普拉格能源 (PLUG) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 Plug Power earnings conference call.

My name is Angela and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

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

Please proceed, ma'am.

Good morning and welcome to Plug Power's second-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.

To begin the call, I'd 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 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 statement.

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 and thank you for joining our call.

During our last conference call I said it was all about preparing to sell and sales.

This time it is all about sales and delivery.

After I make a few brief comments, I will have Mark Sperry, our Chief Marketing Officer, and Greg Silvestri, our Chief Operating Officer, give our status on sales and delivery.

They will be followed by Dave Neumann, who will update us on Plug Power's financial status.

Plug Power has reached an important inflection point on its path to profitability.

We're entering the first stages of commercial liftoff.

We're on a track to meet our corporate milestones for the fifth consecutive year, as we announced in our press release earlier today.

The most important milestone and the key to our commercial liftoff is the booking of 174 GenCore orders against our milestone of 300 for this year.

Mark will elaborate on these orders in a few moments.

First, however, I want to give a quick review of our status on the other public milestones for 2005.

We secured funding from the Department of Defense to support field testing of our next generation prime power fuel cell system.

We reduced our GenCore material costs by approximately 6.5% during the second quarter.

Year-to-date we have reduced our GenCore material costs by 16.5% versus 2004 levels, and we're on track to meet our full-year milestone target of 25%.

We completed and are currently executing against the latest agreement with Honda R&D for Phase III of the Home Energy Station program.

We're on track to keep our cash usage to less than $40 million for the year.

I'm pleased with our progress to date which is due to the coordinated efforts of our suppliers and our employees.

Our employees continue to amaze me by their creative effort and willingness to commit to the growth of Plug Power as the Company.

Now I will turn the call over to Mark Sperry who will summarize our sales and marketing activities.

Mark?

Thank you Roger and good morning everyone.

As noted in our press release this morning, we're now more than half way to our full-year goal of 300 new GenCore orders in 2005.

Roughly two-thirds of the orders for a total of 116 systems came from a single large domestic telecommunications company via our channel partner, Tyco Electronics Power Systems Inc.

Additionally, the Florida Department of Environmental Protection placed an order for 12 GenCore systems due to be deployed at their office buildings located throughout the state.

The 46 remaining orders were received from approximately 20 different new and existing customers and distribution partners for a variety of applications within the telecommunications, utility, industrial, commercial, and public sectors.

We continue to target the large market for backup power within the telecommunications and utilities sectors currently served by a combination of battery and generator technologies.

This order flow is consistent with our expectations and strategy of focusing our sales and marketing resources against large strategic accounts with near-term sales potential, while conducting the marketing conditioning work necessary to develop longer-term opportunities.

We are very pleased with our progress to date and reiterate our intention to book at least 300 GenCore orders during 2005.

As discussed during our last call, we continue to work a few opportunities with order potential in excess of 100 units each.

The GenCore product is now approved for deployment with a total of eight significant customers across the private and public sectors.

We have made good progress within the utilities sector with GenCore systems installed and being evaluated with five major utilities.

GenCore sales prospecting is a global endeavor with systems currently installed and/or under evaluation in North and South America, Europe, Asia and Africa.

As previously announced this year, we have added Interseg Corporation of Venezuela and FDT Associates Limited of the United Kingdom to our family of GenCore distribution partners, both of whom are actively marketing GenCore to our targeted markets within their respective geographies.

We currently have a network of 12 distribution partners for our GenCore product family.

Now I would like to say a few words about the status of the energy bill.

Earlier this week the House Senate Conference Committee approved the Energy Policy Act of 2005.

Both the House and the Senate will likely vote on the confidence report later this week, and the bill is expected to go to the President prior to the August recess.

Although we have not seen the official language, we believe the report will include over $4 billion for hydrogen and fuel cell research, development, demonstration, and market transition activities.

The details of the tax package have not been released.

Our priority remains in obtaining an investment tax credit for fuel cells, and we're excited by the prospect of such a credit being included in the final package.

Our New York State delegation has been very active and supportive in these efforts.

We support the Senate provision that includes a 30% credit capped at $1000 per kilowatt for the purchase of fuel cells for both residential and business applications, including utilization within the telecom industry.

While our over 300 GenCore order milestone does not assume a fuel cell tax credit, we do believe such a credit will stimulate demand further.

At this point I'd like to turn the call over to Greg.

