor of fuel cells.

We're more directly in competition with the incumbent technology sets, so it really goes to the sensitivity of the account around sole sourcing.

And then in some cases, it's very sensitive and in some cases, it's not at all.

Got you.

And question two, back to the manufacturing capacity, let's say, presumably you are about hundred unit -- Your 300 unit target assumes some risk profile, some people choosing to go forward and some not.

Let's say everyone chooses to go forward.

What's the, what do you think your maximum capacity in '05 is?

Is it the 300 number?

Is that where you've geared the supply-chain as well as the manufacturing capacity towards for '05?

Or, you know, if the orders were there, could you do 500?

I'm just trying to get a sense.

You know, this is Greg, we are working plans which actually assume that we can handle a number well in excess of 300.

I'm not for certain reasons I'm not going to give you the specifically whole number that -- But part of being prepared for a back-end loaded year is confirming we have the ability to do better than our public milestone.

And obviously, that we don't finish 2005 and look ahead at 2006 and say you know, now what?

So our plans go past 2005 and are preparing our company for a very aggressive ramp.

And so we are well prepared to support the adoption by the customers that we are focused on.

Thank you.

Your next question comes from the line of Frank Cox with Morgan Stanley.

My question is, does Point have a partnership with Lipa for the power plant in New York City for the capacity of 10,000 customers?, And could Plug Power handle its product , handle that capacity?

The request that Lipa put out was for a substantial amount of power, and that, the RFP, or request that they have put out , really does not align itself with our technology set.

They are looking for a very large plant to be centrally located, and we operate at a 5-kilowatt level.

Do you like to do, elect to do that in the future or get into that field?

Well, our product strategy really is around the provision of clean, reliable on-site energy.

We typically think of ourselves as in the lower end of the range, so we wouldn't typically want to scale up in the mega-watt size.

Our vision is around how do you deal with larger capacities really is more around a virtual power plant where we have distributed assets that are located across a grid infrastructure that can be remotely controlled.

So deploy large numbers of smaller assets that can be brought up and down as needs of the grids vary throughout the scope of the day.

So I wouldn't say don't expect us to be in a providing proceeding a single plan that provides a may go watt materials with microgrids and other schemes that you could use --

And can you tell us when the -- Honda product, when they might be to market?

At this point, our agreement with Honda is purely a development agreement, and we have not had any commercial conversations to this point.

Clearly, deployment of that is key to when our fuel-cell car is going to be more broadly deployed, and I think there's a pretty wide view as to when -- how long is that going to take?

But I wouldn't characterize that as being in a commercial conversation yet.

On the car side of the fuel-cell technology, is that the only product you have or do you have other products in the works?

We are focused on, really the stationery application of the technology, so, you know, in the case of the home refuel, that's a stationery application.

We currently do not have, nor do I anticipate right now I would have any product offerings in the motor side of the business.

Thank you very much.

Thank you.

That concludes the question-and-answer session.

I would like to turn the call back over to Miss Cynthia Mahoney White for closing remarks.

This will conclude our call today.

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

Thank you.

This concludes your presentation Everybody have a wonderful day, and thank you.