Thank you Mark.

As Roger stated in his opening remarks, Plug Power is entering a period of time where reliable delivery of systems will be paramount in maintaining our business's momentum and achieving our stated objectives.

I'm confident in our organization's abilities and genuinely believe that we will continue to meet our customers' expectations as their business levels dramatically increase.

Being able to meet the current set of demand is not a result of a recent set of activities, but rather it is an anticipated outcome based upon several years of building a strong organization and business infrastructure that was designed to manufacture and deliver significant volumes of fuel cell systems.

I will take you through a few examples of why we have held this confidence.

These examples will touch on each of the major sectors of our business model.

One, a well developed and robust set of supply chain partnerships; two, a manufacturing infrastructure that has been tested and proven in its ability to deliver products; and three, a customer operations organization that has been tested in all aspects of customer engagement.

First, on building a robust set of supply chain relationships, in the past several years we've migrated from having a network of over 100 suppliers to a position where less than 20 suppliers provide the vast majority of our product content.

We're working with proven, world-class organizations that have earned strong reputations in supplying automotive, aerospace and electronics industries.

Such organizations include 3M, Engelhard, Dana (ph), Arvin Barritor (ph), Toyo Radiator, Integris and Parker-Hannifin.

We've worked together with our key suppliers to perform formal part supplier qualifications and to develop integrated systems for identifying and resolving any deviations from expectations in regards to components and operations.

Second, on building a manufacturing and delivery infrastructure, Plug Power has consistently earned high marks for implementation and practice of lean manufacturing practices and the depth of our organization's experience.

Our organization has built and delivered over 500 fuel cell systems while constantly improving our manufacturing throughput times and quality levels.

Our employees have developed a regular practice of incorporating design of experiment (technical difficulty) structured problem solving, Six Sigma, DSMA and DMAIC across all of our work objectives.

We've not only relied on our own employees, but we've aggressively utilized third parties for a variety of tasks.

Among some of our key accomplishments in collaboration with subject experts are -- first, advanced modeling of our current factory for overall manufacturing and material movement capacity analysis; second, work cell design and throughput modeling to optimize our practices of single piece flow manufacturing; and third, industry-leading software providers for product data management, quality tracking and monitoring systems.

Our abilities have been rigorously and comprehensive probed and assessed many organizations, perhaps most notably by Tyco's corporate purchasing audit organization as a precondition for entering into our GenCore distribution agreement.

Third, on building a comprehensive customer operations organization, as mentioned previously, Plug Power has delivered over 500 fuel cell systems.

These systems have operated on five of seven continents.

Our ambitions for Australia and Antarctica have yet to be realized.

We have worked with our customers on everything from applications engineering to product training, product service and problem resolution, end of life asset recovery and system analysis.

Over three years we've measured customer satisfaction on 20 specific attributes four times per year.

We have consistently internalized this feedback and shaped our organization and practices to respond to our customers' needs.

As we prepared ourselves or 2005, we can see this year as the inflection point for product volume and commercial liftoff.

We recognize that a new set of demands will be placed on our organization as we migrate it from working with the technical evaluation workgroups within our targeted telecom and electric utility customers to the operating managers who hold the daily responsibility for the effective operation of their companies' critical infrastructure.

In anticipation of these changes we both reorganized our Plug Power teams and modified our internal work practices and processes to meet these new and important challenges.

I believe that our early test results justify our confidence of continuing to earn very strong grades and customer satisfaction.

Thank you, and I would now like to introduce Dave Neumann, our Chief Financial Officer.

Thank you Greg.

I will be providing a summary of our financial results for the second-quarter and six-month period ended June 30, 2005.

Starting with our statement of operations, total revenue for the second quarter of 2005 was 3.7 million, which is equal to the amount reported for the second quarter of 2004.

For the six months ended June 30, 2005 total revenue was 6.9 million, and compares to 7 million during the same six-month period last year.

Products and service revenue, a component of total revenue, was 1.5 million for the second quarter, which compares to 1.5 million in the second quarter of 2004.

We delivered 24 GenCore fuel cell systems and two GenSys systems during the quarter.

Year-to-date product and service revenue was 2.5 million compared to 2.9 million in 2004.

Under our accounting policies for revenue recognition we continue to defer product and service revenues to time of sale, and at June 30 we had total deferred revenue of 4.7 million.

We expect to recognize substantially all of this amount over the next 27 months as our service, maintenance and other contractual obligations expire.

Contract revenue under research and development contracts was 2.2 million for the quarter ended June 30, 2005 compared to 2.2 million in the second quarter of 2004.

Year-to-date contract revenue was 4.4 million for the six months ended June 30, 2005 compared to 4.1 million during the same period last year.

Our cost of product and service revenue continues to represent the direct material costs of fuel cell systems delivered during the period, combined with the labor and materials associated with servicing all of the fuel cell systems under warranty.

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

In addition to the 26 fuel cell systems delivered during the quarter, we supported approximately 175 systems during the second quarter of 2005, and our cost of product and service revenue was $975,000 compared to 1.8 million during the second quarter of 2004.

Year-to-date these costs were 1.7 million for the period ended June 30, 2005 compared to 2.6 million for the period ended June 30, 2004.

Our cost of research and development contract revenues representing the fully burdened cost of research and development contract activity was 3.3 million during the second quarter 2005 compared to 3.1 million during the second quarter of 2004.

Year-to-date these costs were 6.2 million compared to 5.7 million last year.

Other operating expenses were relatively flat year-over-year with research and development expenses of 7.7 million for the second quarter of '05 compared to 7.9 million during the same quarter a year ago.

Year-to-date these costs were 17.6 million for both the six-month period ended June 30, 2005 and the six-month period ended June 30, 2004.

General and administrative expenses were 2.4 million in the second quarter of '05 compared to 2.3 million last year.

And year-to-date G&A expenses were 4.5 million compared to 4.2 million in the same year-to-date period a year ago.

Our net loss for the second quarter ended June 30, 2005 was 10.9 million, or $0.15 per share, compared to 11.3 million, or $0.15 per share, in the second quarter of '04.

Year-to-date the net loss was 23.4 million, or $0.32 per share, which compares to 23.3 million and $0.32 per share for the same period last year.

Net cash used in operating activities for the second quarter ended June 30 was 9.2 million compared to 9.9 million last year.

Year-to-date net cash used in operating activities was 19.4 million and compares to 18.5 million during the same period last year.

As we move closer to commercialization, we have incurred expenses associated with increasing the size of our direct sales organization, along with working capital to execute against our 2005 sales objectives.

We have also increased activities associated with advancing the development of our next generation continuous run product.

And while we may use more cash in our operations this year, we do not expect that our cash requirements will exceed $40 million in 2005.

As of June 30 '05, the Company had approximately 51.5 million in cash, cash equivalents and marketable securities, and approximately 45.6 million in working capital.

That concludes our prepared remarks, and we would now like to open meeting for questions.

Angela, will you please proceed?

(OPERATOR INSTRUCTIONS) Steve Sanders, Stephens.

First, a question on the Tyco orders.

Of the 116, can you just give us a rough estimate of what the shipment and installation schedules look like for those units?

We're actively working that real-time with Tyco in the installer infrastructure.

What I can tell you is we expect that the majority of those systems will go in this year.

The exact sequencing, again, is being worked.

But I essentially see that as being a relatively slow trickle for the next, say, six weeks, eight weeks, and then it will ramp pretty dramatically.

But the current view is that the majority will go in this year.

And then all going to one customer, correct?

That's correct.

Can you provide some additional detail on the applications in a single versus multi unit?

Are they concentrating them geographically or spreading them out, the specific backup?

Sure.

It is directly in the designed application for the product, so it is providing backup power in an outside plant environment.

And for the most part it's a one-to-one single GenCore per site type of configuration.

They are very much geographically concentrated.

Moving to the GenSys product, where do you think that product stands today in terms of commercial viability and sort of a timeline to get there?

And maybe a good way to characterize it would be relative to GenCore.

Are you within a year or two of where GenCore is today?

Or how would you characterize that?

The way I would characterize it is as with GenCore we have spent a lot of time really understanding the value proposition and the applications that we are initially going to put the GenSys product into.

So understanding very much -- and in fact we're targeting many of the same industries and customers that we have today for GenCore.

So there's high alignment with respect to the customers set.

The application is obviously continuous as opposed to emergency or backup power, but the competing technology set, so the incumbent technology sets that are providing the prime power today, again are not grid.

They're technology sets like batteries, like generator sets, like photo-voltaics all being integrated into a redundant solution, if you will, to provide a prime power.

So we understand those technology sets very well.

We understand the value propositions as a result of our experience with GenCore very well.

And we are happy to be in a position to begin, as we said, the field testing of that particular product as we go out the back half of the year.

And when we launch that and begin to make it publicly available really will be determined on our experiences as we are going through the test in the back half of the year.

So we're not really ready to make any projections on that yet today.

Thank you very much.

Walter Nasdeo, Ardour Capital.

Can you guys give us your current cost per kilowatt on the GenCore?

Our list price in the marketplace today for a GenCore system is just under $20,000 for an all-up system.

So that's the price that in out there as our list price.

And the price that actually gets delivered to the customer obviously is dependent on what channel partner they're working with and what volumes they're buying.

What's your margin on that then?

We have not given out margin information on our product.

Okay.

Stepping over to this other R&D expense, can you kind of break that down a little bit and let me know what goes into that, please?

You're talking about the non-cash piece?

Yes.

That's strictly R&D expenses that are paid with stock based compensation.

So the portion of our employee benefit that is paid with a stock match -- for instance, our 401(k) plan -- is stock that we might pay to a consultant for doing some of the work for us, but it's strictly the non-cash component of R&D.

And then that 7.3 million is made up of what?

That's the cash component.

So our total R&D for the quarter was roughly 7.7 million, and we are just required to break out the cash versus non-cash components.

Is this a number that you're feeling fairly confident in going forward in this $7.5 million range or so on a quarterly basis?

I think if you combine the cost of R&D contracts in that line, that's a pretty comfortable rate for us.

How is the development of the other products coming?

I know Steve kind of mentioned -- or brought up on an earlier question with the GenSys.

How are the other -- the GenSike (ph) coming also?

Do you mean the GenSite or the GenSys?

You meant the 24-7 product, right?

Yes, actually.

But I was hoping to get a little color on the GenSite also.

Let's start with the GenSite.

As we have said in previous conversations that we're in a period right now of placing the (indiscernible) with various users who want to gain experience with those.

We are also gaining experience in their application.

And we expected that that would last for a year to 18 months to understand exactly what the design requirements were and also to verify what we had seen already in our laboratory work and our on-site usage relative to the overall performance -- things like availability, reliability and so forth.

With regard to the GenSys, we have a very gated process for product development and new technology delivery which requires us to meet certain mileposts, which certify the reliability, performance, the availability and the efficiency.

What I can say is that this very structured process necessarily has to be extended in time prior to really going out to -- going into the late launch phase.

Right now when we're talking about placing a product, we're talking about a development site or development sites where we can verify what we already are projecting from our multiple product testing in-house.

We need to verify that in a number of field settings in order to make sure that our design is robust.

And since it's designed to be a 24-7 product and has a long lifetime, that kind of testing is necessarily long and exhaustive.

Okay.

In years or quarters, or what's your feel for that anyway?

Our feel is that it will take at least a year or more.

I would not feel comfortable right now just because of the type of work to say that it's 18 months or 12 months.

It's just an extended period of time, so we have statistical confidence.

I would say bottom line we're very pleased with the progress of the development of that product to date.

Thank you very much.

Brian Gammel (ph), Simmons & Company.

In regards to financing going forward, I've seen a couple of deals recently in the fuel cell space specifically in Europe (indiscernible) CR fuel cells (ph) did a series B funding round.

Have you guys seen more interest as far as the finance side goes that's going to enable you to maybe better finance your cash flows going forward?

We are out talking to investors quite often, actually.

And you can feel the momentum starting to build in our Company and our sector.

So the inbound calls and the interest in our Company, you certainly can feel that building.

In regards to that as building, the 174 that you guys have already -- the 174 GenCore units you've already targeted for this year and then the 300 targeted for the end of '05, have you given any thought to an appropriate target for '06 or '07?

Are we talking maybe 1000 units in '06 or 2000 in '07?

Or have you not thought that far ahead?

Clearly we think about it, but at this point we haven't come through a discussion as to what sort of number if any we would put out there for next year.

We typically give that guidance at the end of the year with our fourth-quarter conference call.

I realize that.

I just thought that maybe you might have a preliminary number, given your target for 300 is looking more realistic than it did last quarter.

It always looked realistic to us.

Well, to us on the finance side all those orders coming through this month really helped that reality.

A couple of other questions.

On your cash burn for '06, we thinking 40 million is an appropriate number or are you thinking you'll probably be closer to 30 or 35 for '06?

For 2005 you mean?

Again, for '06 we'll give that guidance out later in the year.

That's fine.

One last question.

In regard to the GenCore units in comparison to the valve regulated asset batteries, what has been your largest complain or objection from potential customers when they compare the two products?

In the analysis there's a couple of things that come forward.

Clearly cost is front and center in the conversation; reliability; more importantly, service ability and the ability to predict the system's state of readiness.

So when you get inside of the conversations, the frustration points today that are out there is knowing that the technology will work when it needs to work and come to life and the ability to predict that and to be proactive about ensuring that it will.

So the things of particular interest from a GenCore perspective is our ability to remotely monitor and diagnose our system.

So from a remote location to be able to know the state of health of the system, if you will, is a distinct advantage versus some of the other technology sets that are out there.

That said, clearly you need to be where you need to be on the cost front, which also includes a perspective on lifecycle cost or total cost of ownership, so what does it take to maintain battery systems, does it take to maintain and operate generator systems versus what does it take to maintain or our GenCore systems.

The other key element obviously is life, so how long will your batteries last versus how long will a GenCore system last clearly place very heavily into the analysis.

Thank you guys very much.

David Smith, Smith Barney.

I think you said -- and you were going pretty quick, Roger, when you said this, but the number of -- I think you said eight customers have been approved for larger scale purchases.

Is that correct?

Yes, there are eight customers across both the public and private sector that we are approved for deployment today.

What industries would those be in?

The majority in the public sector would be, for example, we've publicly said we're on the New York State okay to buy list.

We're on the federal OGS (ph) contract.

The state of Florida, clearly if an agency you can buy.

The balance then being -- in the private sector really being telecommunication companies.

Do you see kind of for the next 12 months that most of the traction for this product coming out of telecom?

We do.

We are, as I said in the comments, pleased with where we are on utility side, but we are about 12 months behind in marketing to the utilities versus our market and sales efforts into the telecommunications company.

So we just very late last year introduced the configuration that's applicable for utilities, and it really ramped up our marketing and sales efforts.

And that to date has primarily been around getting the okay to -- as I like to call it the okay to buy or okay for deployment status with the utilities.

We see that as being a very similar process and timeline to what we experienced on the telecommunications side.

So that is a 9 to 18 month exercise.

And we are, as I said, probably six to nine months inside of working those with some significant utilities.

So that said, we're obviously much further along with the telco side.

And I expected near-term that's where most of the business will come.

When you talk about the telecom side and that eight, is it more than one or more than two customers?

Yes it is.

So when we see the number of orders that this one customer has ordered, we can assume as well that -- you mentioned there is a couple possible hundred unit orders out there.

Would it be (indiscernible) those -- out of that -- the companies that are on that list.?

That's correct.

When you mentioned that one customer that has put in the 100 units plus, is that -- I know you're not going to tell us the customer, but would it be fair to assume that it's a national carrier?

Do they have broad geographic coverage?

It would absolutely be fair to assume.

It has a brand that you would recognize.

So when we look at these individual orders that have come out I guess my question is why haven't they really done it in one shot?

Why would we see sort of pieces coming out?

Would this be the way we would expect it to look going forward?

Yes, it is the way we would expect it.

And the way this particular customer operates is the orders actually come from within the operating entities out in the operations side of the business.

So the budgets are carried locally and the POs are cut locally.

And once you get essentially national approval for deployment, the operations people then are free to make the decision.

So there are to some extent independent decisions once you have the approval for employment at the national level in this particular account.

Can you as well give us the backlog where it stands now and where it was last quarter?

Our current backlog is 137 systems and last call it stood at 25.

Okay.

Touching on what customers like to see in the previous caller's question, can you just -- is cost or reliability the main factor today when you talk to somebody?

I like to call it it's the points of pain.

So in my mind it is really the reliability and the pain points associated with guaranteeing or knowing that the solution will in fact work when you need it to work.

So what does it cost me to know that my batteries are in a ready state, my generators or my GenCore in terms of sites visits out of vists out to the site, those types of activities.

It's really -- as I personally have talked to numerous customers, it is in many cases a very painful operational experience to have to inspect and operate these systems across very, very large numbers of locations; expansive sites that in many cases are not all that accessible.

So I would say cost is less of an issue today than the performance of the system in the conversations that I've been part of.

Do some of the customers seem to be hinging on the possibility of an energy policy credit?

No, they're just not.

At this point it really hasn't come up in any of the conversations that I've been part of.

And no, I don't see anybody really altering their behaviors waiting for it to happen or not waiting for it to happen at this point.

Final question.

In terms of the units that you're selling to those sites, are they brand new sites or are they replacing existing batteries at sites?

The majority of them are existing sites.

There are a few new built sites, but for the most part these are just existing sites, and they currently are replacing or augmenting the backup infrastructure that they have.

Is the majority of them in telecom?

For the particular Tyco order they're all to a single telecom customer.

Is it wireless or wireline?

We're not saying.

Okay.

Any broadband in there?

David, we have a real practice here that you should know about in protecting the --

One question per caller.

I know.

No, protecting the sanctity of our customers all the way through.

And we don't want to set up some anagram here where you can solve it.

I guess that's the most granularity you're going to give me on this, is that it's telecom.

Yes, and it's a large telecom that's domestically based through Tyco.

Fair enough.

Thanks.

Ben Fun (ph), Adams Harkness.

First question on the cost reduction side.

Is that cost reduced percentage against the -- what kind of level of your material components cost is against a rising material components cost or relatively flat?

Can you comment a little bit on that?

Our measure is against the bill of material costs for the system at the start of the year and the bill of material costs for the system -- this markers was at the end of the quarter.

So what it essentially says is that what do a have to pay to our network of suppliers for a product.

So it incorporates and nets out if we had any upward pressure on a particular -- price pressure on a particular component versus the savings that we're realizing during the same period of time.

So you have seen a little bit upward pressure, or actually to -- I'm just wondering how much of that upward pressure are you feeling on your component cost. (multiple speakers)

Day-to-day trenches of our purchasing organization they face a lot of upward pressure, but they're very effective at not knocking most of that back.

That's good to hear.

Second question, if we are at 300 this year, and if even we grow at a moderate rate, so it sounds like we need to add capacity maybe next year or even sooner.

So what's the thought on that?

And what's just qualitatively the impact?

Can you communicate that?

I missed a portion of your question.

Could you just repeat the question?

What I mean is judging by the growth rate now, what's the current capacity planning for next year if we were to receive more orders?

In the comment that I made at the beginning of the call, those activities and those efforts have spanned the time period well beyond 2005.

So we look at some very aggressive internal targets and have a range of outcomes that includes some very impressive ongoing growth rates and are working all parts of our business and our supplier network for what I like to call the optimistic outcomes.

So as Mark said and David said in earlier answers to questions, we don't give guidance at this point for next year.

But in all the planning sessions that we're doing we feel quite confident in our ability to grow with the order rate.

Sure.

And then I wanted to revisit the Energy Bill.

Specifically for Plug what do you perceive as the relatively -- if there's any near-term versus relatively long-term benefits, if this bill gets passed?

If the bill gets passed clearly a positive catalyst to the industry, and it's a case of a rising tide lifts all ships.

So we look at this as a bonus, actually.

But all our planning is independent of what outcomes are relative to tax credits.

Great.

Thanks.

Jessie Pritchel (ph), Piper Jaffray.

Congratulations on the orders.

Would Tyco or any other channel partner take inventory going forward, or is it all make to order?

For the most part it's a build to order process that we have put in place here.

Could you talk about the length of the sales cycle for the telecom backup market?

Sure.

I would say -- I would characterize it as being a sales cycle in the 12 to 24 month sort of timeframe.

The process typically is an initial engagement, usually inside of the technology office with a chief technology officer or some similar organization that has the charter to evaluate equipment and determine its suitability for broad scale deployment inside the infrastructure.

That usually is going to involve a lab test, some equipment regimens where you go through some of the internal testing for -- measured in three to six months, depending on the account.

From there you'll typically get into some sort of limited field test where you move out of a lab, but you're not yet approved for deployment.

You might get into a single site or multiple sites, typically a handful at most, where the equipment is once again evaluated.

Many of the vendors are going to want to see it through various environmental conditions, so they want to know it operates in the winter as well as it operates in the summer.

So that can be a 6 month to 12 months activity really depending on what particular company you're talking about.

After you come through that exercise you typically then will get an approved for deployment kind of reading, so that we've gone through the testing and the technology people understand it and support it, and you can deploy it.

And then you need to begin the selling to the actual operational decision people.

So that's roughly what it feels like.

It is a fairly protracted sales activity, and it does involve engagement, as Greg said, with a technology organizations initially.

And then over time you really shift your focus into the operations side of the business, either to the decision makers that are buying it or to the people that actually have to install and operate the equipment.

You mentioned that you don't anticipate any delay in decision-making pending the passage of the Energy Bill.

If you could elaborate on that a little bit.

Is the bill from what you know retroactive for 2005, or is the amount somewhat insignificant versus the benefit of having a reliable backup system?

Our current understandings is that the latest language would have it being effective the January 1st of 2006 and that it would be a two-year timeframe, so covering '06 and '07.

The interactions that I have had really customers have either budgeted for this and are planning this being a GenCore new technology backup system, and they're going to spend that money whether the tax credit comes through or not.

What it could impact is the amount of systems they can buy with the amount of money they have set aside or allocated to this technology.

So my expectation and experience is that people are not waiting on it, but it could have a volume benefit if it does happen.

The magnitude of it is right now we believe the language will include the $1000 per kilowatt or 30%, whichever is less.

So that's the language which is the language that we supported that came out of the Senate side.

My understanding, although we have not seen the official language, is that's what's being brought forward and that it would absolutely be applicable to the telecommunication industry.

And (indiscernible) one more question.

What is your anticipated bomb (ph) savings for the second-half shipments and for next year?

And where are you finding the bomb savings?

Is it in push back to suppliers?

Is it reengineering or volume purchase discounts?

It's combined of all of those things and it's across the system.

We have stated that our milestone is to achieve minus 25% by the end of the year, but in this release where we are at the current time so we would expect to achieve the rest of that over the course of the remainder of the year.

And year-to-date savings is?

I think it was 16.5.

What percent of your bomb is the actual stack?

And do you anticipate any cost savings there?

The stack is a significant piece.

And savings to date and some of the remaining journeys (ph) have included cost reductions in the stack.

Last question is are these telco systems where we've seen the orders using batteries in addition to fuel cells?

And I'm wondering if you're seeing hydride batteries as a potential threat.

They clearly for the most part have battery technologies.

I would say hydride -- we're mostly running into good old-fashioned lead acid batteries at this point.

There is hydride and other advanced technology sets that are talked about, but for the most part in what's actually being deployed it's generators and it's valve regulated lead acid batteries.

Thank you.

I look forward to the next batch of orders.

Jarett Carson, RBC.

Mark, could you talk a little bit -- just kind of refresh my memory relative to the telecom customers and how they're approaching initial rollout in terms of not necessarily percentage of their side, but how they look at it framing high value added sites, a piece of that if you will in terms of where they want to deploy the first units?

And I think you may have touched on this somewhat in conjunction with just regular generator sets for super-extended runtime.

Can you talk around that for a minute?

Again, it's somewhat customer-specific, but typically people are looking for the highest paying points inside of their organizations.

For some customers for example that's going to be weather-related where you have a tendency because of weather-related issues that have protracted outages where they would need extended runtime; heat related, so battery life is very much affected by the ambient temperature.

So extreme heat, extreme cold tends to cause you a life issue.

There are ways obviously of trying to manage it and maintain temperatures, but that also is expensive.

And so most of the customers are looking at, to use your language, where are the high value spots for them?

They typically translate into where are the high-costs, and costs are being driven by the fact that I have short battery lives for whatever the reason might be or is extreme cost to me when there's a weather-related outage and I'm out of service for 8, 10 hours and I'm losing all that revenue.

So it very much is a -- when they are looking to where am I going to deploy it first, where is my highest pain.

And that does vary a little bit depending on which customer you're talking.

Dave, relative to this influx of orders, is this going to continue with kind of the trend over the last 12, 24 months of going through deferred revenue and then recognizing over a kind of forward 12 to 24 month period?

Can you kind of give a little not necessarily quarterly feel, but is that how we should think about it?

Through June 30 we haven't changed our policies.

But this is a topic that we talk about each quarter with our auditors, our audit committee, and internally.

And we continue to look at that.

You may see us give you some more guidance on that later in the quarter as we make some other decisions, but at this point we will continue to defer at the time of shipment.

Okay, so -- that is a good point.

We always -- the term I kind of use is -- I call it flipping the model, if you will.

So it sounds like we're kind of getting closer to actually making a decision perhaps in the second half.

Is that unfair (ph)?

We haven't made any thing specific there -- said anything specific, but you might see that happen.

We're trying to gather all the data relative to warranty and other issues related to revenue and make a determination.

And we will come out and tell you as that happens.

Finally, you said 51 in cash, and it looks like there's about 4 in restricted cash there.

So netting that out about 47, which is roughly five quarters.

It seems to give one pause.

How concerned are you at this point?

As you know, we have the shelf in place which gives us the ability to go out there and do something when we believe the timing is right for the Company and our shareholders.

We're not extremely concerned about this right now.

We still think we have a pretty healthy balance sheet.

But we've put all the tools in place to be able to move and be passed (ph) if we want to.

Thanks for your time.

Lisa McDonald (ph), Automis (ph).

I actually had the same line of questions as Dave Smith, so I think they've all been answered.

Thank you very much.

John Quealy, Adams Harkness.

Sorry for jumping on late here.

A couple of things.

Did you touch on the reliability profile of the operating fleet earlier in the call and how that's shaping up and progressing with what you think the latest generation of GenCores is doing?

We didn't quantify what our reliability metrics are for the GenCore product in this call.

But I think we have talked about customer satisfaction, and Mark talked about the sales cycle and the prove out that's required to get the okay to buy and then deploy within the operating networks of these customers.

So I would say that we're meeting the expectations our customers have for a reliability driven sale.

Qualitatively can you talk about internally has it been improving to your expectations?

Or can you just give us a little characterization of that?

I think inherent to the product design process when you look at failure call rates and people that study it and will talk about (inaudible) and analysis tools, you always -- a design always starts in a more unreliable state and then improves over time to a more reliable state.

So we don't run for cover when our first prototype unit shows failure rates.

We see what they are and our problem solving ability works that down.

I think one of our hallmarks is that generation to generation and design to design we start out in a better spot than we started the last time, and we show some pretty aggressive rates of learning in terms of improvement upon that.

My last question.

We saw this past quarter American Power Conversion officially launch what looks to be a limited production run of some fuel cell powered UPS equipment.

Number one, can you comment on if you folks were participating in the trials of that product as it was coming into spec?

And number two, do you see more activity from the UPS side of things of folks looking to start to dabble in fuel cell the outside of the APCC news?

We did not participate in that particular activity that you're referencing.

What I can tell you is we do in our marketing look at the UPS, the traditional UPS segments, where it's applicable for the power range of our products.

We are a 5 kilowatt which is typically going to be a single phase as opposed to a multiphase application for us.

We do have systems that are on the way to the field that have actually been shipped that do install in conjunction with UPS gear.

So our general strategy is that we want to be able to look and feel like a battery to a UPS solution so literally you could plug us in just like you would plug in a battery.

And in fact that is the intention of some of the systems that we have shipped, that they will be interfacing with existing UPS gear, and in fact some of that gear and some of those installations is APC gear.

Thanks very much.

You have a follow-up from the line of David Smith, Smith Barney.

Can you guys comments on what the feedback thus far has been from Tyco?

Tyco seems to have been pretty active in getting this product out into the field.

But maybe some feedback in terms of how units have worked out in the field, and then also whether the cadence, for lack of a better word (indiscernible) has arisen really around this latest round of orders?

I really can't characterize too much for Tyco.

I don't want to go too far down that road.

But what I would say is these recent orders that are heading for a single customer obviously the biggest thing has come through Tyco.

And our general thinking collectively has been that that would be a catalytic event for the industry and allow us to do some marketing above and beyond.

As I have indicated before, price has not really been issue.

It's really been an awareness of what is a fuel cell.

Batteries have a lot of problems, but I've been buying batteries for a lot of years and I know what those problems are.

So kind of the devil you know sort of mentality.

And oftentimes can people wait for somebody else to go first.

Well now someone has gone first and I think that's an activity that we collectively will begin to leverage.

And I think right now the learning all across the board inside our of channel and our own Company with respect to the product and potential applications and how do you sell it will substantially increased as a result of this activity.

Thanks.

Now I will turn the call back over to Ms. Cynthia Mahoney White for closing remarks.

Thank you very much.

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 for your participation in today's conference.

This does conclude your presentation and you may now disconnect.

Everyone have a wonderful day and thank you.